Hutchinson, Shockey, Erley & Co.

Transcription

1 NEW ISSUE Ratings ¹ : Moody s:aa2/aa2 Book-Entry-Only TAX STATUS: In the opinion of Thrun Law Firm, P.C., Bond Counsel, assuming continued compliance by the School District with certain requirements of the Internal Revenue Code of 1986, as amended (the Code ), interest on the Bonds is excluded from gross income for federal income tax purposes, as described in the opinion, and the Bonds and interest thereon are exempt from all taxation in the State of Michigan, except inheritance and estate taxes and taxes on gains realized from the sale, payment or other disposition thereof. The School District has designated the Bonds as QUALIFIED TAX-EXEMPT OBLIGATIONS within the meaning of the Code, and has covenanted to comply with those requirements of the Code necessary to continue the exclusion of interest on the Bonds from gross income for federal income tax purposes. $4,930,000 Counties of Emmet and Charlevoix, State of Michigan 2012 School Technology Bonds (General Obligation - Unlimited Tax) PURPOSE AND SECURITY: The Bonds were authorized at an election on May 8, 2012, for the purpose of acquiring and installing educational technology improvements in school district buildings, including related remodeling, equipment, wiring, and infrastructure improvements. The Bonds will pledge the full faith, credit and resources of the School District for payment of the principal and interest thereon, and will be payable from ad valorem taxes, which may be levied without limitation as to rate or amount as provided by Article IX, Section 6, and Article IX, Section 16, of the Michigan Constitution of STATE QUALIFICATION: The Bonds will be fully qualified as of delivery pursuant to Act 92, Public Acts of Michigan, 2005, as amended, enacted pursuant to Article IX, Section 16, of the Michigan Constitution of Under the terms of said constitutional and statutory provisions, if for any reason the School District will be or is unable to pay the principal and interest on the Bonds when due, then the School District shall borrow, and the State of Michigan shall lend to it, an amount sufficient to enable the School District to make the payment. Remove State Qualification language if limited tax issue. BOOK-ENTRY-ONLY: The Bonds are issuable only as fully registered bonds without coupons, and when issued, will be registered in the name of Cede & Co., as Bondholder and nominee for The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository for the Bonds. Purchases of beneficial interests in the Bonds will be made in book-entry only form, in the denominations of $5,000 or any integral multiple thereof. Purchasers will not receive certificates representing their beneficial interest in Bonds purchased. So long as Cede & Co. is the Bondholder, as nominee of DTC, references herein to the Bondholders or registered owners shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners of the Bonds. See BOOK-ENTRY ONLY SYSTEM herein. PAYMENT OF BONDS: Interest on the Bonds will be payable semiannually on May 1 and November 1 of each year commencing on November 1, The Bonds will be registered Bonds, of the denomination of $5,000 or multiples thereof not exceeding for each maturity the principal amount of such maturity. The principal and interest shall be payable at the corporate trust office of The Bank of New York Mellon Trust Company, N.A., Detroit, Michigan(the Paying Agent ) or such other Paying Agent as the School District may hereafter designate by notice mailed to the registered owner not less than sixty (60) days prior to any interest payment date. So long as DTC or its nominee, Cede & Co., is the Bondholder, such payments will be made directly to such Bondholder. Disbursement of such payments to the Beneficial Owners is the responsibility of DTC Participants and Indirect Participants, as more fully described herein. Interest shall be paid when due by check or draft mailed to the registered owner as shown on the registration books as of the fifteenth day of the month preceding the payment date for each interest payment. Dated: July 9, 2012 Principal Due: May 1 of each year as shown below MATURITY SCHEDULE (Base CUSIP : ) Year Amount $390, , , ,000 Interest Rate 1.50% Yield 0.50% CUSIP FL5 FM3 FN1 FP6 Year Amount $540, , ,000 1,225,000 Interest Rate 2.00% Yield 1.25% CUSIP FQ4 FR2 FS0 FT8 Hutchinson, Shockey, Erley & Co. PRIOR REDEMPTION: Bonds of this issue are not subject to redemption prior to maturity, as described herein. See NO PRIOR REDEMPTION herein. BOND COUNSEL: The Bonds will be offered when, as and if issued by the School District subject to the approving legal opinion of Thrun Law Firm P.C., East Lansing, Michigan. This cover page contains information for a quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Additional information relative to this Bond issue may be obtained from Stauder, BARCH & ASSOCIATES, Inc. Municipal Bond Financial and Marketing Consultants 3989 Research Park Drive Ann Arbor, Michigan Official Statement Dated: June 21, 2012 ¹ For an explanation of ratings, see CREDIT RATING herein. As of the date of delivery Copyright 2012, American Bankers Association. CUSIP data herein is provided by Standard & Poor s CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. The School District shall not be responsible for the selection of CUSIP numbers, nor any representation made as to their correctness on the Bonds or as indicated above.

2 1130 Howard Street Petoskey, MI Phone: Fax: BOARD OF EDUCATION PRESIDENT Mary Ling Term Expires2014 VICE PRESIDENT Jack Waldvogel Term Expires 2014 SECOND VICE PRESIDENT Kathy Reed Term Expires 2012 TREASURER Karly Ellison Term Expires 2016 SECRETARY Karen Morrison Term Expires 2016 SUPERINTENDENT John P. Scholten, Ed.D., FINANCE DIRECTOR Kent J. Cartwright C.P.A. PROFESSIONAL SERVICES PAYING AGENT...The Bank of New York Mellon Trust Company, N.A. BOND COUNSEL...Thrun Law Firm, P.C. FINANCIAL CONSULTANT... Stauder, BARCH & ASSOCIATES, Inc. ii

3 TABLE OF CONTENTS Page PURPOSE AND SECURITY... 1 QUALIFICATION BY THE STATE OF MICHIGAN... 1 NO PRIOR REDEMPTION... 1 NOTICE OF SALE... 2 BOOK-ENTRY ONLY SYSTEM... 2 TAX PROCEDURES... 3 TRANSFER OUTSIDE BOOK-ENTRY-ONLY SYSTEM... 4 SOURCES OF SCHOOL OPERATING REVENUE... 4 LITIGATION... 6 TAX MATTERS... 6 State of Michigan... 6 Federal... 6 Original Issue Premium... 7 Future Developments... 7 QUALIFIED BY THE MICHIGAN DEPARTMENT OF TREASURY... 7 CONTINUING DISCLOSURE... 7 BOND COUNSEL S RESPONSIBILITY... 8 FINANCIAL CONSULTANT S OBLIGATION.. 8 CREDIT RATING... 8 PROJECT DESCRIPTION... 9 ESTIMATED SOURCES AND USES OF FUNDS... 9 GENERAL FINANCIAL INFORMATION POPULATION PROPERTY VALUATIONS Historical Valuations Per Capita Valuation Industrial Facilities Tax (IFT) TAX BASE COMPOSITION MAJOR TAXPAYERS TAX RATES - (Per $1,000 of Valuation) Other Major Taxing Units STATE AID PAYMENTS TAX LEVIES AND COLLECTIONS LABOR FORCE PENSION FUND OTHER POST-EMPLOYMENT BENEFITS DEBT STATEMENT DIRECT DEBT OVERLAPPING DEBT DEBT RATIOS DEBT HISTORY FUTURE FINANCING OTHER FINANCING OTHER BORROWING LEGAL DEBT MARGIN SCHOOL BOND QUALIFICATION AND LOAN PROGRAM GENERAL ECONOMIC INFORMATION LOCATION AND AREA POPULATION BY AGE INCOME HOUSING EMPLOYMENT CHARACTERISTICS EMPLOYMENT BREAKDOWN UNEMPLOYMENT BANKING GENERAL SCHOOL INFORMATION DESCRIPTION BOARD OF EDUCATION ADMINISTRATIVE STAFF SCHOOL ENROLLMENT Historical Enrollment Enrollment by Grade Projected Enrollment EXISTING SCHOOL FACILITIES OTHER SCHOOLS APPENDIX A - BUDGET... A-1 APPENDIX B - AUDIT... B-1 APPENDIX C - STATE QUALIFICATION... C-1 APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT... D-1 APPENDIX E - DRAFT LEGAL OPINION... E-1 APPENDIX F - DRAFT OFFICIAL NOTICE OF SALE... F-1 iii

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5 DATED: July 9, 2012 FIRST INTEREST: November 1, 2012 $4,930,000 Counties of Emmet and Charlevoix, State of Michigan 2012 School Technology Bonds (General Obligation - Unlimited Tax) REGISTRATION: PAYING AGENT: TAX DESIGNATION: QUALIFICATION: PRINCIPAL DUE: Principal and Interest The Bank of New York Mellon Trust Company, N.A., Detroit, Michigan QUALIFIED TAX EXEMPT OBLIGATIONS QUALIFIED FOR MICHIGAN SCHOOL LOAN REVOLVING FUND as of delivery pursuant to Act 92, Public Acts of Michigan, 2005, as amended. May 1, annually as shown the front cover PURPOSE AND SECURITY The Bonds were authorized at an election on May 8, 2012, for the purpose of acquiring and installing educational technology improvements in school district buildings, including related remodeling, equipment, wiring, and infrastructure improvements. The Bonds will pledge the full faith, credit and resources of the School District for payment of the principal and interest thereon, and will be payable from ad valorem taxes, which may be levied without limitation as to rate or amount as provided by Article IX, Section 6, and Article IX, Section 16, of the Michigan Constitution of QUALIFICATION BY THE STATE OF MICHIGAN The Bonds will be fully qualified as of the date of delivery of the Bonds pursuant to Act 92, Public Acts of Michigan, 2005, as amended ( Act 92 ), the purpose of which is to implement Article IX, Section 16, of the Michigan Constitution of 1963 (the State Constitution ). Under the terms of said constitutional and statutory provisions, if for any reason the School District will be or is unable to pay the principal of and interest on the Bonds when due, then the School District shall borrow and the State of Michigan (the State ) shall lend to it from the School Loan Revolving Fund (the School Loan Revolving Fund ) established by the State an amount sufficient to enable the School District to make the payment. Article IX, Section 16, of the State Constitution, as also implemented by Act 112, Public Acts of Michigan, 1961, as amended, authorizes the State, without approval of its electors, to borrow from time to time such amounts as shall be required, to pledge its faith and credit and to issue its notes or bonds therefor, for the purpose of making loans to school districts as provided under such Section. Loans to school districts for such purposes are made from the proceeds of such State borrowings. See also APPENDIX C - STATE QUALIFICATION, in this Official Statement. Complete financial statements of all of the State s funds as included in the State s Comprehensive Annual Financial Report ( CAFR ) prepared by the State s Department of Management and Budget are available upon request from the Department of Management and Budget, Office of Financial Management, P. O. Box 30026, Lansing, Michigan 48909, Telephone: (517) The State has agreed to file its CAFR with the Nationally Recognized Municipal Securities Information Repositories and the State Information Depository (as described in Rule 15c2-12(b)(5) of the Securities and Exchange Commission) annually, so long as any bonds qualified for participation in the School Loan Revolving Fund remain outstanding. NO PRIOR REDEMPTION Bonds of this issue are not subject to redemption prior to maturity. 1

6 NOTICE OF SALE See APPENDIX F - DRAFT OFFICIAL NOTICE OF SALE, for further information regarding this issue. BOOK-ENTRY ONLY SYSTEM The information in this section has been furnished by The Depository Trust Company, New York, New York ("DTC"). No representation is made by The Bank of New York Mellon Trust Company, N.A., Detroit, Michigan (the Paying Agent ) as to the completeness or accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. No attempt has been made by the School District or the Paying Agent to determine whether DTC is or will be financially or otherwise capable of fulfilling its obligations. Neither the School District nor the Paying Agent will have any responsibility or obligation to Direct Participants, Indirect Participants (both as defined below) or the persons for which they act as nominees with respect to the Bonds, or for any principal, premium, if any, or interest payment thereof. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the securities (the "Securities"). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue. DTC, the world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor's rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities 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 Securities, except in the event that use of the book-entry system for the Securities is discontinued. To facilitate subsequent transfers, all Securities 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 Securities 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 Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities 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. 2

7 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 Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities 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 Securities 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 Securities unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to School District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Securities 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 School District or Agent, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, Agent, or School District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of School District or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Securities purchased or tendered, through its Participant, to Tender/ Remarketing Agent, and shall effect delivery of such Securities by causing the Direct Participant to transfer the Participant's interest in the Securities, on DTC's records, to Tender/Re marketing Agent. The requirement for physical delivery of Securities in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Securities are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Securities to Tender/Remarketing Agent's DTC account. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to School District or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered. School District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that School District believes to be reliable, but School District takes no responsibility for the accuracy thereof. TAX PROCEDURES Article IX, Section 3, of the Michigan Constitution provides that the proportion of true cash value at which property shall be assessed shall not exceed 50% of true cash value. The Michigan Legislature by statute has provided that property shall be assessed at 50% of its true cash value, except as described below. The Michigan Legislature or the electorate may at some future time reduce the percentage below 50% of true cash value. 3

8 On March 15, 1994, the electors of the State approved an amendment to the Michigan Constitution permitting the Legislature to authorize ad valorem taxes on a non-uniform basis. The legislation implementing this constitutional amendment added a new measure of property value known as "Taxable Value." Beginning in 1995, taxable property has two valuations -- State equalized valuation ("SEV") and Taxable Value. Property taxes are levied on Taxable Value. Generally, Taxable Value of property is the lesser of (a) the Taxable Value of the property in the immediately preceding year, adjusted for losses, and increased or reduced by the lesser of the inflation rate or 5%, plus additions, or (b) the property's current SEV. Under certain circumstances, therefore, the Taxable Value of property may be different from the same property's SEV. When property is sold or transferred, Taxable Value is adjusted to the SEV, which under existing law is 50% of the current true cash value. The Taxable Value of new construction is equal to current SEV. Taxable Value and SEV of existing property are also adjusted annually for additions and losses. Responsibility for assessing taxable property rests with the local assessing officer of each township and city. Any property owner may appeal the assessment to the local assessor, to the local board of reviewand ultimately to the Michigan Tax Tribunal. The Michigan Constitution also mandates a system of equalization for assessments. Although the assessors for each local unit of government within a county are responsible for actually assessing at 50% of true cash value, adjusted for Taxable Value purposes, the final SEV and Taxable Value are arrived at through several steps. Assessments are established initially by the municipal assessor. Municipal assessments are then equalized to the 50% levels as determined by the county's department of equalization. Thereafter, the State equalizes the various counties in relation to each other. SEV is important, aside from its use in determining Taxable Value for the purpose of levying ad valorem property taxes, because of its role in the spreading of taxes between overlapping jurisdictions, the distribution of various State aid programs, State revenue sharing and in the calculation of debt limits. Property that is exempt from property taxes, e.g., churches, government property, public schools, is not included in the SEV and Taxable Value data in the Official Statement. Property granted tax abatements under Act 198, Public Acts of Michigan, 1974, amended, is recorded on a separate tax roll while subject to tax abatement. The valuation of tax-abated property is based upon SEV but is not included in either the SEV or Taxable Value data in the Official Statement except as noted. Under limited circumstances, other state laws permit the partial abatement of certain taxes for other types of property for periods of up to 12 years. TRANSFER OUTSIDE BOOK-ENTRY-ONLY SYSTEM In the event that the book-entry-only system is discontinued, the following provisions would apply to the Bonds. The Paying Agent shall keep the registration books for the Bonds (the Bond Register) at its corporate trust office. Subject to the further conditions contained in the Resolutions, the Bonds may be transferred or exchanged for one or more Bonds in different authorized denominations upon surrender thereof at the corporate trust office of the Paying Agent by the registered owners or their duly authorized attorneys; upon surrender of any Bonds to be transferred or exchanged, the Paying Agent shall record the transfer or exchange in the Bond Register and shall authenticate replacement bonds in authorized denominations; the School District and Paying Agent shall be entitled to treat the registered owners of the Bonds, as their names appear in the Bond Register as of the appropriate dates, as the owners of such Bonds for all purposes under the Resolutions. No transfer or exchange made other than as described above and in the Resolutions shall be valid or effective for any purposes under the Resolutions. SOURCES OF SCHOOL OPERATING REVENUE On March 15, 1994, the electors of the State of Michigan approved a ballot proposition to amend the State Constitution of 1963, in part, to increase the State sales tax from 4% to 6% as part of a complex plan to restructure the sources of funding of public education (K-12) in order to reduce reliance on local property taxes for school operating purposes and to reduce the per pupil finance resource disparities among school districts. The State aid package passed by the Legislature as part of the school finance reform legislation instituted a per pupil foundation allowance beginning in fiscal year 1994/1995. The Legislature has appropriated funds to establish a foundation allowance in 2011/2012 ranging from $6,846 to $8,019 per pupil, depending upon the district s 1993/1994 revenue. 4

9 In the future, the foundation allowance may be adjusted annually by an index based upon the change in revenues to the State school aid fund and change in the total number of pupils statewide and the spread between the high and low per pupil allowance is reduced. The foundation allowance is funded by locally raised property taxes plus State aid. The sources of revenues for the State s contribution to the foundation allowance is derived from a mix of taxing sources, including but not limited to a statewide property tax of 6 mills on all taxable property¹, a State sales and use tax, a real estate transfer tax and a cigarette tax. See STATE AID PAYMENTS in this Official Statement for further information. School districts are required to levy a local property tax of not more than 18 mills or the number of mills levied in 1993 for school operating purposes, whichever is less, on non-homestead properties² in order for the district to receive its per pupil foundation allowance. An intermediate school district may seek voter approval for three enhancement mills for distribution to local constituent school districts on a per pupil basis. The enhancement mills are not counted toward the foundation allowance. Furthermore, districts whose per pupil foundation allowance in 2011/2012 calculates to an amount in excess of $8,019 are authorized to levy additional millage to obtain the foundation allowance, first by levying such amount of the 18 mills against homestead property³ as is necessary to hold themselves harmless and, if the 18 mills is insufficient, to then levy such additional mills against all property uniformly as is necessary to obtain the foundation allowance. The School District s per pupil foundation allowance does not exceed $8,019 and the School District does not levy such supplemental millage. State aid appropriations and the payment schedule for state aid may be changed by the Legislature at any time. See "STATE AID PAYMENTS". Due to State budget constraints, the State School Aid Act, as amended, reduced categorical state school aid by $372 per pupil for 2008/09. The $372 per pupil reduction in 2008/09 was offset by Federal stimulus money received by the State of Michigan pursuant to the American Recovery and Reinvestment Act. In 2009/10, the State of Michigan again experienced reduced revenue in the State School Aid Fund resulting in an additional reduction of $71 per pupil (for a total of $443). Out of the total reduction of State school aid, approximately $278 per pupil was offset by Federal stimulus money in 2009/10, leaving a net reduction in 2009/10 of $165 per pupil from what was received in 2008/09 (taking into consideration the Federal stimulus money in both fiscal years). In July, 2010, the Legislature restored $11 in state aid per pupil for 2009/10 and on December 3, 2010, restored another $6 per pupil, together with federal Education Jobs Fund dollars of $148 per pupil for 2009/10. For 2010/11, the state aid component of the foundation allowance has been reduced by $170 per pupil. On December 3, 2010, the Governor signed HB 5887 (designated Public Act 217 of 2010) which appropriates one-time federal dollars to each school district in a range of $111 to $222 per pupil. The School District is to receive a restoration of $222 per pupil. In addition, the State appropriated $16 per pupil in 2010/11 to pay school district expenses associated with a previously unfunded mandate after the Michigan Supreme Court ruled in favor of school district plaintiffs in Adair v. State of Michigan. Public Act 62 of 2011 ("PA 62") which amends the State School Aid Act and results in a reduction of the School District's foundation allowance for the 2011/12 fiscal year to $6,846, or a $470 per pupil reduction from 2010/11 fiscal year. PA 62 also includes a one-time payment to districts to partially offset increases in the retirement plan contribution rate of 24.46% for the period October 1, 2011 to September 30, The 24.46% rate increase will require the School District to contribute an additional $162 per pupil to meet its increased retirement plan contribution obligation for the 2011/12 fiscal year. However, the School District's one time payment, as described above, equals $80 per pupil, which will result in a net retirement plan contribution increase of only $82 per pupil for the 2011/12 fiscal year. PA 62 also includes grant funding equal to $100 per pupil for school districts if they satisfy 4 out of 5 "financial best practices" relating to health and other benefit coverage, service consolidation plans, competitive bidding for certain vendor services and transparency in reporting certain educational and financial data to its residents and community members. The Board and Administration have satisfied the best practices requirements and the District received its first payment in February See "RETIREMENT PLAN" in APPENDIX B for information regarding historical retirement plan contribution rates. ¹ Taxable property does not include industrial personal property. ² Non-homestead property includes all taxable other than principal residence, qualified agricultural property, qualified forestry property, and industrial personal property. Commercial personal property is exempt from the first 12 mills of not more than 18 mills levied by school districts. ³ Homestead property, in this contest, means principal residence, qualified agricultural property, qualified forestry property, industrial personal property and commercial personal property. 5

10 THE SOURCES OF THE SCHOOL DISTRICT'S OPERATING REVENUE DO NOT IMPACT THE TAXING AUTHORITY OF THE SCHOOL DISTRICT FOR PAYMENT OF GENERAL OBLIGATION UNLIMITED TAX SCHOOL BONDS AND DO NOT AFFECT THE OBLIGATION OF THE SCHOOL DISTRICT TO LEVY TAXES FOR PAYMENT OF DEBT SERVICE ON GENERAL OBLIGATION UNLIMITED TAX BONDS OF THE SCHOOL DISTRICT, INCLUDING THE BONDS OFFERED HEREIN. LITIGATION The School District has not been served with any litigation, administrative action or proceeding, nor, to the knowledge of the School District, is there threatened, any litigation restraining or enjoining the issuance or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Bonds are to be issued or affecting the validity of the Bonds. TAX MATTERS State of Michigan In the opinion of Thrun Law Firm, P.C., East Lansing, Michigan ( Bond Counsel ), based on its examination of the documents described in its opinion, under existing State statutes, regulations and court decisions, the Bonds and the interest thereon are exempt from all taxation in the State of Michigan, except inheritance and estate taxes and taxes on gains realized from the sale, payment or other disposition thereof. Federal In the opinion of Bond Counsel based upon its examination of the documents described in its opinion, under existing statutes, regulations, rulings and court decisions, the interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. It should be noted, however, that certain corporations must take into account interest on the Bonds in determining adjusted net current earnings for the purpose of computing the alternative minimum tax imposed on such corporations. The opinions set forth in the preceding sentences are subject to the condition that the School District comply with all requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. Bond Counsel will express no opinion regarding other federal tax consequences arising with respect to the Bonds. There are additional federal tax consequences relative to the Bonds and the interest thereon. The following is a general description of some of these consequences but is not intended to be complete or exhaustive and investors should consult with their tax advisors with respect to these matters. Prospective purchasers of the Bonds should be aware that (i) interest on the Bonds is included in the effectively connected earnings and profits of certain foreign corporations for purposes of calculating the branch profits tax imposed by Section 884 of the Code, (ii) interest on the Bonds may be subject to a tax on excess net passive income of certain S Corporations imposed by Section 1375 of the Code, (iii) interest on the Bonds is included in the calculation of modified adjusted gross income for purposes of determining the taxability of social security or railroad retirement benefits, (iv) the receipt of interest on the Bonds by life insurance companies may affect the federal tax liability of such companies, (v) in the case of property and casualty insurance companies, the amount of certain loss deductions otherwise allowed is reduced by a specific percentage of, among other things, interest on the Bonds and (vi) holders of the Bonds may not deduct interest on indebtedness incurred or continued to purchase or carry the Bonds. 6

