NEW ISSUE BOOK-ENTRY ONLY Moody s: Aa2 Standard & Poor s: AA- (See MISCELLANEOUS Ratings herein.)

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY RATINGS: Moody s: Aa2 Standard & Poor s: AA- (See MISCELLANEOUS Ratings herein.) In the opinion of Orrick, Herrington & Sutcliffe llp, Bond Counsel to the District, based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See TAX MATTERS. $10,000,000 MILLBRAE SCHOOL DISTRICT (San Mateo County, California) General Obligation Bonds (Election of 2011, Series 2013) Dated: Date of Delivery Due: July 1, as shown on the inside cover This cover page is not a summary of this issue; it is only a reference to the information contained in this Official Statement. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Millbrae School District General Obligation Bonds (Election of 2011, Series 2013) (the Bonds ) are issued by the Millbrae School District (the District ), located in San Mateo County, California (the County ) (i) to finance specific construction and modernization projects approved by the voters; and (ii) to pay costs of issuance of the Bonds. The Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property that is taxable at limited rates), for the payment of principal of and interest on the Bonds, all as more fully described herein. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. Interest on the Bonds is payable on July 1, 2014 and thereafter on each January 1 and July 1 to maturity or earlier redemption. Principal of the Bonds is payable on July 1 in each of the years and in the amounts set forth on the inside cover of this Official Statement. Payments of principal of and interest on the Bonds will be made by the Paying Agent, initially The Bank of New York Mellon Trust Company, N.A., to The Depository Trust Company, New York, New York ( DTC ), for subsequent disbursement to DTC Participants, who will remit such payments to the Beneficial Owners (as defined in APPENDIX F) of the Bonds. See THE BONDS Payment of Principal and Interest and APPENDIX F BOOK-ENTRY ONLY SYSTEM. The Bonds are subject to redemption prior to maturity as described under THE BONDS Redemption herein. The Bonds will be issued in book-entry form only, and initially will be issued and registered in the name of Cede & Co., a nominee of DTC. Purchasers will not receive physical certificates representing their interests in the Bonds. See THE BONDS Form and Registration and APPEN- DIX F BOOK-ENTRY ONLY SYSTEM. MATURITY SCHEDULE See inside cover The Bonds will be offered when, as and if issued by the District and received by the Underwriter, subject to approval of validity by Orrick, Herrington & Sutcliffe llp, Bond Counsel. Certain legal matters will be passed upon for the District by Orrick, Herrington & Sutcliffe llp, as Disclosure Counsel, and for the Underwriter by Matt Juhl-Darlington & Associates. It is anticipated that the Bonds, in definitive form, will be available for delivery through the facilities of DTC on or about December 11, The date of this Official Statement is November 21, 2013.

2 MATURITY SCHEDULE $10,000,000 MILLBRAE SCHOOL DISTRICT (San Mateo County, California) General Obligation Bonds (Election of 2011, Series 2013) Base CUSIP Number: Consisting of: Maturity * 2016 $385, P DC , P DD , P DE , , P DG , , , , , P DM P DP , , , P DS , P DT , , P DV3 * * *

3 MILLBRAE SCHOOL DISTRICT DISTRICT BOARD OF EDUCATION Frank Barbaro President Denis Fama Clerk/President Pro Tem Lynne Ferrario Trustee D. Don Revelo Trustee Jay D. Price Trustee DISTRICT ADMINISTRATION Linda C. Luna Superintendent Wendy Richard Chief Business Official COUNTY ELECTED OFFICERS Sandie Arnott Treasurer-Tax Collector Bob Adler Auditor-Controller PROFESSIONAL SERVICES Bond Counsel and Disclosure Counsel Orrick, Herrington & Sutcliffe LLP San Francisco, California Financial Advisor KNN Public Finance A Division of Zions First National Bank Oakland, California Paying Agent The Bank of New York Mellon Trust Company, N.A. Los Angeles, California

4 This Official Statement does not constitute an offering of any security other than the original offering of the Bonds by the District. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations other than as contained in this Official Statement, and if given or made, such other information or representation not so authorized should not be relied upon as having been given or authorized by the District. The Bonds are exempted from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(2) thereof. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy Bonds in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. The information set forth herein other than that furnished by the District, although obtained from sources which are believed to be reliable, is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market prices of the Bonds at levels above those which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the bonds to certain securities dealers and dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page hereof and said public offering prices may be changed from time to time by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information set forth in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. This Official Statement contains forecasts, projections and estimates that are based upon expectations and assumptions that existed at the time such forecasts, projections and estimates were prepared. In light of the important factors that may materially affect economic conditions in the State, the inclusion in this Official Statement of such forecasts, projections and estimates should not be regarded as a representation by the District that such forecasts, projections and estimates will occur. Such forecasts, projections and estimates are not intended as representations of fact or as guarantees of results. If and when included in this Official Statement, the words plan, expect, forecast, estimate, budget, project, intends, anticipates and similar words are intended to identify forward-looking statements, and any such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, litigation and various other events, conditions and circumstances, many of which are beyond the control of the District. These forward-looking statements speak only as of the date they were prepared.

5 TABLE OF CONTENTS Page INTRODUCTION... 1 The District... 1 THE BONDS... 2 Authority for Issuance; Purpose... 2 Form and Registration... 2 Payment of Principal and Interest... 2 Redemption... 3 Defeasance of Bonds... 4 Unclaimed Money... 5 Application and Investment of Bond Proceeds... 5 ESTIMATED SOURCES AND USES OF FUNDS... 6 DEBT SERVICE... 7 Semi-Annual Debt Service Payments for the Bonds... 7 Combined Debt Service... 8 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS... 9 General... 9 Property Taxation System... 9 Assessed Valuation of Property Within the District... 9 Tax Rates Tax Collections and Delinquencies TAX MATTERS OTHER LEGAL MATTERS Legal Opinion Limitation on Remedies Continuing Disclosure No Litigation MISCELLANEOUS Ratings Professionals Involved in the Offering Underwriting Additional Information APPENDICES APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012 APPENDIX C PROPOSED FORM OF OPINION OF BOND COUNSEL APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX E SAN MATEO COUNTY INVESTMENT POLICIES AND PRACTICES DESCRIPTION OF INVESTMENT POOL AND INVESTMENT REPORTS APPENDIX F BOOK-ENTRY ONLY SYSTEM -i-

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7 $10,000,000 MILLBRAE SCHOOL DISTRICT (San Mateo County, California) General Obligation Bonds (Election of 2011, Series 2013) INTRODUCTION This Official Statement, which includes the cover page and appendices hereto, is provided to furnish information in connection with the sale of the Millbrae School District General Obligation Bonds (Election of 2011, Series 2013) in the aggregate principal amount of $10,000,000 (the Bonds ). This Official Statement speaks only as of its date, and the information contained herein is subject to change. Except as required by the Continuing Disclosure Certificate to be executed by the Millbrae School District (the District ), the District has no obligation to update the information in this Official Statement. See OTHER LEGAL MATTERS Continuing Disclosure. The purpose of this Official Statement is to supply information to prospective buyers of the Bonds. Quotations from and summaries and explanations of the constitutional provisions, statutes and other documents described herein, do not purport to be complete, and reference is hereby made to said constitutional provisions and statutes for the complete provisions thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or owners of any of the Bonds. Copies of documents referred to herein and information concerning the Bonds are available from the District from the Superintendent, 555 Richmond Drive, Millbrae, CA The District may impose a charge for copying, handling and mailing such requested documents. The District The District, located in San Mateo County (the County ), provides educational services to the residents in and around the Cities of Millbrae and San Bruno and is located south of San Francisco near San Francisco International Airport. The District s projected average daily attendance for Fiscal Year is 2,351 students and the District s projected general fund expenditures are approximately $18.3 million. Currently, the District operates four elementary schools and one middle school. Taxable property in the District has a Fiscal Year assessed value of approximately $6.8 billion. The District budgets receipt of $1,022,844 from local property taxes in fiscal year , or 6% of its general fund revenue. As of July 1, 2013, the District employed full-time equivalent (FTE) certificated (credentialed teaching) employees, 50.6 FTE classified (non-instructional) employees and 9.0 FTE management personnel. The District operates under the jurisdiction of the San Mateo County Superintendent of Schools. The District is governed by a Board of Education consisting of five members. The members are elected to four-year terms in staggered years. The day-to-day operations are managed by a board-appointed Superintendent of Schools. Linda C. Luna was appointed Superintendent effective as of July 1, Ms. Luna received her Bachelor s Degree in Music from the University of the Pacific and her Master of Arts, Educational Administration, from California State University, Sacramento. Ms. Luna has been in the educational profession for 28 years, serving as a classroom teacher, a program specialist, a literacy coach, an assistant principal, a principal and most recently as the Assistant Superintendant of Curriculum and Instruction and Categorical Programs in the Stockton Unified School District. Wendy Richard was hired as Chief Business Official on July 1, Ms. Richard received her Bachelor s Degree in Business Administration from California State University, Hayward. Ms. Richard is a graduate of the CBO Mentor Project and has received CBO certification from California Association of School Business Officials (CASBO). Ms. Richard has been in the accounting field over 25 years with experience in both school districts and

8 county offices of education. Most recently, Ms. Richard served as the Director of Fiscal Services for Antioch Unified School District. For additional information about the District, see APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION. THE BONDS Authority for Issuance; Purpose The Bonds are issued pursuant to the Constitution and laws of the State of California (the State ), including the provisions of Article 4.5 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code and other applicable provisions of law, including Chapters 1 and 1.5 of Part 10 of Division 1 of Title 1 of the Education Code of the State, and pursuant to a resolution adopted by the Board of Education of the District on October 15, 2013 (the District Resolution ) and pursuant to the Paying Agent Agreement, dated as of December 1, 2013 (the Paying Agent Agreement ), between the District and The Bank of New York Mellon Trust Company, N.A. (the Paying Agent ). The Board of Supervisors of the County approved the District selling the Bonds on its own behalf on November 5, The Bonds were authorized to be issued at an election held on November 8, 2011, by 55% or more of the votes cast by eligible voters within the District. The measure authorized the District to issue bonds in an aggregate principal amount not to exceed $30,000,000 to renovate and modernize the schools and classrooms in the District, including improving energy efficiency, updating classroom equipment and technology, improving school safety and building a new cafeteria at Taylor Middle School. $20,000,000 of Millbrae School District (San Mateo County, California) General Obligation Bonds (Election of 2011, Series 2012) were issued pursuant to Resolution No of the District, dated as of March 12, 2012, and a Paying Agent Agreement dated as of May 1, 2012 (the 2012 Paying Agent Agreement ), between the District and the Paying Agent. No voted authorization will remain after the Bonds are issued. Form and Registration The Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 principal amount or integral multiples thereof. The Bonds will initially be registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository of the Bonds. Purchases of Bonds under the DTC book-entry system must be made by or through a DTC participant, and ownership interests in Bonds will be recorded as entries on the books of said participants. Except in the event that use of this book-entry system is discontinued for the Bonds, Beneficial Owners will not receive physical certificates representing their ownership interests. See APPENDIX F BOOK-ENTRY ONLY SYSTEM. Payment of Principal and Interest The Bonds will be dated the date of their delivery, and bear interest at the rates set forth on the inside cover page hereof, payable on July 1 and January 1 of each year, commencing on July 1, 2014 (each, an Interest Payment Date ), until payment of the principal amount thereof, computed using a year of 360 days consisting of twelve 30day months. The Bonds authenticated and registered on any date prior to the close of business on June 15, 2014, will bear interest from the date of their delivery. The Bonds authenticated during the period between the 15th day of the calendar month immediately preceding an Interest Payment Date (the Record Date ) and the close of business on that Interest Payment Date will bear interest from that Interest Payment Date. Any other Bond will bear interest from the Interest Payment Date immediately preceding the date of its authentication. If, at the time of authentication of any Bond, interest is then in default on outstanding Bonds, such Bonds will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. The principal of the Bonds is payable in lawful money of the United States of America upon the surrender thereof at the principal corporate trust office of the Paying Agent with respect to the Bonds, initially The Bank of New York Mellon Trust Company, N.A. (the Paying Agent ), at the maturity thereof or upon redemption prior to -2-

9 maturity. Payment of interest on any Bond on each Interest Payment Date (or on the following business day, if the Interest Payment Date does not fall on a business day) is payable in lawful money of the United States of America to the person whose name appears on the registration books of the Paying Agent as the registered owner thereof (the Owner ) as of the close of business on the preceding Record Date, such interest to be paid by check or draft mailed to such Owner at such Owner s address as it appears on such registration books or at such other address as the Owner may have filed with the Paying Agent for that purpose on or before the Record Date. The Owner of an aggregate principal amount of $1,000,000 or more of Bonds may request in writing to the Paying Agent to be paid interest by wire transfer to the bank and account number on file with the Paying Agent as of the applicable Record Date. Redemption Optional Redemption. The Bonds maturing on or before July 1, 2023 are not subject to redemption prior to their respective stated maturity dates. The Bonds maturing on and after July 1, 2024 are subject to redemption prior to their respective stated maturity dates, at the option of the District, from any source of available funds, as a whole or in part on any date on or after July 1, 2023, at a redemption price equal to the principal amount plus accrued interest thereon to the date called for redemption, without premium. Mandatory Sinking Fund Redemption. The $1,765,000 Term Bond maturing on July 1, 2038, is also subject to mandatory sinking fund redemption on each mandatory sinking fund redemption date and in the respective principal amounts as set forth in the following schedule, at a redemption price equal to 100% of the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption: Mandatory Sinking Fund Redemption Date (July 1) Principal Amount To be Redeemed $345, , , , ,000 Maturity. The $1,595,000 Term Bond maturing on July 1, 2042, is also subject to mandatory sinking fund redemption on each mandatory sinking fund redemption date and in the respective principal amounts as set forth in the following schedule, at a redemption price equal to 100% of the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption: Mandatory Sinking Fund Redemption Date (July 1) Principal Amount To be Redeemed $380, , , ,000 Maturity. The principal amount of any maturity to be redeemed in each year shown in the tables above will be reduced proportionately by the amount of any Term Bonds of that maturity optionally redeemed prior to the mandatory sinking fund redemption date. -3-

10 Selection of Bonds for Redemption. If less than all of the Bonds are called for redemption, the Bonds will be redeemed in inverse order of maturities (or as otherwise directed by the District). Whenever less than all of a maturity of outstanding Bonds is designated for redemption, the portion to be redeemed will be determined by lot. For purposes of such determination, each Bond will be deemed to consist of individual Bonds of denominations of $5,000, which may be separately redeemed. Notice of Redemption. Notice of redemption of any Bond is required to be mailed by the Paying Agent, upon written request to the District, postage prepaid not less than 20 nor more than 45 days prior to the date fixed for redemption (i) by first class mail to the respective owners of any Bond designated for redemption at their addresses appearing on the bond registration books of the Paying Agent; (ii) as may be further required in accordance with the Continuing Disclosure Certificate of the District; and (iii) in accordance with operational arrangements of DTC. See APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE. Each notice of redemption is required to contain the following information: (i) the date of such notice; (ii) the name of the affected Bonds and the date of issue of the Bonds; (iii) the date fixed for redemption; (iv) the redemption price, if available; (v) the dates of maturity of the Bonds to be redeemed; (vi) if less than all of the then outstanding Bonds are to be redeemed, the distinctive numbers of the Bonds of each series and maturity to be redeemed; (vii) in the case of Bonds redeemed in part only, the respective maturities or portions of the principal amount of the Bonds of each series and maturity to be redeemed; (viii) the CUSIP number, if any, of each maturity of Bonds to be redeemed; (ix) a statement that such Bonds must be surrendered by the owners at the office of the Paying Agent designated by the Paying Agent for such purpose; and (x) notice that further interest on such Bonds will not accrue after the date fixed for redemption. The actual receipt by the owner of any Bond of notice of such redemption will not be a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, will not affect the validity of the proceedings for the redemption of such Bonds. Effect of Notice of Redemption. When notice of redemption has been given substantially as provided for in the Paying Agent Agreement, and when the redemption price of the Bonds designated for redemption is set aside for the purpose as described in the Paying Agent Agreement, the Bonds designated for redemption will become due and payable on the date fixed for redemption, and upon presentation and surrender of such Bonds at the place or places specified in the notice of redemption, such Bonds will be redeemed and paid at the redemption price thereof out of the money provided therefor. Conditional Notice. Any notice of optional redemption may be conditioned on any fact or circumstance stated therein, and if such condition has not been satisfied on or prior to the date fixed for redemption stated in such notice, said notice will be of no force and effect on and as of the date fixed for redemption, the redemption will be cancelled, and the District will not be required to redeem the Bonds that were the subject of the notice. The Paying Agent is to give notice of such cancellation and reason therefore in the same manner in which notice of redemption was originally given. The actual receipt by the owner of any Bond of notice of such cancellation will not be a condition precedent to cancellation, and failure to receive such notice or any defect in such notice will not affect the validity of the cancellation. Rescission of Notice of Redemption. The District may rescind any optional redemption and notice thereof for any reason on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the owners of the Bonds so called for redemption. Any extraordinary mandatory redemption and notice thereof will be rescinded if the District has cured the conditions that caused the Bonds to be subject to extraordinary mandatory redemption. Notice of rescission of redemption is to be given in the same manner in which notice of redemption was originally given. The actual receipt by the owner of any Bond of notice of such rescission will not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission. Defeasance of Bonds The District may pay and discharge any or all of the Bonds by depositing in trust with the Paying Agent or an escrow agent at or before maturity, money or non-callable direct obligations of the United States of America or other non-callable obligations the payment of the principal of and interest on which is guaranteed by a pledge of the full faith and credit of the United States of America, in an amount which will, together with the interest to accrue -4-

11 thereon and available moneys then on deposit in the interest and sinking fund of the District within the treasury of the County (the Interest and Sinking Fund ), be fully sufficient in the opinion of a certified public accountant licensed to practice in the State to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates. If at any time the District pays or causes to be paid or there is otherwise paid to the owners of any or all outstanding Bonds all of the principal, interest and premium, if any, represented by such Bonds when due, or as described above, or as otherwise provided by law, then such Owners shall cease to be entitled to the obligation of the County to levy and collect taxes to pay the Bonds and such obligation and all agreements and covenants of the District to such Owners under the Paying Agent Agreement shall thereupon be satisfied and discharged and shall terminate, except only that the District will remain liable for payment of all principal, interest and premium, if any, represented by such Bonds, but only out of moneys on deposit in the Interest and Sinking Fund or otherwise held in trust for such payment, provided, that the unclaimed moneys provisions described below will apply in all events. Unclaimed Money Any money held in any fund created pursuant to the Paying Agent Agreement, or held by the Paying Agent in trust, for the payment of the principal of, redemption premium, if any, or interest on the Bonds and remaining unclaimed for two years after the principal of all of the Bonds has become due and payable (whether by maturity or upon prior redemption) shall be transferred to the Interest and Sinking Fund for payment of any outstanding bonds of the District payable from said fund; or, if no such bonds of the District are at such time outstanding, said moneys are to be transferred to the general fund of the District as provided and permitted by law. Application and Investment of Bond Proceeds The proceeds from the sale of the Bonds shall be deposited in the County Treasury to the credit of the Building Fund of the District. Any premium or accrued interest received by the District shall be deposited in the Interest and Sinking Fund of the District in the County Treasury. Earnings on the investment of moneys in either fund will be retained in that fund and used only for the purposes to which that fund may lawfully be applied. Moneys in the Building Fund may only be applied for the purposes for which the Bonds were approved. Moneys in the Interest and Sinking Fund may only be applied to make payments of interest, principal, and premium, if any, on bonds of the District. The Paying Agent may hold bond proceeds in the Costs of Issuance Account to pay costs of issuance of the Bonds. Amounts deposited into the Building Fund and the Interest and Sinking Fund, as well as proceeds of taxes held therein for payment of the Bonds, will be invested at the County Treasurer s discretion pursuant to law and the investment policy of the County. See APPENDIX E SAN MATEO COUNTY INVESTMENT POLICIES AND PRACTICES DESCRIPTION OF INVESTMENT POOL AND INVESTMENT REPORTS. -5-

12 ESTIMATED SOURCES AND USES OF FUNDS The proceeds of the Bonds will be applied as follows: Sources of Funds Aggregate Principal Amount of Bonds Reoffering Premium Total Sources $10,000, , $10,789, Uses of Funds Building Fund $10,000, Interest and Sinking Fund 564, Underwriter s Discount 50, Costs of Issuance(1) 175, Total Uses $10,789, (1) Includes financial advisor fees, bond counsel fees, disclosure counsel fees, rating agency fees, paying agent fees, printing fees and other miscellaneous expenses. -6-

13 DEBT SERVICE Semi-Annual Debt Service Payments for the Bonds The scheduled debt service for the Bonds will be as follows: Payment Date Jul. 1, 2014 Jan. 1, 2015 Jul. 1, 2015 Jan. 1, 2016 Jul. 1, 2016 Jan. 1, 2017 Jul. 1, 2017 Jan. 1, 2018 Jul. 1, 2018 Jan. 1, 2019 Jul. 1, 2019 Jan. 1, 2020 Jul. 1, 2020 Jan. 1, 2021 Jul. 1, 2021 Jan. 1, 2022 Jul. 1, 2022 Jan. 1, 2023 Jul. 1, 2023 Jan. 1, 2024 Jul. 1, 2024 Jan. 1, 2025 Jul. 1, 2025 Jan. 1, 2026 Jul. 1, 2026 Jan. 1, 2027 Jul. 1, 2027 Jan. 1, 2028 Jul. 1, 2028 Jan. 1, 2029 Jul. 1, 2029 Jan. 1, 2030 Jul. 1, 2030 Jan. 1, 2031 Jul. 1, 2031 Jan. 1, 2032 Jul. 1, 2032 Jan. 1, 2033 Jul. 1, 2033 Jan. 1, 2034 Jul. 1, 2034 Jan. 1, 2035 Jul. 1, 2035 Jan. 1, 2036 Jul. 1, 2036 Jan. 1, 2037 Jul. 1, 2037 Jan. 1, 2038 Jul. 1, 2038 Jan. 1, 2039 Jul. 1, 2039 Jan. 1, 2040 Jul. 1, 2040 Jan. 1, 2041 Jul. 1, 2041 Jan. 1, 2042 Jul. 1, 2042 TOTAL Principal Payment $385, , , , , , , , , , , , , , , , , , , , , , , , , , ,000 $10,000,000 The Bonds Interest Payment $276, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , $7,743, Bonds Semi-Annual Debt Service $276, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , $17,743, Total Bonds Debt Service $276, , , , , , , , , , , , , , , , , , , , , , , , , , , , , $17,743,161.99

14 Combined Debt Service The District has previously issued three series of General Obligation Bonds under its 2008 Election: Series A in the principal amount of $12,000,000, dated April 21, 2009, Series B-1 (Qualified School Construction Bonds) in the principal amount of $7,660,000, dated April 19, 2011 and Series B-2 (Tax Exempt) in the principal amount of $10,339,527.25, dated April 19, The District has also previously issued one series of General Obligation Bonds under its 2011 Election: Election of 2011, Series 2012, in the principal amount of $20,000,000, dated May 8, See APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION FINANCIAL AND DEMOGRAPHIC INFORMATION District Debt Structure. After the issuance of the Bonds, annual debt service obligations for all outstanding bonds of the District will be as follows: Year Ending July TOTAL Outstanding Bonds Gross Debt Service(1) $2,801, ,296, ,711, ,789, ,817, ,837, ,690, ,699, ,590, ,598, ,619, ,456, ,254, ,234, ,433, ,479, ,470, ,461, ,567, ,634, ,628, ,633, ,663, ,685, ,698, ,706, ,906, ,759, ,422, $99,548, The Bonds $276, , , , , , , , , , , , , , , , , , , , , , , , , , , , , $17,743, Total Annual Debt Service $3,077, ,794, ,594, ,626, ,635, ,626, ,475, ,463, ,330, ,336, ,337, ,165, ,964, ,938, ,046, ,089, ,065, ,042, ,128, ,175, ,149, ,141, ,153, ,161, ,165, ,170, ,359, ,207, ,864, $117,291, (1) Does not include expected federal subsidy payment in connection with qualified school construction bonds. -8-

15 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS General The interest, principal and premiums, if any, on the Bonds will be payable from moneys on deposit in the Interest and Sinking Fund, consisting of ad valorem taxes collected and held by the Treasurer-Tax Collector, together with any net premium and accrued interest received upon issuance of the Bonds. In order to provide sufficient funds for repayment of principal and interest when due on the Bonds, the Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates). Such taxes are in addition to other taxes levied upon property within the District. When collected, the tax revenues will be deposited by the County in the District s Interest and Sinking Fund, which is required to be maintained by the County and to be used solely for the payment of bonds of the District. Property Taxation System Property tax revenues result from the application of the appropriate tax rate to the total assessed value of taxable property in the District. School districts levy property taxes for payment of voter-approved bonds and receive property taxes for general operating purposes as well. Local property taxation is the responsibility of various county officers. For each school district located in a county, the county assessor computes the value of locally assessed taxable property. Based on the assessed value of property and the scheduled debt service on outstanding bonds in each year, the county auditor-controller computes the rate of tax necessary to pay such debt service, and presents the tax rolls (including rates of tax for all taxing jurisdictions in the county) to the county board of supervisors for approval. The county treasurer-tax collector prepares and mails tax bills to taxpayers and collects the taxes. In addition, the treasurer-tax collector, as ex officio treasurer of each school district located in the county, holds and invests school district funds, including taxes collected for payment of school bonds, and is charged with payment of principal and interest on such bonds when due. Taxes on property in a school district whose boundaries extend into more than one county are administered separately by the county in which the property is located. The State Board of Equalization also assesses certain special classes of property, as described later in this section. Assessed Valuation of Property Within the District Under Proposition 13, an amendment to the California Constitution adopted in 1978, the county assessor s valuation of real property is established as shown on the fiscal year tax bill, or, thereafter, as the appraised value of real property changes when purchased, newly constructed, or a change in ownership has occurred. Assessed value of property may be increased annually to reflect inflation at a rate not to exceed 2% per year, or reduced to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction or in the event of declining property value caused by substantial damage, destruction, market forces or other factors. As a result of these rules, real property that has been owned by the same taxpayer for many years can have an assessed value that is much lower than the market value of the property and of similar properties more recently sold. Likewise, changes in ownership of property and reassessment of such property to market value commonly lead to increases in aggregate assessed value even when the rate of inflation or consumer price index would not permit the full 2% increase on any property that has not changed ownership. See generally, APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS. Classification of Locally Taxed Property. Locally taxed property is classified either as secured or unsecured, and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing State-assessed property and property (real or personal) for which there is a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. All other property is unsecured, and is assessed on the unsecured roll. Secured property assessed by the State Board of Equalization is commonly identified for taxation purposes as utility property. -9-