11 Original Issue Premium For federal income tax purposes, the difference between the initial offering prices to the public (excluding bondhouses and brokers) at which certain Bonds, as set forth on the cover of this Official Statement, are sold and the amounts payable at maturity thereof (the Premium Bonds ), constitutes for the original purchasers of the Premium Bonds an amortizable bond premium. Such amortizable bond premium is not deductible from gross income but is taken into account by certain corporations in determining adjusted current earnings for the purpose of computing the alternative minimum tax, which may also affect liability for the branch profits tax imposed by Section 884 of the Code. The amount of amortizable bond premium allocable to each taxable year is generally determined on the basis of a taxpayer s yield to maturity determined by using the taxpayer s basis (for purposes of determining loss on sale or exchange) of such Premium Bonds and compounding at the close of each six-month accrual period. The amount of amortizable bond premium allocable to each taxable year is deducted from the taxpayer s adjusted basis of such Premium Bonds to determine taxable gain upon disposition (including sale, redemption or payment on maturity) of such Premium Bonds. Future Developments No assurance can be given that any future legislation or clarifications or amendments to the Code, if enacted into law, will not contain proposals which could cause the interest on the Bonds to be subject directly or indirectly to federal or state income taxation, adversely affect the market price or marketability of the Bonds, or otherwise prevent bondholders from realizing the full current benefit of the status of the interest thereon. It is to be understood that the rights of the holders of the Bonds and the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THEIR ACQUISITION, HOLDING OR DISPOSITION OF THE BONDS, INCLUDING THE TREATMENT OF ORIGINAL ISSUE PREMIUM. QUALIFIED BY THE MICHIGAN DEPARTMENT OF TREASURY The School District has received a letter from the Department of Treasury of the State of Michigan stating that the School District is in material compliance with the criteria of the Revised Municipal Finance Act, Act No. 34, Public Acts of Michigan, 2001 ( Act 34 ) for a municipality to be granted qualified status to issue municipal securities without further approval by the Michigan Department of Treasury. CONTINUING DISCLOSURE Prior to delivery of the Bonds the School District will execute a Continuing Disclosure Agreement (the Agreement ) for the benefit of the holders of the Bonds and Beneficial Owners to send certain information annually and to provide notice of certain events to certain information repositories pursuant to the requirements of Rule 15c2-12(b)(5) (the Rule ) adopted by the Securities and Exchange Commission under the Securities Exchange Act of The information to be provided on an annual basis, the events which will be noticed on an occurrence basis, and the other terms of the Agreement are set forth in APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT. Additionally, the School District shall provide certain annual financial information and operating data, generally consistent with the information in the tables under the headings PROPERTY VALUATIONS - Historical Valuations MAJOR TAXPAYERS, TAX RATES - Petoskey Public Schools, STATE AID PAYMENTS, TAX LEVIES AND COLLECTIONS, LABOR FORCE, PENSION FUND, DEBT STATEMENT - DIRECT DEBT, SCHOOL BOND QUALIFICATION AND LOAN PROGRAM, SCHOOL ENROLLMENT and GENERAL FUND BUDGET SUMMARY herein. 7

12 A failure by the School District to comply with the Agreement will not constitute an event of default under the Resolutions authorizing issuance of the Bonds and holders of the Bonds or Beneficial Owners are limited to the remedies described in the Agreement. A failure by the School District to comply with the Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Bonds in the secondary market. Consequently, such failure may adversely affect the transferability and liquidity of the Bonds and their market price. Further, the School District has not in the previous five years, failed to comply, in all material respects, with any previous continuing disclosure agreements executed by the School District pursuant to the Rule. BOND COUNSEL S RESPONSIBILITY The fees of Thrun Law Firm, P.C., East Lansing, Michigan ( Bond Counsel ) for services rendered in connection with its approving opinion are expected to be paid from Bond proceeds. Except to the extent necessary to issue its approving opinion as to the validity of the Bonds and tax matters relating to the Bonds and the interest thereon, and except as stated below, Bond Counsel has not been retained to examine or review, and has not examined or reviewed any financial documents, statements or materials that have been or may be furnished in connection with the authorization, issuance or marketing of the Bonds and accordingly will not express any opinion with respect to the accuracy or completeness of any such financial documents, statements or materials. Bond Counsel has reviewed the statements made in this Official Statement on the cover page and under the heading Information for Bidders. Except as otherwise disclosed on pages herein, Bond Counsel has not been retained to review and has not reviewed any other portion of this Official Statement for accuracy or completeness, and has not made inquiry of any official or employee of the School District or any other person and has made no independent verification of such other portions hereof, and further has not expressed and will not express an opinion as to any portions hereof. FINANCIAL CONSULTANT S OBLIGATION Stauder, BARCH & ASSOCIATES, Inc., Ann Arbor, Michigan (the Financial Consultant ) has been retained by the School District to provide certain financial consultant services including, among other things, preparation of the deemed final Preliminary Official Statement and the final Official Statement (the Official Statements ). The information contained in the Official Statements was prepared in part by the Financial Consultant and is based on information supplied by various officials from records, statements and reports required by various local county or state agencies of the State of Michigan in accordance with constitutional or statutory requirements. To the best of the Financial Consultant s knowledge, all of the information contained in the Official Statements, which it assisted in preparing, while it may be summarized is (i) complete and accurate; (ii) does not contain any untrue statement of material fact; and (iii) does not omit any material fact, or make any statement which would be misleading in light of the circumstances under which these statements are being made. However, the Financial Consultant has not and will not independently verify the completeness and accuracy of the information contained in the Official Statement. The Financial Consultant s duties, responsibilities and fees arise solely from that as financial consultant to the School District and they have no secondary obligations or other responsibility. The Financial Consultants s fees are expected to be paid from Bond proceeds. Further information concerning the Bonds may be secured from Stauder, BARCH & ASSOCIATES, Inc., 3989 Research Park Drive, Ann Arbor, Michigan Telephone: (734) CREDIT RATING Moody s will assign, as the of the date of delivery of the Bonds, their municipal bond rating of Aa2 to the Bonds based upon the fact that the Bonds will be fully qualified for participation in the School Loan Revolving Fund as of their date of delivery. Moody s will also assign, as the of the date of delivery of the Bonds, its underlying municipal bond rating of "Aa2" to the Bonds. 8

13 An explanation of the significance of each rating may be obtained from the rating agency at the following address: Moody s Investors Service, 7 World Trade Center, 250 Greenwich Street, New York, New York The aforementioned ratings will reflect the sole view of the rating agency and there is no assurance that such ratings will be continued for any period of time, or that they will not be revised upwards or downwards or be withdrawn; a revision, suspension, or withdrawal of the ratings may have an effect on the market price of these securities and should be noted. A brief description of the Moody's rating definitions reads as follows: Moody s Investors Service, Inc. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as gilt edge. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds which are rated Aa are judged to be of a high quality by all standards. Together with the Aaa group, they comprise what are generally known as high grade Bonds. They are rated lower than the best Bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of great amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. General Note: Those Bonds in the Aa, A, and Baa groups which Moody s believes possess the strongest investment attributes are designated by the symbols Aa1', A1' and Baa1'. Under the expanded rating scale adopted by Moody s January 7, 1997 the numerical rating modifiers 2 and 3 have been added for long-term debt. The numerical modifier 2 indicates that the security is in the mid-range of its category, while the modifier 3 indicates that the issue is in the lower end of its generic category. A triple-a (Aaa) rating will have no numerical modifier; it remains Moody s highest bond rating. PROJECT DESCRIPTION The Bonds were authorized at an election on May 8, 2012, for the purpose of acquiring and installing educational technology improvements in school district buildings, including related remodeling, equipment, wiring, and infrastructure improvements. ESTIMATED SOURCES AND USES OF FUNDS Project Costs $4,848,000 Cost of Issuance 64,970 TOTAL PROJECT COSTS $4,936,970 Less: Estimated Construction Fund Earnings 6,970 BOND AMOUNT $4,930,000 9

14 GENERAL FINANCIAL INFORMATION AREA POPULATION The areas encompassed by the School District and by the City of Petoskey are as follows: School City of District Petoskey Area in square miles The estimated population totals for the School District and the U.S. Census reported totals for the City of Petoskey are as follows: School City of Year District* Petoskey 2012 (Estimate) 18,513 5, U.S. Census 18,391 5, U.S. Census 17,304 6, U.S. Census 16,232 6,056 * Estimated based on an extrapolation of the U.S. Census figures of the local units within the School District. PROPERTY VALUATIONS In accordance with Act 539, Public Acts of Michigan, 1982, as amended, and Article IX, Section 3 of the Michigan Constitution, the ad valorem State Equalized Valuation (SEV) represents 50% of true cash value. SEV does not include any value of tax exempt property (e.g. churches, governmental property) or property granted tax abatements under Act 198, Public Acts of Michigan, 1974, as amended. As a result of Proposal A, ad valorem property taxes are assessed on the basis of taxable value, which is subject to assessment caps. SEV is used in the calculation of debt margin and true cash value. See TAX PROCEDURES herein for more information. Taxable property in the School District is assessed by the local municipal assessor and is subject to review by the County Equalization Department. Historical Valuations Principal Non-Principal Total State Equalized Year Residence Residence Taxable Valuation Valuation 2012 $582,351,124 $765,146,986 $1,347,498,110 $1,627,269, ,324, ,441,672 1,357,766,050 1,653,604, ,375, ,755,829 1,395,131,269 1,761,701, ,852, ,971,510 1,470,823,920 1,991,660, ,251, ,869,766 1,409,121,536 2,006,122,336 Until 2008 all personal property was included in non-principal residence valuations. Beginning in 2008, all industrial personal property is included in the principal residence tax base. While commercial personal property continues to be included in the non-principal residence tax base, it is exempt from the first 12 mills of the 18 operating mills levied by the School District on non-principal residence property only. In 2012, industrial personal property has a taxable value of $19,483,800 and commercial personal property has a taxable value of $34,980,948 in the School District. ¹ Information included in Appendix B of this Official Statement was obtained from the School District unless otherwise noted. 10

15 Historical Valuations Millions $2,000 $1,500 $1,000 $500 $ Year Taxable Valuation State Equalized Valuation 2012 Taxable Valuation $1,347,498,110 Plus: 2012 IFT Taxable Valuation* 1,772,290 Total Equivalent Valuation $1,349,270,400 *Millage is levied at half rate against the amount listed. See PROPERTY VALUATIONS - Industrial Facilities Tax (IFT) herein. Per Capita Valuation Industrial Facilities Tax (IFT) 2012 Per Capita Taxable Valuation $72, Per Capita State Equalized Valuation $87, Per Capita Estimated True Cash Valuation $175, Under the provisions of Act 198 of the Public Acts of Michigan, 1974 ( Act 198"), plant rehabilitation districts and/or industrial development districts may be established. Businesses in these districts are offered certain property tax incentives to encourage restoration or replacement of obsolete facilities and to attract new facilities to the area. An industrial facilities tax ( IFT ) is paid, at a lesser effective rate and in lieu of ad valorem property taxes, on such facilities for a period of up to 12 years. Qualifying facilities are issued abatement certificates for specific periods. After expiration of the abatement certificate, the then-current SEV of the facility is returned to the ad valorem tax roll. The owner of such facility may obtain a new certificate, provided it has complied with the provisions of Act 198. The 2012 Taxable Value for the properties which have been granted IFT abatements within the School District s boundaries is $1,722,290 which is subsequently taxed at half rate. For further information see PROPERTY VALUATIONS - Historical Valuations herein. TAX BASE COMPOSITION A breakdown of the School District s 2012 Taxable Valuation by municipality, class and use are as follows: Principal¹ Non-Principal¹ Total Taxable Percent of Municipality Residence Residence Valuation Total Emmet County City of Petoskey $161,240,844 $281,363,723 $442,604, % Bear Creek Township 173,616, ,434, ,050, Little Traverse Township 7,563,785 20,370,594 27,934, Littlefield Township 2,604,296 2,871,637 5,475, Resort Township 141,098, ,410, ,508, Springvale Township 55,019,572 30,282,090 85,301,

16 Charlevoix County Chandler Township 13,405,691 5,041,583 18,447, Hayes Township 2,860,105 1,639,112 4,499, Melrose Township 24,942,454 46,733,928 71,676, TOTAL 582,351, ,146,986 1,347,498, % ¹ See SOURCES OF SCHOOL OPERATING REVENUE in this Official Statement for further details. Taxable Percent of Class Valuation Total Real Property $1,275,117, % Personal Property 72,380, TOTAL $1,347,498, % Use Agricultural $13,851, % Commercial 219,053, Industrial 8,432, Residential 1,033,508, Timber Cutover 271, Personal Commercial 34,980, Personal Industrial 19,483, Personal Utility 17,915, TOTAL $1,347,498, % Source: Emmet and Charlevoix Counties Personal Commercial 2.60% Timber Cutover 0.02% Residential 76.70% Personal Industrial 1.45% Taxable Valuation by Use Personal Industrial 1.45% Personal Utility 1.33% Agricultural 1.03% Commercial 16.26% Industrial 0.63% MAJOR TAXPAYERS The ten largest taxpayers in the School District and their 2012 Taxable Valuation totals and Industrial Facilities Tax Valuation totals are as follows: Taxable IFT Total Taxpayer Product/Service Valuation + Valuation = Valuation Bay View Association* Homes/cottages $35,557,001 $0 $35,557,001 Good Will Co., Inc. Retail 6,553, ,553,308 R G Bear Creek LLC Development 5,500, ,500,831 Circuit Controls Corp. Mfg. of auto accessories 5,026,750 1,255,000 6,281,750 Petoskey Plastics, Inc. Industrial products 4,847, ,847,400 Michigan DNR Development 4,585, ,585,142 RGP Petoskey LLC Development 4,097, ,097,858 Koffman-Mcentee, LLC Development 3,984, ,984,987 Vanelslander, Archie Trust 3,986, ,986,783 Manthei Inc. Development 3,131, ,131,065 TOTAL 77,271,125 1,255,000 78,526,125 The Taxable Valuations of the major taxpayers represent 5.73% of the School District's 2012 Taxable Valuation of $1,347,498,110 and their Total Valuations represent 5.82% of the School District's Total Equivalent Valuation of $1,349,270,400. * Bay View Association, is contesting the multipliers used for assessing their real property taxes with the State Tax Tribunal. Source: Respective municipalities TAX RATES - (Per $1,000 of Valuation) Each school district, county, township, special authority and city has a geographical definition which constitutes a tax district. Since local school districts and the county overlap either a township or a city, and intermediate school districts overlap local school districts and county boundaries, the result is many different tax rate districts. 12

17 Public Schools of Petoskey Operating Non-Principal Residence Sinking Fund Debt TOTAL PRINCIPAL RESIDENCE TOTAL NON-PRINCIPAL RESIDENCE The School District levies 18 mills for operating purposes on non-principal residence property and authorized debt millage on all principal residence and non-principal residence property located within the School District. The School District s operating millage expires with the December 2014 levy. The School District s sinking fund millage expires with the December 2018 levy. See SOURCES OF SCHOOL OPERATING REVENUE in this Official Statement. Other Major Taxing Units State Education Tax¹ Emmet County City of Petoskey Bear Creek Township Charlevoix County Charlevoix-Emmet I/S/D North Central Mich. Comm. Coll ¹ The State of Michigan levies 6.00 mills for school operating purposes on all principal residence and non-principal residence property located within the School District. Source: Emmet and Charlevoix Counties STATE AID PAYMENTS The School District's primary source of funding for operating costs is the State school aid foundation allowance per pupil. The foundation allowance was set from $7,316 to $8,478 per pupil for the fiscal year 2010/11 and $6,846 to $8,019 per pupil for the fiscal year 2011/12. In future years, this allowance may be adjusted by an index based upon the change in revenues to the state school aid fund and the change in the total number of pupils statewide. The State may reduce state school aid appropriations at any time if the state s revenues do not meet budget expectations. See "SOURCES OF SCHOOL OPERATING REVENUE" herein for additional information. The following table shows a history and current estimate of the School District's total State school aid revenues, including categoricals and other amounts, the State Amount Received per Pupil and the Foundation Allowance per Pupil. State Amount Foundation Received Allowance Year Total per Pupil per Pupil 2011/12 (May s estimate) $7,450,979 $1,884 $6, /11 6,783,325 2,132 7,316* 2009/10 5,446,707 1,894 7,316* 2008/09 7,138,346 2,259 7,316* 2007/08 7,134,726 2,034 7,204 * Does not include ARRA stabilization funds adjustment. Source: Michigan Department of Education TAX LEVIES AND COLLECTIONS The School District s fiscal year begins July 1 and ends June 30. School District property taxes are due in the City of Petoskey on July 1 of each fiscal year and are payable without interest on or before the following September 14 and without penalty on or before the following February 14. School District property taxes are due in the Townships on December 1 and are payable without interest or penalty on or before the following February 14. All real property taxes remaining unpaid on March 1st of the year following the levy are turned over to the County Treasurers for collection. Emmet and Charlevoix Counties (the Counties ) annually pay from their Tax Payment Funds delinquent taxes on real property to all taxing units in the Counties, including the School District, shortly after the date delinquent taxes are returned to the County Treasurers for collection. The payments from these funds have resulted in collections of taxes approaching 100% for all taxing units. Delinquent personal property taxes are negligible. 13

18 A history of tax levies and collections for the School District is as follows: Levy Operating Collections to Collections Plus Funding Year Tax Levy March 1 of Following Year To June 30 of Following Year 2011 $14,254,230 $13,329, % N/A ,661,244 13,516, $14,641, % ,534,855 14,098, ,513, ,027,184 14,990, ,008, ,038,149 14,085, ,989, The Tax Payment Funds are financed through the issuance of General Obligation Limited Tax Notes (GOLTNs) by the Counties. Although the School District anticipates the continuance of these programs by the Counties, the ability of the Counties to issue such GOLTNs is subject to market conditions at the time of offering. In addition, Act 206, Public Acts of Michigan, 1893, as amended, provides in part that: The primary obligation to pay to the county the amount of taxes and interest thereon shall rest with the local taxing units, and if the delinquent taxes which are due and payable to the county are not received by the county for any reason, the counties have full right of recourse against the taxing unit to recover the amount thereof and interest thereon... On the third Tuesday in July in each year, a tax sale is held by the Counties at which lands delinquent for taxes assessed in the third year preceding the sale, or in a prior year, are sold for the total of the unpaid taxes of those years. Pursuant to Act 123, Public Acts of Michigan of 1999, as amended, property owners with taxes that are two years delinquent will be foreclosed and the property will be sold at public auction. For example, property owners who fail to pay their 2011 delinquent property taxes will lose their property in March LABOR FORCE A breakdown of the number of salaried employees of the School District and their affiliations with organized groups are as follows: Contract Employees Number Bargaining Unit Expiration Administrators 12 Non-Affiliated N/A Teachers 155 Northern MI Ed. Assn./MEA 08/31/2013 Aides 41 Non-Affiliated N/A Clerical/Food Svs./Custodial 29 Petoskey Ed. Supp. Pers./N. MI Ed. Assn. 08/31/2013 TOTALS 237 The School District has not experienced a strike by any of its bargaining units within the past ten years. PENSION FUND For the period October 1 through September 30, the School District pays an amount equal to a percentage of its employees' wages to the Michigan Public School Employees Retirement System ("MPSERS"), which is administered by the State of Michigan. These contributions are required by law and are calculated by using the contribution rates and periods provided in the table below of the employees' wages. The employer contribution rate for employees who first worked July 1, 2010 or later (Pension Plus members) for the time period July 1, 2010 to September 30, 2010 was 15.44%. For other employees, the rate was 16.94% through September 30, Effective October 1, 2010, the employer contribution rate for all employees except Pension Plus members increased to 19.41%. For Pension Plus members, the employer contribution rate is 17.91%. On June 28, 2010, the Michigan Court of Claims issued an injunction in response to a challenge to the authority of the State to require employees who began working before July 1, 2010, to contribute 3% of reportable wages to the retiree health care trust at MPSERS. As a result, the State has adjusted the contribution rate due on employees wages paid between November 1, 2010 and September 30, 2011 to 20.66% for members who first worked prior to July 1, 2010 and 19.16% for Pension Plus members. In March 2011, the Court of Claims granted the plaintiffs' motions for summary disposition finding that the mandatory 3% contribution violated both the U.S. and Michigan constitutions. The State has appealed the ruling to the Michigan Court of Appeals. The Court of Appeals has accepted the appeal and ordered an expedited review. In August 2011, the Court of Appeals issued its decision, affirming the decision of the Court of Claims. The Michigan Supreme Court denied the State s appeal of the Court of Appeals ruling. 14

19 The School District's estimated contribution to MPSERS for the 2011/12 fiscal year and for the previous four fiscal years are shown on the table below. The School District does not have an unfunded accrued liability under MPSERS. Contribution Period Contribution Rate Pension Plus Oct. 1, 2011-Sept. 30, % 23.23% Nov. 1, 2010-Sept. 30, Oct. 1, 2010-Oct. 31, Oct. 1, 2009-Sept. 30, N/A Oct. 1, 2008-Sept. 30, N/A Oct. 1, 2007-Sept. 30, N/A Fiscal Year Ending Contributions to June 30 MPSERS 2012 (estimate) $3,927, ,473, ,605, ,707, ,707,899 Source: Audited financial statements. OTHER POST-EMPLOYMENT BENEFITS MPSERS is a cost-sharing, multi-employer, statewide plan. Pension benefits and retiree health benefits are established by law and funded through employer contributions. The cost of retiree health benefits is funded annually on a pay-as-you-go basis, with retirees paying some of the costs. Current year liability for retiree health benefits is reflected in the figures provided above. Further information regarding MPSERS, including retiree health benefits, can be found at: DEBT STATEMENT (As of June 22, 2012 and including the Bonds described herein) DIRECT DEBT Dated Interest Amount Date Purpose Type Spread Maturities Outstanding 05/27/2005 Building & Site UTQ % 05/01/13-19 $14,120,000 07/09/2012 Technology Bonds UTQ /01/ ,930,000 TOTAL DIRECT DEBT $19,050,000 OVERLAPPING DEBT Amount District Percent Municipality Outstanding Share % City of Petoskey $7,535,000 $7,535, % Bear Creek Township 1,705,211 1,705, Little Traverse Township 603,587 64, Littlefield Township 364,529 17, Charlevoix County 3,100, , Emmet County 5,860,000 2,792, North Central MI CC 7,455,000 3,552, Charlevoix Public Library 5,535,000 32,103 NET OVERLAPPING DEBT $15,843,009 NET DIRECT AND OVERLAPPING DEBT $34,533,009 Source: Municipal Advisory Council of Michigan. DEBT RATIOS Per Capita (18,513) Net Direct Debt $1, Net Direct and Overlapping Debt $1,

20 Ratio to 2012 Taxable Valuation ($1,347,498,110) Net Direct Debt 1.41% Net Direct and Overlapping Debt 2.59% Ratio to 2012 State Equalized Valuation ($1,627,269,219) Net Direct Debt 1.17% Net Direct and Overlapping Debt 2.14% Ratio to 2012 Estimated True Cash Valuation ($3,254,538,438) Net Direct Debt 0.59% Net Direct and Overlapping Debt 1.07% DEBT HISTORY The School District has no record of default. FUTURE FINANCING The School District does not anticipate additional capital financing in the foreseeable future. OTHER FINANCING The School District issued bonds in the amount of $162,282 to the Michigan Municipal Bond Authority ( MMBA ) on November 24, 1998, payable solely from state revenues pursuant to section 11g of the State School Aid Act of 1979, as amended. Such bonds do not, by statute, constitute a general obligation of the School District or a debt of the School District within the meaning of any constitutional or statutory debt limitation. OTHER BORROWING In 2006, the District entered into a land contract for the purchase of land in the amount of $700,000. The balance on the contract was approximately $545,000 at June 30, In 2004, the District also entered into a land contract for the purchase of land. The original amount of the 2004 land contract was $700,000, and the remaining balance at year end is approximately $411,000. See APPENDIX B - AUDIT in this Official Statement. LEGAL DEBT MARGIN 2012 State Equalized Valuation $1,653,604,320 Debt Limit (15% of 2012 State Equalized Valuation) $244,090,383 Debt Outstanding, including Bonds described herein $19,050,000 Less Bonds not subject to Debt Limit** (19,050,000) Total Subject to Debt Limit 0 Additional Debt Which Could Be Legally Incurred $244,090,383 ** Section 1351(3) of Act 451, Public Acts of Michigan, 1976, as amended Act 451, provides that the bonded indebtedness of a school district shall not exceed 15% of the total assessed valuation of the district. Bonds not included in the computation of the legal debt margin are (1) any bond qualified under Article IX, Section 16 of the Michigan Constitution of 1963, and (2) deficit budget bonds as authorized under Section 1356 of Act 451. In addition, Section 605 of Act 34, Public Acts of Michigan, 2001, as amended, provides, in relevant part, that debt evidenced by a refunding security shall not be deemed to be within any statutory or charter limitation of outstanding debt limit. SCHOOL BOND QUALIFICATION AND LOAN PROGRAM The School District does not currently have a School Loan Revolving Fund borrowing balance under the School Bond Qualification and Loan Program. Source: State of Michigan Department of Treasury 16

21 LOCATION AND AREA GENERAL ECONOMIC INFORMATION The Public Schools of Petoskey occupies an area of approximately 174 square miles in the northwestern portion of Michigan s lower peninsula, located at the mouth of the Bear River and Lake Michigan on Little Traverse Bay. The School District includes all of the City of Petoskey and portions of five townships in Emmet County and portions of three townships in Charlevoix County. The City of Petoskey is the county seat of Emmet County. The School District is located the following distances from these commercial and industrial areas: 67 miles north of Traverse City 36 miles south of Mackinaw City 101 miles northeast of Alpena 185 miles north of Grand Rapids 202 miles northwest of Lansing 260 miles northwest of Detroit POPULATION BY AGE The 2010 U.S. Census estimated total for population by age for Emmet County are as follows: Number Percent Total Population 32, % 0 through 19 years 8, through 64 years 19, years and over 5, INCOME Median Age 43.1 years The 2010 U.S. Census estimated total for household income for Emmet County are as follows: Number Percent HOUSEHOLDS BY INCOME 13, % Less than $10, $10,000 to $14, $15,000 to $24,999 1, $25,000 to $34,999 1, $35,000 to $49,999 2, $50,000 to $74,999 3, $75,000 to $99,999 1, $100,000 to $149,999 1, $150,000 to $199, $200,000 or more Source: Median Income $49,235 Mean Income $66,548 HOUSING A history of new residential building permits in Emmet County are as follows: 2012* Number Value $1,102,676 $10,265,597 $12,011,623 $7,534,775 $26,257,922 * Through March 2012 Source: Bureau of the Census, Construction Statistics Division, Building Permits Branch. 17

22 EMPLOYMENT CHARACTERISTICS* The following employers located within the School District s boundaries and surrounding communities offer employment opportunities. Approx. No. Employer Product/Service Employed Within the School District (140 or more employees) Northern Michigan Hospital Health care 1,003 Odawa Casino Resort Casino hotel 500 Public Schools of Petoskey Education 306 Continental Structural Plastics Compressed plastic molds 250 Emmet County Government 250 Meijers Retail 300 K-Mart Retail 200 Walmart Retail 200 Lowes Building supplies 200 Home Depot Building supplies 200 North Country Comm. Mental Health Health care 180 Petoskey Plastics, Inc. Plastic bags 150 Stafford s Hospitality, Inc. (HQ) Hotel 150 Circuit Controls Corp. Automotive 140 Within Emmet County (100 or more employed ) Bay Bluffs Emmet Cnty. Med. Care Healthcare 200 Boyne Highland Resort Golf/ski resort 150 Jervis B.Webb Co. Automated systems 150 Harbor Springs Public Schools Education 135 Moeller Aerospace Inc. Aerospace 130 Harbor Springs Public Schools Education 126 Bortz Health Care of Petoskey Nursing care facility 125 Birchwood Masonry Contractor 120 Glens Market Inc. Grocery stores 120 L'til Traverse Bay Band of Odawa Indians (HQ) Social club 110 Allied EMS Systems, Inc. Ambulance service 110 Stafford's Pier Restaurant Restaurant 100 Within Charlevoix County (80 or more employed) Boyne USA Resorts Ski & golf resorts 450 Lexa Mar Corporation(Decoma Inter/Amer. Inc.) Plastic products 400 Great Lakes Energy Utility 235 Boyne City Public Schools Education 178 Honeywell International Corporation Aeronautical instruments 170 St. Marys Cement, Inc. Dist./of cement 125 DE-Sta-CO Conveyor equipment 111 DCL, Inc. (HQ) Dust control systems 100 The Bay City Times Newspaper publisher 100 K-Mart Stores Retail 100 Catts Realty Co. Grocery stores 85 Boyne City Government 80 Michigan White Cedar Products Lumber Processing 80 *The approximate number of employees listed above are as reported in the sources indicated below. Because of reporting time lags and other factors inherent in collecting and reporting such information, the numbers may not reflect recent changes in employment levels, if any, nor are they necessarily indicative of the current financial condition of the employers listed in light of the significant economic downturn currently affecting the nation and the State. Source: 2012 Michigan Manufacturers Directory, 2012 Crain s Book of Lists, Manta Company Intelligence website, the Michigan Economic Development Council ( MEDC ), and individual employers. 18

23 EMPLOYMENT BREAKDOWN The 2010 U. S. Census reports the occupational breakdown of persons 16 years and over for Emmet County are as follows: Number Percent PERSONS BY OCCUPATION 16, % Professional Specialty Occupations 5, Service Occupations 3, Sales & Office Occupations 4, Natural Resources, Construction, and Maintenance Occupations 1, Transportation & Material Moving Occupations 1, The breakdown by industry for persons 16 years and over in Emmet County are as follows: Number Percent PERSONS BY INDUSTRY 16, % Agriculture, Forestry, Fishing, Hunting & Mining Construction 1, Manufacturing 1, Wholesale Trade Retail Trade 1, Transportation Information Finance, Insurance, & Real Estate Professional & Management Services 1, Educational, Health & Social Services 3, Arts, Entertainment, Recreation and Food Services 2, Other Professional and Related Services Public Administration Source: UNEMPLOYMENT* The Michigan Department of Technology, Management & Budget Information, reports unemployment averages for City of Petoskey and Emmet County as compared to the State of Michigan are as follows: *not seasonally adjusted BANKING County of State of Emmet Michigan 2012 YTD Average (April) 12.5% 8.0% 2011 Annual Average Annual Average Annual Average Annual Average The following banks have branches located within the School District s boundaries. Deposits are as reported in the Accuity American Financial Directory, July - December Total State-Wide Bank Main Office Deposits Bank of Northern Michigan Petoskey, MI $285,084,000 Fifth Third Bank, Michigan Cincinnati, OH N/A First Community Bank Harbor Springs, MI 156,679,000 The Huntington National Bank Columbus, OH N/A JPMorgan Chase Bank, N.A. Columbus, OH N/A Northwestern Bank Traverse City, MI 828,083,000 PNC Bank, N. A. Pittsburgh, PA N/A 19

24 GENERAL SCHOOL INFORMATION DESCRIPTION The School District currently operates five elementary schools, one middle school and one high school. The School District s 2011/12 student enrollment is 2,952. A staff of 155 teachers, 13 administrators and 70 support personnel are employed by the School District. BOARD OF EDUCATION The Board of Education consists of five members who are elected at large for four-year overlapping terms. The Board annually elects a President, Vice President, Treasurer and Secretary. The Board is responsible for the selection and appointment of the Superintendent of Schools. The Board meets as a single body to set or amend policy, develop long range educational goals and act upon recommendations of the Superintendent of Schools. The Board is also responsible for adopting and periodically amending the operating budget and evaluating school programs in accordance with governing laws. ADMINISTRATIVE STAFF John P. Scholten, SUPERINTENDENT Dr. Scholten has served as Superintendent of Schools since Prior to that he served as Superintendent of the Glen Lake Community Schools for nine years and eleven years as a building leader for Glen Lake, Ionia and Unionville-Sebewaing Schools. In addition, Dr. Scholten taught for the Cadillac Community Schools. Dr. Scholten earned a Bachelor of Arts degree from Michigan State University in 1982 and the following degrees from Central Michigan University: M.A. (Secondary Educational Admin. & Community Leadership)1986, Ed.S. (General Educational Administration) 1991, and Ed. D. (Educational Leadership) Dr. Scholten has served as the President of the Rotary Club of Petoskey. Kent J. Cartwright, CPA, CHIEF FINANCIAL OFFICER Mr. Cartwright is a Certified Public Accountant who began his career in the field of education in Prior positions include similar positions at Gaylord Community Schools and Forest Hills Public Schools. He assumed his present position as Chief Financial Officer with the Public Schools of Petoskey in Mr. Cartwright is a 1989 graduate of Central Michigan University with a Bachelor of Science degree in Accounting. He received his Masters in Business Administration degree from Grand Valley State University in He is a member of the American Institute of Certified Public Accountants and has earned his Chief Financial Officer certification from the Michigan School Business Officials. Mr. Cartwright currently serves as Treasurer for the Rotary Club of Petoskey. SCHOOL ENROLLMENT Historical Enrollment The School District s historical enrollment totals (Fall Pupil Count Day) are as follows: School Year Enrollment School Year Enrollment 2011/12 2, /07 3, /11 2, /06 3, /10 2, /05 3, /09 2, /04 3, /08 3, /03 3,084 20

25 Enrollment by Grade The enrollment totals by grade for the school year 2011/12 (Fall Pupil Count Day) are as follows: Projected Enrollment Kindergarten 226 Seventh 222 First 183 Eighth 247 Second 207 Ninth 241 Third 221 Tenth 256 Fourth 197 Eleventh 263 Fifth 202 Twelfth 247 Sixth 240 TOTAL 2,952 The projected enrollment totals for 2015/16 are as follows: EXISTING SCHOOL FACILITIES K-6 1, TOTAL 2,766 Year Type of School Grades Completed Additions Construction Elementary Central K /01 Brick Lincoln K /01 Brick Montessori Wood/vinyl Ottawa K /01 Brick Sheridan K /87/00 Brick Middle School Petoskey /00 Brick High School Petoskey /76/03 Brick Additional Facilities Central Administration Building Resort School Rental Property Curtis Field Sports Complex Agriculture Building Storage Building OTHER SCHOOLS There are three schools that are located within the School District s boundaries. Grades Approximate School Served Enrollment St. Francis Xavier Catholic School P Petoskey Area Seventh Day Adventist School K-8 12 Concord Academy-Petoskey K

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27 APPENDIX A - BUDGET General Fund Budget Summary For Fiscal Year Ending June 30, /12 Final REVENUE Budget Property Taxes $14,815,787 Local Sources 314,316 Athletic Sources 228,927 State Sources 7,508,718 Federal Sources 1,347,377 Incoming Transfers & Other Transactions 1,332,938 TOTAL REVENUE $25,548,063 EXPENDITURES INSTRUCTION: Basic Programs $13,237,067 Added Needs 4,373,774 TOTAL INSTRUCTION 17,610,841 SUPPORTING SERVICES: Pupil $717,985 Instructional 764,084 General Administration 478,264 School Administration 1,586,496 Business Services 741,631 Operations/Maintenance 2,204,115 Pupil Transportation 1,139,788 Staff/ Personal Services 66,058 Support Services Other 593,230 Community Services Direction 13,634 Community Activities 3,000 Non-Public School Pupils 14,662 TOTAL SERVICES 8,322,947 TOTAL EXPENDITURES $25,933,788 Outgoing Transfers & Other Transactions TOTAL EXPENDITURES $25,933,788 REVENUE OVER (UNDER) EXPENDITURES ($385,725) BEGINNING FUND BALANCE, JULY 1 2,876,553 ESTIMATED ENDING FUND BALANCE, JUNE 30 $2,490,828 A-1

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29 APPENDIX B - AUDIT B-1 FINANCIAL STATEMENTS AND SINGLE AUDIT ACT COMPLIANCE FOR THE YEAR ENDED JUNE 30, 2011 [THIS PAGE INTENTIONALLY LEFT BLANK]

30 TABLE OF CONTENTS FOR THE YEAR ENDED JUNE 30, 2011 TABLE OF CONTENTS FOR THE YEAR ENDED JUNE 30, 2011 PAGE PAGE B-2 Independent Auditors Report 1-2 Management s Discussion and Analysis 3-10 Basic Financial Statements District-wide Financial Statements Statement of Net Assets Governmental Activities 11 Statement of Activities Governmental Activities 12 Fund Financial Statements Balance Sheet Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balance Budget and Actual General Fund 17 Statement of Fiduciary Assets and Liabilities Agency Fund 18 Notes to the Financial Statements Combining and Individual Fund Financial Statements and Schedules Combining Balance Sheet Nonmajor Governmental Funds 33 Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Governmental Funds 34 Balance Sheet General Fund 35 Schedule of Revenues General Fund 36 Schedule of Operating Expenditures General Fund Balance Sheet Food Service Special Revenue Fund 39 Statement of Revenues, Expenditures and Changes in Fund Balances Food Service Special Revenue Fund 40 Combining Balance Sheet Capital Project Funds 41 Combining Statement of Revenues, Expenditures and Changes in Fund Balances Capital Project Funds 42 Combining Schedule of Debt Service Balances Debt Service Fund 43 Combining Schedule of Debt Service Activities and Changes in Fund Balances Debt Service Fund 44 Statement of Changes in Assets and Liabilities Agency Fund Schedules of Bond Indebtedness and Other Installment Debt Other Supplementary Information (Unaudited) Property Tax Information 53 Ten-Year Summary of Enrollment 54 Ten-Year Summary of General Fund Expenditures, Student Enrollment and Per Pupil Costs 55 Single Audit Act Compliance Schedule of Expenditures of Federal Awards Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditors Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and Internal Control Over Compliance in Accordance With OMB Circular A Schedule of Findings and Questioned Costs * * * * *

31 Board of Education Public Schools of Petoskey Petoskey, Michigan INDEPENDENT AUDITORS REPORT October 14, South Huron Cheboygan, MI Ph: Fx: In accordance with Government Auditing Standards, we have also issued our report dated October 14, 2011, 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 grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of the 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 Government Auditing Standards and should be considered in assessing the results of our audit. Management s Discussion and Analysis on pages 3-10 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The other supplementary information included on pages has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on it. B-3 We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Public Schools of Petoskey (the District ) as of and for the year ended June 30, 2011, 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 management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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 opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the District as of June 30, 2011, and the respective changes in financial position thereof and the respective budgetary comparisons for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The combining and individual fund financial statements and schedules listed in the table of contents, except for the information included on pages which is unaudited, are presented for purposes of additional analysis and are not a required part of the 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 Nonprofit Organizations, and is also not a required part of the basic financial statements of the District. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. -2-

32 Management s Discussion and Analysis As management of the Public Schools of Petoskey (the District ), a K-12 school district located in Emmet and Charlevoix Counties, Michigan, we offer readers of the District s financial statements this narrative overview and analysis of the financial activities of the District for the fiscal year ended June 30, Please read it in conjunction with the District s financial statements, which immediately follows this section. MANAGEMENT S DISCUSSION AND ANALYSIS Overview of the Financial Statements The District s basic financial statements consist of two parts: Management s Discussion and Analysis (this section) and the basic financial statements. This report also contains other supplementary information. The basic financial statements include two kinds of statements that present different views of the District: The first two statements are the District-wide financial statements that provide both short-term and long-term information about the District s overall financial status. These statements present an aggregate view of the District s finances and a longer-term view of those finances. B-4 The next statements are fund financial statements that focus on individual parts of the District. These statements look at the District s operations in more detail than the District-wide financial statements by providing information about the District s most significant funds the General Fund, the Sinking Fund, and the Debt Service Fund, with all other funds presented in one column as Nonmajor Funds. The statement of fiduciary assets and liabilities presents financial information about activities for which the District acts solely as an agent for the benefit of students and others. District-wide financial statements. The District-wide financial 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 and the statement of activities, which appear first in the District s financial statements, include all assets and liabilities and use the accrual basis of accounting. This means that all of the current year s revenues and expenses are taken into account regardless of when cash is received. The two District-wide financial statements report the District s net assets and how they have changed. Net assets the difference between the District s assets and liabilities is one way to measure the District s financial health or position. Over time, increases or decreases in the District s net assets are an indicator of whether its financial position is improving or deteriorating, respectively. The relationship between revenues and expenses is the District s operating results. However, it should be noted that unlike most private-sector companies where improving shareholder wealth is the goal, the District s goal is to provide services to our students. Therefore, in order to assess the overall health of the District, one must consider many nonfinancial factors such as the quality of education provided, breadth of curriculum offered, condition of school facilities, and the safety of the schools. -3-

33 B-5 The statement of net assets and statement of activities report the governmental activities for the District, which encompass all of the District s services including instruction, supporting services, community services, athletics, and food services. Property taxes, Unrestricted state aid, State grants, and Federal grants finance most of these activities. Fund financial statements. The District s fund financial statements provide detailed information about the most significant funds not the District as a whole. Some funds are required to be established by State law and by bond covenants, though the District may establish other funds to help control and manage money for particular purposes. It may also establish other funds to show that it is meeting legal responsibilities for using certain taxes, grants, and other money. The fund level financial statements are reported on a modified accrual basis, which measures only those revenues that are measurable and currently available. Expenses are recognized to the extent that they are normally expected to be paid with current financial resources. The fund financial statements are formatted to comply with the legal requirements of the Michigan Department of Education s Bulletin In the State of Michigan, the District s major instructional and instructional support activities are reported in the General Fund. Additional activities are reported in their relevant funds including: Debt Service Fund consisting of the 2005 refunding bonds, Durant bonds, and two land contracts. Special Revenue Fund consisting of the Food Service Fund. Capital Projects Funds consisting of the Sinking Fund, Roof Repair Fund and Building & Site Fund. In the fund financial statements, purchased capital assets are reported as expenditures in the year of acquisition. Assets are not capitalized at the fund level. The issuance of debt is recorded as a financial resource. The current year s payments of principal and interest on long-term obligations are recorded as expenditures. Future debt obligations are not recorded at the fund level. The District is the trustee, or fiduciary, for its student activity funds. All of the District s fiduciary activities are reported in a separate statement of fiduciary assets and liabilities. We exclude these activities from the District s other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. District-wide financial analysis As stated earlier, the summary of net assets provides the perspective of the District as a whole. The District s net assets increased 7.35% to approximately $36,574,000 as a result of operations in the current year. Table 1 provides a summary of the District s net assets as of June 30, 2011, and June 30, 2010: Public Schools of Petoskey Condensed Statement of Net Assets Table 1 Governmental Activities Percentage Change Assets Current assets $ 11,392,333 $ 10,387, % Deferred bond refunding costs 457, ,705 (11.11%) Capital assets, net of accumulated depreciation 46,505,769 47,228,548 (1.53%) Total assets 58,355,617 58,130, % Liabilities Current liabilities 3,870,404 4,115,621 (5.96%) Premium on bond refunding 373, ,199 (11.11%) Long-term liabilities 17,537,697 19,524,724 (10.18%) Total liabilities 21,781,610 24,060,544 (9.47%) Invested in capital assets, net of related debt 29,694,803 28,618, % Restricted 3,797,950 3,464, % Unrestricted 3,081,254 1,987, % Total net assets $ 36,574,007 $ 34,070, % Capital assets net of related debt, approximately $29,695,000, is the original cost of the District s capital assets, less depreciation, less the long-term debt outstanding used to finance the acquisition of those assets. This debt will be repaid mainly from voter-approved property taxes collected as the debt and interest payments come due. Restricted net assets of approximately $3,798,000 are shown separately to recognize legal constraints from debt covenants and enabling legislation. These constraints limit the District s ability to use those net assets for day-to-day operations. The remaining amount of net assets of approximately $3,081,000 is unrestricted and represents the accumulated results of all past years operations. The operating results of the General Fund will have a significant impact on the change in unrestricted net assets from year to year