16 Under California law, a city or county could, and did, prior to recent California legislation dissolving redevelopment agencies, create a redevelopment agency in territory within one or more school districts. Upon formation of a project area of a redevelopment agency, most property tax revenues attributable to the growth in assessed value of taxable property within the project area (known as tax increment ) belong to the redevelopment agency, causing a loss of general fund tax revenues (relating to the 1% countywide general fund levy) to other local taxing agencies, including school districts, from that time forward. However, special ad valorem property taxes (in excess of the 1% general fund levy) collected for payment of debt service on school bonds are based on assessed valuation before reduction for redevelopment increment and such special ad valorem property taxes are not affected or diverted by the operation of a redevelopment agency project area. Recently, the State of California dissolved all redevelopment agencies. The application of such revenues diverted by redevelopment agencies is now substantially limited to meeting existing debt service of the redevelopment agencies. For more information on the dissolution of redevelopment agencies, see APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION FINANCIAL AND DEMOGRAPHIC INFORMATION State Funding of Education; State Budget Process Dissolution of Redevelopment Agencies. The greater the assessed value of taxable property in the District, the lower the tax rate necessary to generate taxes sufficient to pay scheduled debt service on the Bonds. The table below shows recent history of taxable assessed valuation. Millbrae School District Summary of Taxable Assessed Valuation Fiscal Years to Fiscal Year Local Secured $2,843,171,665 3,111,289,475 3,351,687,616 3,668,591,200 3,804,520,960 3,824,446,458 3,880,156,356 4,033,866,655 4,267,934,823 Utility $7,452,158 7,225,057 1,210,000 1,210,000 1,210,000 1,210, Unsecured $2,211,156,465 1,996,464,180 2,057,746,503 2,198,426,837 2,228,664,988 1,850,935,228 2,058,668,023 2,428,609,431 2,550,453,401(1) Total Before Redevelopment Increment $5,061,780,288 5,114,978,712 5,410,644,119 5,868,228,037 6,034,395,948 5,676,591,686 5,938,824,379 6,462,476,086 6,818,388,224 Annual % Change 1.05% (5.93) (1) See San Francisco International Airport. Source: California Municipal Statistics, Inc. The District may issue bonds in an amount up to 1.25% of the assessed valuation of taxable property within its boundaries. The District s gross bonding capacity is estimated at $85.2 million, and its unused bonding capacity is approximately $36.6 million, taking into account the issuance of the Bonds. In accordance with the law which permitted the Bonds to be approved by a 55% affirmative vote, bonds approved by the District s voters at the November 8, 2011 election may not be issued unless the District projects that repayment of all outstanding bonds approved at the election are projected to require a tax rate no greater than $30.00 per $100,000 of assessed value. Based on the assessed value of taxable property in the District at the time of issuance of the Bonds and assuming future growth in assessed value of taxable property in the District, the District projects that the maximum tax rate required to repay the Bonds will be within the statutory limit. San Francisco International Airport. San Francisco International Airport ( SFO ) accounts for a significant portion of the assessed value in the District. The City and County of San Francisco is the largest secured taxpayer in the District in large part because of SFO, see Largest Secured Taxpayers in District, and several airlines, including, but not limited to, United Airlines, Inc., Virgin America, Inc., and Continental Airlines, Inc., are among the largest unsecured taxpayers in the District. Property belonging to the aforementioned airlines constitutes a significant portion of the approximately $2.5 billion of unsecured assessed value in the District. The District -10-

17 cannot predict whether or how assessed value at SFO may change in the future or the effect such changes may have on the District s bonding capacity or tax rate. Assessed Valuation by Land Use. The following table gives a distribution of taxable property located in the District by principal purpose for which the land is used, and the assessed valuation and number of parcels for each use. Millbrae School District Assessed Valuation and Parcels by Land Use Assessed Valuation(1) % of Total No. of Parcels % of Total Non-Residential: Commercial Industrial Recreational Airport and Water Facilities Government/Social/Institutional Miscellaneous Subtotal Non-Residential $245,844,671 41,839,591 18,963,415 53,777,182 35,201, ,477 $396,139, % % % % Residential: Single Family Residence Condominium/Townhouse Hotel/Motel 2-4 Residential Units 5+ Residential Units/Apartments Subtotal Residential $2,880,792, ,306, ,538, ,156, ,349,730 $3,856,143, % % 5, , % % Vacant Parcels Total $15,652,435 $4,267,934, % % 81 7, % % (1) Local secured assessed valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. [Remainder of Page Intentionally Blank] -11-

18 Assessed Valuation of Single-Family Residential Properties. The following table focuses on single-family residential properties only, which comprise approximately 67.5% of the local secured assessed value of property in the District. The average assessed value is $519,155, and the median assessed value is $469,512 for single-family residential properties. Millbrae School District Per Parcel Assessed Valuation of Single Family Homes Single Family Residential No. of Parcels 5, Assessed Valuation $2,880,792,702 Average Assessed Valuation $519,155 Median Assessed Valuation $469, No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels(1) Total % of Total Valuation Total % of Total $0 - $99, % 5.698% $ 26,633, % 0.925% $100,000 - $199,999 1, ,338, $200,000 - $299, ,180, $300,000 - $399, ,533, $400,000 - $499, ,578, $500,000 - $599, ,249, $600,000 - $699, ,288, $700,000 - $799, ,934, $800,000 - $899, ,481, $900,000 - $999, ,980, $1,000,000 - $1,099, ,687, $1,100,000 - $1,199, ,508, $1,200,000 - $1,299, ,291, $1,300,000 - $1,399, ,424, $1,400,000 - $1,499, ,712, $1,500,000 - $1,599, ,074, $1,600,000 - $1,699, ,334, $1,700,000 - $1,799, ,716, $1,800,000 - $1,899, ,174, $1,900,000 - $1,999, ,514, $2,000,000 and greater ,156, Total 5, % $2,880,792, % (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc. [Remainder of Page Intentionally Blank] -12-

19 Largest Secured Taxpayers in District. The twenty secured taxpayers in the District with the greatest combined assessed valuation of taxable property on the tax roll, and the assessed valuations thereof, are shown in the following table. The more property (by assessed value) owned by a single secured taxpayer, the more exposure of tax collections to weakness in that taxpayer s financial situation and ability or willingness to pay property taxes. In , no single taxpayer owned more than 1.26% of the total taxable property in the District. Millbrae School District Largest Local Secured Taxpayers Property Owner City & County of San Francisco Westin Bay Hotel Company OR Property Holdings LLC Starwood S.F. Clarion Realty LLC Magnolia of Millbrae Inc. Marymount Greenhills LLC Friend Friend & Friend Simeon SPVEF LLC Wilson Plaza LLC Real Property Storage LLC Green Hills Country Club EQR Skyline Terrace LP John and Susan C. Wilms, Trust Bernard and Lisa Corry, Trust Barbara J. Finnigan, Trust Cooper SF Realty LLC Thakor B. Desai, Trust Millbrae Square Company LP EMJP Partners LP Ramkabir LLC TOTAL Primary Land Use Water and Airport Facilities Hotel Apartments Hotel Rest Home Apartments Commercial Commercial Shopping Center Industrial Country Club Apartments Hotel Apartments Apartments Industrial Hotel Shopping Center Hotel Hotel Assessed Valuation $ 53,777,182 47,476,727 35,437,348 28,969,312 28,525,978 22,201,782 15,843,918 15,706,803 12,305,847 11,885,502 11,826,117 10,055,466 9,742,153 9,463,544 8,147,536 8,027,072 7,300,000 6,770,547 6,301,190 6,100,000 $355,864,024 % of Total(1) 1.26% % (1) local secured assessed valuation: $4,267,934,823. Source: California Municipal Statistics, Inc. State-Assessed Property. Under the Constitution, the State Board of Equalization assesses property of State-regulated transportation and communications utilities, including railways, telephone and telegraph companies, and companies transmitting or selling gas or electricity. The Board of Equalization also is required to assess pipelines, flumes, canals and aqueducts lying within two or more counties. The value of property assessed by the Board of Equalization is allocated by a formula to local jurisdictions in the county, including school districts, and taxed by the local county tax officials in the same manner as for locally assessed property. Taxes on privately owned railway cars, however, are levied and collected directly by the Board of Equalization. Property used in the generation of electricity by a company that does not also transmit or sell that electricity is taxed locally instead of by the Board of Equalization. Thus, the reorganization of regulated utilities and the transfer of electricity-generating property to non-utility companies, as often occurred under electric power deregulation in California, affects how those assets are assessed, and which local agencies benefit from the property taxes derived. In general, the transfer of State-assessed property located in the District to non-utility companies will increase the assessed value of property in the District, since the property s value will no longer be divided among all taxing jurisdictions in the County. The transfer of property located and taxed in the District to a State-assessed utility will have the opposite effect, generally reducing the assessed value in the District as the value is shared among the other jurisdictions in the County. The District is unable to predict future transfers of State-assessed property in the District and the County, the impact of such transfers on its utility property tax revenues, or whether future legislation or litigation may affect -13-

20 ownership of utility assets, the State s methods of assessing utility property, or the method by which tax revenues of utility property is allocated to local taxing agencies, including the District. Appeals of Assessed Valuation. State law affords an appeal procedure to taxpayers who disagree with the assessed value of their taxable property. Taxpayers may request a reduction in assessment directly from the County Assessor (the Assessor ), who may grant or refuse the request, and may appeal an assessment directly to the San Mateo County Board of Equalization, which rules on appealed assessments whether or not settled by the Assessor. The Assessor is also authorized to reduce the assessed value of any taxable property upon a determination that the market value has declined below the then-current assessment, whether or not appealed by the taxpayer. The District can make no predictions as to the changes in assessed values that might result from pending or future appeals by taxpayers. Any reduction in aggregate District assessed valuation due to appeals, as with any reduction in assessed valuation due to other causes, will cause the tax rate levied to repay the Bonds to increase accordingly, so that the fixed debt service on the Bonds (and other outstanding bonds) may be paid. Proposition 8, adopted in 1978, amended Article XIIIA of the State Constitution and added Section 51(a)(2)to the Revenue and Tax Code. Proposition 8 permits the County Assessor to reduce the full cash value of real property for property tax purposes to reflect substantial damages, destruction or other factors causing a decline in value. The District cannot predict how changing economic conditions may affect real property values in the future, and cannot predict how the County Assessor may respond to such conditions, or whether the County Assessor would reduce the full cash value of real property pursuant to Proposition 8 as discussed above. Declines in the full cash value of real property, including those caused by Proposition 8 reductions, would cause an increase in the tax rate. The District cannot predict if or when such increases in the tax rate may occur. Any refund of paid taxes triggered by a successful assessment appeal will be debited by the County Tax Collector against all taxing agencies who received tax revenues, including the District. Tax Rates The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed 1% of the full cash value of the property, and State law requires the full 1% tax to be levied. The levy of special ad valorem property taxes in excess of the 1% levy is permitted as necessary to provide for debt service payments on school bonds and other voter-approved indebtedness. One factor in the ability of taxpayers to pay additional taxes for general obligation bonds is the cumulative rate of tax. The rate of tax necessary to pay fixed debt service on the Bonds in a given year depends on the assessed value of taxable property in that year. (Unsecured property is taxed at the secured property tax rate from the prior year.) Property values could be reduced by factors beyond the District s control, such as a depressed real estate market due to general economic conditions in the San Francisco Bay Area. The District is located in a seismically active area, and property within the District could sustain extensive damage in a major earthquake, and a major earthquake could adversely affect the Bay Area s economic activity. Other possible causes for a reduction in assessed values include the complete or partial destruction of taxable property caused by other natural or manmade disasters, such as flood, fire, toxic dumping, acts of terrorism, etc., or reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes). Lower assessed values could necessitate a corresponding increase in the annual tax rate to be levied to pay the principal of and interest on the Bonds. Issuance of additional authorized bonds in the future might also cause the tax rate to increase. -14-

21 Other local agencies can also impose ad valorem taxes on property owners in the District, generally for outstanding voter-approved general obligation debt. The following table shows ad valorem property tax rates for the last several years in a typical Tax Rate Area of the District (TRA ). The assessed value of TRA is $2.2 billion, or approximately 31.7% of the total assessed value of the District. Millbrae School District Percentage of Assessed Valuation Summary of Ad Valorem Tax Rates TRA (1) Fiscal Year General Tax Rate City of Millbrae Millbrae School District San Mateo Union High School District San Mateo Community College District Total Tax Rate % % % % % % % % % % Source: California Municipal Statistics, Inc. (1) Assessed Valuation of TRA is $2,161,602,846 which is 31.70% of the district s total assessed valuation. Tax Collections and Delinquencies A school district s share of the 1% countywide tax is based on the actual allocation of property tax revenues to each taxing jurisdiction in the county in Fiscal Year , as adjusted according to a complex web of statutory modifications enacted since that time. Revenues derived from special ad valorem taxes for voter-approved indebtedness, including the Bonds, are reserved to the taxing jurisdiction that approved and issued the debt, and may only be used to repay that debt. The county treasurer-tax collector prepares the property tax bills. Property taxes on the regular secured assessment roll are due in two equal installments: the first installment is due on November 1, and becomes delinquent after December 10. The second installment is due on February 1 and becomes delinquent after April 10. If taxes are not paid by the delinquent date, a ten percent penalty attaches. If taxes remain unpaid by June 30, the tax is deemed to be in default. Penalties then begin to accrue at the rate of 1.5% per month. The property owner has the right to redeem the property by paying the taxes, accrued penalties, and costs within five years of the date the property went into default. If the property is not redeemed within five years, it is subject to sale at a public auction by the county treasurer. Annual bills for property taxes on the unsecured roll are generally issued in July, are due in a single payment within 30 days, and become delinquent after August 31. A ten percent penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue on November 1. To collect unpaid taxes, the county treasurer may obtain a judgment lien upon and cause the sale of all property owned by the taxpayer in the county, and may seize and sell personal property, improvements and possessory interests of the taxpayer. The county treasurer may also bring a civil suit against the taxpayer for payment. The date on which taxes on supplemental assessments are due depends on when the supplemental tax bill is mailed. -15-

22 The following table shows a recent history of tax delinquency rates in the District. Millbrae School District Secured Tax Delinquencies % Delinquent June % Fiscal Year Source: California Municipal Statistics, Inc. Teeter Plan. The County has adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in Section 4701 and following of the California Revenue and Taxation Code. Under the Teeter Plan, the County distributes to each participating local tax-levying agency, including school districts, the amount levied on the secured and supplemental tax rolls, instead of the amount actually collected. In return, the County receives and retains delinquent payments, penalties and interest as collected that would have been due the local agency in the absence of the Teeter Plan. The County of San Mateo applies the Teeter Plan to taxes levied for repayment of school district bonds. The County s policy is that any new taxing entity that includes its levy on the County tax roll is qualified to be included in the Teeter Plan. The Teeter Plan is to remain in effect unless the County Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the Board of Supervisors receives a petition for its discontinuance from two-thirds of the participating revenue districts in the County. The Board of Supervisors may also, after holding a public hearing on the matter, discontinue the procedures with respect to any tax levying agency or assessment levying agency in the County if the rate of secured tax delinquency in that agency in any year exceeds 3% of the total of all taxes and assessments levied on the secured rolls in that agency. The rate of secured tax delinquencies in the District has not exceeded 3% in any of the last five years for which such data is available. Direct and Overlapping Debt. The following table was prepared by California Municipal Statistics Inc., and is included for general information purposes only. The District has not reviewed this table for completeness or accuracy and makes no representations in connection therewith. The first column in the table names each public agency which had outstanding debt as of November 1, 2013, and whose territory overlaps the District in whole or in part. The second column shows the percentage of each overlapping agency s assessed value located within the boundaries of the District. This percentage, multiplied by the total outstanding debt of each overlapping agency (which is not shown in the table) produces the amount shown in the third column, which is the apportionment of each overlapping agency s outstanding debt to taxable property in the District. -16-

23 The table generally includes long-term obligations sold in the public credit markets by the public agencies listed. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. Millbrae School District Direct and Overlapping Bonded Debt Assessed Valuation: $6,818,388,224 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable(1) San Mateo Community College District 4.361% San Mateo Union High School District Millbrae School District 100. City of Millbrae 100. California Statewide Communities Development Authority 100. Park Broadway Assessment District TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT OVERLAPPING GENERAL FUND DEBT: San Mateo County General Fund Obligations San Mateo County Board of Education Certificates of Participation City of Millbrae Pension Obligations City of San Bruno Certificates of Participation and Pension Obligations TOTAL OVERLAPPING GENERAL FUND DEBT OVERLAPPING TAX INCREMENT DEBT: 4.361% Debt 11/1/13 $ 24,568,565 56,162,558 48,589,527(2) 9,545,000 1,507,572 $140,373,222 $13,026, ,553 8,009, ,298 $22,304,808 $7,410,000 COMBINED TOTAL DEBT $170,088,030(3) Ratios to Assessed Valuation: Direct Debt ($48,589,527) % Total Direct and Overlapping Tax and Assessment Debt % Combined Total Debt % Ratios to Redevelopment Incremental Valuation ($759,603,926): Total Overlapping Tax Increment Debt % (1) (2) (3) Based on ratios. Excludes general obligation bonds to be sold. Excludes tax and revenue anticipation notes, revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc. -17-

24 TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel to the District ( Bond Counsel ), based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ) and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX C hereto. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each beneficial owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of beneficial owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a beneficial owner s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such beneficial owner. Beneficial owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The District has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a beneficial owner s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the beneficial owner or the beneficial owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. -18-

25 Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. As one example, the Obama Administration s proposed 2014 budget includes a legislative proposal which, for tax years beginning after December 31, 2013, would limit the exclusion from gross income of interest on obligations like the Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service (- IRS ) -or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the District, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The District has covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the District or the beneficial owners regarding the taxexempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its appointed counsel, including the beneficial owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of Bonds is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues, may affect the market price for, or the marketability of, the Bonds, and may cause the District or the beneficial owners to incur significant expense. OTHER LEGAL MATTERS Legal Opinion The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the District. A complete copy of the proposed form of Bond Counsel opinion is contained in APPENDIX C hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Limitation on Remedies Bond Counsel s opinion is qualified with respect to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws related to and affecting creditors rights. Before any district may file for bankruptcy certain steps have to be taken under California law. See APPENDIX C PROPOSED FORM OF OPINION OF BOND COUNSEL. Pursuant to a State law adopted in 1991 ( A.B ), school districts certify their budgets to the county office of education with jurisdiction (typically, the county in which the district resides) periodically throughout the course of each fiscal year. See APPENDIX A INFORMATION RELATING TO THE DISTRICT District Budget Process and County Review below. In the event that a school district determines that its revenues are less than the amount necessary to meet its current year expenditure obligations, the County Superintendent of Schools and the State Superintendent of Public Instruction (the State Superintendent ) are authorized to exercise increased control over the finances of the district. If remedial measures undertaken by the district, the county, and the State are insufficient to address the district s financial problems, the district may request an emergency apportionment from the State. No California school district has filed for bankruptcy since the passage of A.B

26 As a condition of receiving an emergency apportionment from the State, the district must prepare a recovery plan, and the State Superintendent assumes the rights, duties and powers of the governing board of the district. The State Superintendent appoints an administrator (the State Administrator ) to exercise the powers of the governing board on his or her behalf and to implement the recovery plan. When the State Superintendent determines that the district is complying with the recovery plan, and that compliance is likely to continue, the State Superintendent may permit the district board to re-assume its legal rights, duties and powers from the State Administrator, subject to the veto of a trustee (the State Trustee ). The State Trustee s power is unlike the State Administrator s in that it is limited to staying or rescinding an action of the governing board, and does not extend to exercising the board s powers. One of the powers the State Administrator may exercise is the filing of a petition under Chapter 9 of Title 11 of the United States Code ( Chapter 9 ). The District believes that State law mandates the State Superintendent of Public Instruction to appoint a State Administrator for the District before the District could file for bankruptcy under Chapter 9. The District can provide no assurance, however, that a bankruptcy court would agree with the District s interpretation of the law. If the District were to become a debtor in a bankruptcy case, it would be a debtor under Chapter 9. Chapter 9 specifies that it does not limit or impair the power of the applicable state to control its municipalities in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise. California state law provides that the ad valorem taxes must be used to pay principal and interest on the Bonds. The District believes that this law would be respected in any bankruptcy proceeding so that the ad valorem tax revenues could not be used by the District for any purpose other than to make payments on the Bonds, but no assurance can be given that a bankruptcy court would not conclude otherwise. If the County Treasurer commingles the tax revenues collected to make payments on the Bonds, those revenues may no longer be subject to the State law that requires ad valorem tax revenues to be used by the District to pay principal and interest on the Bonds, which may result in reductions or delays in payments on the Bonds. There may be other possible effects of a bankruptcy of the District that could result in delays or reductions in payments on the Bonds, or result in losses to the holders of the Bonds. Regardless of any specific adverse determinations in a bankruptcy proceeding of the District, the fact of such a bankruptcy proceeding could have an adverse effect on the liquidity and market value of the Bonds. Continuing Disclosure The District has covenanted for the benefit of the holders and Beneficial Owners of the Bonds to provide certain financial information and operating data relating to the District (the Annual Report ) by not later than nine months following the end of the District s Fiscal Year (currently ending June 30), commencing with the report for Fiscal Year , and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the District with the Municipal Securities Rulemaking Board ( MSRB ). The notices of material events will be filed by the District with the MSRB. The specific nature of the information to be contained in the Annual Report or the notices of material events is summarized in APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the Rule ). The District failed to timely file certain assessed value data required to be submitted as part of the annual report, but has since filed such information and is now in compliance with its continuing disclosure obligations. The District has adopted a procedure to ensure timely compliance with its future continuing disclosure obligations. No Litigation No litigation is pending or threatened concerning the validity of the Bonds, or the District s ability to receive ad valorem taxes and to collect other revenues, or contesting the District s ability to issue and retire the Bonds. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the title to their offices of District or County officials who will sign the Bonds and other certifications relating to the Bonds, or the powers of those offices. A certificate (or certificates) to that effect will be furnished to purchasers at the time of the original delivery of the Bonds. -20-

27 The District is routinely subject to lawsuits and claims. In the opinion of the District, the aggregate amount of the uninsured liabilities of the District under these lawsuits and claims will not materially affect the financial position or operations of the District. MISCELLANEOUS Ratings The Bonds have received the ratings of Aa2 by Moody s Investors Service ( Moody s ) and AA- by Standard & Poor s Rating Services, a division of the McGraw-Hill Companies, Inc. ( Standard & Poor s ), with respect to the Bonds at the time of delivery of the Bonds. Each rating agency generally bases its rating on its own investigations, studies and assumptions. The District has provided certain additional information and materials to the rating agencies (some of which does not appear in this Official Statement). All such ratings reflect only the views of the respective rating agency, and any explanation of the significance of any rating may be obtained from the rating agency furnishing such rating, from Moody s at and from Standard & Poor s at There is no assurance that any rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the rating agencies, if, in the judgment of the rating agencies, circumstances so warrant. Any such downward revision or withdrawal of a rating may have an adverse effect on the market price of the Bonds. The District undertakes no responsibility to oppose any such downward revision, suspension or withdrawal. Professionals Involved in the Offering Orrick, Herrington & Sutcliffe LLP is acting as Bond Counsel and as Disclosure Counsel to the District with respect to the Bonds, and will receive compensation from the District contingent upon the sale and delivery of the Bonds. KNN Public Finance, A Division of Zions National Bank is acting as Financial Advisor with respect to the Bonds, and will receive compensation from the District contingent upon the sale and delivery of the Bonds. Underwriting The Bonds are being purchased by E. J. De La Rosa & Co., Inc. (the Underwriter ). Pursuant to the terms of a contract of purchase between the District and the Underwriter dated November 21, 2013 (the Purchase Contract ), the Underwriter will be obligated to purchase all of the Bonds if any are purchased, the obligation to make such purchase being subject to certain terms and conditions to be satisfied by the District. The Underwriter has agreed to purchase the Bonds from the District at a purchase price of $10,564, The Underwriter s discount is $50, Also pursuant to the Purchase Contract, the Underwriter shall deposit $175, with The Bank of New York Mellon Trust Company, N.A., as fiscal agent, to pay costs of issuance. The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page. The offering prices may be changed from time to time by the Underwriter. -21-

28 Additional Information Quotations from and summaries and explanations of the Bonds and the Paying Agent Agreement do not purport to be complete, and said documents, while not incorporated herein by reference, are available on request from the District. See INTRODUCTION. * * * All data contained herein have been taken or constructed from the District s records and other sources, as indicated. This Official Statement and its distribution have been duly authorized and approved by the District. The District has duly authorized the delivery of this Official Statement. MILLBRAE SCHOOL DISTRICT By: -22- /s/ Linda C. Luna Superintendent

29 APPENDIX A DISTRICT FINANCIAL AND OPERATING INFORMATION The information in this appendix concerning the operations of the District, the District s finances, and State funding of education, is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Bonds is payable from the general fund of the District or from State revenues. The Bonds are payable from the proceeds of an ad valorem tax approved by the voters of the District pursuant to all applicable laws and Constitutional requirements, and required to be levied by the County on property within the District in an amount sufficient for the timely payment of principal and interest on the Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS in the front section of this Official Statement. FINANCIAL AND DEMOGRAPHIC INFORMATION General The District, located in San Mateo County (the County ), provides educational services to the residents in and around the Cities of Millbrae and San Bruno and is located south of San Francisco near San Francisco International Airport. The District s projected average daily attendance for Fiscal Year is 2,351 students, and the District s projected general fund expenditures are approximately $18.3 million. Currently, the District operates four elementary schools and one middle school. Taxable property in the District has a Fiscal Year assessed value of approximately $6.8 billion. The District budgets receipt of $1,022,844 from local property taxes in fiscal year , or 6% of its general fund revenue. As of July 1, 2013, the District employed full-time equivalent (FTE) certificated (credentialed teaching) employees, 50.6 FTE classified (non-instructional) employees and 9.0 FTE management personnel. The District operates under the jurisdiction of the San Mateo County Superintendent of Schools. The District is governed by a Board of Education consisting of five members. The members are elected to four-year terms in staggered years. The day-to-day operations are managed by a board-appointed Superintendent of Schools. Linda C. Luna was appointed Superintendent effective as of July 1, Ms. Luna received her Bachelor s Degree in Music from the University of the Pacific and her Master of Arts, Educational Administration, from California State University, Sacramento. Ms. Luna has been in the educational profession for 28 years, serving as a classroom teacher, a program specialist, a literacy coach, an assistant principal, a principal and most recently as the Assistant Superintendant of Curriculum and Instruction and Categorical Programs in the Stockton Unified School District. Wendy Richard was hired as Chief Business Official on July 1, Ms. Richard received her Bachelor s Degree in Business Administration from California State University, Hayward. Ms. Richard is a graduate of the CBO Mentor Project and has received CBO certification from California Association of School Business Officials (CASBO). Ms. Richard has been in the accounting field over 25 years with experience in both school districts and county offices of education. Most recently, Ms. Richard served as the Director of Fiscal Services for Antioch Unified School District. State Funding of Education; State Budget Process General. As is true for all school districts in California, the District s operating income consists primarily of two components: a State portion funded from the State s general fund and a local portion derived from the District s share of the 1% county-wide ad valorem property tax authorized by the State Constitution. In addition, school districts may be eligible for other special categorical funding from State and federal government programs. The District receives approximately 85% of its general fund revenues from State funds, budgeted at approximately $14.4 million in Fiscal Year As a result, decreases in State revenues, or in State legislative appropriations made to fund education, may significantly affect District operations. As a consequence of the Local Control A-1

30 Funding Formula replacing the revenue limit as the calculation pursuant to which a district s funding is calculated, the District anticipates receiving $592,000 dollars in addition to the revenues presented herein. See Local Control Funding Formula herein for more information. State funding is guaranteed to a minimum level for school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs. The funding guarantee is known as Proposition 98, a constitutional and statutory initiative amendment adopted by the State s voters in 1988, and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution). Recent years have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporate taxes, making it increasingly difficult for the State to meet its Proposition 98 funding mandate, which normally commands about 45% of all State general fund revenues, while providing for other fixed State costs and priority programs and services. Because education funding constitutes such a large part of the State s general fund expenditures, it is at the heart of annual budget negotiations and adjustments. Adoption of Annual State Budget. Under the State Constitution, the Governor of the State (the Governor ) must propose a budget to the State Legislature no later than January 10 of each year. Under an initiative constitutional amendment approved by the State s voters on November 2, 2010 as Proposition 25, a final budget must be adopted by a majority vote (rather than a supermajority, as was the case prior to the passage of Proposition 25) of each house of the Legislature no later than June 15, although this deadline has been routinely breached in the past. Any tax increase provision of such final budget shall continue to require approval by a twothirds majority vote of each house of the State Legislature. The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget. When the State budget is not adopted on time, basic appropriations and the categorical funding portion of each district s State funding are affected differently. Under the rule of White v. Davis (also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is no constitutional mandate for appropriations to school districts without an adopted budget or emergency appropriation, and funds for State programs cannot be disbursed by the State Controller until that time unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. The Controller has posted guidance as to what can and cannot be paid during a budget impasse at its website: Should the Legislature fail to pass the budget or emergency appropriation before the start of any fiscal year, the District might experience delays in receiving certain expected revenues. Aggregate State Education Funding. The Proposition 98 guaranteed amount for education is based on prior-year funding, as adjusted through various formulas and tests that take into account State proceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and other factors. The State s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given fiscal year s budget, from the Governor s initial budget proposal to actual expenditures to post-year-end revisions, as better information regarding the various factors becomes available. Over the long run, the guaranteed amount will increase as enrollment and per capita personal income grow. If, at year-end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as settle-up. If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster A-2

31 than personal income (or sooner, as the Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as maintenance factor. In recent years, the State s response to fiscal difficulties has had a significant impact on Proposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-up amounts when funding has lagged the guaranteed amount. In response, teachers unions, the State Superintendent, and others, sued the State or Governor in 1995, 2005, and 2009, to force them to fund schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted in over $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down the obligations through additional education funding over time, including the Quality Education Investment Act of 2006 (QEIA), have also become part of annual budget negotiations, resulting in repeated adjustments and deferrals of the settle-up amounts. The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds one fiscal year to the next; by permanently deferring the year-end apportionment from June 30 to July 2; by suspending Proposition 98, and by proposing to amend the Constitution s definition of the guaranteed amount and settle-up requirement under certain circumstances. Prohibitions on Diverting Local Revenues for State Purposes. Beginning in , the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund (ERAF) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the Legislature proposed an amendment to the State Constitution, which the State s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as Proposition State Budget. The Governor signed the fiscal year State budget (the State Budget ) on June 27, The State Budget represents a multiyear plan that maintains a $1.1 billion reserve and pays down certain budgetary debt. The State Budget provides for $97.1 billion in revenues and transfers for fiscal year (down slightly from the $98.2 billion estimated for fiscal year ), and $96.3 billion in total expenditures for fiscal year (up slightly from the $95.7 billion estimates for fiscal year ). However, unlike recent years, the State enters fiscal year with a positive prior year general fund balance, approximately $872 million, as compared to a negative general fund balance of $1.7 billion at the start of fiscal year The State Budget, accordingly, is able to set aside a $1.1 billion reserve in a special fund for economic uncertainties. The State Budget projects that budgetary debt, which was approximately $35 billion at the end of fiscal year and $27 billion at the end of fiscal year , will be reduced to less than $5 billion by the end of fiscal year Although the State Budget is a balanced budget, the State Budget notes that substantial risks, uncertainties and liabilities remain, including the pace of the economic recovery, the State s needs to address its other significant liabilities and the federal budget for federal fiscal year With the passage of Proposition 30 in November 2012, The Schools and Local Public Safety Protection Act (the Temporary Tax Measure ), the State Budget reinvests in, rather than cuts, education funding. The Temporary Tax Measure increased the personal income tax rates on the State s highest income taxpayers by up to three percent for a period of seven years beginning with the 2012 tax year, and increased the sales tax by one-quarter percent for a period of four years beginning on January 1, For kindergarten through twelfth grade ( K-12 ) education, the State Budget provides $55.3 billion (or $8,220 per student) in Proposition 98 funding in fiscal year , which is slightly lower than the $56.5 billion estimated in fiscal year but an increase of more than $8 billion (or $1,045 per student) from fiscal year levels. The State Budget projects $67.1 billion (or $10,010 per student) in Proposition 98 funding in fiscal year Total funding under the State Budget for all K-12 education in fiscal year is approximately $70 billion. A-3

32 The State Budget also contains a new formula for funding the school finance system (the Local Control Funding Formula ). The Local Control Funding Formula is designed to increase local control and flexibility, reduce State bureaucracy and better allocate resources based on student needs. The Local Control Funding Formula would replace the existing revenue limit funding system and most categorical programs. See Local Control Funding Formula herein for more information. Certain budget adjustments for K-12 programs include the following: Local Control Funding Formula. An increase of $2.1 billion in Proposition 98 general funds for school districts and charter schools, and $32 million in Proposition 98 general funds for county offices of education, to support first-year funding provided through the Local Control Funding Formula. Common Core Implementation. An increase of $1.25 billion in one-time Proposition 98 general funds to support the implementation of the Common Core, which are new standards for evaluating student achievement in English-language arts and mathematics. Such funding will be distributed to local education agencies on the basis of enrollment to support necessary investments in professional development, instructional materials and technology. Local education agencies will be required to develop a plan to spend this money over the next two years and to hold a public hearing on such plan. Career Technical Education Pathways Grant Program. An increase of $250 million in Proposition 98 general funds for one-time competitive capacity-building grants for K-12 school districts and community colleges to support programs focused on work-based learning. K-12 schools and community colleges must obtain funding commitments from program partners to support ongoing program costs. K-12 Mandates Block Grant. An increase of $50 million in Proposition 98 general funds to reflect the inclusion of the Graduation Requirements mandate within the block grant program. This increase will be distributed to school districts, county offices of education and charter schools with enrollment in grades K-12 Deferrals. An increase of $1.6 billion in Proposition 98 general funds in fiscal year and an increase of $242.3 million in Proposition 98 general funds in fiscal year for the repayment of inter-year budgetary deferrals. When combined, total funding over such two-year will reduce K-12 inter-year deferrals to $5.6 billion by the end of fiscal year Special Education Funding Reform. The State Budget includes several consolidations for various special education programs in an effort to simplify special education finance and provide Special Education Local Plan Areas with additional funding flexibility. With respect to the implementation of Proposition 39 (The California Clean Energy Jobs Act), which was approved at the November 6, 2012 election, the State Budget allocates $381 million in Proposition 98 general funds to K-12 local education agencies to support energy efficiency projects approved by the California Energy Commission. Of this amount, 85% will be distributed based on A.D.A. and 15% will be distributed based on free and reduced-price meal eligibility. The State Budget establishes minimum grant levels of $15,000 and $50,000 for small and exceptionally small local education agencies and allows these agencies to receive an advance on a future grant allocation. Other local education agencies would receive the greater of $100,000 or their weighted distribution amount. The State Budget also provides $28 million for interest-free revolving loans to assist eligible energy projects at schools and community colleges. The complete State Budget is available from the California Department of Finance website at The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted therein, and such information is not incorporated herein by such reference. A-4

33 Local Control Funding Formula. The Local Control Funding Formula replaces the existing revenue limit funding system and most categorical programs, and distributes combined resources to school districts through a base funding grant ( Base Grant ) per unit of A.D.A. with additional supplemental funding allocated to local educational agencies based on their proportion of English language learners, students from low-income families and foster youth, beginning in fiscal year The Local Control Funding Formula has an eight year implementation program to incrementally close the gap between actual funding and the target level of funding, as described below. The Local Control Funding Formula includes the following components: A Base Grant for each local education agency, equivalent to $7,643 per unit of A.D.A. in fiscal year Such Base Grant per unit of A.D.A., adjusted by grade span variation and to be adjusted annually for cost-of-living, is as follows: $6,845 for grades K-3, $6,947 for grades 4-6, $7,154 for grades 7-8 and $8,289 for grades 9-12 (the Target Base Grant ). This amount includes an adjustment of 10.4% to the Base Grant to support lowering class sizes in grades K-3, and an adjustment of 2.6% to reflect the cost of operating career technical education programs in grades A 20% supplemental grant for the unduplicated number of English language learners, students from low-income families and foster youth to reflect increased costs associated with educating those students. An additional concentration grant of up to 22.5% of a local education agency s Base Grant, based on the number of English language learners, students from low-income families and foster youth served by the local education agency that comprise more than 55% of enrollment. An Economic Recovery Target (the ERT ) that is intended to ensure that almost every local education agency receives at least their pre-recession funding level (i.e., the fiscal year revenue limit per unit of A.D.A.), adjusted for inflation, at full implementation of the Local Control Funding Formula. Upon full implementation, local education agencies would receive the greater of the Target Base Grant or the ERT. Of the projected $25 billion in new funding to be invested through the Local Control Funding Formula over the next eight years, the vast majority of new funding will be provided for Base Grants. Specifically, of every dollar invested through the Local Control Funding Formula, 84 cents will go to Base Grants, 10 cents will go to supplemental grants and 6 cents will go to concentration grants. Under the new formula, for basic aid districts, local property tax revenues would be used to offset up to the entire allocation under the new formula. However, basic aid districts would continue to receive the same level of State aid as allocated in fiscal year All school districts, county offices of education and charter schools will be required to develop and adopt local control and accountability plans, which will identify local goals in areas that are priorities for the State, including pupil achievement, parent engagement and school climate. Such local control and accountability plans are to be developed in accordance with a template to be provided by the State Board of Education. County superintendents will review and provide support to the school districts under their jurisdiction, while the Superintendent of Public Instruction will perform a corresponding role for county offices of education. In addition the State Budget creates the California Collaborative for Education Excellence (the Collaborative ) to advise and assist local education agencies in achieving the goals identified in their plans. For local education agencies that continue to struggle in meeting their goals, and when the Collaborative indicates that additional intervention is needed, the Superintendent of Public Instruction would have authority to make changes to a local education agency s plan. For charter schools, the charter authorizer will be required to consider revocation of a charter if the Collaborative finds that the inadequate performance is persistent and acute as to warrant revocation. State Cash Management Legislation. On March 1, 2010, the Governor signed a bill (and on March 4, 2010, subsequently signed a clean-up bill to clarify certain provisions of such bill) to provide additional cash management flexibility to State fiscal officials (the Cash Management Bill ). The Cash Management Bill authorized deferral of certain payments during the fiscal year for school districts (not to exceed $2.5 billion in the aggregate at A-5

34 any one time, and a maximum of three deferrals during the fiscal year). The Cash Management Bill permitted deferrals of payments to K-12 schools in July 2010, October 2010 and March 2011, for not to exceed 60, 90 and 30 days, respectively, but depending on actual cash flow conditions at the time, and allowed the Controller, Treasurer and Director of Finance to either accelerate or delay the deferrals up to 30 days or reduce the amounts deferred. The Cash Management Bill also permitted the State to move a deferral to the prior month or to a subsequent month upon 30 days written notice by the State Department of Finance to the Legislative Budget Committee, except that the Cash Management Bill provided that the deferral for March 2011 was required to be paid prior to April 30. The Cash Management Bill provided for exceptions to the deferrals for school districts that could demonstrate hardship. The Cash Management Bill made it necessary for many school districts (and other affected local agencies) to increase the size and/or frequency of their cash flow borrowings during fiscal year Similar legislation was enacted for fiscal year The legislation, however, sets forth a specific deferral plan for K-12 education payments. In the legislation, the July 2011 and August 2011 K-12 payments of $1.4 billion and the October 2011 payment of $2.4 billion were deferred. In September 2011, $700 million of the July deferral was paid, in January 2012, $4.5 billion from the remaining July, August and October deferrals was paid, and in March 2012, $1.4 billion was deferred and paid in April The State Legislature enacted similar legislation for fiscal year that provides for $1.2 billion of K-12 payments to be deferred in July 2012, $600 million to be deferred in August 2012, $800 million to be deferred in October 2012 and $900 million to be deferred in March Of such deferred amounts, $700 million of the deferral made in July 2012 was paid in September 2012, the remaining $1.9 billion deferred in July, August and October of 2012 is to be paid in January 2013, and the $900 million deferred in March 2013 is to be repaid in April The District is authorized to borrow temporary funds to cover its annual cash flow deficits and, as a result of this or similar future legislation, the District might find it necessary to utilize cash flow borrowings or increase the size or frequency of its cash flow borrowings in fiscal year and in future years. In future fiscal years, if the District finds that its other funds are insufficient to cover any cash flow deficits, the District is authorized to borrow funds from the County. The District cannot predict when, if, and to what extent the State may defer some or all of those payments due to school districts during the fiscal year. Future Budgets and Budgetary Actions. The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for K-12 education. The State budget will be affected by national and State economic conditions and other factors over which the District cannot predict and will have no control. State budget shortfalls or changes in funding for education could have a material adverse financial impact on the District Prohibitions on Diverting Local Revenues for State Purposes. Beginning in , the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund ( ERAF ) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the Legislature proposed an amendment to the State Constitution, which the State s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as Proposition 22. The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government, including school districts, or from temporarily shifting property taxes from cities, counties and special districts to schools, as in the ERAF program. This intended to, among other things, stabilize local government revenue sources by restricting the State s control over local property taxes. One effect of this amendment will be to deprive the State of fuel tax revenues to pay debt service on most State bonds for transportation projects, reducing the amount of State general fund resources available for other purposes, including education. A-6

35 Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billion in local property tax revenues in from cities, counties, and special districts to the State to offset State general fund spending for education and other programs, and included another diversion in the adopted State budget of $1.7 billion in local property tax revenues from local redevelopment agencies, which local redevelopment agencies have now been dissolved. Redevelopment agencies had sued the State over this latter diversion. However, the lawsuit was decided against the California Redevelopment Association on May 1, Because Proposition 22 reduces the State s authority to use or shift certain revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget in some years such as reducing State spending or increasing State taxes, and school and community college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State s general fund. Dissolution of Redevelopment Agencies. The adopted State budget for fiscal , as signed by the Governor of the State on June 30, 2011, included as trailer bills Assembly Bill No. 26 (First Extraordinary Session) ( AB1X 26 ) and Assembly Bill No. 27 (First Extraordinary Session) ( AB1X 27 ), which the Governor signed on June 29, AB1X 26 suspended most redevelopment agency activities and prohibited redevelopment agencies from incurring indebtedness, making loans or grants, or entering into contracts after June 29, AB1X 26 dissolves all redevelopment agencies in existence and designates successor agencies and oversight boards to satisfy enforceable obligations of the former redevelopment agencies and administer dissolution and wind down of the former redevelopment agencies. Certain provisions of AB1X 26 are described further below. As signed by the Governor, AB1X 27 would have allowed a redevelopment agency to continue to exist, notwithstanding AB1X 26, upon the enactment by the city or county that created the redevelopment agency of an ordinance to comply with AB1X 27 s provisions and the satisfaction of certain other conditions. In July of 2011, various parties filed an action before the Supreme Court of the State of California (the Court ) challenging the validity of AB1X 26 and AB1X 27 on various grounds (California Redevelopment Association v. Matosantos). The Court subsequently stayed the implementation of a portion of AB1X 26 and all of AB1X 27 pending its decision in Matosantos. On December 29, 2011, the Court rendered its decision in Matosantos upholding virtually all of AB1X 26 and invalidating AB1X 27. In its decision, the Court also modified various deadlines for the implementation of AB1X 26. The deadlines for implementation of AB1X 26 below take into account the modifications made by the Court in Matosantos. After Matosantos, AB1X 26 continues to suspend most redevelopment agency activities and continues to prohibit redevelopment agencies from incurring indebtedness, making loans or grants, or entering into contracts. On February 1, 2012, when redevelopment agencies are dissolved, AB1X 26 requires redevelopment agencies to continue to make scheduled payments on and perform obligations required under its enforceable obligations. For this purpose, AB1X 26 defines enforceable obligations to include bonds, including the required debt service, reserve set-asides, and any other payments required under the indenture or similar documents governing the issuance of outstanding bonds of the former redevelopment agency and any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy. AB1X 26 specifies that only payments included on an enforceable obligation payment schedule adopted by a redevelopment agency shall be made by a redevelopment agency until its dissolution. On February 1, 2012, and pursuant to Matosantos, AB1X 26 dissolved all redevelopment agencies in existence and designated successor agencies and oversight boards to satisfy enforceable obligations of the former redevelopment agencies and administer dissolution and wind down of the former redevelopment agencies. With limited exceptions, all assets, properties, contracts, leases, records, buildings and equipment, including cash and cash equivalents of a former redevelopment agency will be transferred to the control of the successor agency and, unless otherwise required pursuant to the terms of an enforceable obligation, distributed to various taxing agencies pursuant to AB1X 26. AB1X 26 requires each successor agency to continue to make payments on enforceable obligations of the former redevelopment agencies. However, until a successor agency adopts a recognized obligation payment schedule the only payments permitted to be made are payments on enforceable obligations included on an enforceable obligation payment schedule. The initial enforceable obligation payment schedule will be the enforceable obligation payment schedule adopted by the former redevelopment agency. A successor agency may A-7

36 amend the enforceable obligation payment schedule at any public meeting, subject to the approval of its oversight board. Under AB1X 26, commencing February 1, 2012, property taxes that would have been allocated to each redevelopment agency if the agencies had not been dissolved will instead be deposited in a redevelopment property tax trust fund created for each former redevelopment agency by the related county auditor-controller and held and administered by the related county auditor-controller as provided in AB1X 26. AB1X 26 generally requires each county auditor-controller, on May 16, 2012 and June 1, 2012 and each January 16 and June 1 thereafter, to apply amounts in a related redevelopment property tax trust fund, after deduction of the county auditor-controller s administrative costs, in the following order of priority: To pay pass-through payments to affected taxing entities in the amounts that would have been owed had the former redevelopment agency not been dissolved; provided, however, that if a successor agency determines that insufficient funds will be available to make payments on the recognized obligation payment schedule and the county auditor-controller and State Controller verify such determination, pass-through payments that had previously been subordinated to debt service may be reduced; To the former redevelopment agency s successor agency for payments listed on the successor agency s recognized obligation payment schedule for the ensuing six-month period; To the former redevelopment agency s successor agency for payment of administrative costs; and Any remaining balance to school entities and local taxing agencies. It is likely that there will be additional legislation proposed and/or enacted to clean up various inconsistencies contained in AB1X 26 and there may be additional legislation proposed and/or enacted in the future affecting the current scheme of dissolution and winding up of redevelopment agencies currently contemplated by AB1X 26. No assurances can be given as to the effect of any such future proposed and/or enacted legislation on the Notes. District Revenues The State Budget replaces the current K-12 finance system, with a new Local Control Funding Formula (the LCFF ). The LCFF creates base, supplemental and concentration grants as the new general purpose entitlement to replace most existing funding streams, including the State aid portion of the revenue limit and most State categorical programs from prior years. The State Budget provides an additional $2.1 billion of funding to school districts and charter schools to support the first-year implementation of the LCFF. Until full implementation, however, school districts will receive roughly the same amount of funding they received in plus an additional amount each year to bridge the gap between current funding levels and the new LCFF target levels. The State Budget projects the time frame for full implementation of the LCFF to be eight years. For more information on the LCFF, see STATE FUNDING OF EDUCATION; STATE BUDGET PROCESS Local Control Funding Formula above. The California Department of Education (the CDE ) cannot immediately determine how much a school district is entitled to receive under the LCFF because funding is based on current year attendance data not known until the end of the fiscal year, and because the CDE must reprogram its apportionment systems to reflect the new formula calculations. However, because the greater part of a school district s funding is based on what the school received in fiscal year , the CDE will apportion funds during the advance principal apportionment and first principal apportionment periods based on fiscal year funding, and according to the fiscal year model (not the LCFF), plus a portion of the $2.1 billion appropriated to begin implementation of the provisions of the LCFF. The CDE has indicated that the second principal apportionment will be based on the LCFF. The fiscal year A-8

37 budgetary information that follows, which discusses the District s revenues and expenditures, does so under the budget model, and does not reflect how funds will be apportioned once the LCFF is implemented. Under Education Code Section and following, each school district is determined to have a target funding level: a base revenue limit per student multiplied by the district s student enrollment measured in units of average daily attendance ( A.D.A. ). The base revenue limit is calculated from the district s prior-year funding level, as adjusted for a number of factors, such as inflation, special or increased instructional needs and costs, employee retirement costs, especially low enrollment, increased pupil transportation costs, etc. Generally, the amount of State funding allocated to each school district is the amount needed to reach that district s base revenue limit after taking into account certain other revenues, in particular, locally generated property taxes. This is referred to as State equalization aid. To the extent local tax revenues increase due to growth in local property assessed valuation, the additional revenue is offset by a decline in the State s contribution. The District s total base revenue limit per A.D.A. is budgeted to be $6,677 for , compared to $6,576 for However, the amount received is less; in recent years, the State has exercised its authority to apply a deficit factor. The State may apply deficit factors to revenue limits and categorical programs when the appropriation to the State School Fund or any categorical program is insufficient based on the funding formulas specified by law. The District s recent A.D.A. history per the District s Second Period Reports (P2) for kindergarten through grade 8 (K-8) is set forth in the table below: Millbrae School District Total K-8 Average Daily Attendance (P2) Fiscal Year (1) Average Daily Attendance 2,063 2,043 2,064 2,060 2,070 2,094 2,102 2,168 2,270 2,323 2,351 (1) Projected. The principal component of local revenues is the school district s property tax revenues, i.e., the District s share of the local 1% property tax, received pursuant to Sections 75 and following and Sections 95 and following of the California Revenue and Taxation Code. Education Code Section 42238(h) itemizes the local revenues that are counted towards the base revenue limit before calculating how much the State must provide in equalization aid. The more local property taxes a district receives, the less State equalization aid it is entitled to; ultimately, a school district whose local property tax revenues exceed its base revenue limit is entitled to receive no State equalization aid, and receives only its special categorical aid, which is deemed to include the basic aid of $120 per student per year guaranteed by Article IX, Section 6 of the Constitution. Such districts are known colloquially as basic aid districts. Districts that receive some equalization aid may be referred to as revenue limit districts. The District is not a basic aid district. Local property tax revenues account for approximately 7.6% of the District s aggregate revenue limit income, and are projected to be $1,022,844, or 6% of total general fund revenue in Fiscal Year For a discussion of legal limitations on the ability of the District to raise revenues through local property taxes, see CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS herein. A-9

38 Changes in local property tax income and student enrollment (or A.D.A.) affect revenue limit districts and basic aid districts differently. In a revenue limit district, increasing enrollment increases the total revenue limit and thus generally increases a district s entitlement to State equalization aid, assuming property tax revenues are unchanged. Operating costs increase disproportionately slowly and only at the point where additional teachers and classroom facilities are needed. Declining enrollment has the reverse effect on revenue limit districts, generally resulting in a loss of State equalization aid, while fixed operating costs decrease slowly and only when, for example, the district decides to lay off teachers or close schools. In basic aid districts, the opposite is generally true: increasing enrollment does increase the revenue limit, but since all revenue limit income (and more) is already generated by local property taxes, there is no increase in State income, other than the $120 per student in basic aid. Meanwhile, as new students impose increased operating costs, the fixed property tax income is stretched further. Declining enrollment does not reduce property tax income, and has a negligible impact on State aid, but eventually reduces operating costs, and thus can be financially beneficial to a basic aid district. For revenue limit districts, any loss of local property taxes is made up by an increase in State equalization aid, until the base revenue limit is reached. For basic aid districts, the loss of property tax revenues is not reimbursed by the State. In the District s Budget (the Budget ), the District predicts that it will receive approximately $13.4 million in aggregate revenue limit income in , or approximately 79% of its total general fund revenues. This amount represents an increase of approximately 1% from the approximately $13.1 million that the District received in State funds for special (categorical) programs are projected at approximately $2.0 million, including the State lottery fund portion. Lottery funds may not be used for non-instructional purposes, such as the acquisition of real property, the construction of facilities, or the financing of research. School districts receive lottery funds proportional to their total A.D.A. The District s State lottery revenue is projected at $373,758. The District cannot make any predictions regarding how the current economic environment or changes thereto will affect the State s ability to meet the revenue and spending assumptions in the State s adopted budget, and the effect of these changes on school finance. The District s Budget and projected A.D.A. are used for planning purposes only, and do not represent the actual financial performance, attendance, or the District s actual funding level for fiscal year or beyond. Certain adjustments will have to be made throughout the year based on actual State funding and actual attendance. Effect of Redevelopment Project Area. Under former California law, a city or county could create a redevelopment agency in territory within one or more school districts. Upon formation of a project area of a redevelopment agency, all property tax revenues attributable to the growth in assessed value of taxable property within the project area (known as tax increment ) belonged to the redevelopment agency, causing a loss of tax revenues to other local taxing agencies, including school districts, from that time forward. Taxes collected for payment of debt service on school bonds was not affected or diverted by the operation of a redevelopment agency project area. Some school districts negotiated pass-through agreements with their local redevelopment agencies, entitling the district to receive a portion of the tax increment revenue that would otherwise belong to the redevelopment agency (provided such revenue is not pledged and needed to pay debt service on redevelopment agency tax-increment bonds). In some cases the pass-through was mandated by statute (in which case it cannot be pledged to pay redevelopment agency bonds). The Cities of Millbrae and San Bruno each created a redevelopment project area in the District s boundaries, and negotiated pass-through agreements with the District, pursuant to which the District received passthrough payments in Fiscal Year of $179,021, and due to the elimination of redevelopment agencies as of February 2, 2012, expects to receive additional monies in future years. District Expenditures The largest part of each school district s general fund budget is used to pay salaries and benefits of certificated (credentialed teaching) and classified (non-instructional) employees. Changes in salary and benefit A-10