34 B-6 The results of this year s operations of the District as a whole are reported in the statement of activities, summarized in Table 2, which shows the changes in net assets for fiscal year 2011 and Public Schools of Petoskey Condensed Statement of Change in Net Assets Table 2 Governmental Activities Percentage Change Revenue Program Revenues Charges for services $ 751,739 $ 709, % Grants and contributions 4,513,737 5,384,848 (16.18%) General Revenues Property taxes 19,546,617 20,752,638 (5.81%) State foundation allowance 5,587,801 4,331, % Other 335, , % Total revenues 30,735,753 31,398,456 (2.11%) Expenses Instruction 16,908,930 17,485,598 (3.30%) Supporting services 7,232,749 7,304,958 (0.99%) Community services 25,248 38,593 (34.58%) Food services 992, ,884 (0.73%) Athletics 549, ,604 (8.57%) Interest on long-term debt 819, ,218 (6.99%) Unallocated depreciation 1,703,392 1,641, % Total expenses 28,231,752 28,952,491 (2.49%) Increase in net assets $ 2,504,001 $ 2,445, % Of the District s total revenues available to operate the District, 2.45% or approximately $750,000 came from fees charged to those who benefited from the programs. Revenues from other governments or organizations that subsidize certain programs with grants and other directed types of funding approximated 14.69% or approximately $4,514,000. Local property taxes, of approximately $19,547,000 or 63.60% of total revenue, supported the remaining portion of the governmental activities. Property tax revenue declined by 5.81% due to the declines in property valuations experienced all across the region. The property tax revenue comes mainly from the 18 mills on all non-homestead property, which we are required to levy by the State in order to receive our full State foundation allowance. The District enjoys the support of the community in maintaining our facilities, as approximately $1,840,000 of the $19,547,000 in tax revenue is generated by a special millage specifically for capital expenditures. The proceeds and expenditures of this special millage are accounted for exclusively in the District s Sinking Fund. This special millage was renewed by voters in May 2005, and will expire on December 31, offset by the equal loss of federal American Recovery and Reinvestment Act funds. In 2010, the State had used the federal ARRA funds as a dollar-for-dollar offset against its reduction of the foundation allowance. For 2011, the federal ARRA funds were no longer available, and the State restored the $170 per pupil cut, essentially keeping gross funding level across the two years. The expense portion of Table 2 shows the financial support of each functional area required during the year. The overall decrease of 2.49% is due to deliberate budget reductions designed to help balance the District finances over the next few years. Being in the business of educating children, the largest expenses were incurred in instruction, which accounted for approximately $16,909,000 or 59.89% of total expenses. Support services cost approximately $7,233,000 or 25.62% of total expenses, which include such items as transportation, maintenance, security, supervision, counseling, health care, and a variety of similar services that support the District s mission of educating children. The District experienced an increase in net assets of approximately $2,504,000 or a 2.37% increase from the fiscal 2010 increase in net assets of approximately $2,446,000. Overall, revenue decreased 2.11%, while expenses decreased by 2.49%. It should be noted that under the accrual basis of accounting, property taxes collected for debt service are recognized as revenue, while only interest on the debt is recognized as expense. The increase in net assets differs from the change in fund balance and a reconciliation appears later in the financial statements. Financial Analysis of the District s Funds As noted earlier, the District uses funds to help control and manage money for particular purposes. Looking at funds helps the reader consider whether the District is being accountable for the resources taxpayers and others provide, and may provide more insight in the District s overall financial health. As the District completed this year, the governmental funds reported a combined fund balance of approximately $7,500,000, which is an increase of approximately $1,300,000 from the prior year. Approximately $908,000 of this increase is in the Sinking Fund, designated for upcoming construction projects. Of the combined governmental fund balances, 2.64% or approximately $198,000 constitutes unassigned fund balance, which is available for spending at the District s discretion. District management has assigned approximately $3,245,000 as assigned fund balance to indicate planned uses of these funds. Of the assigned fund balance, approximately $92,000 has been set aside to recognize the fund balance accumulated by the efforts of the Athletic department and supporters. Management has assigned approximately another $2,404,000 against subsequent year expenditures, in anticipation of declines in state and federal funding. Also, approximately $748,000 has been assigned for construction activities already planned or in progress. Approximately $3,773,000 is restricted fund balance to indicate that it is not available for spending at the District s discretion. Of the restricted fund balance, approximately $3,402,000 is earmarked for capital improvements and approximately $371,000 is earmarked for payments on long-term debt. The remaining fund balance is designated as non-spendable fund balance, and is earmarked for inventory, prepaid items and real estate held for sale. The General Fund is the principal operating fund of the District. At the end of the current fiscal year, assigned fund balance of the General Fund was approximately $2,496,000, while total fund balance was approximately $2,877,000. As a measure of the General Fund s liquidity, it may be useful to compare total fund balance to total fund expenditures. Total fund balance represents 11.52% of total General Fund expenditures and transfers. The State foundation allowance accounted for 18.18% or approximately $5,588,000 of the revenue available. This revenue is determined by a formula that incorporates pupil headcount, the annual per pupil allowance, and the non-homestead property taxable values of the District. The increase of 29.00% is mainly due to the restoration of $170 per pupil funding that had been reduced in 2010, and

35 B-7 The fund balance of the District s General Fund increased by approximately $213,000 during the current fiscal year, mainly due to management instituted budget cuts designed to bring spending levels within anticipated revenues. See the above discussion relative to District-wide governmental activities. General Fund Budgetary Highlights Over the course of the year, the District revises its budget as it attempts to deal with changes in revenues and expenditures. State law requires the budget be amended to ensure expenditures do not exceed appropriations. A schedule showing the District s original and final budget amounts, compared with amounts actually paid and received, is provided in the basic financial statements. A summary of variances from the final amended budget is as follows: The District s General Fund revenues were approximately $257,000 less than the final amended budget, a variance of (1.00)%. The actual revenue was under budget mainly due to some federal awards not being spent in the time frame anticipated. The District s General Fund expenditures were approximately $617,000 less than the final amended budget, a variance of (2.41)%. The reduction of actual expenditures under budget is due to cost saving programs implemented throughout the year and due to some federal awards not being spent in the time frame anticipated. Capital Asset and Debt Administration Capital Assets. By June 30, 2011, the District had invested approximately $74,880,000 in a broad range of capital assets, including school buildings, land, athletic facilities, furniture, and equipment. This represents a net increase (including all additions and disposals) of approximately $980,000 or 1.33% from last year. More detailed information about capital assets is available in Note III C to the financial statements. This year s capital asset additions include HVAC replacement, gym improvements, as well as lighting and roofing replacement. Construction-in-progress is attributable mainly to Middle School Auditorium renovation. The disposals include the sale of a parcel of land. Public Schools of Petoskey Capital Assets Table Land $ 3,384,351 $ 3,394,351 Construction-in-progress 727, ,494 Buildings 62,841,985 62,129,808 Furniture and equipment 7,927,755 7,927,755 Total capital assets 74,882,021 73,901,408 Less accumulated depreciation 28,376,252 26,672,860 Net capital assets $ 46,505,769 $ 47,228,548 Debt. At year-end, the District had approximately $17,540,000 in general obligation bonds and other long-term debt outstanding a reduction of 10.18% from last year as shown in Table 4. More detailed information about the District s long-term debt is presented in Note III F to the financial statements, and in the Other Supplemental Information section. Public Schools of Petoskey Long-Term Debt Table General obligation bonds $ 15,855,000 $ 17,540,000 Other general obligation debt 1,682,697 1,984,724 Total long-term debt $ 17,537,697 $ 19,524,724 In 2006, the District entered into a land contract for the purchase of land in the amount of $700,000. The balance on the contract was approximately $545,000 at June 30, In 2004, the District also entered into a land contract for the purchase of land. The original amount of the 2004 land contract was $700,000, and the remaining balance at year end is approximately $411,000. Factors Bearing on the District s Future We considered many factors when setting the District s fiscal year budget, including the anticipated loss of significant amounts of state and federal funding. Approximately 81% of total General Fund revenues are from the foundation allowance. The State foundation allowance is determined by multiplying the blended student count by the foundation allowance per pupil. That makes our student count estimate one of the most important factors impacting our budget. We encountered a loss of 45 students from September 2010 to September 2011, which was a larger loss than anticipated. In setting the budget for , we assumed a further reduction of 15 students

36 Since the District s revenue is heavily dependent on State funding and the health of the State s School Aid Fund, the actual revenue received depends on the State s ability to collect the revenues to fund its appropriation to school districts. For fiscal year , the District saw a foundation allowance of $7,146. While this State funding was $170 higher than in , it was offset by the equal loss of Federal ARRA funding. Essentially, school funding has remained static over the past two years. Going into the budget planning cycle for , we believe the foundation allowance will stay level at $7,146. We also assume that the Federal Stimulus funds which expired in June 2010 will not be renewed. However, to offset the flat State funding along with the loss of Federal Stimulus funds, the District has held onto federal Edujobs funds from last year to use in the upcoming year. In order to address increased inflationary costs, the District cut approximately $750,000 in expenses from the budget. These cuts were made through a combination of measures that mostly affected non-educational areas, and included some limited work force reduction. The combination of expected results in pupil count, reductions and offsets in funding, and increases in expenditures results in our budget showing an approximate decrease of approximately $860,000 in ending fund balance. This planned decrease will reduce the fund balance to approximately 8.08% of expenditures, which is slightly above the minimum level required to meet cash flow requirements without borrowing. At this time, no additional cost-savings measures are anticipated as the year begins. BASIC FINANCIAL STATEMENTS B-8 The District s labor contract with the Petoskey Education Association, which represents the District s teachers, was settled in June 2011, and will expire in August The District s labor contract with the Petoskey Educational Support Personnel Association, which represents the District s support personnel, was settled in June 2011, and will expire in August Contacting the School District s Financial Management This financial report is designed to provide the District s citizens, taxpayers, customers, investors, and creditors with a general overview of the District s finances. It is also designed 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 Business Office, 1130 Howard Street, Petoskey, Michigan

37 STATEMENT OF NET ASSETS GOVERNMENTAL ACTIVITIES JUNE 30, 2011 DISTRICT-WIDE FINANCIAL STATEMENTS Assets Cash and cash equivalents $ 5,247,998 Investments 4,373,724 Receivables 1,486,829 Other current assets 283,782 Deferred bond refunding costs 457,515 Capital assets not being depreciated 4,112,281 Capital assets being depreciated, net 42,393,488 Total assets 58,355,617 Liabilities Accounts payable and accrued expenditures 3,645,282 Unearned revenue 225,122 Long-term liabilities Premium on bond refunding 373,509 Due within one year 1,973,046 Due in more than one year 15,564,651 B-9 Total liabilities 21,781,610 Net assets Invested in capital assets, net of related debt 29,694,803 Restricted for capital outlay 3,402,127 Restricted for debt service 370,823 Unrestricted 3,106,254 Total net assets $ 36,574,007 The accompanying notes are an integral part of these basic financial statements. -11-

38 STATEMENT OF ACTIVITIES GOVERNMENTAL ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2011 Program Revenues Operating Charges Grants and Net (Expense) Functions/Programs Expenses for Services Contributions Revenue Governmental activities Instruction $ 16,908,930 $ 148,206 $ 3,803,073 $ (12,957,651) Supporting services 7,232,749 39,770 1,484 (7,191,495) Community services 25, (25,248) Food services 992, , ,667 32,249 Athletics 549, ,556 71,513 (301,079) Interest on long-term debt 819, (819,660) Unallocated depreciation 1,703, (1,703,392) FUND FINANCIAL STATEMENTS Total governmental activities $ 28,231,752 $ 751,739 $ 4,513,737 (22,966,276) B-10 General revenues Property taxes - operations 17,099,795 Property taxes - debt service 2,446,822 Unrestricted state aid 5,587,801 Unrestricted investment earnings 40,176 Gain on sale of capital assets 188,911 Other 106,772 Total general revenues 25,470,277 Change in net assets 2,504,001 Net assets, beginning of year 34,070,006 Net assets, end of year $ 36,574,007 The accompanying notes are an integral part of these basic financial statements. -12-

39 BALANCE SHEET GOVERNMENTAL FUNDS BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2011 JUNE 30, 2011 B-11 ASSETS Non- Total Debt Major Governmental General Sinking Service Funds Funds Cash and cash equivalents $ 610,841 $ 3,530,779 $ 317,045 $ 789,333 $ 5,247,998 Investments 4,105, ,875 53,778-4,373,724 Accounts receivable 46, ,162 Due from other governmental units 1,419,407-21,260-1,440,667 Other assets 182, , ,782 Total assets $ 6,363,494 $ 3,745,654 $ 392,083 $ 891,102 $ 11,392,333 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 262,871 $ - $ - $ 39,764 $ 302,635 Contracts payable - 343, ,527 Salaries payable 1,890, ,890,738 Accrued expenses 989, ,444 Deferred revenue 343,888-21,260 1, ,382 Total liabilities 3,486, ,527 21,260 40,998 3,892,726 Fund balances Non-spendable Inventory 15, , ,075 Prepaid items 46, ,707 Real-estate held for sale 120, ,000 Restricted Debt service , ,823 Capital outlay - special revenue fund - 3,402, ,402,127 Assigned Athletics 91, ,947 Capital outlay - capital project funds , ,396 Capital outlay - special revenue fund ,939 2,939 Subsequent year expenditures 2,404, ,404,265 Unassigned 198, ,328 Total fund balances 2,876,553 3,402, , ,104 7,499,607 Total liabilities and fund balances $ 6,363,494 $ 3,745,654 $ 392,083 $ 891,102 $ 11,392,333 Reconciliation of fund balances on the balance sheet for governmental funds to net assets of governmental activities on the statement of net assets Fund balances - total governmental funds $ 7,499,607 Amounts reported for governmental activities in the statement of net assets are different because Capital assets used in governmental activities are not financial resources and therefore are not reported in the governmental funds. Add - capital assets 74,882,021 Deduct - accumulated depreciation (28,376,252) The focus of governmental funds is on short-term financing, some assets will not be available to pay for current-period expenditures. Those assets (such as certain receivables) are offset by deferred revenues in the governmental funds, and thus are not included in fund balance. Add - long term deferred assets 141,260 Certain liabilities, such as bonds payable, are not due and payable in the current period and therefore are not reported in the funds. Add - deferred bond refunding costs, net of amortization 457,515 Deduct - premium on bond refunding, net of amortization (373,509) Deduct - bonds and other long-term liabilities (16,832,226) Deduct - employee incentives (135,350) Deduct - accrued interest on bonds payable (118,938) Deduct - compensated absences (570,121) Net assets of governmental activities $ 36,574,007 Concluded Continued The accompanying notes are an integral part of these basic financial statements

40 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2011 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2011 B-12 Non- Total Debt Major Governmental General Sinking Service Funds Funds Revenues Local sources Property taxes $ 14,772,141 $ 1,842,610 $ 2,446,822 $ - $ 19,061,573 Revenue in lieu of taxes 485, ,044 Charges for services 122, , ,325 Tuition 26, ,088 Rent income ,770 39,770 Interest 11,084 18,660 5,486 4,946 40,176 Athletics 248, ,069 Other income 119, ,426 State sources 6,768,438-11,396 55,555 6,835,389 Federal sources 940, ,112 1,522,590 Interdistrict sources 1,681, ,681,958 Total revenues 25,175,101 1,861,270 2,464,447 1,069,590 30,570,408 Expenditures Current Instruction 17,061, ,061,247 Supporting services 7,875, ,875,627 Community services 25, ,248 Food services , ,625 Other - 13,654 16,209-29,863 Capital outlay - 806,370-81, ,304 Debt service Principal - - 1,777,707-1,777,707 Interest , ,517 Total expenditures 24,962, ,024 2,612,433 1,074,559 29,469,138 Revenues over (under) expenditures 212,979 1,041,246 (147,986) (4,969) 1,101,270 Other financing (uses) sources Proceeds from sale of capital assets , ,911 Transfers in , ,853 Transfers out - (132,853) - - (132,853) Total other financing (uses) sources - (132,853) 132, , ,911 Net change in fund balances 212, ,393 (15,133) 193,942 1,300,181 Fund balance, beginning of year, as restated 2,663,574 2,493, , ,162 6,199,426 Fund balances, end of year $ 2,876,553 $ 3,402,127 $ 370,823 $ 850,104 $ 7,499,607 Continued Reconciliation of the statement of revenues, expenditures and change in fund balance of governmental funds to the statement of activities Net change in fund balances - total governmental funds $ 1,300,181 Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. Add - capital outlay 990,613 Deduct - proceeds from sale of capital assets (198,911) Add - gain on sale of capital assets 188,911 Deduct - depreciation expense (1,703,392) Governmental funds report bond refunding costs and bond premiums as expenditures and revenue, respectively. However, in the statement of activities, these costs are allocated over the life of the related bonds and reported as amortization expense. Add - amortization of bond premium 46,690 Deduct - amortization of bond refunding cost (57,190) Bond proceeds provide current financial resources to governmental funds in the period issued, but issuing bonds increases long-term liabilities in the statement of net assets. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets. Add - principal payments on long-term liabilities 1,777,707 Add - early retirement incentive payments 216,488 Revenues in the statement of activities that do not provide current financial resources are not reported as revenue in the funds Deduct - payments received on long-term Durant Settlement receivable (9,912) Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds. Deduct - increase in the accrual for compensated absences (7,168) Deduct - reduction of the fair market value of long term deferred assets (50,000) Add - decrease in accrued interest payable on bonds 9,984 Change in net assets - governmental activities $ 2,504,001 Concluded The accompanying notes are an integral part of these basic financial statements

41 B-13 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2011 Variance - Positive Budget (Negative) Final Final Amended Original Amended Actual to Actual Revenues Local sources $ 15,605,060 $ 15,904,166 $ 15,784,227 $ (119,939) State sources 6,175,788 6,780,842 6,768,438 (12,404) Federal sources 594,841 1,075, ,478 (135,345) Interdistrict sources 1,542,380 1,671,198 1,681,958 10,760 Total revenues 23,918,069 25,432,029 25,175,101 (256,928) Expenditures Education Instruction 16,925,966 17,273,726 17,061, ,479 Supporting services 7,569,766 8,265,989 7,875, ,362 Community services 36,410 39,316 25,248 14,068 Total expenditures 24,532,142 25,579,031 24,962, ,909 Revenues (under) over expenditures (614,073) (147,002) 212, ,981 Other financing sources (uses) Transfers in 35, Assets JUNE 30, 2011 Cash and cash equivalents $ 175,370 Investments 425,000 Accounts receivable 1,498 Total assets $ 601,868 Liabilities STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES AGENCY FUND Due to student groups $ 194,965 Scholarships payable 259,455 Due to others 147,448 Total liabilities $ 601,868 Net change in fund balance (579,073) (147,002) 212, ,981 Fund balance, beginning of year, as restated 2,663,574 2,663,574 2,663,574 - Fund balance, end of year $ 2,084,501 $ 2,516,572 $ 2,876,553 $ 359,981 The accompanying notes are an integral part of these basic financial statements. The accompanying notes are an integral part of these basic financial statements

42 NOTES TO THE FINANCIAL STATEMENTS I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting entity NOTES TO THE FINANCIAL STATEMENTS Public Schools of Petoskey (the District ) has followed the guidelines of the Governmental Accounting Standards Board s Statement No. 14 and has determined that no entities should be consolidated into its basic financial statements as component units. Therefore, the reporting entity consists of the primary government financial statements only. The criteria for including a component unit include significant operational or financial relationships with the District. B. District-wide and fund financial statements B-14 The District-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 primary government. 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 District had no business-type activities during the year ended June 30, 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 and fiduciary funds, even though the latter are excluded from the District-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 District-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting as are the fiduciary fund financial statements. However, agency funds do not have a measurement focus. 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. -19-

43 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS B-15 Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the end of the current fiscal period or within one year for reimbursement type grants. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property taxes and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when cash is received by the government. The District reports the following major governmental funds: The General Fund is the government s primary operating fund. It accounts for all financial resources of the District, except those required to be accounted for in another fund. The Sinking Fund is used to record capital project activities funded with the Sinking Fund millage. The Debt Service Fund accounts for the property tax revenue collected and the payment of principal and interest on the District s outstanding debt. Additionally, the District reports the following fund types: The Special Revenue Fund accounts for the food service program sponsored by the District. Revenues in the food service program consist of federal awards and charges for services. The Capital Project Funds account for the financial resources used for the acquisition or construction of major capital facilities. The Agency Fund accounts for assets held for other groups and organizations and is custodial in nature. When both restricted and unrestricted resources are available for use, it is the District s policy to use restricted resources first, then unrestricted resources as they are needed Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided and 2) operating grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. The effect of interfund activity has been eliminated from the District-wide financial statements. D. Assets, liabilities and 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. Investments are reported at fair value. 2. Receivables and payables Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either due to/from other funds (i.e., the current portion of interfund loans) or advances to/from other funds (i.e., the non-current portion of interfund loans). There were no interfund advance loans outstanding at June 30, Inventory and prepaid items Inventory is valued at the lower of cost (first-in, first-out) or market. Inventory consists of expendable supplies held for sale or consumption. The cost is recorded as an expenditure when consumed rather than when purchased. Reported inventories are equally offset by non-spendable fund balance, which indicates that they do not constitute available spendable resources even though they are a component of net current assets. Payments made to vendors for services that will benefit future periods are reported as prepaid items. 4. Capital assets Capital assets, which include property and equipment, are reported in the governmental activities column in the District-wide financial statements. Generally, capital assets are defined by the District as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. -21-

44 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 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. Capital assets of the primary government are depreciated using the straight line method over the following estimated useful lives: Assets Years When the District incurs an expenditure for purposes for which various fund balance classifications can be used, it is the District s policy to use restricted fund balance first, then committed fund balance, assigned fund balance, and finally unassigned fund balance. Restricted net assets represent assets which are legally restricted by outside parties or enabling legislation. B-16 Buildings and improvements 5-50 Furniture and equipment Compensated absences District policy permits certain employees to accumulate earned but unused sick pay benefits, which are paid when the employee separates from service with the District. A liability is recorded in the government-wide financial statements for such amounts. No liability is recorded for accumulated vacation since hours earned do not vest. 6. Long-term obligations In the District-wide financial statements, long-term obligations are reported as liabilities in the governmental activities statement of net assets. Where applicable, bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight line method. 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. II. III. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary information Annual budgets are adopted on a basis consistent with generally accepted accounting principles for the general and special revenue funds. All annual appropriations lapse at fiscal year-end. The General Fund is under formal budgetary control. Budgets shown in the financial statements are adopted on a basis consistent with generally accepted accounting principles ( GAAP ), and are not significantly different from the modified accrual basis used to reflect actual results, and consist only of those amounts contained in the formal budget as originally adopted or as amended by the Board of Education. The budget for the General Fund is adopted on a functional basis. DETAILED NOTES ON ALL FUNDS A. Deposits and investments A reconciliation of cash and cash equivalents and investments as shown on the Statement of Net Assets and Statement of Fiduciary Net Assets follows: 7. Fund equity Governmental funds report nonspendable fund balance for amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. Restricted fund balance is reported when externally imposed constraints are placed on the use of resources by grantors, contributors, or laws or regulations of other governments. Committed fund balance is reported for amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the Distrct s highest level of decision-making authority, the Board of Education. A formal resolution of the Board of Education is required to establish, modify, or rescind a fund balance commitment. The District reports assigned fund balance for amounts that are constrained by the District s intent to be used for specific purposes, but are neither restricted nor committed. Unassigned fund balance is the residual classification for the general fund Statement of Net Assets Cash and cash equivalents $ 5,247,998 Investments 4,373,724 Total Statement of Net Assets 9,621,722 Statement of Fiduciary Net Assets Agency Funds Cash and cash equivalents 175,370 Investments 425,000 Total Statement of Fiduciary Net Assets 600,370 Total deposits and investments $10,222,