39 expenditures from year to year are generally based on changes in staffing levels, negotiated salary increases, and the overall cost of employee benefits. In its Budget, the District projects that it will expend approximately $14.6 million in salaries and benefits for Fiscal Year , or approximately 80% of its general fund expenditures. This amount represents an increase of approximately 1.05% from the $13.9 million the District expended in Labor Relations. As of July 1, 2013 approximately 170 employees were represented by labor organizations, as shown in the table below. The District employed full-time equivalent (FTE) certificated (credentialed teaching) employees and 50.6 FTE classified (non-instructional) employees. As of July 1, 2011, the District also employed 9.0 management employees who are not represented by labor organizations. Millbrae School District Labor Organizations Labor Organization Represented Employees Millbrae Education Association Classified School Employees Association Total Contract Expiration June 30, 2015 June 30, 2014 Retirement Programs. The District participates in the State Teachers Retirement System ( STRS ). This plan basically covers all full-time and some part-time certificated District employees. Each school district is required by statute to contribute 8.25% of eligible employee s salaries to STRS on a monthly basis. Employees are required to contribute 8% of eligible salary if enrolled before January 1, Employees enrolled after January 1, 2013 are required to pay 50% of the annual normal cost of benefits as determined by an actuary. The State is required to contribute as well. The District s employer contribution to STRS was approximately $691,774 for fiscal year and a contribution of approximately $740,279 is projected for fiscal year The District also participates in the California Public Employees Retirement System ( CalPERS ) for all full-time and some part-time classified employees. The District is required to contribute toward CalPERS, at a State-determined percentage of CalPERS-eligible salaries. For fiscal year , the contribution percentage is 11.44%, compared to 11.42% for Fiscal Year The District s contributions to CalPERS for the fiscal year was approximately $387,891, and projected at approximately $389,192 for fiscal year The District is unable to predict what the amount of State pension liabilities will be in the future, or the amount of the contributions that the District may be required to make. STRS and CalPERS and the other District liabilities discussed in this section are more fully described in APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 10. Post-Employment Benefits. In addition to the pension benefits described above, the District provides post-retirement healthcare benefits for eligible employees who retire early and certain of their dependents. The amount and length of these benefits depends on a variety of factors, including age at retirement, length of service, and status as a certificated, classified or management employee. Beginning in Fiscal Year , the District was required to implement Governmental Accounting Standards Board Statement No. 45 ( GASB 45 ) which directs certain changes in accounting for other postemployment benefits (OPEBs) in order to quantify a government agency s current liability for future benefit payments. GASB 45 is directed at quantifying and disclosing OPEB obligations, and does not impose any requirement on public agencies to fund such obligations. On April 29, 2013, Total Compensation Systems, Inc., actuarial consultants, Agoura Hills, California, completed a study of the District s outstanding post-employment benefit obligations as of February 1, The report calculates the value of all future benefits already earned by current retirees and current employees, known as the actuarial accrued liability (AAL). As of the date of the report, the District had an actuarial accrued liability of approximately $4.5 million for 93 current retirees and beneficiaries and 177 additional future participants. The AAL A-11

40 is an actuarial estimate that depends on a variety of assumptions about future events such as health care costs and beneficiary mortality. Every year, active employees earn additional future benefits, an amount known as the normal cost, which is added to the AAL. The report estimated the normal cost at $158,001 for the year beginning February 1, To the extent that the District has not set aside moneys in an OPEB trust with which to pay these accrued and accruing future liabilities, there is an unfunded actuarial accrued liability (UAAL). As of the date of the report, the District had not set aside any moneys in an irrevocable trust to fund its future obligations. However, the District has moneys in Fund 17 that are earmarked for future obligations although not restricted for this use. The District s actuarial accrued liability as of February 1, 2013, was $4,467,659, all of which is unfunded. The annual required contribution (ARC) is the amount required if the District were to fund each year s normal cost plus an annual amortization of the UAAL, assuming the UAAL will be fully funded over a 30 year period. If the amount budgeted and funded in any year is less than the ARC, the difference reflects the amount by which the UAAL is growing. As of February 1, 2013, the ARC was determined to be $377,885. In , the District funded $228,434 in pay-as-you-go expenditures. The District s budgeted pay-as-you-go expenditures for post-retirement benefits is $220,464. Accrued Vacation and other Obligations. The long-term portion of accumulated and unpaid employee vacation for the District as of June 30, 2013 was $107,180. See APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Notes 1 and 6. Summary of District Revenues and Expenditures The following table summarizes the District s actual or budgeted general fund revenue, expenditures and fund balances from Fiscal Years through See also APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012 for the District s audited financial statements for the year ending June 30, The District is required by State law and regulation to maintain various reserves. The District is required to maintain a reserve for economic uncertainties in the amount of 3% of its total (adjusted) general fund expenditures, based on its total student attendance. As of July 1, 2013, the District has budgeted an unrestricted general fund reserve of approximately 3.5%, or approximately $579,172. [Remainder of Page Intentionally Blank] A-12

41 MILLBRAE SCHOOL DISTRICT THROUGH GENERAL FUND REVENUES, EXPENDITURES AND FUND BALANCES Revenue/Receipts Revenue Limit Sources: State Apportionments Local Sources Revenue Limit Transfers Federal Revenue Other State Revenue Other Local Revenue TOTAL Expenditures/Disbursements Certificated Salaries Classified Salaries Employee Benefits Books and Supplies Services/Other Operating Expenditures Capital Outlay Other Outgo Debt Service Direct Support/Indirect Costs TOTAL Actual(1) Actual(1) Actual(1) Unaudited Actuals(2) Budgeted(2) $5,910,172 4,311,108 1,147,771 1,291,321 2,183, ,961 $15,463,106 $5,458,408 6,661,397 1,002,794 1,993, ,026 $15,691,026 $11,634, ,489 85, ,216 2,030, ,781 $16,020,190 $11,987,232 1,108,605 (42,053) 722,770 2,037, ,476 $16,717,495 $12,419,085 1,022,844(3) (42,231) 667,353 2,035, ,985 $16,962,976 $8,507,848 2,267,444 2,936, ,125 $7,387,413 2,008,387 2,766, ,832 $7,783,132 2,009,102 2,993, ,340 $8,558,128 2,172,553 3,170, ,251 $9,054,508 2,137,906 3,434, ,983 1,945,842 19, ,503 2,337,771 10,223 1,007,125 2,211, ,686 2,147, ,861 2,177,744 1,208,632 (27,295) $16,657,780 (27,984) $15,837,718 (30,590) $16,471,896 (29,987) $17,410,175 (37,180) $18,348,591 (1,194,674) (146,692) (124,461) (692,681) (1,348,435) Other Financing Sources/(Uses) Transfers In Transfers Out TOTAL 849,369 (153,781) $695,588 3,349,826 (207,226) $3,142,600 57,088 (53,559) $3, ,776 $569, ,083 $722,083 Net Increase (Decrease) in Fund Balance (499,086) 2,995,908 (120,932) (122,905) (626,352) $1,574,510 $4,570,418 Excess of Revenues Over/(Under) Expenditures Fund Balance, Beginning $2,073,596 $1,349,801 $1,226,896 Fund Balance, Ending $1,574,510 $4,570,418 $4,449,486 $1,226,896 $600,544 (1) Excerpted from the District s audited Financial Statements for Fiscal Years through (2) Excerpted from the District s Unaudited Actual Financial Report for Fiscal Year as adopted on September 9, (3) In Fiscal Year and following, local property taxes that would otherwise have been allocated to revenue-limit districts in the County were used to offset a negative balance in the County s Educational Revenue Augmentation Fund. See State Funding of Education; State Budget Process Prohibitions on Diverting Local Revenues for State Purposes. The State allocates funding to a school district based on the amount needed to reach that school district s base revenue limit after taking into account locally generated tax revenues. In Fiscal year , the decrease in local property taxes discussed above resulted in an increase of state revenue limit funding. See District Revenues. A-13

42 District Debt Structure Certain of the District s outstanding indebtedness is described below. For a complete discussion of the District s outstanding indebtedness as of June 30, 2012, see APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Notes 6 and 8. General Obligation Bonds. On November 4, 2008, the voters of the District approved a bond proposition authorizing the issuance of $30 million of bonds of the District. On April 17, 2009, the District issued its 2009 General Obligation Bonds (Election of 2008, Series A) in the principal amount of $12 million, having a final maturity on July 1, 2033, of which $10,690,000 remains outstanding. On April 19, 2011, the District issued its 2011 General Obligation Bonds, Series B-1 and Series B-2 in the aggregate principal amount of $17,999,527, maturing on July 1, 2041, all of which remains outstanding. Because the 2011 General Obligation Bonds, Series B-2 ( Series B-2 Bonds ) are designated as qualified school construction bonds under Section 54F of the Code, the District receives a direct subsidy from the federal government under Section 6431 of the Code. The annual tax credit subsidies to be received from the U.S. Treasury for the Series B-2 Bonds outstanding as of July 1, 2013, are as follows: Fiscal Year ending July Total Total $ 496, , , ,640 1,861, ,280 $4,839,588 On November 8, 2011, the voters of the District approved a bond proposition authorizing the issuance of $30 million of bonds of the District. On May 8, 2012, the District issued its General Obligation Bonds (Election of 2011, Series 2012), in the aggregate principal amount of $20,000,000, maturing on July 1, 2042 of which $19,900,000 remains outstanding. The following summarizes all general obligation bonds outstanding as of August 1, 2013: Bond Election of 2008, Series A Election of 2008, Series B-1 Election of 2008, Series B-2 Election of 2011, Series 2012 Total Issue Date 4/21/09 4/19/11 4/19/11 5/08/12 Maturity Date 7/1/33 7/1/25 7/1/41 7/1/42 Interest Rate % Original Issue $12,000,000 7,660,000 10,339,527 20,000,000 $49,999,527 Bonds Outstanding August 1, 2013 $10,690,000 7,660,000 10,339,527 19,900,000 $48,589,527 The District has no other general obligation bonds outstanding. See DEBT SERVICE in the front portion of this Official Statement. A-14

43 Certificates of Participation. The District has caused the Millbrae School District Financing Corporation to issue $1,208, in certificates of participation in a Lease Agreement, dated as of November 1, 2008 (the Lease Agreement ), by and between the District and the Millbrae School District Financing Corporation. The proceeds of the certificates of participation were used by the District to make improvements to athletic fields at certain District school sites. The District is obligated to make semiannual lease payments pursuant to the Lease Agreement each February 1 and August 1 through August 1, 2023, and the District s annual lease rental obligation is approximately $120,000. The District s rental under the Lease Agreement is payable from any available funds of the District, although the District intends to use funds it receives from the successor entity to the Millbrae Redevelopment Agency to make the required payments in each year. Capital Leases. The District has several capital lease agreements for office equipment. The minimum lease payments for the capital leases consisted of the following as of June 30, 2013: Year Ending June 30, Total: Principal $42,733 44,334 45,995 $133,062 Interest $6,847 5,246 3,585 $15,678 Total $49,580 49,580 49,580 $148,740 Source: Millbrae School District. Capital Financing Plan In its five-year facilities master plan, the District has identified facilities improvement needs in excess of $35 million. The District does not expect to be able to fund all projects from its bonds and from available state funding, developer fees, and redevelopment pass-through agreements to complete all projects in its facilities master plan by The District also received approximately $16 million in 2008 from the sale of surplus District property, which funds are eligible to be spent on facilities. The District set aside approximately $4 million of such funds for payment of facilities deferred maintenance or capital expenditures and is holding the balance in reserve. Because of this property sale, the District is not eligible to receive State modernization or construction funds until 2018 unless the District demonstrates to the State Allocation Board that enrollment growth or a need for additional sites or construction that the District could not have easily anticipated at the time the property was sold, in which case the District may apply for such funding. In , the District projects a maintenance reserve contribution of $536,819. Insurance, Risk Pooling and Joint Powers Arrangements The District participates in the San Mateo County Schools Insurance Group (SMCSIG), a joint venture under a Joint Powers Agreement among 24 local school districts in the County of San Mateo. The District purchases comprehensive general liability, property damage, and workers compensation coverage from SMCSIG, in coverage amounts comparable to other school districts participating in SMCSIG. For property damage, the District has a deductible of $5,000 per occurrence; SMCSIG covers damage up to $250,000 via a self-insured retention, and purchases excess property insurance in the commercial market to a policy limit of $1 billion per occurrence through Public Entity Property Insurance Program (PEPIP). For liability insurance, the District has a deductible of $1,500 per occurrence; SMCSIG covers liability up to $250,000 via a self-insured retention, purchases excess general liability coverage through CSAC-EIA to a policy limit of $5 million per occurrence, and purchases additional excess liability coverage to $25 million per occurrence through Schools Excess Liability Fund (SELF). The District purchases workers compensation coverage in the commercial market through SMCSIG at levels required by statute. The District shares SMCSIG s surpluses and deficits in proportion to its participation in SMCSIG. The District s potential liabilities under its arrangement with SMCSIG are described in APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 8. The District does not directly bear liability for the losses of other members of SMCSIG; however in the event of numerous large A-15

44 local losses, SMCSIG s self-insured retention fund could be exhausted, and member districts such as the District could be required to make further contributions to cover member claims. The District is also a member of the School Project for Utility Rate Reduction (SPURR) joint powers authority, through which the District receives certain utility services. The utility services from SPURR totaled $29,891 for the fiscal year ended June 30, The District is not a member of any other joint powers agencies or authorities. See APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 8. Charter Schools Charter schools operate as autonomous public schools, under charter from a school district, county office of education, or the State Board of Education, with minimal supervision by the local school district. Charter schools receive revenues from the State and from the District for each student enrolled, and thus effectively reduce revenues available for students enrolled in District schools. The District is also required to accommodate charter school students originating in the District in facilities comparable to those provided to regular District students. There are currently no charter schools operating in, or under a charter provided by, the District. Environmental Issues An environmental analysis of the District school sites performed in 2010 detected the presence of chlorinated pesticides at Lomita Park Elementary School ( Lomita Park ), Spring Valley Elementary School ( Spring Valley ), and Taylor Middle School ( Taylor Middle ). The District has reached an oversight agreement, memorialized in the form of a Land Use Covenant (the Agreement ), with the California Department of Toxic Substances Control ( DTSC ) to address these findings. The Agreement requires the District to obtain DTSC approval prior to any construction at the Lomita Park at the Lomita Park Elementary School site, to refrain from certain other activities that would significantly disturb the soil at the site, and to certify annually that it is in compliance with the Agreement. The District has made the certification each year since the agreement was reached and currently has no plans to make any material changes to the Lomita Park site. The Spring Valley and Taylor Middle school sites are not subject to the agreement because insufficient levels of the pesticides were found at those sites to require continuing DTSC oversight. District can give no assurance that material obligations or liabilities under environmental laws will not arise in the future which may have a material adverse effect on the District, or that the District will not be subject to third-party claims relating to environmental contamination or compliance. SCHOOL DISTRICT BUDGET PROCEDURES AND REQUIREMENTS District Budget Process and County Review State law requires school districts to maintain a balanced budget in each fiscal year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. Under current law, a school district governing board must adopt and file with the county superintendent of schools a tentative budget by July 1 in each fiscal year. The District is under the jurisdiction of the San Mateo County Superintendent of Schools. The county superintendent must review and approve or disapprove the budget no later than August 15. The county superintendent is required to examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance with the established standards. If the budget is disapproved, it is returned to the District with recommendations for revision. The District is then required to revise the budget, hold a public hearing thereon, adopt the revised budget and file it with the county superintendent no later than September 8. Pursuant to State law, the county superintendent has available various remedies by which to impose and enforce a budget that complies A-16

45 with State criteria, depending on the circumstances, if a budget is disapproved. After approval of an adopted budget, the school district s administration may submit budget revisions for governing board approval. Subsequent to approval, the county superintendent will monitor each district under its jurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis if the district can meet its current or subsequent year financial obligations. If the county superintendent determines that a district cannot meet its current or subsequent year obligations, the county superintendent will notify the district s governing board of the determination and may then do either or both of the following: (a) assign a fiscal advisor to enable the district to meet those obligations or (b) if a study and recommendations are made and a district fails to take appropriate action to meet its financial obligations, the county superintendent will so notify the State Superintendent of Public Instruction, and then may do any or all of the following for the remainder of the fiscal year: (i) request additional information regarding the district s budget and operations; (ii) develop and impose, after also consulting with the district s board, revisions to the budget that will enable the district to meet its financial obligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the county superintendent may not abrogate any provision of a collective bargaining agreement that was entered into prior to the date upon which the county superintendent assumed authority. A State law adopted in 1991 ( A.B ) imposed additional financial reporting requirements on school districts, and established guidelines for emergency State aid apportionments. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the county superintendent (on December 15, for the period ended October 31, and by mid-march for the period ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The county superintendent reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that is deemed unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years. A school district that receives a qualified or negative certification may not issue tax and revenue anticipation notes or certificates of participation without approval by the county superintendent. In the last five years, the District has not received a qualified or negative certification. Accounting Practices The accounting policies of the District conform to generally accepted accounting principles in accordance with the definitions, instructions and procedures of the California School Accounting Manual, as required by the State Education Code. Revenues are recognized in the period in which they become both measurable and available to finance expenditures of the current fiscal period. Expenditures are recognized in the period in which the liability is incurred. Chavan & Associates, LLP, Campbell, California, serves as independent auditor to the District and its report for Fiscal Year Ended June 30, 2012, is attached hereto as APPENDIX B. The District considers its audited financial statements to be public information, and accordingly no consent has been sought or obtained from the auditor in connection with the inclusion of such statements in this Official Statement. The auditor has made no representation in connection with inclusion of the audit excerpts herein that there has been no material change in the financial condition of the District since the audit was concluded. The final (unaudited) statement of receipts and expenditures for each Fiscal Year ending June 30 is required by State law to be approved by the District s Board of Education by September 15, and the audit report must be filed with the San Mateo County Superintendent of Schools and State officials by December 15 of each year. The District is required by law to adopt its audited financial statements following a public meeting to be conducted no later than January 31 following the close of each fiscal year. A-17

46 CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Limitations on Revenues Article XIIIA of the California Constitution. Article XIIIA of the State Constitution, adopted and known as Proposition 13, was approved by the voters in June Section 1(a) of Article XIIIA limits the maximum ad valorem tax on real property to 1% of full cash value, and provides that such tax shall be collected by the counties and apportioned according to State law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to ad valorem taxes levied to pay interest and redemption charges on (i) indebtedness approved by the voters prior to July 1, 1978, or (ii) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast on the proposition, or (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. The tax for payment of the District s bonds approved at the 2011 election falls within the exception for bonds approved by a 55% vote. Section 2 of Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the Fiscal Year tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. The Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently recapture such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending on the assessor s measure of the restoration of value of the damaged property. The California courts have upheld the constitutionality of this procedure. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except the 1% base tax levied by each County and taxes to pay debt service on indebtedness approved by the voters as described above. Since its adoption, Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of the District. Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA. Article XIIIC and Article XIIID of the California Constitution. On November 5, 1996, the voters of the State approved Proposition 218, the so-called Right to Vote on Taxes Act. Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges. Among other things, Article XIIIC establishes that every tax is either a general tax (imposed for general governmental purposes) or a special tax (imposed for specific purposes); prohibits special purpose government agencies such as school districts from levying general taxes; and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote. Article XIIIC also provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIIC also provides that the initiative power shall not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. The State Constitution and the laws of the State impose a duty on the county treasurer and tax collector to levy a property tax sufficient to pay debt service on school bonds coming due in A-18

47 each year. The initiative power cannot be used to reduce or repeal the authority and obligation to levy such taxes or to otherwise interfere with performance of the duty of the County with respect to such taxes. Legislation adopted in 1997 provides that Article XIIIC shall not be construed to mean that any owner or Beneficial Owner of a municipal security assumes the risk of or consents to any initiative measure which would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution. Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by the District. Developer fees imposed by the District are restricted as to use and are neither pledged nor available to pay the Bonds. The interpretation and application of Proposition 218 continues to be considered and determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination. Expenditures and Appropriations Article XIIIB of the California Constitution. In addition to the limits Article XIIIA imposes on property taxes that may be collected by local governments, certain other revenues of the State and local governments are subject to an annual appropriations limit or Gann Limit imposed by Article XIIIB of the State Constitution, which effectively limits the amount of such revenues that government entities are permitted to spend. Article XIIIB, approved by the voters in June 1979, was modified substantially by Proposition 111 in The appropriations limit of each government entity applies to proceeds of taxes, which consist of tax revenues, state subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed the cost reasonably borne by such entity in providing the regulation, product or service. Proceeds of taxes exclude tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on the appropriation of funds which are not proceeds of taxes, such as reasonable user charges or fees, and certain other non-tax funds. Article XIIIB also does not limit appropriation of local revenues to pay debt service on bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified capital outlay projects, and appropriation by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990, levels. The appropriations limit may also be exceeded in cases of emergency; however, the appropriations limit for the three years following such emergency appropriation must be reduced to the extent by which it was exceeded, unless the emergency arises from civil disturbance or natural disaster declared by the Governor, and the expenditure is approved by two-thirds of the legislative body of the local government. The State and each local government entity has its own appropriations limit. Each year, the limit is adjusted to allow for changes, if any, in the cost of living, the population of the jurisdiction, and any transfer to or from another government entity of financial responsibility for providing services. Each school district is required to establish an appropriations limit each year. In the event that a school district s revenues exceed its spending limit, the district may increase its appropriations limit to equal its spending by taking appropriations limit from the State. Proposition 111 requires that each agency s actual appropriations be tested against its limit every two years. If the aggregate proceeds of taxes for the preceding two-year period exceeds the aggregate limit, the excess must be returned to the agency s taxpayers through tax rate or fee reductions over the following two years. If the State s aggregate proceeds of taxes for the preceding two-year period exceeds the aggregate limit, 50% of the excess is transferred to fund the State s contribution to school and college districts. In Fiscal Year , the District had an appropriations limit of $15,385,625, and estimates an appropriations limit in of $16,365,449. A-19

48 Future Initiatives. Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, as well as Propositions 98 and 111, were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time other initiative measures could be adopted, further affecting District revenues or the District s ability to expend revenues. A-20

49 APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012 B-1

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51 MILLBRAE SCHOOL DISTRICT COUNTY OF SAN MATEO MILLBRAE, CALIFORNIA AUDIT REPORT June 30, 2012 CHAVAN & ASSOCIATES, LLP CERTIFIED PUBLIC ACCOUNTANTS 1475 SARATOGA AVE., SUITE 180 SAN JOSE, CA 95129

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53 Millbrae School District San Mateo County Table of Contents TITLE PAGE FINANCIAL SECTION: Independent Auditor s Report Management s Discussion and Analysis Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Assets Statement of Activities Fund Financial Statements: Governmental Funds Balance Sheet Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Statement of Fiduciary Assets and Liabilities Notes to the Basic Financial Statements REQUIRED SUPPLEMENTARY INFORMATION: Schedule of Revenue, Expenditures and Changes in Fund Balances - Budget and Actual (GAAP) - General Fund SUPPLEMENTARY INFORMATION: Combining Statements - Nonmajor Funds: Nonmajor Governmental Funds - Combining Balance Sheet Nonmajor Governmental Funds - Combining Schedule of Revenues, Expenditures and Changes in Fund Balances State and Federal Award Compliance Section: Organization Schedule of Average Daily Attendance Schedule of Instructional Time Offered Schedule of Charter Schools Schedule of Financial Trends and Analysis Schedule of Expenditures Federal Awards Reconciliation of the Annual Financial Budget Report (SACS) to the Audited Financial Statements Schedule of Excess Sick Leave Notes to State and Federal Award Compliance Sections

54 Millbrae School District San Mateo County Table of Contents OTHER INDEPENDENT AUDITOR S REPORTS: Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s 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 Independent Auditors' Report on Compliance with Requirements that Could Have A Direct and Material Effect on State Programs FINDINGS AND RECOMMENDATIONS: Schedule of Findings and Questioned Costs Status of Prior Year Findings and Recommendations... 60

55 FINANCIAL SECTION

56 The Honorable Board of Trustees Millbrae School District Millbrae, California INDEPENDENT AUDITOR S REPORT We have audited the accompanying financial statements of the governmental activities, each major fund and the aggregate remaining fund information of the Millbrae School District (the "District"), as of and for the year ended June 30, 2012, 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 an opinion 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, and Standards and Procedures for Audits of California K-12 Local Educational Agencies (K-12 Audit Guide), prescribed by the California State Controller s Office. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the governmental activities, each major fund and the aggregate remaining fund information of the District at June 30, 2012, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated November 5, 2012 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, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on 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 read in conjunction with this report in considering the results of our audit. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and budgetary comparison information on pages 3 through 9 and 39 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

57 about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise District s basic financial statements. The combining and individual fund financial statements and other schedules listed in the supplementary section of the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements of the District. These statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U. S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements of the District. This information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. November 5, 2012 San Jose, California 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

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59 Management s Discussion and Analysis