45 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS B-17 A reconciliation of cash and investments as shown in the financial statements to the District s deposits and investments is as follows: Bank deposits (checking accounts, savings accounts, and certificates of deposit) $ 5,847,968 Investments 4,373,724 Cash on hand 400 Total deposits and investments $10,222,092 Michigan law authorizes the District to deposit and invest in: (a) Bonds, bills, or notes of the United States; obligations, the principal and interest of which are fully guaranteed by the United States; or obligations of the State. In a primary or fourth class school district, the bonds, bills, or notes shall be payable at the option of the holder upon not more than 90 days notice or, if not so payable, shall have maturity dates not more than five years after the purchase dates. (b) Certificates of deposit insured by a State or national bank, savings accounts of a state or federal savings and loan association, or certificates of deposit or share certificates of a state or federal credit union organized and authorized to operate in this State. (c) Commercial paper rated prime at the time of purchase and maturing not more than 270 days after the date of purchase. (d) Securities issued or guaranteed by agencies or instrumentalities of the United States government or federal agency obligation repurchase agreements, and bankers acceptance issued by a bank that is a member of the federal deposit insurance corporation. (e) Mutual funds composed entirely of investment vehicles that are legal for direct investment by a school district. (f) Investment pools, as authorized by the surplus funds investment pool act, composed entirely of instruments that are legal for direct investment by a school district. The District s investment policy allows for all of these types of investments. The District chooses to disclose its investments by specifically identifying each. As of year-end, the District had the following investments: Investment Maturity Fair Value Rating Michigan Liquid Asset Fund n/a $ 4,373,724 S&P AAAm Certificates of deposit of $425,000 are considered bank deposits for risk purposes Investment and deposit risk Interest Rate Risk. State law limits the allowable investments and the maturities of some of the allowable investments as identified above. The District s investment policy does not have specific limits in excess of state law on investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. Credit Risk. State law limits investments to specific government securities, certificates of deposits and bank accounts with qualified financial institutions, commercial paper with specific maximum maturities and ratings when purchased, bankers acceptances of specific financial institutions, qualified mutual funds and qualified external investment pools as identified in the list of authorized investments above. The District s investment policy does not have specific limits in excess of state law on investment credit risk. The ratings for each investment are identified above for investments held at year-end. Custodial Credit Risk Deposits. Custodial credit risk is the risk that in the event of a bank failure, the District s deposits may not be returned. State law does not require and the District does not have a policy for deposit custodial credit risk. As of year-end, $5,700,068 of the District s bank balance of $6,200,068 was exposed to custodial credit risk because it was uninsured and uncollateralized. Custodial Credit Risk Investments. For an investment, custodial credit risk 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. State law does not require and the District does not have a policy for investment custodial credit risk. On the investments listed above, there is no custodial credit risk, as these investments are uncategorized as to credit risk. Concentration of Credit Risk. State law limits allowable investments but does not limit concentration of credit risk as identified in the list of authorized investments above. The District s investment policy does not have specific limits in excess of state law on concentration of credit risk. All investments held at year-end are reported above. B. Receivables Receivables in the governmental activities are 97% due from other governments and 3% accounts receivable. -25-

46 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS B-18 C. Capital assets Capital assets activity was as follows for the year ended June 30, 2011: Balance Balance July 1, June 30, 2010 Additions Disposals Transfers 2011 Capital assets not being depreciated Land $ 3,394,351 $ - $ (10,000) $ - $ 3,384,351 Construction in process 449, ,930 - (449,494) 727,930 Total capital assets not being depreciated 3,843, ,930 (10,000) (449,494) 4,112,281 Capital assets being depreciated Buildings and improvements 62,129, , ,494 62,841,985 Furniture and equipment 7,927, ,927,755 Total capital assets being depreciated 70,057, , ,494 70,769,740 Accumulated depreciation Buildings and improvements (19,776,079) (1,447,532) - - (21,223,611) Furniture and equipment (6,896,781) (255,860) - - (7,152,641) Total accumulated depreciation (26,672,860) (1,703,392) - - (28,376,252) Total capital assets being depreciated, net 43,384,703 (1,440,709) - 449,494 42,393,488 Governmental activities capital assets, net $ 47,228,548 $ (712,779) $ (10,000) $ - $ 46,505,769 Unallocated depreciation expense of $1,703,392 was charged to the governmental activities. D. Accounts payable and accrued expenses Accounts payable and accrued expenses are 8 percent vendors, 9 percent contracts, 52 percent salaries, and 31 percent accrued expenses. E. Interfund receivables, payables and transfers The District reports interfund balances between certain funds. These interfund balances resulted primarily from the time lag between the dates that 1) interfund goods and services are provided or reimbursable expenditures occur, 2) transactions are recorded in the accounting system, and 3) payments between funds are made. As of June 30, 2011, there were no outstanding interfund receivables or payables. Transfers are used to: 1) move revenues from the fund that is required to collect them to the fund that is required or allowed to expend them; 2) move receipts restricted to or allowed for debt service from the funds collecting the receipts to the debt service fund as debt service payments become due; and 3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. For the year ended June 30, 2011, the District s Sinking Capital Project Fund transferred $132,853 to the Debt Service Fund. F. Long-Term Debt Long-term debt of the District consists of the following: Balance Balance Due July 1, June 30, Within 2010 Increases (Decreases) 2011 One Year Bonds payable General obligation $ 17,540,000 $ - $ (1,685,000) $ 15,855,000 $ 1,735,000 Durant resolution 31,172 - (9,912) 21,260 10,383 Total bonds payable 17,571,172 - (1,694,912) 15,876,260 1,745,383 Other liabilities Land contracts 1,038,761 - (82,795) 955,966 87,031 Early retirement incentives 351,838 - (216,488) 135, ,348 Compensated absences 562,953 7, ,121 5,284 Total other liabilities 1,953,552 7,168 (299,283) 1,661, ,663 Total long-term liabilities $ 19,524,724 $ 7,168 $ (1,994,195) $ 17,537,697 $ 1,973,

47 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS Long-term debt at June 30, 2011, includes the following: Debt service requirements B-19 General Obligation Bonds 2005 refunding bonds due in annual installments ranging from $1,685,000 to $2,125,000 with interest ranging from 3.50% to 5.00%; final payment due May $ 15,855,000 Durant Resolution Bond 1998 series, school improvement bonds due in annual installments ranging from $9,912 to $10,877 with interest charged at 4.76%. These bonds are self-liquidating. The principal and interest is payable solely through annual appropriations by the State of Michigan. If the legislature fails to appropriate the funds, the District is under no obligation for payment. Final payment is due May 15, ,260 Total bonds 15,876,260 Other Liabilities IV. The annual requirements to service the bonds, early retirement incentives, and land contracts outstanding to maturity, including both principal and interest, are as follows: Year Ending June 30 Principal Interest Total 2012 $ 1,967,762 $ 754,834 $ 2,722, ,927, ,137 2,590, ,976, ,064 2,570, ,071, ,145 2,566, ,176, ,473 2,567, ,810, ,521 7,389, , ,750 Total $ 16,967,576 $ 3,477,812 $ 20,445,388 Interest and paying agent fees paid were $819,660 for the year ended June 30, Compensated absences are generally liquidated by the General Fund. OTHER INFORMATION Land contract payable in monthly installments of $5,536 including interest charged at 5.00%; final payment due May 1, ,038 Land contract payable in monthly installments of $5,536 including interest charged at 5.00%; final payment due May 15, ,928 Early retirement incentives 135,350 A. Risk management The District is exposed to various risks of loss related to property loss, torts, errors and omissions, employee injuries (workers compensation) as well as medical benefits provided to employees. The District has purchased commercial insurance for general liability, property and casualty and health claims and participates in the MASB/SET-SEG (risk pool) for claims relating to employee injuries/workers compensation. Settled claims relating to the commercial insurance have not exceeded the amount of insurance coverage in any of the past three fiscal years. Compensated absences 570,121 Total long-term debt $ 17,537,697 The shared-risk pool program, in which the District participates, operates as a common risk-sharing management program for school districts in Michigan; member premiums are used to purchase commercial excess insurance coverage and to pay member claims in excess of deductible amounts. B. Property taxes Property taxes are assessed as of December 31, and attach as an enforceable lien on property as of July 1 of the following year. School related property taxes are levied on December 1 each year, based on the previous year s assessment, by township governments whose boundaries include property within the District, and are due on February 28. Delinquent real taxes are advanced to the District by the Revolving Tax

48 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS B-20 Fund of the applicable County. Taxes are recorded as revenue in the year levied. Taxes receivable are recorded for property taxes collected within 60 days of year-end, if any. C. Defined benefit pension plan Plan Description The District contributes to the Michigan Public School Employees Retirement System ( MPSERS ), a cost-sharing multiple-employer defined benefit pension plan administered by the State of Michigan Department of Management and Budget, Office of Retirement Systems. MPSERS provides survivor and disability benefits, to plan members and beneficiaries. Benefit provisions are established and must be amended by state statute. The Office of Retirement Systems issues a publicly available financial report that includes financial statements and required supplementary information for MPSERS. That report can be obtained by writing to Michigan Public School Employees Retirement System, 7150 Harris Drive, PO Box 30171, Lansing, Michigan, or by calling (517) Funding Policy Member contribution rates vary based on date of hire and certain voluntary elections. Member Investment Plan ( MIP ) members enrolled in MIP prior to January 1, 1990 contribute at a permanently fixed rate of 3.90% of gross wages. Members first hired January 1, 1990 through June 30, 2008 contribute at the following graduated permanently fixed contribution rates: 3.00% of the first $5,000; 3.60% of $5,001 through $15,000; 4.30% of all wages over $15,000. Members first hired July 1, 2008 through June 30, 2010 contribute at the following graduated permanently fixed contribution rates: 3.00% of the first $5,000; 3.60% of $5,001 through $15,000; 6.40% of all wages over $15,000. Basic Plan members make no contributions. Members first enrolled on or after July 1, 2010 are enrolled in the Pension Plus Plan which contains a defined contribution component. Member contributions are matched at a rate of 50% by the employer, up to a maximum of one percent of gross wages. The District is required to contribute the full actuarial funding contribution amount to fund pension benefits, plus an additional amount to fund retiree health care benefits on a cash disbursement basis. The rates for the year ended June 30, 2011 as a percentage of payroll ranged from 16.94% to 20.66% for MIP members and 15.44% to 19.16% for Pension Plus members. The contribution requirements of plan members and the District are established by Michigan State statute and may be amended only by action of the State Legislature. The District s contributions to MPSERS under all retirement plans for the years ended June 30, 2011, 2010, and 2009, were $3,473,860, $2,605,638, and $2,707,543 respectively, equal to the required contributions for each year. Other Postemployment Benefits The State of Michigan has contracted to provide the comprehensive group medical, hearing, dental and vision coverage for retirees and beneficiaries. All health care benefits are on a self-funded basis. A significant portion of the premium is paid by MPSERS with the balance deducted from the monthly pension. Pension recipients are eligible for fully paid Master Health Plan coverage and 90% paid Dental Plan, Vision Plan and Hearing Plan coverage with the following exceptions: 1. Retirees not yet eligible for Medicare coverage pay an amount equal to the Medicare Part B premiums. 2. Retirees with less than 30 years of service, who terminate employment after October 31, 1980 with the vested deferred benefits, are eligible for partially employer paid health benefit coverage (no payment if less than 21 years of service). D. Sinking funds The Sinking Fund records capital project activities funded with a sinking fund millage. For this fund, the District has complied with the applicable provisions of 1212(1) of the Revised School Code and the applicable section of the Revised Bulletin for School District Audits of Bonded Construction Funds and of Sinking Funds in Michigan. E. Commitments and contingencies Under the terms of various Federal and State grants and regulatory requirements, periodic audits are required and certain cost may be questioned as not being appropriate expenditures under the terms of the grants and requirements. Such audits could lead to reimbursement of the grantor or regulatory agencies. However, management does not believe such disallowances, if any, would be material to the financial position of the District. As is the case with other entities, the District faces exposure from potential claims and legal proceedings involving environmental matters. No such claims or proceedings have been asserted as of June 30, During fiscal year 2011, the District had entered into a construction contract amounting to approximately $2,000,000. The contract is for renovations to the middle school auditorium. As of June 30, 2011, approximately $640,000 was recorded as constructionin-progress related to these projects

49 NOTES TO THE FINANCIAL STATEMENTS F. Net assets invested in capital assets, net of related debt The composition of net assets invested in capital assets, net of related debt as of June 30, 2011, was as follows: Capital assets, not being depreciated $ 4,112,281 Capital assets, net of depreciation 42,393,488 Noncurrent liabilities Due within one year (1,973,046) Due in more than one year (15,564,651) Add back: early retirement incentives 135,350 Add back: Durant bonds 21,260 Add back: compensated absences 570,121 COMBINING AND INDIVIDUAL FUND FINANCIAL STATEMENTS AND SCHEDULES $ 29,694,803 B-21 G. Restatement The District adopted the provisions of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, in the current year. GASB 54 establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of resources reported in governmental funds. The District s beginning General Fund fund balance was restated by an increase of $92,691, with a corresponding decrease to the District s Nonmajor Governmental Funds beginning fund balance, due to the elimination of the Athletic Fund which is now combined with the General Fund. * * * * * -32-

50 COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS JUNE 30, 2011 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2011 B-22 ASSETS Special Total Revenue Fund Capital Project Funds Nonmajor Food Building Governmental Service Roof Repair and Site Funds Cash and cash equivalents $ 43,937 $ 13,702 $ 731,694 $ 789,333 Inventory 101, ,769 Total assets $ 145,706 $ 13,702 $ 731,694 $ 891,102 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 39,764 $ - $ - $ 39,764 Deferred revenue 1, ,234 Total liabilities 40, ,998 Fund balances Non-spendable - inventory 101, ,769 Assigned - capital outlay 2,939 13, , ,335 Total fund balances 104,708 13, , ,104 Total liabilities and fund balances $ 145,706 $ 13,702 $ 731,694 $ 891,102 Special Total Revenue Fund Capital Project Funds Nonmajor Food Building Governmental Service Roof Repair and Site Funds Revenues Local sources Charges for services $ 387,207 $ - $ - $ 387,207 Rent income ,770 39,770 Interest ,153 4,946 State sources 55, ,555 Federal sources 582, ,112 Total revenues 1,025, ,923 1,069,590 Expenditures Current Food services 992, ,625 Capital outlay ,934 81,934 Total expenditures 992,625-81,934 1,074,559 Revenues over (under) expenditures 32, (38,011) (4,969) Other financing sources Proceeds from sale of capital assets , ,911 Net change in fund balances 32, , ,942 Fund balances, beginning of year 71,751 13, , ,162 Fund balances, end of year $ 104,708 $ 13,702 $ 731,694 $ 850,

51 BALANCE SHEET GENERAL FUND SCHEDULE OF REVENUES GENERAL FUND JUNE 30, 2011 (WITH COMPARATIVE TOTALS AS OF JUNE 30, 2010) FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B ASSETS Cash and cash equivalents $ 610,841 $ 424,486 Investments 4,105,071 4,881,010 Accounts receivable 46,162 3,156 Due from other governmental units 1,419, ,323 Other assets 182, ,045 Total assets $ 6,363,494 $ 6,317,020 LIABILITIES AND FUND BALANCE Liabilities Accounts payable $ 262,871 $ 332,344 Salaries payable 1,890,738 2,005,458 Accrued expenses 989, ,775 Deferred revenue 343, ,869 Total liabilities 3,486,941 3,653,446 Fund balance Non-spendable Inventory 15,306 21,898 Prepaid items 46,707 11,147 Real-estate held for sale 120, ,000 Assigned Athletics 91,947 92,690 Subsequent year expenditures 2,404,265 2,367,839 Unassigned 198,328 - Total fund balance 2,876,553 2,663,574 Total liabilities and fund balance $ 6,363,494 $ 6,317, Revenues Local Sources Property taxes $ 14,772,141 $ 15,770,556 Payment in lieu of taxes 485,044 1,151,696 Charges for services 122,118 52,082 Tuition 26,088 27,587 Interest 11,084 19,344 Athletics 248, ,537 Other local sources 119, ,061 Total local sources 15,784,227 17,387,863 State sources State school aid - LEA pupil deduct (491,963) - State school aid - Headlee 5,829,864 4,273,592 State school aid - Prior year adjustments 164,195 43,244 State school aid - Special Education Headlee Obligation 739, ,042 State school aid - restricted grants 62,417 - State school aid - other unrestricted grants 23,288 14,924 At-risk 441, ,992 Total state sources 6,768,438 5,615,794 Federal sources American Recovery and Reinvestment Act 442, ,646 Title I 359, ,728 Title II 63, ,678 Title IX 49,745 53,766 Other 25,582 24,988 Total federal sources 940,478 1,448,806 Interdistrict sources Vocational education - millage 487, ,199 Vocational education - added cost 102,137 83,791 Expense reimbursements 1,092, ,574 Total interdistrict sources 1,681,958 2,010,564 Total revenues $ 25,175,101 $ 26,463,

52 SCHEDULE OF OPERATING EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B-24 Supplies, Employee Purchased Materials and Capital Salaries Benefits Services Other Expenses Outlay Instruction Basic programs Elementary $ 3,578,127 $ 2,132,317 $ 148,913 $ 117,132 $ - Middle school 1,908,993 1,102,605 66,043 21,246 - High School 2,343,963 1,331, ,907 53,761 - Summer school 5,592 1,428 2, Total basic programs 7,836,675 4,567, , ,199 - Added needs Special education 1,256, , ,003 3,093 - Compensatory education 290, , ,989 28,683 - Vocational education 587, ,497 52, ,354 - Total added needs 2,135,204 1,214, , ,130 - Total instuction 9,971,879 5,781, , ,329 - Supporting services Pupil services Guidance services 361, ,889-7,153 - Health services , Other 14,813 4,206 55, Total pupil services 376, , ,699 7,246 - Instructional staff services Improvement of instruction 1, ,532 13,641 - Library 119,541 87,603 61,693 25,895 - Technology assisted instruction 118,922 51, ,708 - Supervision 122,080 56,560 1,618 3,603 - Academic student assessment ,064 - Total instructional staff services 361, , ,714 90,911 - Total $ 5,976,489 $ 6,052,031 3,098,887 3,169,362 3,891,939 3,772,198 9,450 28,747 12,976,765 13,022,338 2,088,521 2,197, , ,470 1,174,792 1,531,624 4,084,482 4,549,566 17,061,247 17,571, , , , ,554 74,658 78, , ,481 55,969 83, , , , , , ,460 29,064 31, , ,770 Continued -37-

53 SCHEDULE OF OPERATING EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B-25 Supplies, Employee Purchased Materials and Capital Salaries Benefits Services Other Expenses Outlay General administration Board of education $ - $ - $ 43,658 $ 1,956 $ - Executive administration 177,856 87, ,673 8,868 - Total general administration 177,856 87, ,331 10,824 - School administration Office of the principal 616, , ,004 26,649 - Business services Fiscal services 224, ,740 16, ,464 - Transportation - - 1,112, Operations and maintenance 355, , , ,723 52,180 Support services - central 30,637 16, Security services , Athletic activities 104,085 29, ,749 72,114 50,131 Total supporting services 2,248,066 1,319,512 3,121,807 1,083, ,311 Community services Community services direction 3,591 2,893 4,705 7,773 - Non-public school pupils - - 2,959 3,327 - Total community services 3,591 2,893 7,664 11,100 - Total operating expenditures $ 12,223,536 $ 7,104,263 $ 3,996,652 $ 1,535,360 $ 102,311 Total $ 45,614 $ 128, , , , ,951 1,443,489 1,550, , ,928 1,112,013 1,082,424 2,028,040 1,954,950 47,165-52,909 51, , ,604 7,875,627 7,907,446 18,962 19,135 6,286 19,458 25,248 38,593 $ 24,962,122 $ 25,517,943 Concluded -38-

54 BALANCE SHEET FOOD SERVICE SPECIAL REVENUE FUND JUNE 30, 2011 (WITH COMPARATIVE TOTALS AS OF JUNE 30, 2010) STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOOD SERVICE SPECIAL REVENUE FUND FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B-26 ASSETS Assets Cash and cash equivalents $ 43,937 $ 23,385 Accounts receivable - 25,000 Inventory 101,769 92,078 Total assets $ 145,706 $ 140,463 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 39,764 $ 65,052 Deferred revenue 1,234 3,660 Total liabilities 40,998 68,712 Fund balances Non-spendable - inventory 101,769 92,078 Assigned - capital outlay 2,939 - Unassigned (deficit) - (20,327) Total fund balances 104,708 71,751 Total liabilities and fund balances $ 145,706 $ 140, Revenues Local sources Lunch sales $ 212,606 $ 245,697 Breakfast sales 10,954 10,490 Ala carte sales 163, ,854 State sources 55,555 64,064 Federal sources 582, ,445 Interest income Total revenues 1,025,582 1,054,092 Expenditures Salaries 61,774 53,646 Employee benefits 50,570 54,986 Purchased services 400, ,900 Supplies, materials and other expenditures 78, ,951 Food costs 401, ,401 Total expenditures 992, ,884 Net change in fund balances 32,957 54,208 Fund balances, beginning of year 71,751 17,543 Fund balances, end of year $ 104,708 $ 71,

55 COMBINING BALANCE SHEET CAPITAL PROJECT FUNDS JUNE 30, 2011 (WITH COMPARATIVE TOTALS AS OF JUNE 30, 2010) COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES CAPITAL PROJECT FUNDS FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B-27 Sinking Building Total Fund Roof Repair and Site Assets Cash and cash equivalents $ 3,530,779 $ 13,702 $ 731,694 $ 4,276,175 $ 3,289,884 Investments 214, , ,726 Due from other governmental units ,327 Total assets $ 3,745,654 $ 13,702 $ 731,694 $ 4,491,050 $ 3,510,937 LIABILITIES AND FUND BALANCES Liabilities Contracts payable $ 343,527 $ - $ - $ 343,527 $ 432,792 Fund balances Restricted - capital outlay 3,402, ,402,127 2,493,734 Assigned - capital outlay - 13, , , ,411 Total fund balances 3,402,127 13, ,694 4,147,523 3,078,145 Total liabilities and fund balances $ 3,745,654 $ 13,702 $ 731,694 $ 4,491,050 $ 3,510,937 Sinking Building Total Fund Roof Repair and Site Revenues Property taxes $ 1,842,610 $ - $ - $ 1,842,610 $ 1,946,461 Rent income ,770 39,770 25,022 Interest 18, ,153 22,898 24,172 Total revenues 1,861, ,923 1,905,278 1,995,655 Expenditures Capital outlay 806,370-81, ,304 1,878,316 Other 13, ,654 7,519 Total expenditures 820,024-81, ,958 1,885,835 Revenues over (under) expenditures 1,041, (38,011) 1,003, ,820 Other financing (uses) sources Proceeds from sale of capital assets , ,911 - Transfers out (132,853) - - (132,853) (132,854) Total other financing (uses) sources (132,853) - 198,911 66,058 (132,854) Net change in fund balances 908, ,900 1,069,378 (23,034) Fund balances, beginning of year 2,493,734 13, ,794 3,078,145 3,101,179 Fund balances, end of year $ 3,402,127 $ 13,702 $ 731,694 $ 4,147,523 $ 3,078,

56 COMBINING SCHEDULE OF DEBT SERVICE BALANCES - DEBT SERVICE FUND JUNE 30, 2011 (WITH COMPARATIVE TOTALS AS OF JUNE 30, 2010) 2005 Foster Veurink Refunding Land Land Durant Bonds Contract Contract Settlement Total ASSETS Cash and cash equivalents $ 317,045 $ - $ - $ - Investments 53, Due from other governmental units ,260 Total assets $ 370,823 $ - $ - $ 21,260 $ 317,045 $ 325,585 53,778 53,728 21,260 39,564 $ 392,083 $ 418,877 LIABILITIES AND FUND BALANCES B-28 Liabilities Accounts payable $ - $ - $ - $ - Deferred revenue ,260 Total liabilities ,260 Fund balances Restricted - debt service 370, Total liabilities and fund balances $ 370,823 $ - $ - $ 21,260 $ - $ 1,749 21,260 31,172 21,260 32, , ,956 $ 392,083 $ 418,877 Note: This schedule represents various debt issues that are accounted for in the Debt Service Fund. -43-

57 COMBINING SCHEDULE OF DEBT SERVICE ACTIVITIES AND CHANGES IN FUND BALANCES DEBT SERVICE FUND FOR THE YEAR ENDED JUNE 30, 2011 (WITH COMPARATIVE TOTALS FOR THE YEAR ENDED JUNE 30, 2010) B Foster Veurink Refunding Land Land Durant Bonds Contract Contract Settlement Revenues Local sources Property taxes $ 2,446,822 $ - $ - $ - State sources ,396 Interest income 5, Other Total revenues 2,453, ,396 Expenditures Principal 1,685,000 44,661 38,134 9,912 Interest 766,975 21,765 28,293 1,484 Other 16, Total expenditures 2,468,184 66,426 66,427 11,396 Revenues under expenditures (15,133) (66,426) (66,427) - Other financing sources Transfers in - 66,426 66,427 - Net change in fund balances (15,133) Fund balances, beginning of year 385, Fund balances, end of year $ 370,823 $ - $ - $ - Total $ 2,446,822 $ 2,583,925 11,396 11,396 5,486 7, ,464,447 2,602,662 1,777,707 1,718, , ,753 16,209 10,352 2,612,433 2,608,332 (147,986) (5,670) 132, ,854 (15,133) 127, , ,772 $ 370,823 $ 385,956 Note: This schedule represents various debt issues that are accounted for in the Debt Service Fund. -44-

58 STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUND STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUND FOR THE YEAR ENDED JUNE 30, 2011 FOR THE YEAR ENDED JUNE 30, 2011 B-30 Balances Balances July 1, June 30, 2010 Receipts Disbursements 2011 ASSETS Cash $ 89,785 $ 636,027 $ 550,442 $ 175,370 Investments 425, ,000 Accounts receivable - 1,498-1,498 Total assets $ 514,785 $ 637,525 $ 550,442 $ 601,868 LIABILITIES Due to student groups $ 176,886 $ 408,258 $ 390,179 $ 194,965 Scholarships payable 255,412 39,341 35, ,455 Due to others 82, , , ,448 Total liabilities $ 514,785 $ 637,525 $ 550,442 $ 601,868 The balances consist of the following: Deposits due to student groups Student groups 6th Grade Club $ 1,919 $ 26,979 $ 27,463 $ 1,435 7th Grade Club 1,704 15,616 15,493 1,827 8th Grade Fund 3,278 14,854 13,900 4,232 Middle School Art Club 1, ,165 Middle School Athletics Middle School Ecology Club 384 2,086 1, Middle School Enrichment 5,742 1,954 2,374 5,322 Middle School Football 2,442 2,339 2,172 2,609 Middle School Photo Club 101 1, ,121 Middle School Student Council 1,796 2,196 2,313 1,679 Middle School Track 4,619 1,390 3,336 2,673 Middle School Volleyball 3, ,692 Middle School Yearbook 1,939 8,219 7,099 3,059 M.S. Youth In Government - 4,460 3,040 1,420 Ottawa 4th Grade Field Trip 390 2,903 2,192 1,101 Ottawa 5th Grade Field Trip 1,292 3,990 3,880 1,402 Ottawa Field Trip Fund 2,051 5,271 4,139 3,183 Ottawa Learning Center Sheridan 3rd Grade 5 2,762 2, Sheridan 4th Grade Sheridan 5th Grade Sheridan Student Council Sheridan Garden Fund Wrestling - 4,500-4,500 Continued Balances Balances July 1, June 30, 2010 Receipts Disbursements 2011 Builder s Club $ 380 $ 1,182 1,062 $ 500 Building Trades Fund 2 5,841 1,201 4,642 Business Club Central 5th Grade 156 3,399 3, Central 3rd Grade Central Library & Computer 439 4,011 4, Central School Fund 1,788 1,855 3, Central School Store 221 1, Graduated Classes - 4,532-4,532 Class of Class of , ,167 - Class of Class of Class of Class of Class of ,882-1,882 - Class of Class of ,342-1,342 - Class of ,373-1,250 2,123 Class of ,599 7,850 8,806 2,643 Class of ,784 7,311 6,051 3,044 Class of , ,034 DECA 57 12,042 10,611 1,488 Debate Club 3,372 2,222 1,591 4,003 Elementary Enrichment 1,840 4,325 5,149 1,016 Elementary Enrichment Play 7,734 8,845 7,175 9,404 Elementary Music Fund 623 1,995 2, FCCLA (304) 3,415 2, FCCLA Region II French Club 1, ,350 - Future Farmers of America 2, ,111 1,734 Skateboarding Club G Wing Productions 2,523-2, HOSA 1, , High School Art Club 2, ,759 High School Spring Musical 1,079 8,325 6,876 2,528 High School Fall Play 1,177 2,620 2, High School Journalism 520 3,250 3, High School Learning Center High School Fund 5,564 1,545 2,600 4,509 High School Steel Drum Band - 26,250 26,250 - High School Enrichment 1,515 10,212 9,745 1,982 High School Quiz Bowl Team High School Student Council 1,212 19,210 19,371 1,051 Continued

59 STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUND STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUND FOR THE YEAR ENDED JUNE 30, 2011 FOR THE YEAR ENDED JUNE 30, 2011 B-31 Balances Balances July 1, June 30, 2010 Receipts Disbursements 2011 High School Vocal $ 85 $ 1,100 $ 1,000 $ 185 High School Yearbook ,895 22, Inward Bound Fund Key Club ,149 Lincoln School Fund 1, , Middle School Enrichment Play 7,253 4,563 4,607 7,209 Middle School Book Fair Middle School Fund 5,798 4,864 3,359 7,303 Middle School Store 49 2,590 2, Middle School Adventure Education Middle School Washington DC Club 938 2,682 1,893 1,727 Middle School Dance Middle School Boys Basketball National Honor Society 1, ,221 Northmen Club Ottawa Popcorn Sales 2,294 2,934 2,459 2,769 Ottawa School Fund 5,851 2,948 3,322 5,477 Petoskey High School Papermakers 2,625 1,714 1,646 2,693 Sheridan School 5,443 10,607 6,828 9,222 Spanish Club World History Trip Fund Athletic Hall Of Fame 547 1, Boys Golf 1,891 1,290 2, Communications Camp 2, ,384 Girls Basketball 1,493 3,795 3,110 2,178 Girls Golf 2,411 3,000 5,725 (314) Boys Tennis 784 5,065 3,999 1,850 Girls Tennis (8) 15,586 13,425 2,153 Girls Track Dance High School Baseball High School Boys Soccer 3,125 1,425 3,127 1,423 High School Cross Country 8,434 5,648 6,625 7,457 Drafting 1, Robotics - 3,277 3,369 (92) Forensics Middle School Girls Basketball Middle School Greenhouse Ottawa Boy's Group Continued Balances Balances July 1, June 30, 2010 Receipts Disbursements 2011 High School Football $ 45 $ - $ - $ 45 High School Girls Soccer 4,307 1,001 2,886 2,422 H. S. Social Studies Club High School Hockey 21,432 57,155 50,004 28,583 Indian Education - Unity Trip Volleyball ,159 Total due to student groups 176, , , ,965 Scholarships payable Doris Reber - Class of 1932 Scholarship 210,997 2,492 5, ,489 Robert Motely Memorial Fund Henshaw Memorial Scholarship 4, ,389 Middle School Foundation Grant 7,753 8,000 7,633 8,120 McClutchey Memorial Scholarship 5, ,066 Midshipmen Scholarship 7, ,219 PEF Grants - ACT/SAT Seminar 168 1,198 1,366 - PEF Grants - High School 1,000 6,050 5,952 1,098 PEF Grants - Lincoln PEF Grants - Sheridan - 1,964 1,964 - PEF Grants - Central - 2,135 2,135 - PEF Grants - Ottawa PEF Grants - Middle School - 1,486 1,486 - Vaughn Memorial Scholarship 17, ,986 Football Family Fund - 7,100 6, Carol Hansen Memorial Fund - 7,595-7,595 Wil Moyer Music Scholarship , Total scholarships payable 255,412 39,341 35, ,455 Due to others Central Gym Project Central PTO 2,532 47,750 23,447 26,835 Eric Greyerbiehl Memorial Fund 2, ,032 Guidance Dept Testing 1,699 3,517 2,361 2,855 Kathy Robinson Memorial Fund Lincoln PTO 2,804 39,844 35,429 7,219 Middle School Celebration Garden Northmen Night ,215 9,527 41,868 Ottawa PTO (61) Ottawa PTO Board Fund 30,133 30,269 32,987 27,415 Spitler Building Pop Fund Student Reserve 40,299 5,418 11,851 33,866 Pay To Participate Donations - 3,730-3,730 African Wells Fundraiser - 6,914 6,914 - Maintenance Fund - 1,062 1,062 - Athletic miscellaneous fundraisers Total due to others 82, , , ,448 Totals $ 514,785 $ 637,525 $ 550,442 $ 601,868 Concluded

60 SCHEDULE OF BOND INDEBTEDNESS SCHEDULE OF BOND INDEBTEDNESS FOR THE YEAR ENDED JUNE 30, 2011 FOR THE YEAR ENDED JUNE 30, 2011 Purpose 2005 Refunding Bonds Date of issue May 27, 2005 Rate of interest 3.50% to 5.00% Original obligation $ 21,370,000 Amount previously paid 5,515,000 Balance outstanding - June 30, 2011 $ 15,855,000 Purpose Durant Resolution Package Bonds Date of issue November 24, 1998 Rate of interest 4.76% Original obligation $ 162,282 Amount previously paid 141,022 Balance outstanding - June 30, 2011 $ 21,260 B-32 November 1, May 1, May 1, Annual Fiscal Year Interest Interest Principal Requirements $ 354,000 $ 354,000 $ 1,735,000 $ 2,443, , ,625 1,825,000 2,446, , ,688 1,880,000 2,437, , ,688 1,970,000 2,433, , ,438 2,070,000 2,434, , ,688 2,125,000 2,386, ,594 86,594 2,125,000 2,298, ,563 43,563 2,125,000 2,212,126 $ 1,618,284 $ 1,618,284 $ 15,855,000 $ 19,091,568 Call provision May 15, May 15, Annual Fiscal Year Interest Principal Requirements $ 1,012 $ 10,383 $ 11, ,877 11,395 $ 1,530 $ 21,260 $ 22,790 This bond is not subject to redemption prior to maturity. Continued Call Provision Bonds of this issue maturing on or after May 1, 2016, are subject to redemption at the option of the issuer in multiples of $5,000 in such order as the issuer may determine, and by lot within any maturity, on any date occurring on or after May 1, 2015, at par plus accrued interest to the date fixed for redemption. Continued

61 SCHEDULE OF OTHER INSTALLMENT DEBT SCHEDULE OF OTHER INSTALLMENT DEBT FOR THE YEAR ENDED JUNE 30, 2011 FOR THE YEAR ENDED JUNE 30, 2011 Purpose Purchase of Foster property on land contract. Purpose Purchase of Veurink property on land contract. Date of issue November 14, 2003 Rate of interest 5.00% Original obligation $ 700,000 Amount previously paid 289,072 Balance outstanding - June 30, 2011 $ 410,928 Date of issue December 22, 2006 Rate of interest 5.00% Original obligation $ 700,000 Amount previously paid 154,962 Balance outstanding - June 30, 2011 $ 545,038 B-33 May 15, Annual Fiscal Year Interest Principal Requirements $ 19,480 $ 46,946 $ 66, ,078 49,348 66, ,554 51,873 66, ,900 54,527 66, ,110 57,317 66, ,178 60,249 66, ,095 63,332 66, ,336 27,679 $ 81,738 $ 410,928 $ 492,666 Continued May 1, Annual Fiscal Year Interest Principal Requirements $ 26,342 $ 40,085 $ 66, ,291 42,136 66, ,135 44,292 66, ,869 46,558 66, ,487 48,940 66, ,983 51,443 66, ,351 54,075 66, ,585 56,842 66, ,676 59,750 66, ,620 62,807 66, ,110 38,748 $ 157,977 $ 545,038 $ 703,015 Concluded

62 PROPERTY TAX INFORMATION (UNAUDITED) FOR THE YEAR ENDED JUNE 30, 2011 Delinquent Percentage Collections Personal of Current and Other Property Year Levy Taxing District Tax Levy Reductions Taxes Collected OTHER SUPPLEMENTARY INFORMATION (UNAUDITED) Bear Creek Township $ 5,460,100 $ 5,457,537 $ 2, % Littlefield Township 68,622 68, % Little Traverse Township 426, ,968 6, % Resort Township 3,535,202 3,533,017 2, % Springvale Township 835, , % City of Petoskey 7,417,112 7,407,004 10, % Chandler Township 150, , % Hayes Township 43,022 43, % Melrose Township 1,005,686 1,004,651 1, % Total $ 18,941,843 $ 18,919,167 $ 22, % B-34 Allocated as follows General Fund $ 14,661,243 $ 14,641,592 $ 19, % Debt Service Funds 2,442,017 2,440,891 1, % Capital Projects Fund 1,838,583 1,836,684 1, % Total allocated to all funds $ 18,941,843 $ 18,919,167 $ 22, % -53-

63 TEN-YEAR SUMMARY OF ENROLLMENT (UNAUDITED) TEN-YEAR SUMMARY OF GENERAL FUND EXPENDITURES, STUDENT ENROLLMENT AND PER PUPIL COSTS (UNAUDITED) FOR THE YEAR ENDED JUNE 30, 2011 Special Elementary Middle High Year Education School School School Total Non-Resident Resident , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Note: Data above extracted from the September pupil counts only. * General Fund expenditures and transfers only. Expenditures Expenditures Year and Transfers* Enrollment Per Pupil 2002 $ 21,642,904 3, $ 7, ,412,914 3, , ,051,973 3, , ,942,607 3, , ,785,212 3, , ,725,450 3, , ,959,034 2, , ,666,499 2, , ,517,943 2, , ,962,122 2, ,646 B

64 SINGLE AUDIT ACT COMPLIANCE B-36 [THIS PAGE INTENTIONALLY LEFT BLANK]

65 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2011 B-37 Accrued Federal Grantor/ Approved Revenue Pass-Through Grantor/ CFDA Grant Award July 1, Program Title/Grant Number Number Amount 2010 U.S. Department of Education Indian Education 09/ A $ 53,766 $ 6,947 10/ A 58,260 - Total Indian Education 112,026 6,947 Passed Through the Michigan Department of Education Title I, Part A Cluster ECIA Title I Regular ,432 22, Regular ,086 - Total ECIA Title I 734,518 22,095 ARRA Title I Regular ,353 3, Regular ,560 - Total ARRA Title I 299,913 3,710 Title IIA - Improving Teacher Quality Regular ,643 7, Regular ,840 - Total Title IIA 217,483 7,423 Title II D - Enhancing Education Through Technology ARRA - Title II-D A 7, ARRA - Title II-D A 7,053 - Total Title IID 14, State Fiscal Stabilization Fund Cluster ARRA - State Fiscal Stabilization Fund , ,042 - Total ARRA State Fiscal Stabilization Fund 1,174,387 - Accrued (Memo Only) Current Year Revenue Prior Year Current Year Receipts June 30, Expenditures Expenditures Cash Basis 2011 $ 53,766 $ - $ 6,947 $ ,745 48,396 1,349 53,766 49,745 55,343 1, ,141 23,736 45, , , , , , , ,269 74,185 18,608 22, ,478 38,364 37,114 74,185 94,086 60,682 37,114 93,784 10,726 18, ,943 43,866 9,077 93,784 63,669 62,015 9, , , , , , , , , , ,042 - Total Passed Through Michigan Department of Education 2,440,576 33,256 1,324, , , ,370 Continued -56-

66 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2011 Federal Grantor/ Approved Accrued Pass-Through Grantor/ CFDA Grant Award Revenue Program Title/Grant Number Number Amount July 1, 2010 (Memo Only) Current Year Accrued Prior Year Current Year Receipts Revenue Expenditures Expenditures (Cash Basis) June 30, 2011 U.S. Department of Education (concluded) Passed Through ISD B-38 Vocational Education Secondary CTE Perkins A $ 10,043 $ A 9,224 - Total Perkins 19,267 - Tech-Prep Education / A / A 8,980 Total Tech-Prep Education 9,480 - Homeless Children and Youths Total Homeless Children and Youths 1,032 - Medicaid Cluster Medicaid Outreach 0910 Regular , Regular ,285 - Total Medicaid Outreach 12,725 - Total Passed Through ISD 42,504 - Total U.S. Department of Education 2,595,106 40,203 $ 10,043 $ - $ - $ - - 9,224 9,224-10,043 9,224 9, ,980 8, ,980 8, , ,285 7,285-5,440 7,285 7,285-16,922 25,582 25,582-1,395, , , ,719 Continued -57-

67 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2011 Federal Grantor/ Approved Accrued Pass-Through Grantor/ CFDA Grant Award Revenue Program Title/Grant Number Number Amount July 1, 2010 (Memo Only) Current Year Accrued Prior Year Current Year Receipts Revenue Expenditures Expenditures (Cash Basis) July 1, 2011 U.S. Department of Agriculture B-39 Passed through Michigan Department of Education Child Nutrition Cluster Non-cash assistance - Commodities Entitlement Commodities $ 59,852 $ - Bonus Commodities ,693 - Total Commodities 63,545 - National School Lunch - Breakfast , ,875 - Total National School Lunch - Breakfast 188,808 - National School Lunch Section 4 All Lunches ,777 - Section 4 All Lunches ,760 - Section 11 Free & Reduced ,494 - Section 11 Free & Reduced ,555 - Total National School Lunch 765,586 - Total Passed Through Michigan Department of Education 1,017,939 - Total U.S. Department of Agriculture 1,017,939 - Total Federal Financial Awards $ 3,613,045 $ 40,203 Notes to Schedule of Expenditures of Federal Awards 1) Basis of Presentation- The Schedule of Expenditures of Federal Awards includes the federal grant activity of Public Schools of Petoskey and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of State and Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in or used in the preparation of the basic financial statements. $ - $ 59,852 $ 59,852 $ - - 3,693 3, ,545 63,545-84,045 7,888 7, ,875 96,875-84, , ,763-56,600 6,177 6, ,760 57, ,183 33,311 33, , , , , , , , , , , ,111 - $ 1,831,087 $ 1,522,590 $ 1,397,074 $ 165,719 Continued 2) Management has utilized the CMS Grant Auditors Report (GAR) in preparing the Schedule of Expenditures of Federal Awards. -58-

68 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2011 RECONCILIATION TO GRANT SECTION AUDITORS REPORT Current payments per the grant section auditors report $ 1,252,604 Plus Amounts passed through Intermediate School District 25,582 Entitlement and bonus commodities 63,545 Direct award from Department of Education 55,343 Total current year receipts per schedule of expenditures of federal awards $ 1,397,074 Concluded 902 South Huron Cheboygan, MI Ph: Fx: INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Education Public Schools of Petoskey Petoskey, Michigan October 14, 2011 B-40 We have audited the financial statements of the governmental activities, each major fund and the aggregate remaining fund information of Public Schools of Petoskey (the District ) as of and for the year ended June 30, 2011, which collectively comprise the District s basic financial statements, and have issued our report thereon dated October 14, 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. Internal Control Over Financial Reporting In planning and performing our audit, we considered the District s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above

69 Compliance and Other Matters As part of obtaining reasonable assurance about whether the District s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Audit Committee, management, the Board of Education, others within the District and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. 902 South Huron Cheboygan, MI Ph: Fx: INDEPENDENT AUDTORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 October 14, 2011 Board of Education Public Schools of Petoskey Petoskey, Michigan Compliance B-41 We have audited the Public Schools of Petoskey (the District ) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended June 30, The District s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the District s management. Our responsibility is to express an opinion on the District s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A- 133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the District s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the District s compliance with those requirements. In our opinion, the District complied, in all material respects, with the requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,

70 B-42 Internal Control Over Compliance Management of the District is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the District s internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. This report is intended solely for the information and use of the Audit Committee, management, the Board of Education, others within the District, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2011 SECTION I SUMMARY OF AUDITORS RESULTS Financial Statements Type of auditors report issued: Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified? Noncompliance material to financial statements noted? Federal Awards Internal Control over major programs: Material weakness(es) identified? Significant deficiency(ies) identified? Type of auditors report issued on compliance for major programs: Any audit findings disclosed that are required to be reported in accordance with Circular A-133, Section 510(a)? No Unqualified No None reported No No None reported Unqualified Continued

71 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2011 October 14, South Huron Cheboygan, MI Ph: Fx: B-43 SECTION I SUMMARY OF AUDITORS RESULTS Identification of major programs: CFDA Number(s) Name of Federal Program or Cluster State Fiscal Stabilization Fund / Title I Cluster Dollar threshold used to distinguish between Type A and Type B programs: $300,000 Auditee qualified as low-risk auditee? Yes Instances where results of audit follow-up procedures disclosed that the summary schedule at prior audit findings materially misrepresents the status of any prior audit findings? No SECTION II FINANCIAL STATEMENT FINDINGS No matters were reported. SECTION III FEDERAL AWARD FINDINGS AND QUESTIONED COSTS No financial statement findings. SECTION IV PRIOR YEAR FINDINGS No findings in the prior year. * * * * * Concluded Board of Education Public Schools of Petoskey Petoskey, Michigan We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Public Schools of Petoskey (the District ) for the year ended June 30, 2011, and have issued our report thereon dated October 14, Professional standards require that we provide you with the following information related to our audit. Our Responsibility Under Auditing Standards Generally Accepted in the United States of America and OMB Circular A-133 As stated in our engagement letter dated July 6, 2011, our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of your responsibilities. In planning and performing our audit, we considered the District s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide assurance on the internal control over financial reporting. We also considered internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133. As part of obtaining reasonable assurance about whether the District s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit. Also, in accordance with OMB Circular A-133, we examined, on a test basis, evidence about the District s compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement applicable to each of its major federal programs for the purpose of expressing an opinion on the District s compliance with those requirements. While our audit provides a reasonable basis for our opinion, it does not provide a legal determination on the District s compliance with those requirements. -65-

72 B-44 Board of Education Public Schools of Petoskey October 14, 2011 Page 2 Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our engagement letter and our meeting about planning matters on August 9, Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the District are described in Note 1 to the financial statements. Other than the adoption of GASB Statement No.54, which is described in Note IV G to the financial statements, no other new accounting policies were adopted and the application of existing policies was not changed during the year. We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. There are no sensitive or significant estimates recorded by the District. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole. Board of Education Public Schools of Petoskey October 14, 2011 Page Disagreements with Management or purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the attached management representation letter dated October 14, Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the entity s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the District s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Board of Education and management of the Public Schools of Petoskey and is not intended to be and should not be used by anyone other than these specified parties.