60 Millbrae School District Management s Discussion and Analysis June 30, 2012 This discussion and analysis of Millbrae School District s (the District s) financial performance provides an overall review of the District s financial activities for the fiscal year ended June 30, The intent of this discussion and analysis is to look at the District s financial performance as a whole. Readers should also review the notes to the basic financial statements and financial statements to enhance their understanding of the District s financial performance. Financial Highlights Key financial highlights for the fiscal year are as follows: The District had $19,261,051 in expenses for governmental activities, which is 93% of total revenues. Program specific revenues in the form of operating grants and contributions and charges for services accounted for $3,116,971, or 16% of the total revenues of $20,090,542. General revenue of $16,973,571 was comprised of $2,971,808 in property taxes, $13,116,878 in grants and entitlements, and $884,885 in other revenue. The District s ending net assets were $22,566,153, an increase of 4% from The fund balances of all governmental funds increased by $8,882,955 which is a 28% increase from Of this amount, $7,472,113 was from an increase in the fund balance of the Building Fund due to proceeds from the bond issuance in the current year, net of capital expenditures. Total governmental fund revenues and expenditures totaled $20,072,784 and $31,847,391, respectively, and net proceeds from a new bond issuance in 2012 totaling $20,657,562. Using the Annual Report This annual report consists of a series of basic financial statements and notes to those statements. These statements are organized so the reader can understand Millbrae School District as a financial whole, an entire operating entity. The statements provide an increasingly detailed look at specific financial activities. The Statement of Net Assets and Statement of Activities comprise the District-wide financial statements and provide information about the activities of the entire District, presenting both an aggregate view of the District s finances and a longer-term view of those finances. Fund financial statements provide the next level of detail. For governmental funds, these statements tell how services were financed in the short-term as well as what remains for future spending. The fund financial statements also look at the District s most significant funds with all other non-major funds presented in total in one column. In the case of Millbrae School District, the General Fund is by far the most significant fund. The basic financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. 3

61 Overview of the Financial Statements Millbrae School District Management s Discussion and Analysis June 30, 2012 The full annual financial report is a product of three separate parts: the basic financial statements, supplementary information, and this section, the Management Discussion and Analysis. These three sections together provide a comprehensive financial overview of the District. The basic financials are comprised of two kinds of statements that present financial information from different perspectives, District-wide and funds. District-wide financial statements, which comprise the first two statements, provide both shortterm and long-term information about the District s overall financial position. Individual parts of the District, which are reported as fund financial statements, focus on reporting the District s operations in more detail. These fund financial statements comprise the remaining statements. Notes to the financials, which are included in the financial statements, provide more detailed data and explain some of the information in the statements. The required supplementary information section provides further explanations and provides additional support for the financial statements. District-Wide Financial Statements - Statement of Net Assets and the Statement of Activities While this document contains the large number of funds used by the District to provide programs and activities, the view of the District as a whole looks at all financial transactions and asks the question, How did we do financially during the fiscal year ? The Statement of Net Assets and the Statement of Activities answer this question. These statements include all assets and liabilities using the accrual basis of accounting similar to the accounting practices used by most private-sector companies. This basis of accounting takes into account all of the current year s revenues and expenses, regardless of when cash is received or paid. These two statements report the District s net assets and changes in those assets. This change in net assets is important because it tells the reader that, for the District as a whole, the financial position of the District has improved or diminished. The causes of this change may be the result of many factors, some financial, and some not. Non-financial factors include the District s property tax base, current property tax laws in California restricting revenue growth, facility conditions, and required educational programs. In the Statement of Net Assets and the Statement of Activities, the District reports governmental activities. Governmental activities are the activities where most of the District s programs and services are reported including, but not limited to, instruction, support services, operation and maintenance of plant, pupil transportation and extracurricular activities. The District does not engage in business activities. Reporting the District s Most Significant Funds Fund Financial Statements The analysis of the District s major funds begins on page 12. Fund financial reports provide detailed information about the District s major funds. The District uses many funds to account for a multitude of financial transactions. These fund financial statements focus on each of the District s most significant 4

62 Millbrae School District Management s Discussion and Analysis June 30, 2012 funds. The District s major governmental funds are the General Fund, Building Fund and Special Reserve Fund for Other Than Capital Projects. Governmental Funds Most of the District s activities are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end available for spending in the future periods. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District s general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the future to finance educational programs. The relationship (or differences) between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds is reconciled in the financial statements. The District as a Whole Recall that the Statement of Net Assets provides a perspective of the District as a whole. Table 1 provides a summary of the District s net assets as of June 30, 2012 compared to June 30, 2011: Table 1 - Summary of Net Assets Increase (Decrease) Percent Assets Current and Other Assets $ 43,199,608 $ 39,570,911 $ 3,628, % Capital Assets 34,386,914 22,564,284 11,822, % Total Assets $ 77,586,522 $ 62,135,195 $ 15,451, % Liabilities Other Liabilities $ 2,940,411 $ 8,369,236 $ (5,428,825) -64.9% Long-Term Liabilities 52,079,958 32,029,297 20,050, % Total Liabilities $ 55,020,369 $ 40,398,533 $ 14,621, % Net Assets Invested in Capital Assets, Net of Debt $ 2,445,860 $ 2,981,713 $ (535,853) -18.0% Restricted 5,177,522 4,363, , % Unrestricted 14,942,771 14,391, , % Total Net Assets $ 22,566,153 $ 21,736,662 $ 829, % Total assets of governmental activities increased by 24.9% because of construction and building improvements related to the bond program. Unrestricted net assets of the District, which is the portion of net assets that may be used to finance day-to-day activities without constraints from grants and legal requirements, increased by 3.8%. Other liabilities decreased by 64.9% mainly due to the payment of and the completion of construction in progress as of June 30,

63 Millbrae School District Management s Discussion and Analysis June 30, 2012 Table 2 shows the changes in net assets for the fiscal year : Table 2 - Change in Net Assets Increase (Decrease) Percent Revenues Program Revenues: Charges for Services $ 390,033 $ 357,694 $ 32, % Operating Grants and Contributions 2,726,938 2,396, , % General Revenues: Property Taxes 2,971,808 8,214,268 (5,242,460) -63.8% Grants and Entitlements - Unrestricted 13,116,878 7,023,943 6,092, % Other 884, , , % Total Revenues 20,090,542 18,774,435 1,316, % Program Expenses Instruction 10,815,227 9,868, , % Instruction-Related Services 1,370,173 1,230, , % Pupil Services 1,950,335 1,984,906 (34,571) -1.7% General Administration 1,295,102 1,241,732 53, % Plant Services 1,515,377 1,637,818 (122,441) -7.5% Other 2,314,837 2,126, , % Total Expenses 19,261,051 18,090,375 1,170, % Change in Net Assets $ 829,491 $ 684,060 $ 145, % Governmental Activities Property taxes made up 14.8% of revenues from governmental activities for the District during the fiscal year and decreased by 63.8% from 2011, because the District didn t receive any revenue limit property taxes for the school year as a result of San Mateo County s negative ERAF, therefore, Millbrae s revenue limit was funded entirely by State aid. Grants and entitlements unrestricted increased by 86.7% due to the additional State aid received as a result of the loss in property tax revenue from San Mateo County s negative ERAF. Other revenue increased by $102,843 mainly due to the premium on the bond issuance recorded in the current year. Direct instruction expenses comprised 56% of total District expenses. Interest and fiscal charges increased because of increased debt service requirements from the issuance of general obligation bonds in The Statement of Activities shows the cost of program services and the charges for services and grants offsetting those services. 6

64 Millbrae School District Management s Discussion and Analysis June 30, 2012 Table 3 shows the total cost of services and the net cost of services, and identifies the cost of these services supported by revenues. Table 3 - Net Cost of Services Increase Function (Decrease) Percent Instruction $ 9,377,347 $ 8,166,601 $ 1,210, % Instruction-Related Services 1,251,472 1,134, , % Pupil Services 1,317,968 1,343,037 (25,069) -1.87% General Administration 1,229,599 1,146,671 82, % Plant Services 1,507,543 1,632,909 (125,366) -7.68% Other 1,460,151 1,912,445 (452,294) % Total Expenses $ 16,144,080 $ 15,336,193 $ 807, % Instruction expenses include activities directly dealing with the teaching of pupils and the interaction between teacher and pupil. Pupil Services and Instruction-Related Services expenses include the activities involved with assisting staff with the content and process of teaching to pupils. General Administration expenses include the costs for the Board of Trustees, administration, fiscal and business services and other expenses associated with administrative and financial supervision of the District. Plant Services expenses include the operation and maintenance of plant activities which involve keeping the school grounds, buildings, and equipment in an effective working condition. Other expense includes community service, interest and fiscal charges. Interest and fiscal charges involve the transactions associated with the payment of interest and other related charges to debt of the District. 7

65 Millbrae School District Management s Discussion and Analysis June 30, 2012 The District s Funds The District s governmental funds report a combined fund balance of $40,167,642, which is an increase of 28% from the prior year s total of $31,284,687. The majority of the increase (84%) is due to Measure X and Measure N. Table 4 provides an analysis of the District s fund balances and the total change in fund balances from the prior year. Table 4 - Change in Fund Balances Increase Funds (Decrease) General Fund $ 4,449,486 $ 4,570,418 $ (120,932) Cafeteria Fund 51,888 41,929 9,959 Deferred Maintenance Fund - 20,433 (20,433) Foundation Fund 50,689 50,809 (120) Building Fund 18,875,752 11,403,639 7,472,113 Capital Facilities Fund 399, ,270 61,316 Special Reserve Fund for Capital Projects 14,404,203 13,679, ,738 Bond Interest & Redemption Fund 1,936,038 1,179, ,314 Total Governmental Fund Balances $ 40,167,642 $ 31,284,687 $ 8,882,955 Capital Assets At the end of the fiscal year , the District had $40,428,910 invested in land, buildings, furniture and equipment, and vehicles. Table 5 shows June 30, 2012 balances compared to June 30, 2011: Table 5 - Summary of Capital Assets Net of Depreciation Accumulated Net Net Percentage Capital Asset Cost Depreciation Capital Asset Capital Asset Change Land $ 358,270 $ - $ 358,270 $ 358, % Buildings 38,835,555 5,558,121 33,277,434 10,567, % Property and Equipment 677, , , , % Work-in-Progress 557, ,293 11,390, % Totals $ 40,428,910 $ 6,041,996 $ 34,386,914 $ 22,564, % Net capital assets increased by $11,822,630 during the fiscal year , mainly due to the renovation and modernization of buildings. 8

66 Millbrae School District Management s Discussion and Analysis June 30, 2012 Long Term Debt Table 6 reports the balance and changes of long-term liabilities during the fiscal year Table 6 - Long-term Debt Percentage Type of Debt Change Capital lease obligations $ 41,931 $ 67, % General obligation bonds 50,554,380 30,464, % School loan 1,025,082 1,083, % Net OPEB obligation 357, , % Compensated absences 101,395 71, % Total Debt $ 52,079,958 $ 32,029, % Factors Bearing on the District s Future Because of the economic crisis and reduced funding for the Revenue Limit (Prop. 98), the district has been facing budget shortfalls for years. The District no longer has the use of one-time federal resources and has to rely on state categorical flexibility, rental income, and interest from other funds to balance the budget. The State s economy continues to be dismal with future reductions to the District s Revenue Limit (Prop 98), the District faces insurmountable challenges to balance its budget. Contacting the District s Financial Management This financial report is designed to provide our citizens, taxpayers, parents, investors, and creditors with a general overview of the District s finances and to show the District s accountability for the money it receives. If you have questions regarding this report or need additional financial information, contact Wendy Richard, Chief Business Official, Millbrae School District, 555 Richmond Drive, Millbrae, CA or via at wrichard@mesd.k12.ca.us. 9

67 Basic Financial Statements

68 Millbrae School District Statement of Net Assets June 30, 2012 Governmental Activities Assets Cash and investments $ 36,342,111 Accounts receivable 6,041,653 Prepaid and other assets 11,257 Debt issuance costs 804,587 Land 358,270 Construction in progress 557,293 Building and improvements 38,835,555 Equipment 677,792 Less accumulated depreciation (6,041,996) Total Assets $ 77,586,522 Liabilities Accounts payable $ 1,753,699 Deferred revenue 473,680 Accrued interest 713,032 Long-term liabilities: Due within one year: Capital leases payable 28,919 School loan 61,980 General obligation bonds 281,375 Total due within one year 372,274 Due after one year: Capital leases payable 13,012 School loan 963,102 General obligation bonds 50,273,005 Net OPEB obligation 357,170 Compensated absences payable 101,395 Total due after one year 51,707,684 Total Liabilities $ 55,020,369 Net Assets Invested in capital assets, net of related debt $ 2,445,860 Restricted for: Debt service 1,936,038 Miscellaneous 283,223 Other Postemployment Benefits 2,958,261 Unrestricted 14,942,771 Total Net Assets $ 22,566,153 The notes to the financial statements are an integral part of this statement. 10

69 Millbrae School District Statement of Activities For the Fiscal Year Ended June 30, 2012 Program Revenues Net (Expense) Operating Revenue and Charges for Grants and Changes in Expenses Services Contributions Net Assets Governmental activities Instruction $ 10,815,227 $ 20,155 $ 1,417,725 $ (9,377,347) Instruction-related services: Supervision of instruction 369,811 2, ,369 (251,131) Instruction library, media and technology 31, (31,375) School site administration 968, (968,966) Pupil services: Home-to-school transportation 283,527 4,813 4,033 (274,681) Food services 705, , ,391 (115,837) All other pupil services 961,218 9,064 24,704 (927,450) General administration: Data processing 165,255-1,011 (164,244) All other general administration 1,129,847 15,420 49,072 (1,065,355) Plant services 1,515, ,793 (1,507,543) Community services 42,590-2,550 (40,040) Other outgo 957,703 16, ,284 (105,567) Interest on long-term debt 1,314, (1,314,544) Total governmental activities $ 19,261,051 $ 390,033 $ 2,726,938 (16,144,080) General revenues: Taxes and subventions: Taxes levied for general purposes 1,065,692 Taxes levied for debt service 1,701,079 Taxes levied for other specific purposes 205,037 Federal and state aid not restricted to specific purposes 13,116,878 Interest and investment earnings 345,089 Miscellaneous 539,796 Total general revenues and special item 16,973,571 Change in net assets 829,491 Net assets beginning 21,736,662 Net assets ending $ 22,566,153 The notes to the financial statements are an integral part of this statement. 11

70 Millbrae School District Governmental Funds Balance Sheet June 30, 2012 Special Reserve for Nonmajor Total General Building Capital Projects Governmental Governmental Fund Fund Fund Funds Funds Assets Cash and investments $ 4,899,725 $ 19,674,695 $ 9,355,944 $ 2,411,747 $ 36,342,111 Accounts receivable 5,922,046 26,885 45,464 47,258 6,041,653 Due from other funds 36,435-5,179,664 15,800 5,231,899 Prepaid and other current assets ,257 11,257 Total Assets $ 10,858,206 $ 19,701,580 $ 14,581,072 $ 2,486,062 $ 47,626,920 Liabilities and Fund Balances Liabilities: Accounts payable $ 828,857 $ 823,578 $ 85,806 $ 15,458 $ 1,753,699 Due to other funds 5,211,960 2,250-17,689 5,231,899 Deferred revenue 367,903-91,063 14, ,680 Total Liabilities 6,408, , ,869 47,861 7,459,278 Fund balances: Nonspendable: Revolving fund 2, ,350 Inventories ,257 11,257 Restricted for: Educational programs 192, , ,442 Cafeteria Programs ,781 39,781 Debt service ,936,038 1,936,038 Capital projects - 18,875, ,875,752 Other Postemployment Benefits 2,958, ,958,261 Assigned for: Capital projects ,404, ,586 14,803,789 Unassigned: Reserve for economic uncertainties 519, ,000 Unappropriated 776, ,972 Total Fund Balances 4,449,486 18,875,752 14,404,203 2,438,201 40,167,642 Total Liabilities and Fund Balances $ 10,858,206 $ 19,701,580 $ 14,581,072 $ 2,486,062 $ 47,626,920 The notes to the financial statements are an integral part of this statement. 12

71 Millbrae School District Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets June 30, 2012 Total fund balances - governmental funds $ 40,167,642 Capital assets for governmental activities are not financial resources and therefore are not reported as assets in governmental funds. The cost of the assets is $40,428,910 and the accumulated depreciation is $6,041,996 34,386,914 In governmental funds, interest on long-term debt is not recognized until the period in which it matures and is paid. In the government-wide statement of activities, it is recognized in the period that it is incurred. The accrued interest at the end of the period was: (713,032) In the governmental funds, debt issuance costs are recognized as expenditures in the period they are incurred. In the government-wide statements, debt issuance costs are amortized over the life of the debt. Debt issuance costs of $872,630 were reported net accumulated amortization of $68, ,587 Long-term liabilities are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term liabilities at year-end consist of: Capital leases payable $ 41,931 School loan 1,025,082 General obligation bonds 50,554,380 Net OPEB obligations 357,170 Compensated absences 101,395 (52,079,958) Total net assets - governmental activities $ 22,566,153 The notes to the financial statements are an integral part of this statement. 13

72 Millbrae School District Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances For the Fiscal Year Ended June 30, 2012 Special Reserve for Nonmajor Total General Building Capital Projects Governmental Governmental Fund Fund Fund Funds Funds Revenues: Revenue limit sources $ 12,667,493 $ - $ - $ 60,000 $ 12,727,493 Federal 995, ,621 1,250,837 Other state 2,030, ,788 2,061,733 Other local 653,781 71, ,022 2,404,070 4,032,721 Total revenues 16,347,435 71, ,022 2,750,479 20,072,784 Expenditures: Instruction 10,231, ,232,107 Instruction-related services: Supervision of instruction 369, ,811 Instruction library, media and technology 31, ,375 School site administration 968, ,987 Pupil services: Home-to-school transportation 283, ,527 Food services , ,497 All other pupil services 961, ,218 General administration: Data processing 165, ,255 All other general administration 998, ,101 1,033,600 Plant services 1,435,643 1,078-28,305 1,465,026 Facility acquisition and construction - 12,574, ,574,943 Community services 42, ,590 Other outgo 957, ,703 Debt service: Principal 25,981-58, , ,641 Interest - 21, ,624 1,148,023 1,289,111 Total expenditures 16,471,896 12,597, ,284 2,599,726 31,847,391 Excess (deficiency) of revenues over (under) expenditures (124,461) (12,525,637) 724, ,753 (11,774,607) Other financing sources (uses): Transfers in 57, ,088 Transfers out (53,559) (2,250) - (1,279) (57,088) Bond issuance costs (323,413) (323,413) Proceeds from bond issuance - 20,000, ,000,000 Premium from bond issuance , ,975 Total other financing sources (uses) 3,529 19,997, ,283 20,657,562 Changes in fund balances (120,932) 7,472, , ,036 8,882,955 Fund balances beginning 4,570,418 11,403,639 13,679,465 1,631,165 31,284,687 Fund balances ending $ 4,449,486 $ 18,875,752 $ 14,404,203 $ 2,438,201 $ 40,167,642 The notes to the financial statements are an integral part of this statement. 14

73 Millbrae School District Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement of Activities For the Fiscal Year Ended June 30, 2012 Total net change in fund balances - governmental funds $ 8,882,955 Capital outlays are reported in governmental funds as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital assets additions of $12,575,399 exceeded depreciation expense of $752,769 in the period. 11,822,630 The governmental funds report long-term debt proceeds as an other financing source, while repayment of debt principal is reported as an expenditure. Also, governmental funds report the effect of issuance costs and premiums when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. Interest is recognized as an expenditure in the governmental funds when it is due. The net effect of these differences in the treatment of long-term debt and related items is as follows: Capital leases principal 25,981 School loan principal 58,660 Bond principal 750,000 Proceeds from bond issuance (20,000,000) Bond Premiums (980,975) Issuance costs and discounts 323,413 Amortization of debt issuance costs (25,433) Amortization of bond premiums 17,790 (19,830,564) In the statement of activities, compensated absences are measured by the amount earned during the year. In governmental funds, however, expenditures for those items are measured by the amount of financial resources used (essentially the amounts paid). This year vacation used exceeded vacation earned by $29,528. (29,528) In the statement of activities, the net postemployment benefit obligation is the amount by which the contributions toward the OPEB plan were less than the annual required contribution as actuarially determined. The net OPEB obligation was not recorded in the governmental fund statements. The change in the net OPEB obligation was recorded in the statement of activities in the amount of: (16,002) Change in net assets of governmental activities $ 829,491 The notes to the financial statements are an integral part of this statement. 15

74 Millbrae School District Statement of Fiduciary Net Assets Fiduciary Funds June 30, 2012 Assets: Student Body Agency Fund Cash on hand and in banks $ 54,556 Total Assets $ 54,556 Liabilities: Due to student groups $ 54,556 Total Liabilities $ 54,556 The notes to the financial statements are an integral part of this statement. 16

75 Notes to the Basic Financial Statements

76 1. SIGNIFICANT ACCOUNTING POLICIES A. Accounting Principles Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Millbrae School District (the "District") accounts for its financial transactions in accordance with the policies and procedures of the Department of Education s California School Accounting Manual. The account policies of the District conform to accounting principles generally accepted in the United States of America as prescribed by the U. S. Governmental Accounting Standards Board ("GASB") and the American Institute of Certified Public Accountants ("AICPA"). B. Reporting Entity The District is the level of government primarily accountable for activities related to public education. The governing authority consists of five elected officials who, together, constitute the Board of Trustees. The District s combined financial statements include the accounts of all its operations. The District evaluated whether any other entity should be included in these financial statements using the criteria established by GASB. The Millbrae School District Financing Corporation (the Corporation ) is a nonprofit entity organized under the laws of State of California and is a blended component unit of the District. This is a nonprofit public benefit corporation created on February 6, 1996, to assist the District authorizing lease financing of improvement projects and approving related documents of and actions. The Corporation is governed by the same board that governs the District. C. Basis of Presentation Government-wide Financial Statements: The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the non-fiduciary activities of the District. Eliminations have been made to minimize the effect of interfund of activities. The government-wide statements are prepared using the economic resources measurement focus. This is the same approach used in the preparation of the proprietary fund and fiduciary fund financial statements but differs from the manner in which governmental fund financial statements are prepared. Governmental fund financial statements, therefore, includes a reconciliation with brief explanations to better identify the relationship between the government-wide statements and the statements for the governmental funds. The government-wide statement of activities presents a comparison between direct expenses and program revenues for each function or program of the District s governmental activities. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the statement of activities. Program revenues include charges paid by the recipients of goods or services offered by a program, as well as grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues of the District, with certain 17

77 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 exceptions. The comparison of direct expenses with program revenues identifies the extent to which each governmental function is self-financing or draws from the general revenues of the District. Fund Financial Statements: Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major governmental fund is presented in a separate column, and all non-major funds are aggregated into one column. Fiduciary funds are reported by fund type. The accounting and financial treatment applied to a fund is determined by its measurement focus. All governmental funds are accounted for using a flow of current financial resources measurement focus. With this measurement focus, only current assets and current liabilities are generally included on the balance sheet. The Statement of Revenues, Expenditures, and Changes in Fund Balances for these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets. Fiduciary funds are reported using the economic resources measurement focus. D. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Government-wide financial statements are prepared using the accrual basis of accounting. Governmental funds use the modified accrual basis of accounting. Fiduciary funds use the accrual basis of accounting. Revenues - Exchange and Non-exchange Transactions: Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded under the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, available means collectible within the current period or within 60 days after year-end. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, grants, and entitlements. Under the accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants and entitlements is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are to be used or the fiscal year when use is first permitted; matching requirements, in which the District must provide local resources to be used for a specific purpose; and expenditure requirements, in which the resources are provided to the District on a reimbursement basis. Under the modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. 18

78 Unearned/Deferred revenue: Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Unearned/Deferred revenue arises when assets are received before revenue recognition criteria have been satisfied. Grants and entitlements received before eligibility requirements are met are recorded as deferred revenue. On governmental fund financial statements, receivables associated with nonexchange transactions that will not be collected within the availability period have also been recorded as deferred revenue. Expenses/Expenditures: Using the accrual basis of accounting, expenses are recognized at the time a liability is incurred. On the modified accrual basis of accounting, expenditures are generally recognized in the accounting period in which the related fund liability is incurred, as under the accrual basis of accounting. However, under the modified accrual basis of accounting, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Allocations of cost, such as depreciation and amortization, are not recognized in the governmental funds. When both restricted and unrestricted resources are available for use, it is the District s policy to use restricted resources first, than unrestricted resources as they are needed. E. Fund Accounting The accounts of the District are organized on the basis of funds, each of which is considered to be a separate accounting entity. The operations of each fund are accounted for with a separate set of selfbalancing accounts that comprise its assets, liabilities, fund equity or retained earnings, revenues, and expenditures or expenses, as appropriate. The District resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent and the means by which spending activities are controlled. The District s accounts are organized into major, nonmajor, and fiduciary funds as follows: Major Governmental Funds: The General Fund is the general operating fund of the District. It is used to account for all financial resources except those required to be accounted for in another fund. The Building Fund is used to account for the acquisition of major governmental capital facilities and buildings from the sale of bond proceeds. The Special Reserve Fund for Capital Outlay Projects exists primarily to account for resources from rentals and proceeds from the sale of real property accumulated for capital outlay. Non-major Governmental Funds: Special Revenue Funds are used to account for the proceeds of specific revenue sources that are restricted or committed for purposes other than debt service or capital projects. The restricted or committed resources need to comprise a substantial portion of the inflows reported in the special revenue fund. The District maintains three nonmajor special revenue funds: 19

79 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The Cafeteria Fund is used to account for revenues received and expenditures made to operate the District s food service programs. The Deferred Maintenance Fund is used for the purpose of major repair or replacement of District property. The Foundation Special Reserve Fund exists primarily to account for money received from gifts and bequests. Capital Projects Funds are used to account for resources restricted, committed or assigned for capital outlays. The District maintains one nonmajor capital projects fund: The Capital Facilities Fund is used to account for resources received from developer impact fees assessed under provisions of the California Environmental Quality Act ("CEQA"). The Bond Interest and Redemption Fund is used to account for the interest and redemption of principal of general obligation bonds. Fiduciary Funds: Agency Funds are used to account for assets of others for which the District acts as an agent. The District maintains an agency fund for the student body accounts. The student body funds are used to account for the raising and expending of money to promote the general welfare, morale, and educational experience of the student body. F. Budgets and Budgetary Accounting Annual budgets are adopted on a basis consistent with generally accepted accounting principles for all governmental funds. By state law, the District s governing board must adopt a final budget no later than July 1. A public hearing must be conducted to receive comments prior to adoption. The District s governing board satisfied these requirements. These budgets are revised by the District s governing board during the year to give consideration to unanticipated income and expenditures. The original and final revised budgets for the General Fund are presented as Required Supplementary Information. Formal budgetary integration was employed as a management control device during the year for all budgeted funds. The District employs budget control by minor object and by individual appropriation accounts. Expenditures cannot legally exceed appropriations by major object account. G. Encumbrances Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated when the commitments are paid. All encumbrances are liquidated on June