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77 APPENDIX C - STATE QUALIFICATION State loans to school districts. STATE QUALIFICATION ARTICLE IX, SECTION 16 OF THE 1963 STATE OF MICHIGAN CONSTITUTION Sec. 16. The state, in addition to any other borrowing power, may borrow from time to time such amounts as shall be required, pledge its faith and credit and issue its notes or bonds therefor, for the purpose of making loans to school districts as provided in this section. Amount of loans. If the minimum amount which would otherwise be necessary for a school district to levy in any year to pay principal and interest on its qualified bonds, including any necessary allowances for estimated tax delinquencies, exceeds 13 mills on each dollar of its assessed valuation as finally equalized, or such lower millage as the legislature may prescribe, then the school district may elect to borrow all or any part of the excess from the state. In that event the state shall lend the excess amount to the school district for the payment of principal and interest. If for any reason any school district will be or is unable to pay the principal and interest on its qualified bonds when due, then the school district shall borrow and the state shall lend to it an amount sufficient to enable the school district to make the payment. Qualified bonds. The term "qualified bonds" means general obligation bonds of school districts issued for capital expenditures, including refunding bonds, issued prior to May 4, 1955, or issued thereafter and qualified as provided by law pursuant to Section 27 or Section 28 of Article X of the Constitution of 1908 or pursuant to this section. Repayment of loans, tax levy by school district. After a school district has received loans from the state, each year thereafter it shall levy for debt service, exclusive of levies for nonqualified bonds, not less than 13 mill or such lower millage as the legislature may prescribe, until the amount loaned has been repaid, and any tax collections therefrom in any year over and above the minimum requirements for principal and interest on qualified bonds shall be used toward the repayment of state loans. In any year when such levy would produce an amount in excess of the requirements and the amount due to the state, the levy may be reduced by the amount of the excess. Bonds, state loans, repayment. Subject to the foregoing provisions, the legislature shall have the power to prescribe and to limit the procedure, terms and conditions for the qualification of bonds, for obtaining and making state loans, and for the repayment of loans. Power to tax unlimited. The power to tax for the payment of principal and interest on bonds hereafter issued which are the general obligations of any school district, including refunding bonds, and for repayment of any state loans made to school districts, shall be without limitations as to rate or amount. Rights and obligations to remain unimpaired. All rights acquired under Sections 27 and 28 of Article X of the Constitution of 1908, by holders of bonds heretofore issued, and all obligations assumed by the state or any school district under these sections, shall remain unimpaired. ACT 92, PUBLIC ACTS OF MICHIGAN 2005, AS AMENDED School Bond Qualification, Approval and Loan Act* AN ACT to prescribe the procedures, terms, and conditions for the qualification or approval of school bonds and other bonds; to authorize this state to make loans to certain school districts for the payment of certain bonds and to authorize schools to borrow from this state for that purpose; to prescribe the terms and conditions of certain loans to school districts; to prescribe the powers and duties of certain state agencies and certain state and local officials; to provide for certain fees; to prescribe certain penalties; and to repeal acts and parts of acts. The People of the State of Michigan enact: Sec. 1. This act shall be known and may be cited as the school bond qualification, approval, and loan act. *Act 92 was signed into law with immediate effect on July 20, It repealed Act 108, Public Acts of Michigan, 1961, as amended. C-1

78 Sec. 2. The purpose of this act is to implement section 16 of article IX of the state constitution of 1963 and to provide for loans to school districts. Sec. 3. As used in this act: (a) Computed millage means the number of mills in any year, not less than 7 mills and not more than 13 mills, determined on the date of issuance of the order qualifying the bonds or on a later date if requested by the school district and approved by the state treasurer, that, if levied by the school district, will generate sufficient annual proceeds to pay principal and interest on all the school district s qualified bonds plus principal and interest on all loans related to those qualified bonds no later than the date specified in the note and repayment agreement entered into by the school district under this act. (b) Qualified bond means a bond that is qualified under this act for state loans as provided in section 16 of article IX of the state constitution of A qualified bond includes the interest amount required for payment of a school district s net interest obligation under an interest rate exchange or swap, hedge, or other agreement entered into pursuant to the revised municipal finance act, 2001 PA 34, MCL to , but does not include a termination payment or similar payment related to the termination or cancellation of an interest rate exchange or swap, hedge, or other similar agreement. A qualified bond may include a bond issued to refund loans owed to the state under this act. (c) Qualified loan means a loan made under this act or 1961 PA 108, MCL to , from this state to a school district to pay debt service on a qualified bond. (d) Revolving loan fund means the school loan revolving fund created under section 16c of the shared credit rating act, 1985 PA 227, MCL c. (e) School district means a general powers school district organized under the revised school code, 1976 PA 451, MCL to , or a school district of the first class as described in the revised school code, 1976 PA 451, MCL to , having the power to levy ad valorem property taxes. (f) State treasurer means the state treasurer or his or her duly authorized designee. (g) Superintendent of public instruction means the superintendent of public instruction appointed under section 3 of article VIII of the state constitution of (h) Taxable value means the value determined under section 27a of the general property tax act, 1893 PA 206, MCL to Sec. 4. (1) A school district may issue and market bonds as qualified bonds if the state treasurer has issued an order granting qualification under this act. (2) Except with regard to qualification of new bonds, nothing in this act shall be construed to alter the terms and conditions applicable to outstanding qualified bonds issued in accordance with 1961 PA 108, MCL to , and the loans associated with those qualified bonds. Unless otherwise amended as permitted by this act, outstanding qualified loans incurred in association with outstanding qualified bonds described in this subsection shall continue to bear interest and be due and payable as provided in the repayment agreements entered into between the school district and the state before the effective date of this act. (3) The state treasurer may qualify bonds for which the state treasurer has received an application for prequalification on or before May 25, 2005 without regard to the requirements of section 5(2)(f) if the electors of the school district approve the bonds at an election held during Sec. 5. (1) A school district may apply to the state treasurer for preliminary qualification of a proposed school bond issue by filing an application in the form and containing the information required by this act. (2) An application for preliminary qualification of a school bond shall contain all of the following information: (a) The proposed ballot language to be submitted to the electors. (b) A description of the project or projects proposed to be financed. (c) A pro forma debt service projection showing the estimated mills the school district will levy to provide revenue the school district will use to pay the qualified bonds. For the purpose of the pro forma debt service projection, the school district may assume for the first 5 years following the date of the application the average growth in taxable value for the 5 years preceding the date of the application and the lesser of that average growth rate or 3% for the remaining term of the proposed bonds. C-2

79 (d) Evidence that the rate of utilization of each project to be financed will be at least 85% for new buildings and 60% for renovated facilities. If the projected enrollment of the district would not otherwise support utilization at the rates described in this subsection, the school district may include an explanation of the actions the school district intends to take to address the underutilization, including, if applicable, actions to close school buildings or other actions designed to assure continued assured use of the facilities being financed. (e) Evidence that the cost per square foot of the project or projects will be reasonable in light of economic conditions applicable to the geographic area in which the school district is located. (f) Evidence that the school district will repay all outstanding qualified loans at the times described in section 9. (g) The weighted average age of all school buildings in the school district based on square footage. (h) The overall utilization rate of all school buildings in the school district, excluding special education purposes. (i) The taxable value per pupil. (j) The total bonded debt outstanding of the school district and the total taxable value of property in the school district for the school district fiscal year in which the application is filed. (k) A statement describing any environmental or usability problems to be addressed by the project or projects. projects. (l) An architect s analysis of the overall condition of the facilities to be renovated or replaced as a part of the project or (m) An amortization schedule demonstrating that the weighted average maturity of the qualified bond issue does not exceed 120% of the average reasonably expected useful life of the facilities, excluding land and site improvements, being financed or refinanced with the proceeds of the qualified bonds, determined as of the later of the date on which the qualified bonds will be issued or the date on which each facility is expected to be placed in service. Sec. 6. The state treasurer shall prequalify bonds of a school district if the state treasurer determines all of the following: (a) The issuance of additional qualified bonds will not prevent the school district from repaying its outstanding qualified loans on the earlier of the dates described in section 9. (b) The form of the ballot conforms with the requirements of this act. Sec. 7. (1) The state treasurer shall qualify bonds of a school district if the state treasurer determines all of the following: (a) A majority of the school district electors have approved the bonds. (b) The terms of the bond issue comply with applicable provisions of the revised school code, 1976 PA 451, MCL to (c) The school district is in compliance with the revised municipal finance act, 2001 PA 34, MCL to (d) The weighted average maturity of the qualified bond issue does not exceed 120% of the average reasonably expected useful life of the facilities, excluding land and site improvements, being financed or refinanced with the proceeds of the bonds, determined as of the later of the date on which the qualified bonds will be issued or the date on which each facility is expected to be placed in service. (e) The school district has filed any information necessary to update the contents of the original application to reflect changes in any of the information approved in the preliminary qualification process. (f) The school district has paid a qualification fee of not less than $3, or the amount determined by the state treasurer, which shall be approximately equal to the amount required to pay the estimated administrative expenses incurred under this act for the fiscal year in which the state treasurer imposes the fee. C-3

80 (2) An order qualifying bonds shall specify the principal and interest payment dates for all the bonds, the maximum principal amount of and maximum interest rate on the bonds, the computed millage, if any, the final repayment date for any loans made with respect to those bonds, and other matters as the state treasurer shall determine or as are required by this act. (3) If the application for prequalification demonstrates that the school district will borrow from this state in accordance with this act, the state treasurer and the school district shall enter into a loan agreement setting forth the terms and conditions of any qualified loans to be made to the school district under this act. (4) If a school district does not issue its qualified bonds within 180 days after the date of the order qualifying bonds, the school district may reapply for qualification by filing an application and information necessary to update the contents of the original application for prequalification or qualification. (5) The state treasurer shall qualify refunding bonds issued to refund qualified bonds if the state treasurer finds that the refunding bonds comply with the provisions of the revised municipal finance act, 2001 PA 34, MCL to Sec. 8. A ballot submitted to the school electors of a school district after November 8, 2005 requesting authorization to issue unlimited tax general obligations that will be guaranteed by this state in accordance with section 16 of article IX of the state constitution of 1963 shall inform the electors that if the school district borrows from this state to pay debt service on the bonds, the school district may be required to continue to levy mills beyond the term of the bonds to repay this state. Sec. 9. (1) Except as otherwise provided in this act, a school district may borrow from the state an amount not greater than the difference between the proceeds of the school district s computed millage and the amount necessary to pay principal and interest on its qualified bonds, including any necessary allowances for estimated tax delinquencies. (2) For school districts having qualified loans outstanding as of July 20, 2005, the state treasurer shall review information relating to each school district regarding the taxable value of the school district and the actual debt service of outstanding qualified bonds as of July 20, 2005 and shall issue an order establishing the payment date for all those outstanding qualified loans and any additional qualified loans expected to be incurred by those school districts related to qualified bonds issued before July 20, The payment date shall be not later than 72 months after the date on which the qualified bonds most recently issued by the school district are due and payable. (3) For qualified loans related to qualified bonds issued after July 20, 2005, the qualified loans shall be due not later than 72 months after the date on which the qualified bonds for which the school borrowed from this state are due and payable. This section does not preclude early repayment of qualified bonds or qualified loans. (4) Except with regard to qualified loans described in subsection (2), each loan made or considered made to a school district under this act shall be for debt service on only a specific qualified bond issue. The state treasurer shall maintain separate accounts for each school district on the books and accounts of this state noting the qualified bond, the related qualified loans, the final payment date of the bonds, the final payment date of the qualified loans, and the interest rate accrued on the loans. (5) For qualified loans relating to qualified bonds issued after July 20, 2005, a school district shall continue to levy the computed mills until it has completely repaid all principal and interest on its qualified loans. (6) For qualified loans relating to qualified bonds issued before July 20, 2005, a school district shall continue to comply with the levy and repayment requirements imposed before July 20, Not less than 90 days after July 20, 2005, the state treasurer and the school district shall enter into amended and restated repayment agreements to incorporate the levy and repayment requirements applicable to qualified loans issued before July 20, (7) Upon the request of a school district made before June 1 of any year, the state treasurer annually may waive all or a portion of the millage required to be levied by a school district to pay principal and interest on its qualified bonds or qualified loans under this section if the state treasurer finds all of the following: (a) The school board of the school district has applied to the state treasurer for permission to levy less than the millage required to be levied to pay the principal and interest on its qualified bonds or qualified loans under subsection (1). (b) The application specifies the number of mills the school district requests permission to levy. (c) The waiver will be financially beneficial to this state, the school district, or both. (d) The waiver will not reduce the millage levied by the school district to pay principal and interest on qualified bonds or qualified loans under this act to less than 7 mills. (e) The board of the school district, by resolution, has agreed to comply with all conditions that the state treasurer considers necessary. C-4

81 (8) Except as otherwise provided in this act, qualified loans shall bear interest at 1 of the following rates: (a) The greater of 3% or the average annual cost of funds computed by the state treasurer not less often than annually on the basis of 1 of the following: (i) All notes or bonds issued by the Michigan municipal bond authority to fund qualified loans or refinance those notes or bonds plus 0.125%. (ii) If no bonds or notes issued by the Michigan municipal bond authority are outstanding, all bonds or notes issued by this state under sections 15 and 16 of article IX of the state constitution of 1963 plus 0.125%. (b) A lesser rate determined by the state treasurer to be necessary to maintain the exemption from federal income tax of interest on any qualified loans. Sec. 10. The state treasurer shall keep all certificates of qualification or approval in a permanent file and shall deliver copies of the certificates to the school district. Sec. 11. The state treasurer shall promulgate rules to implement this act pursuant to the administrative procedures act of 1969, 1969 PA 306, MCL to Sec. 12. If a school district does not apply for prequalification or qualification or approval of a bond issue before the issuance of those bonds, the state treasurer shall not approve or qualify those bonds as qualified bonds under this act. Sec. 13. (1) If a school district owes a balance due to the revolving loan fund or has been identified as a potential borrower, the school district shall file an annual loan activity application with the state treasurer no less than 60 days before certifying its annual tax levy. The annual loan activity application shall be submitted in a format prescribed by the state treasurer and shall provide the taxable value, debt service, and any other information necessary to determine the proper required millage levy required under this act. The application shall contain a resolution passed by the local school board authorizing a designated school district official to complete all necessary documents to obtain a loan from the revolving loan fund or for making repayment to the revolving loan fund for the year. (2) If a school district is eligible to borrow for debt service on qualified bonds, the school district shall file a draw request with the state treasurer not less than 30 days before each date on which the school district owes the debt service. The draw request shall include all of the following: (a) A statement of the debt service owed in the next 6 months. bonds. (b) A copy of the most recent bank statement showing the amount on hand in the debt service accounts for all qualified (c) A statement of any revenue received for payment of the debt service since the date of the bank statement. (d) A statement of any withdrawals made from the debt service account since the date of the bank statement. (3) Not more than 7 days before the date established by the state treasurer for making qualified loans, the school district shall confirm in writing the final qualified loan amount to be drawn on a certificate in the form prescribed by the state treasurer. (4) Upon receipt of a qualified loan confirmation described in subsection (3), the state treasurer shall determine the amount of the draw, which shall be the difference between the funds on hand in all debt service accounts and the amount of the debt service, and shall make a qualified loan in that amount to the school district no later than 6 days before the date the debt service is due. (5) When a school district s computed millage is sufficient to pay principal and interest on its qualified bonds, a school district shall file a loan activity statement with the state treasurer no later than 30 days before the date set for payment of the qualified bonds setting forth all of the following: (a) A statement of the debt service owed in the next 6 months. bonds. (b) A copy of the most recent bank statement showing the amount on hand in the debt service account for the qualified (c) A statement of any revenue received for payment of the debt service since the date of the bank statement. C-5

82 (d) A statement of any withdrawals made from the debt service account since the date of the bank statement. (6) Within 30 days after receipt of the loan activity statement under subsection (5), the state treasurer shall send an invoice to the school district for the amount of repayment the school district owes on its outstanding qualified loans, which shall be the difference between the debt service payable or paid to bondholders and the funds on hand at the school district, less a reasonable amount of funds on hand, as determined by the state treasurer, to cover minimum balance requirements or potential tax disputes. The school district shall remit the amount specified in the invoice within 30 days after the dated date of the invoice. Sec. 14. (1) If any paying agent for a school district s qualified bonds notifies the state treasurer that the school district has failed to deposit sufficient funds to pay principal and interest due on the qualified bonds when due, or if a bondholder notifies the state treasurer that the school district has failed to pay principal or interest on qualified bonds when due, whether or not the school district has filed a draw request with the state treasurer, the state treasurer shall promptly pay the principal or interest on the qualified bond when due. (2) If the state treasurer pays any amount described in this section, the state treasurer shall bill the school district for the amount paid and the school district shall immediately remit the amount to the state treasurer. If the school district would have been eligible to borrow the debt service in accordance with the terms of this act, the school district shall enter into a loan agreement establishing the terms of the qualified loan as provided in this act. If the state treasurer directs the Michigan municipal bond authority to pay any amount described in this section, the state treasurer shall cause the Michigan municipal bond authority to bill the school district for the amount paid and the school district shall immediately remit the amount to the Michigan municipal bond authority. Sec. 15. (1) If a school district that owes this state loan repayments relating to qualified bonds fails to levy at least the computed millage upon its taxable value for debt retirement purposes for qualified bonds and for repayment of a qualified loan made under this act while any part of the qualified loan is unpaid or defaults in its agreement to repay a qualified loan or any installment of a qualified loan, the school district shall increase its debt levy in the next succeeding year to obtain the amount necessary to repay this state the amount of the default plus a late charge of 3% and shall pay that amount to this state together with any other amounts owed during the next tax year. The school district may use other funds to repay this state including a transfer of general funds of the school district, if approved by the state treasurer. The state treasurer shall not disburse state school aid to the school district until the school district has made satisfactory arrangements with the state treasurer for the payment of the amount in default. (2) If a school district fails to process any report, application, confirmation, or repayment as required under this act, the state treasurer may withhold a school district s state aid funds until the school district complies with the requirements under this act. Sec. 16. The state treasurer shall deposit all fees collected under this act into a separate fund established within the state treasury, and shall use the proceeds of the fees solely for the purpose of administering and enforcing this act. The unexpended and unobligated balance of this fund at the end of each state fiscal year shall be carried forward over to the succeeding state fiscal year and shall not lapse to the general fund but shall be available for reappropriation for the next state fiscal year. Sec. 17. A person who knowingly makes a false statement or conceals material information for the purpose of obtaining qualification of a bond issue under this act or for the purpose of obtaining a qualified loan under this act, or who knowingly uses all or part of the proceeds of a qualified loan obtained under this act for any purpose not authorized by this act, is guilty of a felony punishable by imprisonment for not more than 4 years or a fine of not more than $5,000.00, or both. Sec. 18. If a school district has completed the projects approved by the school electors of the school district to be funded from proceeds of qualified bonds, a school district may use any remaining proceeds of the qualified bonds as follows: (a) To pay for enhancements to the projects approved by the school electors as described in the ballot proposing the qualified bonds. (b) To pay debt service on the qualified bonds. (c) To repay this state. Sec. 19. The state treasurer may designate in writing a person or persons to take any actions required to be taken by the state treasurer under this act. The signature of any designee shall have the same force and effect as the signature of the state treasurer for all purposes of this act. C-6

83 OPINION #4422 OF THE ATTORNEY GENERAL, STATE OF MICHIGAN DATED MARCH 12, 1965 CONSTITUTIONAL LAW: SCHOOL BONDS: MUNICIPAL FINANCE COMMISSION: Article 9, 16, Michigan Constitution of 1963, requires school districts to borrow and State to lend sufficient sum to cover debt service payments on qualified bonds of school districts. Although this is not a pledge of full faith and credit of the State, the Municipal Finance Commission may and must enforce the duty of the district to borrow and the State to lend such sum. No March 12, Hon. Sanford A. Brown State Treasurer Lansing, Michigan You have asked in your letter of February 5 whether Article IX, 16 of the Michigan Constitution of 1963 pledges the full faith and credit of the State to the payment of principal and interest of qualified school bonds. Article IX, 16 of the Michigan Constitution of 1963 provides in pertinent part as follows: "The state * * * may borrow from time to time such amounts as shall be required, pledge its faith and credit and issue its notes or bonds therefor, for the purpose of making loans to school districts as provided in this section. "If the minimum amount which would otherwise be necessary for a school district to levy in any year to pay principal and interest on its qualified bonds, including any necessary allowances for estimated tax delinquencies, exceeds 13 mills on each dollar of its assessed valuation as finally equalized, or such lower millage as the legislature may prescribe, then the school district may elect to borrow all or any part of the excess from the state. In that event the state shall lend the excess amount to the school district for payment of principal and interest. If for any reason any school district will be or is unable to pay the principal and interest on its qualified bonds when due, then the school district shall borrow and the state shall lend to it an amount sufficient to enable the school district to make the payment. "The term 'qualified bonds' means general obligation bonds of school districts issued for capital expenditures, including refunding bonds, issued prior to May 4, 1955, or issued thereafter and qualified as provided by law pursuant to Section 27 or Section 28 of Article X of the Constitution of 1908 or pursuant to this section." Thus, the school district is required to borrow and the State to lend an amount sufficient to enable the school district to make payments of principal and interest due on qualified bonds, and the state is empowered to borrow and to issue its notes or bonds for the purpose of making such loans, and to pledge its full faith and credit for such state bonds or notes. The constitutional provision quoted does not pledge the full faith and credit of the state to all qualified bonds. The state is not primarily liable on qualified bonds of a school district. Rather, the state is required to lend whatever the school district needs, from time to time, to meet debt service requirements on such bonds. You ask what remedies are available to enforce the obligation of the state. The quoted language makes it mandatory upon the school district to borrow and upon the state to lend "an amount necessary to enable the school district to make the payment." Under Chapter II, Section 2(f) of the Municipal Finance Act [C.L ; M.S.A Rev. Vol (4)f], the Municipal Finance Commission has power to enforce compliance with any law by, inter alia, the "institution of appropriate proceedings in the courts of the state, including those for writs of mandamus and injunction." The Commission could and indeed must enforce the duty of the district to borrow and the state to lend. The bondholders also would have an action to enforce the duty of the district to borrow and of the state to lend. C-7

84 Thus the bondholders are assured of the availability of state funds where needed to meet debt service requirements on qualified bonds. This is not a pledge of full faith and credit, but gives the bondholders as much or more protection as would such a pledge. FRANK J. KELLEY, Attorney General C-8