80 H. Assets, Liabilities, and Equity a) Cash and Investments Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Cash balances held in banks and in revolving funds are insured to $250,000 by the Federal Deposit Insurance Corporation except for non-interest bearing accounts which are completely insured. In accordance with Education Code Section 41001, the district maintains substantially all of its cash in the County Treasury. The county pools these funds with those of other districts in the county and invests the cash. These pooled funds are carried at cost, which approximates market value. Interest earned is deposited quarterly into participating funds. Any investment losses are proportionately shared by all funds in the pool. All District-directed investments are governed by Government Code Section and Treasury investment guidelines. The guidelines limit specific investments to government securities, domestic chartered financial securities, domestic corporate issues, and California municipal securities. The District s securities portfolio is held by the County Treasurer. Interest earned on investments is recorded as revenue of the fund from which the investment was made. b) Stores Inventories and Prepaid Expenditures Inventories Inventories are recorded using the purchases method, in that inventory acquisitions are initially recorded as expenditures. Reported inventories are equally offset by a fund balance reserve, which indicates that these amounts are not available for appropriation and expenditure even though they are a component of net current assets. The District s central warehouse inventory is valued at cost and consists of expendable supplies held for consumption. Prepaid expenditures The District has the option of reporting expenditures in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditure during the benefiting period, thus recording a prepaid expenditure in the Statement of Net Assets. c) Capital Assets Capital assets are those purchased or acquired with an original cost of $5,000 or more and are reported at historical cost or estimated historical cost. Contributed assets are reported at fair market value as of the date received. Additions, improvements, and other capital outlays that significantly extend the useful life of an asset are capitalized. The costs of normal maintenance and repairs that do not add to the value of the assets or materially extend the asset s lives are not capitalized, but are expensed as incurred. 21

81 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Depreciation on all capital assets is computed using a straight-line basis over the following estimated useful lives: d) Deferred Revenue Assets Years Improvement of sites 20 Buildings 50 Portable buildings 20 Building improvements 20 Furniture and fixtures 20 Playground equipment 20 Food services equipment 15 Transportation equipment 15 Telephone system 10 Vehicles 8 Computer system and equipment 5 Office equipment 5 Cash received for federal and state special projects and programs is recognized as revenue to the extent that qualified expenditures have been incurred and timing requirements have been met. Unearned revenue is recorded to the extent that cash received on specific projects and programs exceeds qualified expenditures. Deferred revenue in the funds is recorded for grant and entitlement receivables that are not available within ninety days of year end and for cash receipts from grants and entitlements for which the District has not met the eligibility requirements for recognizing revenue. e) Compensated Absences All vacation pay is accrued when incurred in the government-wide financial statements. A liability for these amounts is reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Accumulated sick leave benefits are not recognized as liabilities of the District. The District s policy is to record sick leave as an operating expense in the period taken, since such benefits do not vest, nor is payment probable; however, unused sick leave is added to the creditable service period for calculation of retirement benefits when the employee retires. Credit for unused sick leave is applicable to all classified school members who retire after January l, At retirement, each member will receive.004 year of service credit for each day of unused sick leave. f) Long-Term Liabilities In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Assets. Bond premiums and discounts as well as issuance costs are deferred and amortized over the life of the bonds using the effectiveinterest method. Bonds payable are reported net of applicable bond premium or discount. Bond 22

82 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 issuance costs are reported as prepaid expenditures and amortized over the term of the related debt. In the fund financial statements, governmental funds recognize bond premiums and discounts as well as bond issuance costs, during the current period. The face amount of the debt issued, premiums, or discounts are reported as other financing sources/uses. g) Fund Balance Classifications The District is committed to maintaining a prudent level of financial resources to protect against the need to reduce service levels because of temporary revenue shortfalls or unpredicted expenditures. The District minimum fund balance policy requires a reserve for economic uncertainties, consisting of unassigned amounts, of 3 percent of general fund operating expenditures and other financing uses. In accordance with Government Accounting Standards Board 54, Fund Balance Reporting and Governmental Fund Type Definitions, the District classifies governmental fund balances as follows: Nonspendable - includes fund balance amounts that cannot be spent either because it is not in spendable form or because of legal or contractual constraints. Restricted - includes fund balance amounts that are constrained for specific purposes which are externally imposed by providers, such as creditors or amounts constrained due to constitutional provisions or enabling legislation. Committed - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the government through formal action of the highest level of decision making authority and does not lapse at year-end. Committed fund balances are imposed by the District s board of education. Assigned - includes fund balance amounts that are intended to be used for specific purposes that are neither considered restricted or committed. Fund balance may be assigned by the Executive Director and the Deputy Director of Finance. Unassigned includes positive fund balance within the general fund which has not been classified within the above mentioned categories and negative fund balances in other governmental funds. The District uses restricted/committed amounts to be spent first when both restricted and unrestricted fund balance is available unless there are legal documents/contracts that prohibit doing this, such as a grant agreement requiring dollar for dollar spending. Additionally, the District would first use committed, then assigned, and lastly unassigned amounts of unrestricted fund balance when expenditures are made. 23

83 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 h) Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the district or through external restrictions imposed by creditors, grantors, laws or regulations of other governments. The district applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. Capital projects restrictions will be used for the acquisition and construction of capital facilities. Debt service restrictions reflect the cash balances in the debt service funds that are restricted for debt service payments by debt covenants. Legally Restricted restrictions reflect amounts to be expended for federal and state funded educational programs. Other educational program restrictions reflect the amounts to be expended on specific school programs that are legally restricted. Unrestricted net assets reflect net assets that are not subject to any donor-imposed restrictions. This class also includes restricted gifts whose donor-imposed restrictions were met during the fiscal year. i) Revenue Limit/Property Tax The District s revenue limit is received from a combination of local property taxes, state apportionments, and other local sources. The county is responsible for assessing, collecting, and apportioning property taxes. Taxes are levied for each fiscal year on taxable real and personal property in the county. The levy is based on the assessed values as of the preceding January 1, which is also the lien date. Property taxes on the secured roll are due on November 1 and February 1, and taxes become delinquent after December 10 and April 10, respectively. Property taxes on the unsecured roll are due on the lien date (March 1), and become delinquent if unpaid by August 31. Secured property taxes are recorded as revenue when apportioned, in the fiscal year of the levy. The county apportions secured property tax revenue in accordance with the alternate method of distribution prescribed by Section 4705 of the California Revenue and Taxation Code. This alternate method provides for crediting each applicable fund with its total secured taxes upon completion of the secured tax roll - approximately October 1 of each year. The County Auditor reports the amount of the District s allocated property tax revenue to the California Department of Education. Property taxes are recorded as local revenue limit sources by the District. 24

84 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The California Department of Education reduces the District s entitlement by the District s local property tax revenue. The balance is paid from the state General Fund, and is known as the State Apportionment. The District s base revenue limit is the amount of general purpose tax revenue, per average daily attendance (ADA), that the District is entitled to by law. This amount is multiplied by the second period ADA to derive the District s total entitlement. j) Risk Management The District is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets, errors and omissions, injuries to employees, and natural disasters. The District has joined together with other school districts in the County to form the San Mateo County Schools Insurance Group ("SMCSIG ) public entity risk pool. The District pays an annual premium for its property and casualty, workers compensation, and liability insurance coverage. The Joint Powers Agreements provide that SMCSIG will be self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of self-insured levels. There were no significant reductions in insurance coverage from coverage in the prior year and no insurance settlement exceeding insurance coverage. k) Interfund Transactions Interfund transactions are reported as either loans, services provided, reimbursements, or transfers. Loans are reported as interfund receivables and payables, as appropriate, and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures/expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers among governmental funds are eliminated as part of the reconciliation to the government-wide financial statements. l) Accounting Estimates The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. I. New Accounting Pronouncements Summary of Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions an amendment of GASB Statement No. 5 (Issued 06/11). The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty s credit support provider. This Statement sets forth criteria that establish when the effective hedging relationship continues and 25

85 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 hedge accounting should continue to be applied. The provisions of this Statement were implemented as of June 30, 2012 and did not have a significant impact on the District s financial statements. J. Upcoming Accounting and Reporting Changes Summary of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements (Issued 12/10). The objective of this Statement is to incorporate into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: 1. Financial Accounting Standards Board (FASB) Statements and Interpretations 2. Accounting Principles Board Opinions 3. Accounting Research Bulletins of the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure. This Statement also supersedes Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, thereby eliminating the election provided in paragraph 7 of that Statement for enterprise funds and business-type activities to apply post-november 30, 1989 FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements. The requirements of this Statement are effective for financial statements for periods beginning after December 15, The implementation of this standard will not have a significant impact on the District s financial statements. Summary of Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position (Issued 06/11). This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net assets by the government that is applicable to a future reporting period, and an acquisition of net assets by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities. Concepts Statement 4 also identifies net position as the residual of all other elements presented in a statement of financial position. This Statement amends the net asset reporting requirements in Statement No. 34, Basic Financial Statements-and Management s Discussion and Analysis-for State and Local Governments, and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure as net position, rather than net assets. The provisions of this Statement are effective for financial statements for periods beginning after December 15, The implementation of this standard will not have a significant impact on the District s financial statements. Summary of Statement No. 65 Items Previously Reported as Assets and Liabilities (Issued 03/12). This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously 26

86 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This Statement amends the financial statement element classification of certain items previously reported as assets and liabilities to be consistent with the definitions in Concepts Statement 4. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. The implementation of this standard will not have a significant impact on the District s financial statements. Summary of Statement No. 67 Financial Reporting for Pension Plans - an amendment of GASB Statement No. 25 (Issued 06/12). This Statement replaces the requirements of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 50, Pension Disclosures, as they relate to pension plans that are administered through trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. This Statement establishes a definition of a pension plan that reflects the primary activities associated with the pension arrangement-determining pensions, accumulating and managing assets dedicated for pensions, and paying benefits to plan members as they come due. This Statement also details the note disclosure requirements for defined contribution pension plans administered through trusts that meet the identified criteria. This Statement is effective for financial statements for fiscal years beginning after June 15, Earlier application is encouraged. The determination of the impact on the District s financial statements from the implementation of this standard is pending as of the issuance date of this report. Summary of Statement No. 68 Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 (Issued 06/12). The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. This Statement establishes a definition of a pension plan that reflects the primary activities associated with the pension arrangement-determining pensions, accumulating and managing assets dedicated for pensions, and paying benefits to plan members as they come due. This Statement is effective for fiscal years beginning after June 15, Earlier application is encouraged. The determination of the impact on the District s financial statements from the implementation of this standard is pending as of the issuance date of this report. 27

87 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, CASH AND INVESTMENTS A summary of cash and investments as of June 30, 2012 is as follows: Carrying Fair Investment Deposit or Investment Amount Value Rating Government-Wide Statements - Cash: Cash in county treasury investment pool $ 36,317,113 $ 36,163,128 AA Cash in revolving fund 3,350 3,350 n/a Cash in banks 18,278 18,278 n/a Cash with fiscal agent 3,370 3,370 n/a Total Government-Wide Cash and Investments 36,342,111 36,188,126 Fiduciary Funds: Cash in banks 54,556 54,556 n/a Total Cash and Investments $ 36,396,667 $ 36,242,682 Cash in Banks and in Revolving Funds Noninterest bearing cash balances in banks and revolving funds are insured up to $250,000 by the Federal Deposit Insurance Corporation ("FDIC"). These accounts are held within various financial institutions. As of June 30, 2012, the bank balance of the District s accounts with banks was $77,605 which was fully insured by FDIC. Cash in County Treasury The District is considered to be an involuntary participant in an external investment pool as the District is required to maintain substantially all of its cash with the County Treasurer in accordance with Education Code Section The fair value of the District s investment in the pool is reported in the accounting financial statements at amounts based upon the District s pro rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. Local Agency Investment Fund LAIF allows local governments such as the District to participate in a Pooled Money Investment Account managed by the State Treasurer Office and overseen by the Pooled Money Investment Board and State Treasurer investment committee. A Local Agency Investment Advisory Board oversees LAIF. The investments with LAIF are not classified for credit risk due to their diverse nature and are stated at cost, which approximates fair value. The total amount invested by all public agencies in LAIF, as of June 30, 2012, was approximately $62.68 billion. Of that amount, 95.27% is invested in non-derivative financial products and 4.73% in structured notes and asset-backed securities. The average maturity for the investment in LAIF is 270 days. 28

88 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Policies and Practices The District is authorized under California Government Code Section to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to the changes in market interest rates. The District manages its exposure to interest rate risk by investing in the County Treasury. The District maintains cash with the San Mateo County Investment Pool. The pool has a fair value of approximately $868 million and an amortized book value of $865 million. Credit Risk Credit risk is the risk of loss due to the failure of the security issuer. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The investment with the San Mateo County Investment Pool is governed by the County s general investment policy. The investment with the San Mateo County Investment Pool is rated at least Aa1 by Moody s Investor Service. 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 to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer beyond the amount stipulated by the California Government code. District investments that are greater than 5 percent of total investments are in either an external investment pool or mutual funds and are therefore exempt. 29

89 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, ACCOUNTS RECEIVABLE Accounts receivable consisted of the following as of June 30, 2012: Special Reserve Fund for Capital General Building Outlay Nonmajor Receivables Fund Fund Projects Funds Total Federal Government: Local Assistance, IDEA $ 33,003 $ - $ - $ - $ 33,003 Title III LEP 10, ,781 Child Nutrition ,934 38,934 Other Categorical 104, ,125 State Government: State Aid 5,043, ,043,291 Lottery 25, ,022 Class Size Reduction 247, ,615 Lottery Instructional Materials 27, ,326 After School Education and Safety 11, ,250 Special Education 206, ,194 Local Resources: ERAF Property Tax 143, ,700 Interest 1,887 26,885 30,014 8,160 66,946 Other Local Resources 67,852-15, ,466 Accounts Receivable $ 5,922,046 $ 26,885 $ 45,464 $ 47,258 $ 6,041, CAPITAL ASSETS AND DEPRECIATION Capital asset activities for the year ended June 30, 2012 were as follows: Balance Balance Capital Assets July 01, 2011 Additions Deletions Adjustments June 30, 2012 Land - not depreciable $ 358,270 $ - $ - $ - $ 358,270 Work-in-progress 11,390, ,293 11,390, ,293 Buildings 15,426,744 23,408, ,835,555 Equipment 677, ,792 Total capital assets 27,853,511 23,966,104 11,390,705-40,428,910 Less accumulated depreciation for: Buildings 4,859, , ,558,121 Equipment 430,214 53, ,875 Total accumulated depreciation 5,289, , ,041,996 Total capital assets - net depreciation $ 22,564,284 $ 23,213,335 $ 11,390,705 $ - $ 34,386,914 30

90 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Depreciation expense was charged to governmental activities as follows: Depreciation expense was charged to governmental activities as follows: Instruction $ 538,078 Puipil services, food services 68,093 All other general administration 96,247 Plant services 50,351 Total depreciation expense $ 752, INTERFUND TRANSACTIONS Interfund transactions are reported as either loans, services provided, reimbursements, or transfers. Loans are reported as interfund receivables and payables (Due From/To), as appropriate, and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures/expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers among governmental funds are netted as part of the reconciliation to the government-wide financial statements. Interfund Receivables/Payables (Due From/Due To) Interfund receivables and payables consisted of the following as of June 30, 2012: Due From (Receivable-in) General Special Reserve Nonmajor Total Due To (Payable-in) Fund Fund Funds Due To General Fund $ 16,525 $ 5,179,635 $ 15,800 $ 5,211,960 Building Fund 2, ,250 Nonmajor Funds 17, ,689 Total Due From $ 36,435 $ 5,179,664 $ 15,800 $ 5,231,899 Interfund Transfers Interfund transfers consisted of the following for the fiscal year ended June 30, 2012: Fund Receiving Transfers Fund Making Transfers Amount General Fund Special Res. Fund for Other Capital Outlay (1) 53,559 1 General Fund Building Fund 2,250 2 General Fund Capital Facilities Fund 1,279 3 $ 57,088 1 To reimburse General Fund for One Alp Way waiver expenses 2 To reimburse General Fund for Bond Audit Expense 3 To reimburse General Fund for allowable 3% Admin Fee for Developer Fees (1) The Special Reserve Fund for Other Than Capital Projects has been combined with the General Fund for reporting purposes as required by GASB

91 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, LONG-TERM DEBT Schedule of Changes in Long-term Debt A schedule of changes in long-term debt for the fiscal year ended June 30, 2012, is shown below: Balance Balance Due Within Long Term Debt July 01, 2011 Additions Deductions June 30, 2012 One Year General obligation bonds: Bond principal $ 29,999,527 $ 20,000,000 $ 750,000 $ 49,249,527 $ 235,000 Bond premium 465, ,563 17,790 1,304,853 46,375 Total general obligation bonds 30,464,607 20,857, ,790 50,554, ,375 Capital leases 67,882-25,951 41,931 28,919 School loan 1,083,742-58,660 1,025,082 61,980 Net OPEB obligation 341, , , ,170 - Compensated absences 71,899 29, ,395 - Total Long-Term Debt $ 32,029,298 $ 21,195,887 $ 1,145,227 $ 52,079,958 $ 372,274 Payments on the general obligation bonds are made from the Bond Interest and Redemption Fund using local revenues. Compensated absences are paid by the fund for which the employee worked. Net other post employment benefits and capital leases are paid from the General Fund. The school loan is paid from the Special Reserve for Capital Projects Fund. General Obligation Bonds Payable On April 17, 2009, the District issued the 2009 General Obligation Bonds, Series A in the amount of $12,000,000, maturing on July 1, Interest is payable on July 1 and January 1 and principal is payable on July 1 each year through maturity. The proceeds of the Bonds will be used for specific construction and modernization projects approved by the voters. The Bonds are a general obligation of the District payable solely from the proceeds of ad valorem taxes. On April 19, 2011, the District issued the 2011 General Obligation Bonds, Series B in the amount of $17,999,527, maturing on July 1, Interest is payable on July 1 and January 1 and principal is payable on July 1 each year through maturity. The proceeds of the Bonds will be used for specific construction and modernization projects approved by the voters. The Bonds are a general obligation of the District payable solely from the proceeds of ad valorem taxes. On April 19, 2012, the District issued the 2012 General Obligation Bonds in the amount of $20,000,000, maturing on July 1, Interest is payable on July 1 and January 1 and principal is payable on July 1 each year through maturity. The proceeds of the Bonds will be used for specific construction and modernization projects approved by the voters. The Bonds are a general obligation of the District payable solely from the proceeds of ad valorem taxes. 32

92 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The following summarizes the bonds outstanding as of June 30, 2012: Bonds Bonds Issue Maturity Interest Original Outstanding Outstanding Bond Date Date Rate Issue July 01, 2011 Issued Redeemed June 30, /17/09 7/1/ % $ 12,000,000 $ 12,000,000 $ - $ 750,000 $ 11,250, /19/11 7/1/ % 17,999,527 17,999, ,999, /19/12 7/1/ % 20,000,000-20,000,000-20,000,000 Total General Obligation Bonds $ 49,999,527 $ 29,999,527 $ 20,000,000 $ 750,000 $ 49,249,527 The annual debt service requirements of the bonds are as follows: Interest to Fiscal Year Principal Maturity Total 2013 $ 235,000 $ 1,904,767 $ 2,139, ,000 2,180,246 2,605, ,000 2,158,771 2,788, ,150,000 2,126,421 3,276, ,000 2,095,571 2,700, ,940,000 9,705,035 17,645, ,610,000 7,672,014 17,282, ,916,557 6,954,138 16,870, ,779,812 9,179,101 17,958, ,603,158 9,948,641 18,551, ,355,000 33,875 1,388,875 Total $ 49,249,527 $ 53,958,580 $ 103,208,107 The annual tax credit subsidies to be received from the U.S. Treasury for QSCB s outstanding as of June 30, 2012, are as follows: Fiscal Year Total 2013 $ 496, , , , , ,861, ,280 Total $ 4,839,588 33

93 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 Capital Leases The District had several capital lease agreements for office equipment. The minimum lease payments for the capital leases consisted of the following as of June 30, 2012: School Loan Interest to Fiscal Year Principal Maturity Total 2013 $ 28,919 $ 5,784 $ 34, ,011 1,838 14,849 Total $ 41,930 $ 7,622 $ 49,552 In November 1, 2009, the District entered into a Lease Agreement with the Millbrae School District Financing Corporation (the Corporation ) to finance $1,208,893. The proceeds are used by the District to substantially rehabilitate and to construct improvements on the athletic fields at the district schools. Pursuant to the Agreement, the District leased the real property constituting the Lomita Park School (the Leased Property ) to the Corporation for an up-front rental payment which is sufficient to enable the District to finance the projects, and Corporation has leased the Leased Property back to the District. The District is obliged under the Lease Agreement to pay certain Lease Payments which have been assigned by the Corporation to Zions First National bank under an Assignment of Lease Agreement dated November 1, Under the lease agreement, the principal and interest are paid semi-annually every August 1 and February 1, maturing on August 1, Interest rate is assumed to be 5.66% for the term of the lease. Scheduled lease payments as of June 30, 2012 were as follows: Interest to Fiscal Year Principal Maturity Total 2013 $ 61,980 $ 56,266 $ 118, ,488 52, , ,195 48, , ,112 44, , ,250 40, , , , , ,060 12, ,744 Total $ 1,025,082 $ 385,908 $ 1,410,990 34

94 8. JOINT POWERS AGREEMENTS Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The District participates in a joint powers agreement ("JPA") with the San Mateo County Schools Insurance Group ("SMCSIG"). A board consisting of a representative from each member district governs the JPA. The governing board controls the operation of the JPA independent of any influence by the District beyond the District s representation on the governing board. The JPA is independently accountable for its fiscal matters. Budgets are not subject to any approval other than that of the governing board. Member districts share surpluses and deficits proportionately to their participation. The relationship between the District and the JPA is such that the JPA not a component unit of the District for financial reporting purposes. The following is a summary of coverage provided by SMCSIG JPA and its most recent financial statement information: Risk Management JPA's SMCSIG June 30, 2011 Total Assets $ 12,966,179 Total Liabilities 6,403,177 Total Net Assets 6,563,002 Total Revenues 31,945,163 Total Expenditures 31,959,454 The District also participates in the School Project for Utility Rate Reduction (SPURR) JPA. Utility services from SPURR totaled $29,891 for the fiscal year ended June 30, The relationship between the District and the JPA is such that the JPA is not a component unit of the District for financial reporting purposes. There is no financial information available for SPURR. 9. COMMITMENTS AND CONTINGENCIES Litigation Various claims involving the District are currently outstanding. However, management believes, based on consultation with legal counsel, that the ultimate resolution of these matters will not have a material adverse effect on the District s financial position or results of operations. Federal and State Allowances, Award, and Grants The District has received federal and state funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believed that any required reimbursement will not be material. 10. EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers Retirement System ("STRS"), and classified employees are members of the Public Employees Retirement System ("PERS"). 35

95 State Teachers Retirement System a) Plan Description Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The District contributes to the STRS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by STRS. The plan provides retirement, disability, and survivor benefits to beneficiaries. Benefit provisions are established by state statues, as legislatively amended, within the State Teachers Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the STRS annual financial report may be obtained from the STRS, 7667 Folsom Boulevard, Sacramento, California b) Funding Policy Active plan members are required to contribute 8.0% of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers Retirement Board. The required employer contribution rate for fiscal year 2012 was 8.25% of annual payroll. The contribution requirements of the plan members are established by state statute. The District s contributions to STRS for the fiscal year ended June 30, 2012, 2011, and 2010 were $632,808, $604,335 and $673,922, respectively, and equal 100% of the required contributions for each year. Public Employees Retirement System a) Plan Description The District contributes to PERS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by PERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by state statutes, as legislatively amended, within the Public Employee s Retirement Law. PERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the PERS annual financial report may be obtained from the PERS Executive Office, 400 P Street, Sacramento, CA b) Funding Policy Active plan members are required to contribute 7.0% of their salary, and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the PERS Board of Administration. The required employer contribution rate for fiscal year 2012 was % of annual payroll. The contribution requirements of the plan members are established by state statute. The District s contribution to PERS for the fiscal year ended June 30, 2012, 2011, and 2010 were $235,805, $233,693 and $225,592, respectively, and equal 100% of the required contributions for each year. 36

96 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, POSTEMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS Postemployment Healthcare Plan Plan Description. The District s Postemployment Healthcare Plan (PHP) is a single-employer defined benefit healthcare plan including medical, dental, and vision benefits for the following groups of employees. Certificated Classified Benefit types provided Medical, Dental and Vision Medical, Dental and Vision Duration of benefits Option 1-5 years at current cap, not beyond age 65 Option 1-5 years at current cost Option 2-10 years subject to cap below Option 2-10 years subject to cap below Required service 10 Years 10 Years Minimum age Dependent coverage Yes Yes District contribution % 100% to cap 100% to cap District cap $347 per month $347 per month Funding Policy. The required contribution to the PHP is based on projected pay-as-you-go financing requirements. For the fiscal year ended June 30, 2012, the District contributed $292,826 to the plan from payment of current premiums and current retiree benefits. Annual OPEB Cost and Net OPEB Obligation. The District s annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District s net OPEB obligation: Annual required contribution $ 308,828 Interest on net OPEB obligation - Adjustment to annual required contribution - Annual OPEB cost (expense) 308,828 Contributions made (292,826) Increase in net OPEB obligation 16,002 Net OPEB obligation - beginning of year 341,168 Net OPEB obligation - end of year $ 357,170 37

97 Millbrae School District Notes to Basic Financial Statements For the Year Ended June 30, 2012 The District s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2012 was as follows: Fiscal Net Year Annual Percentage of Annual OPEB Ended OPEB Cost Cost Contributed Obligation 6/30/2010 $ 392, % $ 301,023 6/30/ , % 341,168 6/30/ , % 357,170 Actuarial Methods and Assumptions. In the Entry Age Normal method, the cost of each individual s OPEB benefits is amortized on a straight-line basis over his/her working career. For each employee, a normal cost is computed, the amount which, if accumulated during each year of employment, will at retirement be sufficient to fund the expected benefits for that individual. The sum of all the individual normal costs for all employees is called the Normal Cost. The accumulated value of all normal costs attributed to prior years, including the full value of benefits for all currently retired employees, is called the Actuarial Accrued Liability. The unfunded Actuarial Accrued Liability is amortized over a period of future years. The longest amortization period permitted under GASB 45 is 30 years. The ARC is the sum of the Normal Cost and the amortization of the unfunded Actuarial Accrued Liability. The remaining amortization period at June 30, 2012, was twenty-eight years. The actuarial assumptions included a discount rate of 5% per year and an annual healthcare cost trend rate of 4%. The discount rate is the interest rate at which future benefit obligations are discounted back to the present time. GASB 45 requires that the discount rate reflect the expected investment return on the District s investments. Required Supplementary Information (OPEB Schedule of Funding Progress) Schedule of Funding Progress - Postemployement Healthcare Plan: Actuarial Accrued UAAL as Actuarial Liability Unfunded a Percentage Actuarial Value of (AAL) AAL Funded Covered of Covered Valuation Assets Entry Age (UAAL) Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a/c)) 10/1/2010 $ - $ 4,056,331 $ 4,056, % $ 10,986, % 38

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99 REQUIRED SUPPLEMENTARY INFORMATION

100 Millbrae School District Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual (GAAP) General Fund For the Fiscal Year Ended June 30, 2012 Budgeted Amounts Variance with Final Budget Actual Positive - Original Final (GAAP Basis) (Negative) Revenues: Revenue limit sources $ 12,320,436 $ 12,667,728 $ 12,667,493 $ (235) Federal 881,800 1,110, ,216 (115,348) Other state 1,824,171 2,036,939 2,030,945 (5,994) Other local 372,655 1,048, ,781 (394,640) Total revenues 15,399,062 16,863,652 16,347,435 (516,217) Expenditures: Certificated salaries 7,727,847 7,817,288 7,783,132 34,156 Classified salaries 2,002,480 2,023,360 2,009,102 14,258 Employee benefits 3,081,641 3,016,459 2,993,774 22,685 Books and supplies 260, , , ,302 Services and other operating expenditures 2,001,337 2,796,227 2,211, ,775 Capital outlay - 14,248-14,248 Other outgo 1,116, , ,686 5,760 Transfers of indirect/direct support costs (31,209) (22,540) (30,590) 8,050 Total expenditures 16,159,568 17,256,130 16,471, ,234 Excess (deficiency) of revenues over (under) expenditures (760,506) (392,478) (124,461) 268,017 Other financing sources (uses): Transfers in 450,000 57,104 57,088 (16) Transfers out - (63,167) (53,559) 9,608 Total other financing sources (uses) 450,000 (6,063) 3,529 9,592 Changes in fund balance $ (310,506) $ (398,541) (120,932) $ 277,609 Fund balance beginning 4,570,418 Fund balance ending $ 4,449,486 39

101 SUPPLEMENTARY INFORMATION

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103 Nonmajor Governmental Funds Combining Schedules

104 Millbrae School District Combining Balance Sheet Nonmajor Funds June 30, 2012 Special Revenue Funds Capital Projects Funds Debt Service Funds Bond Deferred Capital Interest and Cafeteria Maintenance Foundation Facilities Redemption Fund Fund Fund Fund Fund Totals Assets Cash and investments $ 43,198 $ 4,860 $ 50,575 $ 380,326 $ 1,932,788 $ 2,411,747 Accounts receivable 39, ,739 3,250 47,258 Due from other funds ,800-15,800 Prepaid and other current assets 11, ,257 Total Assets $ 93,581 $ 4,889 $ 50,689 $ 400,865 $ 1,936,038 $ 2,486,062 Liabilities and Fund Balances Liabilities: Accounts payable $ 10,598 $ 4,860 $ - $ - $ - $ 15,458 Due to other funds 16, ,279-17,689 Deferred Revenue 14, ,714 Total Liabilities 41,693 4,889-1,279-47,861 Fund balances: Nonspendable: Revolving fund Inventories 11, ,257 Restricted for: Debt service ,936,038 1,936,038 Educational programs , ,689 Cafeteria programs 39, ,781 Assigned for: Capital projects , ,586 Total Fund Balances 51,888-50, ,586 1,936,038 2,438,201 Total Liabilities and Fund Balances $ 93,581 $ 4,889 $ 50,689 $ 400,865 $ 1,936,038 $ 2,486,062 40

105 Millbrae School District Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Funds For the Fiscal Year Ended June 30, 2012 Special Revenue Funds Capital Projects Funds Debt Service Funds Bond Deferred Capital Interest and Cafeteria Maintenance Foundation Facilities Redemption Fund Fund Fund Fund Fund Totals Revenues: Revenue limit sources $ 60,000 $ - $ - $ - $ - $ 60,000 Federal 255, ,621 Other state 21, ,760 30,788 Other local 341, ,255 1,987,015 2,404,070 Total revenues 678, ,255 1,996,775 2,750,479 Expenditures: Instruction Pupil services: Food services 637, ,497 General administration: All other general administration 30, ,511-35,101 Plant services 81 21,075-7,149-28,305 Debt service: Principal , ,000 Interest ,148,023 1,148,023 Total expenditures 668,168 21, ,660 1,898,023 2,599,726 Excess (deficiency) of revenues over (under) expenditures 9,959 (20,433) (120) 62,595 98, ,753 Other financing sources (uses): Transfers in Transfers out (1,279) - (1,279) Bond issuance costs (323,413) (323,413) Premium from bond issuance , ,975 Total other financing sources (uses) (1,279) 657, ,283 Changes in fund balances 9,959 (20,433) (120) 61, , ,036 Fund balances beginning 41,929 20,433 50, ,270 1,179,724 1,631,165 Fund balances ending $ 51,888 $ - $ 50,689 $ 399,586 $ 1,936,038 $ 2,438,201 41

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107 STATE AND FEDERAL AWARD COMPLIANCE SECTION

108 Millbrae School District Organization June 30, 2012 The Millbrae School District was established in 1870 in San Mateo County. There were no changes in boundaries during the current year. The District is comprised of four elementary and one middle school. The Board of Education for the fiscal year ended June 30, 2012, was comprised of the following members: Governing Board Name Office Term Expires Jay D. Price President 2015 Marjory Luxenberg Clerk/President Pro Tem 2013 D. Don Revelo Trustee 2013 Frank Barbaro Trustee 2015 Caroline Shea Trustee 2013 Administration Linda C. Luna Superintendent 42

109 Millbrae School District Schedule of Average Daily Attendance For the Fiscal Year Ended June 30, 2012 Second Period Annual Report Report Elementary: Kindergarten Grades one through three Grades four through six Grades seven and eight Special education ADA Totals 2, ,

110 Millbrae School District Schedule of Instructional Time For the Fiscal Year Ended June 30, 2012 Reduced Reduced Number Number 1982/ / / / /12 of Days of Days Actual Actual Minutes Minutes Actual Traditional Multitrack Grade Level Minutes Minutes (1) Requirements Requirements (1) Minutes Calendar Calendar Status Kindergarten 32,040 29,843 36,000 33,531 34, In Compliance Grade 1 48,950 45,593 50,400 46,944 51, In Compliance Grade 2 48,950 45,593 50,400 46,944 51, In Compliance Grade 3 48,950 45,593 50,400 46,944 51, In Compliance Grade 4 53,400 49,738 54,000 50,297 53, In Compliance Grade 5 53,400 49,738 54,000 50,297 53, In Compliance Grade 6 53,400 49,738 54,000 50,297 58, In Compliance Grade 7 56,070 52,225 54,000 50,297 58, In Compliance Grade 8 56,070 52,225 54,000 50,297 58, In Compliance Districts must maintain their instructional minutes at either the 1982/83 actual minutes or the 1986/87 requirement, whichever is greater, as required by Educational Code Section (1) Commencing in the school year and continuing through the school year, a school district, county office of ed. or charter school may reduce the equivalent of up to 7 days of instruction or the equivalent number of instructional minutes without incurring penalties set forth in Sections 41420, 46200, , 46201, 46202, and A school district, county office of ed, or charter school shall receive revenue limit funding based on the adjustments prescribed pursuant to Section whether or not it reduces the number of school days or instructional minutes. 44

111 Millbrae School District Schedule of Charter Schools June 30, 2012 This schedule is provided to list all charter schools chartered by the District and displays information for each charter school on whether or not the charter school is included in the District audit. There were no charter schools in the Millbrae School District. 45

112 Millbrae School District Schedule of Financial Trends and Analysis For the Fiscal Year Ended June 30, 2012 General Fund (Budget) (1) Revenues and other financial sources $ 16,568,950 $ 16,404,523 $ 19,040,852 $ 16,312,475 Expenditures 16,630,276 16,471,896 15,837,718 16,657,780 Other uses and transfers (out) - 53, , ,781 Total outgo 16,630,276 16,525,455 16,044,944 16,811,561 Change in fund balance $ (61,326) $ (120,932) $ 2,995,908 $ (499,086) Ending fund balance $ 4,388,160 $ 4,449,486 $ 4,570,418 $ 1,574,510 Available reserves (2) (3) $ 1,204,645 $ 519,000 $ 504,000 $ 504,347 Designated for economic uncertainty $ 499,000 $ 519,000 $ 504,000 $ 504,347 Unassigned fund balance $ 705,645 $ - $ - $ - Available reserves as a percentage of total outgo 7.24% 3.14% 3.14% 3.00% Total long-term debt $ 51,707,684 $ 52,079,958 $ 32,029,297 $ 13,765,721 Average daily attendance at P-2 2,260 2,260 2,168 2,098 Average daily attendance has increased by 162 over the past three years. The district does not anticipate any change in ADA for The general fund balance has increased by $2,874,973 over the past three years, but had an operating deficit. in two out of the last three years. For a district this size, the state recommends available reserves of at least 3% of total general fund expenditures, transfers out and other uses (total outgo). Total long-term debt has increased by $38,314,237 over the past three years. (1) Budget numbers are based on the first adopted budget of the fiscal year 2012/13 (2) Available reserves consist of all unassigned fund balances in the general fund, which includes the reserve for economic uncertainties. (3) In 2010, available reserves consisted of all undesignated fund balances and all funds designated for economic uncertainty within the general fund and special reserve fund for other than capital outlay projects. 46

113 Millbrae School District Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2012 Pass-Through Federal Entity Catalog Identifying Program Program Name Number Number Expenditures U.S. DEPARTMENT OF EDUCATION Passed Through California Department of Education Special Education Cluster IDEA Basic Local Assistance $ 379,553 IDEA Private School ISP's ,136 IDEA Preschool Local Entitlement ,025 IDEA Preschool Grants ,430 IDEA Preschool Staff Development Total Special Education Cluster 420,291 Title I, Part A Cluster Title I: Block Grant (1) ,199 Title I: ARRA (1) ,732 Total Title I, Part A Cluster 200,931 Title II Cluster Title II: Improving Teacher Quality ,557 Title II: EETT Formula Grants Title II: ARRA EETT ,833 Total Title II Cluster 50,263 Title III, Limited English Proficient Student Program ,565 Title III, Immigrant Education Program ,345 ARRA Education Jobs Fund ,821 TOTAL U.S. DEPARTMENT OF EDUCATION 995,216 U.S. DEPARTMENT OF AGRICULTURE Passed Through California Department of Education National school lunch program (1) ,620 TOTAL FEDERAL PROGRAMS $ 1,250,836 (1) Audited as major program 47

114 Millbrae School District Reconciliation of Annual Financial and Budget Report (SACS) to the Audited Financial Statements For the Fiscal Year Ended June 30, 2012 Special Reserve for Other General Building Capital Projects Governmental Fund Fund Fund Funds June 30, 2012 Annual Financial and Budget Report Fund Balances $ 1,349,802 $ 18,875,752 $ 14,404,203 $ 5,537,885 Adjustments and Reclassifications: Special Reserve Fund for Other Than Capital Outlay: Cash with County Treasury 3,109, (3,109,191) Accounts Receivable 7, (7,018) Due to Other Funds (16,525) ,525 June 30, 2012 Audited Financial Statements Fund Balances $ 4,449,486 $ 18,875,752 $ 14,404,203 $ 2,438,201 48

115 Section (a)(3)(c) Disclosure Millbrae School District Excess Sick Leave For the Fiscal Year Ended June 30, 2012 The District does not provide more than 12 sick leave days in a school year to any group of employees who are CalSTRS members. 49

116 1. PURPOSE OF SCHEDULES A. Schedule of Average Daily Attendance Millbrae School District Notes to Supplementary Information For the Fiscal Year Ended June 30, 2012 Average daily attendance is a measurement of the number of pupils attending classes in the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments in state funds are made to school Districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. B. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through C. Schedule of Financial Trends and Analysis This schedule discloses the District s financial trends by displaying past years data along with current year budget information. These financial trend disclosures are used to evaluate the District s ability to continue as a going concern for a reasonable period of time. D. Schedule of Expenditures of Federal Awards OMB Circular A-133 requires a disclosure of the financial activities of all federally funded programs. This schedule was prepared to comply with OMB Circular A-133 requirements. E. Reconciliation of Annual Financial and Budget Report with Audited Financial Statements This schedule provides the information necessary to reconcile the fund balances of all funds reported on the SACS report to the audited financial statements. F. Schedule of Excess Sick Leave This schedule provides information on whether the District grants excess sick leave, as that term is defined in subdivision (c) of Education Code Section , to employees who are members of the California State Teachers Retirement System. 50

117 Millbrae School District Notes to Supplementary Information For the Fiscal Year Ended June 30, RESULTS OF RECONCILIATIONS OF EXPENDITURES PER SCHEDULE OF GRANT ACTIVITY WITH THE DISTRICT S ACCOUNTING SYSTEM There were no material unreconciled differences between the District s records and the Schedule of Federal Grant Activity as shown on the Schedule of Expenditures of Federal Awards. 3. BASIS OF PRESENTATION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS The accompanying schedule of expenditures of federal awards includes the federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. 4. EARLY RETIREMENT INCENTIVE PROGRAM The District has not adopted an early retirement incentive program, pursuant to Education Code Sections and 44929, whereby the service credit to eligible employees is increased to two years. 51

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119 OTHER INDEPENDENT AUDITOR S REPORTS

120 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Trustees Millbrae School District Millbrae, California We have audited the basic financial statements of Millbrae School District as of and for the year ended June 30, 2012, and have issued our report thereon dated November 5, We conducted our audit in accordance with generally accepted auditing standards 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 Management of the District is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered Millbrae School District's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Millbrae School District s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of Millbrae School 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 and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. 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. However, we identified certain deficiencies in internal control over financial reporting, described in the accompanying schedule of findings and questioned costs as item /30000, that we consider to be significant deficiencies in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance Compliance and Other Matters As part of obtaining reasonable assurance about whether Millbrae School District's financial statements are free of material misstatement, we performed tests of its compliance with certain 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

121 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. The District s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the District s response and, accordingly, we express no opinion on them. This report is intended for the information of the Board, management, 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. November 5, 2012 San Jose, California 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

122 INDEPENDENT AUDITOR S 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 Board of Trustees Millbrae School District Millbrae, California Compliance We have audited Millbrae School District s compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of Millbrae School District s major federal programs for the year ended June 30, Millbrae School District s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of Millbrae School District s management. Our responsibility is to express an opinion on Millbrae School 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 Millbrae School District s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Millbrae School District s compliance with those requirements. In our opinion, Millbrae School District complied, in all material respects, with the compliance 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, Internal Control over Compliance Management of Millbrae School District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered Millbrae School 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 Millbrae School District s internal control over compliance Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

123 A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. 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 Board, management, 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. November 5, 2012 Campbell, California 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

124 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE DIRECT AND MATERIAL EFFECT ON STATE PROGRAMS Board of Trustees Millbrae School District Millbrae, California We have audited Millbrae School District's compliance with the types of compliance requirements described in the Standards and Procedures for Audits of California K-12 Local Education Agencies , published by the Education Audit Appeals Panel that could have a direct and material effect on each of Millbrae School District's State programs for the year ended June 30, Compliance with the applicable requirements is the responsibility of Millbrae School District's management. Our responsibility is to express an opinion on the District's compliance with the applicable requirements based on our compliance audit. We conducted our compliance audit in accordance with auditing standards generally accepted in the United States of America; the standards for financial and compliance audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Standards and Procedures for Audits of California K-12 Local Education Agencies , published by the Education Audit Appeals Panel. Those standards require that we plan and perform the compliance 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 State program occurred. The compliance audit includes examining, on a test basis, evidence about Millbrae School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our compliance audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Millbrae School District's compliance with those requirements. In connection with the compliance audit referred to above, we selected and tested transactions and records to determine the District's compliance with the state laws and regulations applicable to the following items: Procedures in the Procedures Description Audit Guide Performed Attendance Reporting 6 6 Teacher Certification and Missassignments 3 3 Kindergarten Continuance 3 3 Independent Study 23 None Continuation Education 10 None Instructional Time: School Districts 6 6 County Offices of Education 3 Not applicable Instructional Materials - General Requirements 8 8 Ratios of Administrative Employees to Teachers 1 1 Classroom Teacher Salaries Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

125 Procedures in the Procedures Description Audit Guide Performed Early Retirement Incentive 4 Not applicable Gann Limit Calculation 1 1 School Accountability Report Card 3 3 Public Hearing Requirements - Receipt of Funds 1 1 Juvenile Courts 8 Not applicable Exclusion of Pupils - Pertussis Immunization 2 2 Class Size Reduction: General Requirements 7 7 Option One 3 3 Option Two 4 Not applicable Districts or Charter Schools with Only One School Serving K-3 4 Not applicable After School Education and Safety Program: General Requirements 4 4 After School 5 5 Before School 6 6 Charter Schools: Contemporaneous Records of Attendance 3 Not applicable Mode of Instruction 1 Not applicable Nonclassroom-Based Instruction/Independent Study 15 Not applicable Determination of Funding for Nonclassroom-Based Instruction 3 Not applicable Annual Instructional Minutes - Classroom Based 4 Not applicable We did not perform the audit procedures for Continuation Education and Full-time Independent Study programs because the ADA was under the level that requires testing. In our opinion, Millbrae School District complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on State Programs for the fiscal year ended June 30, This report is intended solely for the information and use of the District Board, management, State Controller's Office, Department of Finance, Department of Education and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. November 5, 2012 San Jose, California 1475 Saratoga Ave, Suite 180, San Jose, CA Tel: E-Fax: info@cnallp.com

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127 FINDINGS AND RECOMMENDATIONS

128 Millbrae School District Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2012 Section 1 - Summary of Auditor's Results Financial Statements Type of auditor's report issued Unqualified Internal control over financial reporting: Material weaknesses? Yes x No Significant deficiencies identified not considered to be material weaknesses? x Yes No Non-compliance material to financial statements noted? Yes x No Federal Awards Internal control over major programs: Material weaknesses? Yes x No Significant deficiencies identified not considered to be material weaknesses? Yes x No Type of auditor's report issued on compliance over major programs Unqualified Any audit findings disclosed that are required to be reported in accordance with Circular A-133 Section.510(a) Yes x No Identification of Major Programs: CFDA Numbers Name of Federal Program Title I: Block Grant Title I: ARRA National School Lunch Program Dollar threshold used to distinguish between type A and type B programs: $ 300,000 Auditee qualified as low risk auditee? x Yes No State Awards Internal control over state programs: Material weaknesses? Yes x No Significant deficiencies identified not considered to be material weaknesses? Yes x No Type of auditor's report issued on compliance over state programs: Unqualified 58

129 Section II - Financial Statement Findings Millbrae School District Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2012 Deficiency / I-9 Filing Requirement and Human Resources Criteria: Employers have certain responsibilities under immigration law during the hiring process. The employer sanctions provisions, found in section 274A of the Immigration and Nationality Act (INA), were added by the Immigration Reform and Control Act of 1986 (IRCA). These provisions further changed with the passage of the Immigration Act of 1990 and the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA) of The verification of employment status is required by Unites States Citizenship and Immigration Services (USCIS). Employers are required to verify the identity and employment authorization of each person hired after Nov. 6, In addition, employers are required to complete and retain a Form I-9 for each employee required to complete the form. Form I-9 is required to be fully completed and kept in employee files to document the verification was completed. Condition: During the audit, we inspected documents and inquired about personnel files in human resources for certificated and classified employees and found that the employer portion of the I-9 was incomplete and not signed in 13 of the 25 samples we selected for testing. Questioned Costs: None Effect: Employers who violate the INA and IRCA may be subject to civil fines ($110 per form for the first offense) and criminal penalties (when there is a pattern or practice of violations). Cause: Staffing over human resources was insufficient to provide systematic control over the completion of Form I-9. In addition, control checklists used to ensure compliance with state and federal hiring laws were not fully utilized. Recommendation: We recommend that the District commit at least one half (.5) of a full time equivalent employee to assist management with processing new hires and maintaining employee files. District Response: In the current fiscal environment it is not possible to hire additional staff for the Human Resources department. We are planning to do a workload analysis of the clerical employees in the District Office to see if the existing staff can provide more assistance to HR. Copies of the personnel action forms are now retained in the personnel folder. I-9 forms will be fully completed during the hiring interview. Section III - Federal Award Findings and Questioned Costs None Section IV - State Award Findings and Questioned Costs None 59

130 Section II - Financial Statement Findings None Millbrae School District Schedule of Prior Year Findings and Recommendations For the Fiscal Year Ended June 30, 2012 Section III - Federal Award Findings and Questioned Costs None Section IV - State Award Findings and Questioned Costs None * * * The audit staff wishes to express their thanks and appreciation for the help and cooperation of the District office staff during the course of our audit. 60

131 APPENDIX C PROPOSED FORM OF OPINION OF BOND COUNSEL [Delivery Date] Board of Education Millbrae School District Millbrae, California Millbrae School District General Obligation Bonds (Election of 2011, Series 2013) (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the Millbrae School District (the District ), which is located in the County of San Mateo, California (the County ), in connection with the issuance by the District of $10,000,000 aggregate principal amount of bonds designated as Millbrae School District General Obligation Bonds (Election of 2011, Series 2013) (the Bonds ), representing a portion of the $30,000,000 of bonds authorized at an election held in the District on November 8, The Bonds are issued under and pursuant to a paying agent agreement (the Paying Agent Agreement ), dated as of December 1, 2013, by and between the District and The Bank of New York Mellon Trust Company, N.A, and Resolution No , adopted by the District on October 15, 2013 (the Resolution ). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Paying Agent Agreement. In such connection, we have reviewed the Paying Agent Agreement, the Resolution, the resolution of the County adopted on November 5, 2013 (the County Resolution ), the tax certificate for the Bonds of the District, dated the date hereof (the Tax Certificate ), certificates of the District, the Paying Agent, the County and others, and such other documents and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Paying Agent Agreement, the Resolution, the County Resolution and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Paying Agent Agreement, the Resolution, the County Resolution and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations C-1

132 on legal remedies against school districts and counties in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), arbitration, judicial reference, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the documents mentioned in the preceding sentence. Our services did not include financial or other non legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing and in reliance thereon, as of the date hereof, we are of the following opinions: the District. The Bonds constitute valid and binding obligations of the District. The Resolution has been duly and legally adopted and constitutes a valid and binding obligation of 3. The Paying Agent Agreement has been duly and legally executed and delivered by, and constitutes a valid and binding obligation of, the District. 4. The Board of Supervisors of the County has power and is obligated to levy ad valorem taxes without limitation as to rate or amount upon all property within the District s boundaries subject to taxation by the District (except certain personal property which is taxable at limited rates) for the payment of the Bonds and the interest thereon. 5. Interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from the State of California personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP per C-2

133 APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the Disclosure Certificate ) is executed and delivered by the Millbrae School District (the District ) in connection with the issuance of $10,000,000 aggregate principal amount of Millbrae School District General Obligation Bonds (Election of 2011, Series 2013) (the Bonds ). The Bonds are being issued as authorized by a resolution adopted by the Board of Education of the District on October 15, 2013 and in accordance with the terms of a Paying Agent Agreement, dated as of December 1, 2013 (the Paying Agent Agreement ), by and between the District and The Bank of New York Mellon Trust Company, N.A., as Paying Agent (the Paying Agent ). The District covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). SECTION 2. Definitions. In addition to the definitions set forth in the Paying Agent Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. Beneficial Owner shall mean any person who has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). Dissemination Agent shall mean the District, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. Holder shall mean the person in whose name any Bond shall be registered. Listed Events shall mean any of the events listed in Section 5(a) or (b) of this Disclosure Certificate. MSRB shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB currently located at Participating Underwriter shall mean the original underwriter of the Bonds required to comply with the Rule in connection with offering of the Bonds. Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. SECTION 3. Provision of Annual Reports. (a) The District shall, or shall cause the Dissemination Agent to, not later than nine months after the end of the District s fiscal year (presently June 30), commencing with the Annual Report for the fiscal year of the District ending June 30, 2013 (which is due no later than April 1, 2014), provide to the Participating Underwriter and the MSRB an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. Each Annual Report must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB, and may include by reference other information as provided in Section 4 D-1

134 of this Disclosure Certificate; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. Neither the Paying Agent nor the Dissemination Agent shall have any duties or responsibilities with respect to the contents of the Annual Report. If the District s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5. (b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the District shall provide the Annual Report to the Dissemination Agent and the Paying Agent (if the Paying Agent is not the Dissemination Agent). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the District and the Paying Agent to determine if the District is in compliance with the first sentence of this subsection (b). (c) If the Paying Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Paying Agent shall send a notice, in electronic format, to the MSRB, such notice to be in substantially the form attached as Exhibit A. (d) If the Annual Report is delivered to the Dissemination Agent for filing, the Dissemination Agent shall file a report with the District and (if the Dissemination Agent is not the Paying Agent) the Paying Agent certifying that the Annual Report has been provided pursuant to this Disclosure Agreement and stating the date it was provided. SECTION 4. reference the following: Content of Annual Reports. The District s Annual Report shall contain or include by Audited financial statements of the District for the preceding fiscal year, prepared in accordance with the laws of the State of California and including all statements and information prescribed for inclusion therein by the Controller of the State of California. If the District s audited financial statements are not available by the time the Annual Report is required to be provided to the MSRB pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be provided to the MSRB in the same manner as the Annual Report when they become available. To the extent not included in the audited financial statement of the District, the Annual Report shall also include the following: Adopted budget of the District for the current fiscal year, or a summary thereof, and any interim budget reports approved as of the date of filing of the Annual Report. District average daily attendance. District outstanding debt. Information regarding total assessed valuation of taxable properties within the District, if and to the extent provided to the District by the County. Information regarding total secured tax charges and delinquencies on taxable properties within the District, if and to the extent provided to the District by the County. 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 District or related public entities, which have been submitted to the MSRB through the EMMA System. The District shall clearly identify each such other document so included by reference. D-2

135 SECTION 5. Reporting of Significant Events. (a) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds not later than ten business days after the occurrence of the event: 1. Principal and interest payment delinquencies; 2. Unscheduled draws on debt service reserves reflecting financial difficulties; 3. Unscheduled draws on credit enhancements reflecting financial difficulties; 4. Substitution of credit or liquidity providers, or their failure to perform; 5. Adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); 6. Tender offers; 7. Defeasances; 8. Rating changes; or 9. Bankruptcy, insolvency, receivership or similar event of the obligated person. Note: for the purposes of the event identified in subparagraph (9), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material, not later than ten business days after the occurrence of the event: 1. Unless described in paragraph 5(a)(5), other material notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; 2. Modifications to rights of Bond holders; 3. Optional, unscheduled or contingent Bond calls; 4. Release, substitution, or sale of property securing repayment of the Bonds; 5. Non-payment related defaults; 6. 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; or D-3