85 OPINION #4508 OF THE ATTORNEY GENERAL, STATE OF MICHIGAN DATED AUGUST 29, 1966 BONDS: Qualified bonds of school districts. CONSTITUTION OF 1963: School Bond Loan Fund. SCHOOLS: Bond Loans. STATE TREASURER: Payment of principal and interest on qualified school district bonds. Authority of State Treasurer and procedures to be followed in paying from the School Bond Loan Fund principal and interest on qualified school bonds upon presentment by a bondholder. No Hon. Allison Green August 29, State Treasurer Capitol Building Lansing, Michigan You have requested my opinion on what procedures should be followed by the state treasurer preparatory to making loans to local school districts which are unable to make payments on principal and interest of qualified school district bonds. 1 Loans to bonded school districts are authorized by Article IX, Section 16, Constitution of 1963, which in part contains pertinent language: "If the minimum amount which would otherwise be necessary for a school district to levy in any year to pay principal and interest on its qualified bonds, including any necessary allowances for estimated tax delinquencies, exceeds 13 mills on each dollar of its assessed valuation as finally equalized, or such lower millage as the legislature may prescribe, then the school district may elect to borrow all or any part of the excess from the state. In that event the state shall lend the excess amount to the school district for the payment of principal and interest. If for any reason any school district will be or is unable to pay the principal and interest on its qualified bonds when due, then the school district shall borrow and the state shall lend to it an amount sufficient to enable the school district to make the payment. "The term 'qualified bonds' means general obligation bonds of school districts issued for capital expenditures, including refunding bonds, issued prior to May 4, 1955, or issued thereafter and qualified as provided by law pursuant to Section 27 or Section 28 of Article X of the Constitution of 1908 or pursuant to this section." Article IX, Section 16, Constitution of 1963, is a continuation with minor revisions of the provisions relating to school bond financing which appeared in Sections 27 and 28 of Article X, Constitution of Section 27, Article X, Constitution of 1908, was proposed by joint resolution of the legislature in 1955 and approved by the people at the regular election of April 4, The loan provisions of Section 27 ceased to have effectiveness after July 1, 1962, and were replaced by the provisions of Section 28, Article X, Constitution of 1908, which was proposed by joint resolution of the legislature in 1960 and approved by the people at the general election of November 8, Section 28 by its own terms took effect on July 1, Section 28, Article X, Constitution of 1908, was implemented by the legislature by the enactment of Act 108, P.A. 1961, which took effect September 8, The first section of Act 108, P.A. 1961, stated that the purpose of the act was to implement Section 28 of Article X of the Constitution of The Constitution of 1963 took effect on January 1, In anticipation of the effectiveness of that Constitution, the legislature passed Act 33, P.A. 1963, Second Extra Session, such act to take effect on January 1, Act 33, P.A. 1963, Second Extra Session, amended Sections 1, 3, 8 and 9 of Act 108, P.A. 1961, and further amended section 7 of Act 108, P.A. 1961, as amended by Act 131, P.A The first section of amendatory Act 33 stated that the act's purpose was to implement Section 16 of Article IX of the Constitution of Subsequent amendment has been made to Sections 2, 4, 6, 9 and 10 of Act 108, P.A. 1961, by Act 169, P.A. 1964, which act also added a new Section 4a In your letter of request you stated that you were familiar with Opinion No issued by me on March 12, 1965, in which it was ruled that Article IX, Section 16, Constitution of 1963, requires school districts to borrow and the state to lend sufficient sums to cover debt service payments on qualified bonds of school districts but that this requirement is not a pledge of the full faith and credit of the state; the Municipal Finance Commission however may and must enforce the duty of the school district to borrow and have the state to lend the necessary amounts. 2 Act 108, P.A. 1961, in its present amended form appears in M.S.A Cum. Supp. S 3.424(111) et seq. C-9

86 Answer to your question is to be found in amended Sections 6, 7 and 8 of the act. These sections present two situations in which you may become involved as state treasurer. The first situation is where a loan is to be made to the school district to permit the district to meet the principal and interest requirements on its bonds without a default in payment; the second is where the principal or interest on the bonds has not been paid when due upon proper presentation because of inadequate funds resulting in a default in payment. Under amended Section 6 of the act, in any school district where the amount necessary to be levied in any year for principal and interest on qualified bonds exceeds 7 mills on each dollar of the assessed valuation of the school district as last equalized by the state, such school district on or before 60 days prior to the time of certification of its tax levy to the assessing officer shall file with the superintendent of public instruction 3 a preliminary application for a loan from the state in the amount of any part of such excess over 7 mills which the school district does not propose to levy in such year. 4 Amended Section 6 specifies the information to be supplied in the application. The superintendent of public instruction if he finds the application in proper form shall approve or deny the application in whole or in part and notify the school district of his action. Amended Section 7 of the act provides that if a loan from the state shall become necessary for the payment of principal and interest on qualified bonds in accordance with an approved preliminary application to the superintendent of public instruction or by virtue of a supplemental application, it shall be the duty of the superintendent of public instruction after audit to forward to the state treasurer a statement setting forth the amount to be loaned to the school district for the payment of principal and interest and the date on or before which loan shall be made. 5 The superintendent shall prepare a voucher as a basis for the issuance of a warrant and upon receipt of such statement and warrant, it shall be the duty of the state treasurer to loan to the school district from the school bond loan fund the amount set forth in the statement of the superintendent of public instruction on or before the date specified therein. The state treasurer upon making such loan shall obtain from the school district a receipt for the amount so loaned which receipt shall specify the terms of repayment in accordance with the provisions of Section 16 of Article IX, Constitution of 1963 and the act. The school district treasurer upon receipt of the loan is required to deposit the same in the debt retirement fund to be used solely for the payment of principal and interest on qualified bonds. The foregoing summaries of the procedures prescribed by amended Section 6 and 7 relate to the first situation abovedescribed where the loan to the school district is to be made before the school district has defaulted in the payment of the principal or interest on its bonds. The second situation described above is covered by amended Section 8 of the act which prescribes that in the event the principal or interest on any qualified bond is not paid when due, upon proper presentation of the bond or interest coupon to the agent or officer charged with making payment thereof, the state treasurer shall forthwith pay such principal or interest upon presentation of the bond or coupon to him. Any amount so paid by the state treasurer shall be deemed a loan to the school district made pursuant to the requirements of Section 16, Article IX, Constitution of 1963, and the act and the school district shall give a receipt therefor and repay the loan in the manner provided in the act for the repayment of loans. The method of processing loans to school districts under amended Sections 6 and 7 before default in payment of principal or interest is adequately spelled out in those sections and no additional comment from me is necessary. Your real concern is in regard to the applicable procedures which you should follow in the situation where the school district has defaulted in the payment of principal or interest on its bonds and the bond or bonds and the interest coupons have not been paid when due by the paying agent because of lack of funds. In the event of such a happening it is assumed for the purposes of this opinion that the holder of the bond or of the interest coupon will make demand on you as state treasurer for the prompt payment of the obligation thereunder. Should such demand be made on you as state treasurer, you would be entitled to take the following action before making payment: a. Ascertaining from the superintendent of public instruction or from the records in your own office that the bonds involved are duly qualified bonds as defined and described in amended Section 3 of the act; b. Requiring proof reasonably satisfactory to you that the bond or bonds or the interest coupons have been properly presented for payment to the paying agent or officer charged with the responsibility for making payment thereof and that payment has been refused because sufficient monies had not been deposited by the school district for that purpose; such proof of nonpayment may be furnished you in the form of a certificate from the paying agent. 3 Article VIII, Section 3, Constitution of 1963 requires the state board of education to appoint a superintendent of public instruction who shall be the principal executive officer of the department of education and who shall have powers and duties provided by law. Section 14 of Act 287, P.A (M.S.A Cum. Supp (14)) specifies that after June 30, 1965, a reference in any law to the powers and duties of the superintendent of public instruction shall be deemed to be made to the state board of education, subject to exceptions not pertinent here, and that the state board of education may delegate any of its functions to the superintendent. Section 300 of Act 380, P.A. 1965, creates a department of education. Section 301 of that act provides that the head of the department of education is the state board of education. Section 303 of that act transfers by a Type III transfer all powers, duties and functions then vested by law in the superintendent of public instruction to the department of education. Section 305 of the act specifies that the principal executive officer of the department of education is the superintendent of public instruction. Act 380 appears in M.S.A Cum. Supp. at 3.29(1) et seq. Act 380, P.A. 1965, was amended without regard to the sections involved here by Act 407, P.A Without doubt, under the foregoing provisions the state board of education could delegate to the superintendent of public instruction the performance of all of the functions and duties imposed on the board in connection with the School Bond Loan Fund. 4 Other details set forth in amended Section 6 have been omitted. 5 Other details set forth in amended Section 7 have been omitted. C-10

87 c. Notification to the school district given by you or your designee of the action taken by paying agent in refusing payment of the bonds or interest coupons on presentment because of the failure of the school district to have deposited funds with the paying agent for that purpose and verification from the school district of the fact of such failure to supply the required funds; notification to the school district by you or your designee that payment of the required amounts were to be made from the school bond loan fund by you as state treasurer and that such payment would be in the form of a loan to the school district which the school district would be required to be repay to the school bond loan fund in the manner required by law; the school district will be required to furnish you as state treasurer with a receipt evidencing the loan and specifying the terms of repayment, as required by law. Upon the fulfillment of the above conditions in a manner reasonably acceptable to you, you would be authorized to make payment of the amounts due on the bonds and interest coupons and thereupon to demand their surrender and delivery to you as state treasurer. Because of the safeguards built into the Michigan Constitution and statutes there should be no default of Michigan qualified school bonds. The School Loan Fund Program will have afforded the school district access to loan funds prior to the due date of the principle [sic] and interest on such bonds. In order to advise of the procedures in the remote possibility of nonpayment, however, I have set forth the foregoing guide lines [sic]. FRANK J. KELLEY, Attorney General C-11

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89 APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT FORM OF CONTINUING DISCLOSURE AGREEMENT $4,930,000 COUNTIES OF EMMET AND CHARLEVOIX STATE OF MICHIGAN 2012 SCHOOL TECHNOLOGY BONDS (GENERAL OBLIGATION - UNLIMITED TAX) This Continuing Disclosure Agreement (the "Agreement") is executed and delivered by Public Schools of Petoskey, Counties of Emmet and Charlevoix, State of Michigan (the "Issuer"), in connection with the issuance of $4,930, School Technology Bonds (General Obligation - Unlimited Tax) (the "Bonds"). The Bonds are being issued pursuant to resolutions adopted by the Board of Education of the Issuer on May 17, 2012 and June 21, 2012 (the "Resolutions"). The Issuer covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Agreement. This Agreement is being executed and delivered by the Issuer for the benefit of the Bondholders and in order to assist the Participating Underwriters in complying with the Rule. The Issuer acknowledges that this Agreement does not address the scope of any application of Rule 10b-5 promulgated by the SEC pursuant to the 1934 Act to the Annual Reports or notices of the Listed Events provided or required to be provided by the Issuer pursuant to this Agreement. SECTION 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" shall mean any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Agreement. "Bondholder" means the registered owner of a Bond or any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including any person holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bond for federal income tax purposes. "Dissemination Agent" means any agent designated as such in writing by the Issuer and which has filed with the Issuer a written acceptance of such designation, and such agent's successors and assigns. "EMMA" shall mean the MSRB's Electronic Municipal Market Access which provides continuing disclosure services for the receipt and public availability of continuing disclosure documents and related information required by Rule 15c2-12 promulgated by the SEC. D-1

90 "Listed Events" shall mean any of the events listed in Section 5(a) of this Agreement. "MSRB" shall mean the Municipal Securities Rulemaking Board. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Official Statement" shall mean the final Official Statement for the Bonds dated June 21, "Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with the offering of the Bonds. "Resolution" shall mean the resolutions duly adopted by the Issuer authorizing the issuance, sale and delivery of the Bonds. "Rule" shall mean Rule 15c2-12 promulgated by the SEC pursuant to the 1934 Act, as the same may be amended from time to time. "SEC" shall mean the Securities and Exchange Commission. "State" shall mean the State of Michigan. "State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rule and recognized as such by the SEC. Currently, the following is the State Repository: Municipal Advisory Council of Michigan Buhl Building 535 Griswold, Suite 1850 Detroit, Michigan Tel: (313) Fax: (313) mac@macmi.com SECTION 3. Provision of Annual Reports. (a) Each year, the Issuer shall provide, or shall cause the Dissemination Agent to provide, on or prior to the 180th day after the end of the fiscal year of the Issuer commencing with the fiscal year ending June 30, 2012, to EMMA and the State Repository an Annual Report for the preceding fiscal year which is consistent with the requirements of Section 4 of this Agreement. Currently, the Issuer's fiscal year ends on June 30. In each case, the Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by specific reference other information as provided in Section 4 of this Agreement; provided, however, that if the audited financial statements of the Issuer are not available by the deadline for filing the Annual Report, they shall be provided when and if available, and unaudited financial statements in a format similar to the financial statements contained in the Official Statement shall be included in the Annual Report. D-2

91 (b) The Annual Report shall be submitted to EMMA either through a web-based electronic submission interface or through electronic computer-to-computer data connections with EMMA in accordance with the submission process, document format and configuration requirements established by the MSRB. The Annual Report shall also include all related information required by MSRB to accurately identify: (i) the category of information being provided; (ii) the period covered by the Annual Report; (iii) the issues or specific securities to which the Annual Report is related (including CUSIP number, Issuer name, state, issue description/securities name, dated date, maturity date, and/or coupon rate); (iv) the name of any obligated person other than the Issuer; (v) the name and date of the document; and (vi) contact information for the Dissemination Agent or the Issuer's submitter. (c) If the Issuer is unable to provide to EMMA an Annual Report by the date required in subsection (a), the Issuer shall send a notice in a timely manner to the MSRB and to the State Repository in substantially the form attached as Appendix A. (d) If the Issuer's fiscal year changes, the Issuer shall send a notice of such change to the MSRB and to the State Repository in substantially the form attached as Appendix B. If such change will result in the Issuer's fiscal year ending on a date later than the ending date prior to such change, the Issuer shall provide notice of such change to the MSRB and to the State Repository on or prior to the deadline for filing the Annual Report in effect when the Issuer operated under its prior fiscal year. Such notice may be provided to the MSRB and to the State Repository along with the Annual Report, provided that it is filed at or prior to the deadline described above. SECTION 4. Content of Annual Reports. The Issuer's Annual Report shall contain or include by reference the following: (a) audited financial statements of the Issuer prepared pursuant to State laws, administrative rules and guidelines and pursuant to accounting and reporting policies conforming in all material respects to generally accepted accounting principles as applicable to governmental units as such principles are prescribed, in part, by the Financial Accounting Standards Board and modified by the Government Accounting Standards Board and in effect from time to time; and (b) additional annual financial information and operating data as set forth in the Official Statement under "CONTINUING DISCLOSURE". Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Issuer or related public entities, which previously have been provided to each of the Repositories or filed with the SEC. If the document included by specific reference is a final official statement, it must be available from the MSRB. The Issuer shall clearly identify each such other document so included by reference. D-3

92 SECTION 5. Reporting of Significant Events. (a) The Issuer covenants to provide, or cause to be provided, notice in a timely manner not in excess of ten business days of the occurrence of any of the following events with respect to the Bonds in accordance with the Rule: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security; (7) modifications to rights of security holders, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the obligated person; (13) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. (b) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event, the Issuer shall as soon as possible determine if such event would constitute material information for the Bondholders, provided, that any event other than those listed under Section 5(a)(1), (3), (4), (5), (9), (11) (only with respect to any change in any rating on the Bonds) or (12) above will always be deemed to be material. Events listed under Section 5(a)(6) and (8) above will always be deemed to be material except with respect to that portion of those events which must be determined to be material. (c) The Issuer shall promptly cause a notice of the occurrence of a Listed Event, determined to be material in accordance with the Rule, to be electronically filed with EMMA and with the State Repository together with a significant event notice cover sheet substantially in the form attached as Appendix C. In connection with providing a notice of the occurrence of a Listed Event described in Section 5(a)(9) above, the Issuer shall include in the notice explicit disclosure as to whether the Bonds have been escrowed to maturity or escrowed to call, as well as appropriate disclosure of the timing of maturity or call. D-4

93 (d) The Issuer acknowledges that the "rating changes" referred to above in Section 5(a)(11) of this Agreement may include, without limitation, any change in any rating on the Bonds or other indebtedness for which the Issuer is liable, or on any indebtedness for which the State is liable. (e) The Issuer acknowledges that it is not required to provide a notice of a Listed Event with respect to credit enhancement when the credit enhancement is added after the primary offering of the Bonds, the Issuer does not apply for or participate in obtaining such credit enhancement, and such credit enhancement is not described in the Official Statement. SECTION 6. Termination of Reporting Obligation. (a) The Issuer's obligations under this Agreement shall terminate upon the legal defeasance of the Resolution or the prior redemption or payment in full of all of the Bonds. (b) This Agreement, or any provision hereof, shall be null and void in the event that the Issuer (i) receives an opinion of nationally recognized bond counsel, addressed to the Issuer, to the effect that those portions of the Rule, which require such provisions of this Agreement, do not or no longer apply to the Bonds, whether because such portions of the Rule are invalid, have been repealed, amended or modified, or are otherwise deemed to be inapplicable to the Bonds, as shall be specified in such opinion, and (ii) delivers notice to such effect to the MSRB, and to the State Repository, if any. SECTION 7. Dissemination Agent. The Issuer, from time to time, may appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. SECTION 8. Amendment. Notwithstanding any other provision of this Agreement, this Agreement may be amended, and any provision of this Agreement may be waived to the effect that: (a) such amendment or waiver is made in connection with a change in circumstances that arises from a change in legal requirements, a change in law or a change in the identity, nature or status of the Issuer, or the types of business in which the Issuer is engaged; (b) this Agreement as so amended or taking into account such waiver, would have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, in the opinion of independent legal counsel; and (c) such amendment or waiver does not materially impair the interests of the Bondholders, in the opinion of independent legal counsel. If the amendment or waiver results in a change to the annual financial information required to be included in the Annual Report pursuant to Section 4 of this Agreement, the first Annual Report that contains the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of such change in the type of operating data or D-5

94 financial information being provided. If the amendment or waiver involves a change in the accounting principles to be followed in preparing financial statements, the Annual Report for the year in which the change is made shall present a comparison between the financial statements or information prepared based on the new accounting principles and those prepared based on the former accounting principles. The comparison should include a qualitative discussion of such differences and the impact of the changes on the presentation of the financial information. To the extent reasonably feasible, the comparison should also be quantitative. A notice of the change in the accounting principles should be sent by the Issuer to the MSRB and to the State Repository. Further, if the annual financial information required to be provided in the Annual Report can no longer be generated because the operations to which it related have been materially changed or discontinued, a statement to that effect shall be included in the first Annual Report that does not include such information. SECTION 9. Additional Information. Nothing in this Agreement shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in this Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Agreement. If the Issuer chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Agreement, the Issuer shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the Issuer to comply with any provision of this Agreement, any Bondholder may take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the Issuer to comply with its obligations under this Agreement. A default under this Agreement shall not be deemed an Event of Default under the Resolution or the Bonds, and the sole remedy under this Agreement in the event of any failure of the Issuer to comply with the Agreement shall be an action to compel performance. SECTION 11. Duties of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Agreement. SECTION 12. Beneficiaries. This Agreement shall inure solely to the benefit of the Issuer, the Dissemination Agent, the Participating Underwriters, and the Bondholders and shall create no rights in any other person or entity. D-6

95 SECTION 13. Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of the State, and any suits and actions arising out of this Agreement shall be instituted in a court of competent jurisdiction in the State. Notwithstanding the foregoing, to the extent this Agreement addresses matters of federal securities laws, including the Rule, this Agreement shall be construed and interpreted in accordance with such federal securities laws and official interpretations thereof. COUNTIES OF EMMET AND CHARLEVOIX STATE OF MICHIGAN Dated: July 9, 2012 By: Its: Superintendent D-7

96 APPENDIX A NOTICE TO THE MSRB AND TO THE STATE REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Public Schools of Petoskey, Emmet and Charlevoix Counties, Michigan Name of Bond Issue: 2012 School Technology Bonds (General Obligation - Unlimited Tax) Date of Bonds: July 9, 2012 NOTICE IS HEREBY GIVEN that the Issuer has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of its Continuing Disclosure Agreement with respect to the Bonds. The Issuer anticipates that the Annual Report will be filed by. COUNTIES OF EMMET AND CHARLEVOIX STATE OF MICHIGAN Dated: By: Its: Superintendent D-8

97 APPENDIX B NOTICE TO THE MSRB AND THE STATE REPOSITORY OF CHANGE IN ISSUER'S FISCAL YEAR Name of Issuer: Public Schools of Petoskey, Emmet and Charlevoix Counties, Michigan Name of Bond Issue: 2012 School Technology Bonds (General Obligation - Unlimited Tax) Date of Bonds: July 9, 2012 NOTICE IS HEREBY GIVEN that the Issuer's fiscal year has changed. Previously, the Issuer's fiscal year ended on. It now ends on. COUNTIES OF EMMET AND CHARLEVOIX STATE OF MICHIGAN Dated: By: Its: Superintendent D-9

98 APPENDIX C SIGNIFICANT EVENT NOTICE COVER SHEET This cover sheet and significant event notice should be provided in an electronic format to the Municipal Securities Rulemaking Board and the State Repository pursuant to Securities and Exchange Commission Rule 15c2-12(b)(5)(i)(C) and (D). Issuer's and/or other Obligated Person's Name: Issuer's Six-Digit CUSIP Number(s): or Nine-Digit CUSIP Number(s) to which this significant event notice relates: Number of pages of attached significant event notice: Description of Significant Events Notice (Check One): 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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security 7. Modifications to rights of security holders 8. Bond calls 9. Tender offers 10. Defeasances 11. Release, substitution, or sale of property securing repayment of the securities 12. Rating changes 13. Bankruptcy, insolvency, receivership or similar event of the obligated person 14. The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms 15. Appointment of a successor or additional trustee or the change of name of a trustee 16. Other significant event notice (specify) I hereby represent that I am authorized by the issuer or its agent to distribute this information publicly: Signature: Name: Title: Employer: Address: City, State, Zip Code: Voice Telephone Number ( ) The MSRB Gateway is or through the EMMA portal at emma.msrb.org/submission/submission_portal.aspx. Contact the MSRB at (703) with questions regarding this form or the dissemination of this notice. The cover sheet and notice may also be faxed to the MAC at (313) D-10

99 APPENDIX E - DRAFT LEGAL OPINION THRUN L A W F I R M, P. C. U.S. M AIL A DDRESS P.O. B OX 2575 E AST L ANSING, MI P HONE: (517) F AX: (517) F AX: (517) A LL O THER S HIPPING 2900 W EST R OAD, S UITE 400 E AST L ANSING, MI DRAFT LEGAL OPINION Public Schools of Petoskey Counties of Emmet and Charlevoix State of Michigan We have acted as bond counsel in connection with the issuance by Public Schools of Petoskey, Counties of Emmet and Charlevoix, State of Michigan (the "Issuer"), of 2012 School Technology Bonds (General Obligation - Unlimited Tax) (the "Bonds"), in the aggregate principal amount of Four Million Nine Hundred Thirty Thousand Dollars ($4,930,000). The Bonds are in fully registered form and issued without coupons, are dated July 9, 2012, are of $5,000 denomination or any integral multiple thereof; mature serially on May 1 of each year, bearing interest payable on November 1, 2012, and semiannually thereafter on the first day of May and November of each year, in the amounts and rates as follows: Date Amount Rate Date Amount Rate 2013 $390, % 2017 $ 540, % , , , , , ,225, Bonds of this issue are not subject to redemption prior to maturity. We have examined the documents which we deem authentic and pertinent to the validity of the Bonds, including the certified record evidencing the authorization of the Bonds by the electors and board of education of the Issuer, a copy of the approval of the Department of Treasury of the State of Michigan to issue the Bonds, a certified copy of the certificate of the Treasurer of the State of Michigan qualifying the Bonds for purposes of Article IX, Section 16, of the Michigan Constitution, and a specimen of the Bond certificate of said issue. Based upon the foregoing, we are of the opinion that under existing law: (1) the Bonds have been lawfully authorized and issued and are enforceable obligations of the Issuer in accordance with their terms; (2) the Bonds are the general obligation of the Issuer for which its full faith, credit and resources have been irrevocably pledged; (3) the Issuer has the power, and is obligated, to levy taxes on all taxable property now situated within the corporate boundaries of the Issuer, without limitation as to rate or amount, sufficient to pay the principal of and interest on the Bonds; E-1 E AST L ANSING C N OVI