136 7. Appointment of a successor or additional paying agent or the change of name of a paying agent. (c) The District shall give, or cause to be given, in a timely manner, notice of a failure to provide the annual financial information on or before the date specified in Section 3, as provided in Section 3(b). (d) Whenever the District obtains knowledge of the occurrence of a Listed Event described in Section 5(b), the District shall determine if such event would be material under applicable federal securities laws. (e) If the District learns of the occurrence of a Listed Event described in Section 5(a), or determines that knowledge of a Listed Event described in Section 5(b) would be material under applicable federal securities laws, the District shall within ten business days of occurrence file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsection (b)(3) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Paying Agent Agreement. SECTION 6. Termination of Reporting Obligation. The District s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior prepayment or payment in full of all of the Bonds. If such termination occurs prior to the final principal payment date of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(e). SECTION 7. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall be the District. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) the undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the District shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(e), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. D-3

137 SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate; provided that any such action may be instituted only in Superior Court of the State of California in and for the County of San Mateo or in U.S. District Court in or nearest to the County. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Paying Agent Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance. SECTION 11. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. Date:, 2013 MILLBRAE SCHOOL DISTRICT By: Authorized Officer D-3

138 EXHIBIT A FORM OF NOTICE TO THE MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: MILLBRAE SCHOOL DISTRICT Name of Issue: MILLBRAE SCHOOL DISTRICT GENERAL OBLIGATION BONDS (ELECTION OF 2011, SERIES 2013) Date of Issuance: December 11, 2013 NOTICE IS HEREBY GIVEN that the Millbrae School District (the District ) has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of its Continuing Disclosure Certificate, dated the Date of Issuance. [The District anticipates that the Annual Report will be filed by.] Dated:, 2013 MILLBRAE SCHOOL DISTRICT D-6

139 APPENDIX E SAN MATEO COUNTY INVESTMENT POLICIES AND PRACTICES AND INVESTMENT REPORTS DESCRIPTION OF INVESTMENT POOL The following information has been furnished by the Office of the Treasurer-Tax Collector, County of San Mateo. It describes (i) the policies applicable to investment of District funds, including bond proceeds and tax levies, and funds of other agencies held by the County Treasurer and (ii) the composition, carrying amount, market value and other information relating to the investment pool. Further information may be obtained directly from the Treasurer-Tax Collector, 555 County Center, 1st Floor, Redwood City, CA SAN MATEO COUNTY STATEMENT OF INVESTMENT POLICY See following page. E-1

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141 SAN MATEO COUNTY Investment Policy Statement Calendar Year 2013 Approved by the San Mateo County Board of Supervisors Date: May 7, 2013 Resolution #072512

142 Table of Contents I. Introduction... 1 II. Delegation of Authority. 1 III. Policy Statement.. 1 IV. Standard of Care.. 1 V. Investment Objectives. 2 A. Safety of Principal.. 2 B. Liquidity. 2 C. Yield... 3 VI. Management Style and Strategy 3 VII. Authorized Investments.. 3 A. U.S. Treasury Securities... 4 B. U.S. Government Agency/GSE... 4 C. Commercial Paper... 4 D. Negotiable Certificates of Deposit 4 E. Bankers Acceptance. 4 F. Certificates of Deposit.. 5 G. Asset Backed Securities.. 5 H. Corporate Securities 5 I. Repurchase Agreements... 6 J. Local Agency Investment Fund (LAIF).. 6 K. Registered Warrants. 6 L. Mutual Funds 7 VIII. Security Lending.. 7 A. Borrowers Default Risk.. 8 B. Collateral Investment Risk... 8 C. Operational Risk.. 8 Schedule 1 Securities Lending. 8 IX. Community Reinvestment Act Program... 9 X. Diversification and Maturity Restrictions... 9 XI. Average Life 11 XII. Prohibited Transactions.. 11 [i]

143 XIII. Method of Accounting. 12 XIV. Safekeeping XV. Performance Evaluation.. 13 XVI. Withdrawal Requests for Pool Participants. 13 XVII. Internal Controls.. 14 A. Investment Authority and Responsibility B. County Treasury Oversight Committee C. Reporting.. 15 D. Annual Audit of Compliance 15 E. Pool Rating F. External Investment Advisor. 16 G. Loss Control H. Credit Quality. 16 I. Approved Brokers J. Transaction Settlement.. 17 K. Internal Controls.. 17 XVIII. Execution of Investment Authority 17 XIX. Disaster Recovery XX. Ethics and Conflict of Interest. 19 XXI. Limits on Honoraria, Gifts and Gratuities 20 Comparison and Interpretation of Credit Ratings 20 Glossary of Terms. 22 [ii]

144 SAN MATEO COUNTY Investment Policy Statement Calendar Year 2013 I. Introduction It is the policy of the San Mateo County Treasurer to invest public funds in a manner which will provide maximum security of principal invested with secondary emphasis on providing adequate liquidity to pool participants, achieving the highest yield while conforming to all applicable statutes and resolutions governing the investment of public funds. To meet liquidity and long term investing needs, the County has established the County Investment Pool. This fund is suitable for planned expenditures or capital funds. II. Delegation of Authority By Resolution #072511, effective May 7, 2013, the County Board of Supervisors has delegated to the Treasurer authority to invest and reinvest the funds of the County and other depositors as specified in California Government Code Sections and for the period calendar year The Treasurer may delegate investment authority to such persons within the Treasurer s Department as deemed appropriate. III. Policy Statement This Investment Policy establishes cash management and investment guidelines for the Treasurer, and those to whom he/she delegates investment authority, who are responsible for the stewardship of the San Mateo County Pooled Investment Fund. Each transaction and the entire portfolio must comply with California Government Code and this Policy. All portfolio activities will be monitored and judged by the standards of this Policy and its investment objectives. Activities that violate its spirit and intent will be considered contrary to policy. The Treasurer will annually render to the Board of Supervisors and any Oversight Committee a statement of investment policy, which the Board shall review and approve at a public meeting. Any change in the policy shall also be reviewed and approved by the Board at a public meeting. IV. Standard of Care The Treasurer is a fiduciary of the pooled investment fund and therefore subject to the prudent investor standard. The Treasurer, employees involved in the investment process and members of the San Mateo County Treasury Oversight Committee shall refrain from all personal business activities that could conflict with the management of the investment program. Page 1

145 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 All individuals involved will be required to report all gifts and income in accordance with California state law. (See Section XXI) When investing, reinvesting, purchasing, acquiring, exchanging, selling and managing public funds, the Treasurer, and those to whom he/she delegates investment authority, shall act with due professional care, skill, prudence and diligence taking into consideration circumstances then prevailing, including, but limited to, general economic conditions and anticipated needs of the County and other depositors. This should be accomplished with the care that a prudent person acting in a like capacity would use to safeguard the principal and maintain the liquidity needs of the County and other depositors. As outlined in the California Government Code Section , the standard of prudence to be used by the County investment officers shall be the prudent investor standard and shall be applied in the context of managing the portfolio. Investment officers shall act in accordance with written procedures and the investment policy, exercise due diligence, report in a timely fashion, and implement appropriate controls for adverse development. V. Investment Objectives The San Mateo County Pool shall be prudently invested in order to preserve principal while earning a reasonable rate of return while awaiting application for governmental purposes. Investments should be made with precision and care considering the safety of the principal investment, as well as the income to be derived from the investment. The specific objectives for the program are ranked in order of importance: A. Safety of Principal - The Treasurer shall seek to preserve principal and minimize capital losses by mitigating credit risk and market risk as follows: Credit Risk - Defined as an issuer(s) ability and willingness to repay interest and principal. Credit risk shall be minimized by diversifying the fund among issues and issuers so that the failure of any one issue or issuer would not result in a significant loss of income or principal to participants. Credit rating evaluations for all securities are monitored on a consistent basis. Market Risk - Defined as the risk of market value fluctuations due to changes in the general level of interest rates. Because longer-term securities generally have greater market risk than shorter-term securities; market risk will be minimized by establishing the maximum Weighted Average Maturity of the pool at three years. The maximum allowable maturity for any instrument in the pool at time of purchase is 7 years (Treasuries and Agencies only). Occasional market losses on individual securities are inevitable with active portfolio management and must be considered within the context of the overall investment return. B. Liquidity The Treasurer s Office attempts to match maturities with its 15 month projected cash flow. The nature of the planning process behind the cash flow of the pool is relatively predictable and less volatile than is the case of discretionary money. Page 2

146 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 C. Yield This allows leeway for some of the underlying investments in the County Pool to maintain a somewhat longer duration. The County Pool is designed as an income fund to maximize the return on investable funds over various market cycles, consistent with the pool s first priority of safeguarding principal. Yield will be considered only after the basic requirements of safety and liquidity have been met. The County Pool is managed as an income fund whose purpose is to provide its investors with a reasonably predictable level of income, as opposed to a growth fund or fund measured on the basis of total return. VI. Management Style and Strategy This policy describes the County s strategic investment objective, risk tolerance and investment constraints. The County Treasurer or designee, at the Treasurer s discretion, prepares an economic outlook and evaluates the capital markets environment. The investment programs reflect a common strategy that is based on conservative principles of fixed income portfolio management consistently applied in a disciplined fashion. VII. Authorized Investments Subject to the limitations set forth in California Government Code et seq. which may be amended from time to time, the Treasurer may invest in the following instruments, subject to the limits described in the following sections. Long-term credit ratings, where shown, specify the minimum credit rating category required at time of purchase without regard to modifiers (e.g. +/- or 1,2,3) if any. As noted previously, all securities purchased shall be regularly monitored and re-evaluated should their ratings be downgraded below the minimum investment grade level required of the Pool. The Treasury Oversight Committee will be notified, within 10 days of any security downgrades that fall below the pool s investment standards and the course of action to be taken if any. In addition the information will be posted on the Treasurer s website within the same time frame. Decisions regarding the holding of, or the potential sale of, securities are based on factors such as remaining time to maturity and the need for liquidity in the Pool. Where a percentage limitation of eligible security percentages and maximum maturity is established, for the purpose of determining investment compliance, that maximum amount will be applied on the date of trade settlement. Therefore, depending on the liquidation of other securities and the performance of other securities in the pool, the percentage of the pool of any given security or instrument could exceed the initial percentage limitations without violating the Investment Policy. Page 3

147 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 A. U.S. Treasury Securities United States Treasury bills, notes, bond or certificates of indebtedness, for which the full faith and credit of the United States is pledged for the payment of principal and interest. The maximum maturity of U.S. Treasury Securities is 7 years. B. U.S. Government Agency/GSE (Government Sponsored Enterprise) Obligations, participations, or other instruments of, or issued by, a federal agency or a United States government sponsored enterprise. The maximum percent of the fund per issuer is 40%. The maximum percent of the fund for U.S. Agencies Callables Securities is 25%. U.S. Government Agency/GSE securities must be rated AA, long-term, or A-1, Short-term, or better by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch). The maximum maturity for Agency Securities is 7 years. C. Commercial Paper At the time of purchase, commercial paper must be rated either A-1/P-1/F1 or better by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch) and a long term rating of single A or better when applicable. Eligibility is limited to U.S. organized and operating corporations. Corporations must have assets in excess of $5 Billion, and have an A rating or better on the issuer s debt other than commercial paper by at least two of the three nationally recognized rating services. Maturities may not exceed 270 days. Purchases of commercial paper will not exceed 40% of the pool s investable money. D. Negotiable Certificates of Deposit Negotiable certificates are negotiable money market instruments that trade on the open market. At the time of purchase, negotiable certificates of deposit must be rated either A-1/P-1/F1 or better by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch) and a long term rating of single A or better when applicable. These certificates must be issued by a U.S. National or State chartered bank or state or federal association (as defined by section 5102 of the California Financial Code) or by a state licensed branch of a foreign bank. Eligible foreign banks must have branches or agencies in the U.S. Issuers must be a corporation with total assets in excess of $5 Billion. Purchases of Negotiable Certificates of Deposit will not exceed 30% of the pool. E. Bankers Acceptance A Bankers Acceptance (BA) is a draft drawn and accepted by banks that is based upon funds that will pay its face value at maturity. The security is normally traded at a discounted price. Because the accepting institution is obligated to pay for the bill, a Bankers Acceptance is considered less risky than commercial paper. Page 4

148 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 At the time of purchase, BAs must be rated A-1/P-1/F1 or better by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch) and a long term rating of single A or better if applicable. BAs are primarily used to finance international trade. BAs are timed drafts (bills of exchange) drawn on and accepted by a commercial bank Issuers must be a corporation with total assets in excess of $5 Billion. Purchases of Bankers Acceptances will not exceed 15% of the pool for domestic commercial banks and 15% of the pool for foreign commercial banks. F. Certificates of Deposit Collateralized Certificates of Deposit must comply with Bank Deposit Law. Purchases of Collateralized Certificates of Deposit will not exceed 15% of the pool. G. Asset Backed Securities The issuer of these securities must be rated AAA by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch). Securities shall have a maximum remaining maturity of five years. Purchases of Asset Backed Securities will not exceed 20% of the pool. The allowable types of Asset Backed Securities include the following: 1. U.S. Government Agency Mortgage pass-through securities. 2. Collateralized Mortgage Obligations (CMO) where the underlying mortgages have U.S. government backing. 3. Equipment lease back certificates. 4. Consumer receivable backed bonds. 5. Auto loan receivable backed bonds. H. Corporate Securities The maximum maturity for corporate securities is five years. Eligible securities shall be issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. At the time of purchase, corporate securities must be rated A or better by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch). Securities in this classification must be dollar denominated and registered with the Securities and Exchange Commission and be publicly traded or at least have undergone shelf registration. If a security is owned and downgraded below the pool s investment standards, the Treasury Oversight Committee will be notified within 10 days of any security downgrades that fall below the pool s investment standards and the course of action to be taken if any. In addition, the information will be posted on the Treasurer s website within the same time frame. Purchases of Corporate Securities shall not exceed 30% of the pool. At the time of purchase, a maximum of 25% of the entire core position of 30% can be rated single A. The remaining 75% must be AA rated or higher. There is a 5% limitation Page 5

149 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 of the fund in any single issuer of Corporate Securities, however, the Pool has a target of holding no more than 3%. The 3% target may be exceeded under exceptional circumstances. (i.e.: peak tax collection periods, G.O. Bond issuances, etc.) when there is a large influx of cash. I. Repurchase Agreements Repurchase Agreements must be executed with dealers with whom the County has written agreements and are either banking institutions that meet the rating requirements of this policy or dealers who report to the Market Reports Division of the Federal Reserve Bank of N.Y. (Primary Dealers). All transactions must be collateralized at 102% of current value plus accrued interest and must be marked to market daily. The only acceptable collateral for these transactions include Treasuries or Agencies with a maximum maturity of seven years. For purposes of this authorized investments section, the term Repurchase Agreement means a purchase of a security by the County pursuant to an agreement by which the seller will repurchase the securities on or before a specified date and for a specified dollar amount and will deliver the underlying securities to the County by book entry. All County pool transactions are conducted through the County custodian on a payment vs. delivery basis. When the transaction is unwound, the transfer of the underlying securities will revert to the counter party s bank account by book entry. The term Counter party means the other party to the transaction with the County. The Counter Party, or its parent, must have a short-term rating of A-1, P-1 or F1 by at least two of the three nationally recognized rating services (S&P, Moody s and Fitch). The maximum allowable term of a repurchase agreement shall not exceed 92 days. J. Local Agency Investment Fund (LAIF) The Local Agency Investment Fund (LAIF) is an investment fund run by the Treasurer of the State of California to pool local agency monies. LAIF will be used as a comparative fund to the County s pool. The maximum percent of the fund that can be invested is up to the current State limit. K. Registered Warrants In accordance with Government Code All registered warrants issued by the state are legal investments for all: 1. Trust funds. 2. Funds of all insurers. 3. Funds of savings and loan associations. 4. Funds of all banks, including any legal combination of commercial banks, savings banks and trust companies. 5. Funds of all counties, municipal corporations, districts, public corporations, political subdivisions, or state agencies. Page 6

150 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 L. Mutual Funds Shares of beneficial interest issued by diversified management companies as defined in Government Code Section Purchases of Mutual Funds will not exceed 10%. VIII. Security Lending Security Lending is a temporary exchange of portfolio assets for acceptable collateral between a lender and an approved borrower. The additional income generated from this transaction can be used to enhance portfolio performance. This process can be summarized in three key steps: A. The Security Lending agent lends securities from our portfolio to an approved borrower at a negotiated rate. The negotiated rate is dependent upon the level of demand for the securities. B. The Security Lending agent invests the cash collateral in highly liquid, short duration, high credit quality instruments approved by our investment policy. C. The earnings generated net of rebates from these transactions are split between the third party agent and the County based on the contract agreement. Our contract with The Bank of New York requires daily reporting of the securities borrowed, the borrowers, and the short term investments made with the collateral. The County retains the right to recall securities at any given time; cutoffs are 9:30 a.m. eastern standard time for same day recalls of treasuries/agencies and 1:30 p.m. eastern standard time on trade date for corporates. We also require acknowledgement of the County Investment Policy, and check the adherence to that policy daily. All securities purchased with any funds received as a result of such lending shall be regularly monitored and re-evaluated. Should their ratings fall below the pool s investment standards, the Treasury Oversight Committee will be notified within 10 days of any security downgrades that fall below the pool s investment standards and the course of action if any. In addition the information will be posted on the Treasurer s website within the same time frame. Additionally, the percentage of the Fund s market value in any one issuer s securities shall be regularly monitored and the Treasury Oversight Committee will be notified within 10 days, and the information posted on the Treasurer s website, of any instances where the percentage of the Fund s market value in any one issuer s securities exceeds the percentage limitations set forth herein or where there is any change in diversification and the course of action, if any. There are always risks in any financial transaction. The three most common risks in Security Lending are as follows: Page 7

151 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 A. Borrower Default Risk Although rare, a borrower may not return a security in a timely manner. To protect against this risk, we require 102% cash collateral, which is marked to market and monitored daily. In the event of borrower default, the Security Lending agent is responsible for replacing the securities or providing the cash value of the securities. In other words, The Bank of New York indemnifies the County of San Mateo against borrower default. B. Collateral Investment Risk The value of the securities in which we invest the cash collateral may decline due to fluctuations in interest rates or other market related events. This risk is controlled by investing in a huge investment pool with highly liquid short duration, high credit quality instruments identified in this investment policy. C. Operational Risks critical operations, such as maintaining the value of the collateral, collecting interest and dividend payments are essential to a smooth running Security Lending operation. Operational risks are the responsibility of the Security Lending agent. We further mitigate this risk by reviewing all transactions and collateral requirements on a daily basis. Schedule 1 Securities Lending Securities Loans No more than 5% of the Pool can be on loan to any single counterparty. A single loan shall not exceed 3% of the total portfolio. The maximum maturity of a securities loan shall not exceed 92 days. Collateral Acceptable Collateral U.S. Treasuries and Agencies and cash Collateral Investment The only authorized investments are shown in the following table. No floating or reset notes are permitted. Fund means actual market value of all securities lending collateral. INSTRUMENT RATING LIMITATIONS % of % of Fund per Maturity Fund Issuer U.S. Treasury Obligations % 1 year Obligations of U.S. Agencies or government sponsored AA or A % per issuer 1 year enterprises Repurchase agreements secured by U.S. Treasury or agency obligation (102% collateral) A % overnight Bankers Acceptances Domestic A-1 / P-1/ Foreign F1 15 5% Aggregate 180 days 15 5% Aggregate 180 days Commercial paper A-1 / P-1 / F1 40 5% Aggregate 270 days or less Page 8

152 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 Other Agent Qualifications The only acceptable Agent is the Pool s custodian bank. Contract Provisions The Agent must indemnify the Pool against borrower default. The Agent must acknowledge and accept the Policy in writing. A copy of this acceptance will be attached to future policies. The Agent must submit monthly reports showing securities out on loan (terms and borrowers), defaults, earnings, and the percent by sector of Pool assets out on loan as well as information on the collateral investments (including market values, income and realized and unrealized gains and losses). Oversight The Treasurer shall include copies of the Agent s most recent report with his reports to the Treasury Oversight Committee. IX. Community Reinvestment Act Program A. This policy sets aside up to $5 million dollars for investment in banks whose primary operations are located in San Mateo County. Investments from this fund must meet the requirements of this investment policy. Eligible banks must have Community Reinvestment Act performance ratings of satisfactory or outstanding from each financial institution s regulatory authority. In addition, deposits greater than the federally-insured amount must be collateralized. Banks must place securities worth between 110% and 150% of the value of the deposit with a custodial bank. X. Diversification and Maturity Restrictions It is the policy of the Treasurer to diversify the Fund s portfolios. Investments are diversified to minimize the risk of loss resulting in over concentration of assets in a specific maturity, specific issuer or a specific class of securities. Diversification strategies shall be established by the Treasurer and Assistant Treasurer. INSTRUMENT RATING % of Fund LIMITATIONS % of Fund per Issuer Maturity U.S. Treasury Obligations 100% 100% 7 years Obligations of U.S. Agencies or government sponsored enterprises AA or A-1 100% 40% 7 years U.S. Agencies Callables AA 25% 7 years Page 9

153 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 INSTRUMENT RATING % of Fund Bankers Acceptances *Domestic: ($5 billion minimum assets) *Foreign: ($5 billion minimum assets) Collateralized Time Deposits within the state of CALIFORNIA Negotiable Certificates of Deposit ($5 billion minimum assets) Commercial paper Repurchase Agreements secured by U.S. Treasury or agency obligation (102% collateral) A-1 / P-1/ F1 15% 15% A-1/P-1/ F1 A-1/P-1/ F1 LIMITATIONS % of Fund per Issuer 5% Aggregate 5% Aggregate Maturity 180 days 180 days 15% 5% Aggregate 1 year 30% 5% Aggregate 5 years A-1/P-1/ F1 40% 5% Aggregate 270 days or less See limitations 92 days for Treasuries A-1 100% and Agencies above Corporate bonds, Medium Term Notes & Covered Bonds (two agencies) Local Agency Investment Fund (LAIF) AA/A A 30% 25% of the 30% above 5% Aggregate 5 years Up to the current state limit Shares of beneficial interest issued by diversified management companies as defined in Government Code Section 53601(Mutual Funds) Money Market A-1/P-1 10% 5% Aggregate Mortgage Backed Securities/CMO s: No Inverse Floaters No Range Notes No Interest only strips derived from a pool of Mortgages A 20% 5% Aggregate 5 Years Asset Backed Securities AAA 20% 5 Years Page 10

154 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 XI. Average Life The maximum dollar weighted average maturity of the fund will be 3 years. The focus of this fund is in order of priority: preservation of principal, liquidity and then yield. The policy of maintaining a maximum dollar weighted maturity or weighted average maturity (WAM) of 3 years leaves open the flexibility to take advantage of interest rate trends to maximize the return on investment. The imposed maximum 3 year average maturity limits the market risk to levels appropriate to a short, intermediate income fund. The word Maturity refers to the instrument s stated legal final redemption date - not coupon reset, put or call dates. Securities purchased specifically to match the maturity of a bond issue and/or a contractual arrangement must be authorized by California Government Code and but are not included in the requirements listed above. Such securities shall be clearly designated in the appropriate investment journals and reports. XII. Prohibited Transactions At the time of purchase, all permitted investments shall conform in all respects with this Investment Policy and with California Government Code Sections 53601, , , , and 53635, as may be amended from time to time. No investment prohibited by California Government Code shall be permitted herein. Any investment transactions, credit risk criterion, percentage limitations or market valuation that are not in compliance with this Investment Policy at time of purchase must be documented and approved by the Treasurer in writing. Thereafter, action shall be taken by the Treasurer to correct such matter as soon as practical. If a percentage restriction is adhered to at the time of purchase, a later increase or decrease in percentage resulting from a change in values or assets will not constitute a violation of that restriction. The Treasurer shall not leverage the County pool through any borrowing collateralized or otherwise secured by cash or securities held unless authorized by this investment policy. Security Lending is authorized by this policy and will be limited to a maximum of 20% of the portfolio. The following transactions are prohibited: A. Borrowing for investment purposes ( Leverage ) B. Inverse floaters, leveraged floaters, equity-linked securities, event-linked securities, structured investment vehicles (SIV) Simple floating rate notes whose periodic coupon adjustment is based on a short-term (one-year or less) rate index (such as Treasury bills, federal funds, prime rate or LIBOR) and which have a reasonable expectation of maintaining a value at par at each interest rate adjustment through final maturity, are exempt from this definition. Additionally, U.S. Treasury and Agency zero coupon bonds, Page 11

155 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 U.S. Treasury and Agency strips, Resolution Funding Corporation (REFCORP) strips or other callable securities which otherwise meet quality, maturity and percent limitations assigned to their respective security category, are exempt from this section. C. Derivatives (e.g. swaptions, spreads, straddles, caps, floors, collars, etc.) shall be prohibited. D. Trading of options and futures are prohibited. XIII. Method of Accounting: A. For earnings calculations, investments will be carried at original purchase cost (plus purchased accrued interest, if applicable). Premiums or discounts acquired in the purchase of securities will be amortized or accreted over the life of the respective securities. For GASB purposes, investments will be carried at cost and marked to market. B. Gains or losses from investment sales will be credited or charged to investment income at the time of sale. All interest income, gains/ losses are posted quarterly. C. Premiums paid for callable securities will be amortized to the 1 st call date after purchase. D. Purchased accrued interest will be capitalized until the first interest payment is received. Upon receipt of the first interest payment, the funds will be used to reduce the investment to its principal cost with the remaining balance credited to investment income. E. Yield is calculated on an accrual basis using a 365-day calendar year. Earnings are calculated as follows: (Earnings* + Capital Gains) - (Banking Cost +Fees+Amortized Premiums + Capital Losses) Average Daily Pool Balance * Earnings equal net interest payments + accrued interest + accreted discounts. F. The County Pool is operated as a single investment pool in which the banking and reporting services, required by the participant, will determine level of charges assigned to the account. Funds that generate specific volume of related banking charges such as payroll, extra reporting, etc. (variable costs) will be charged both fixed and variable banking costs as well as administrative fees before interest allocation and will be designated as Pool 1. Those funds that do not generate excessive banking cost but utilize the basic banking services (fixed costs) will be designated as Pool 2 and charged fixed banking costs and administrative fees. The final classification is designated as Pool 3 and represents those funds that Page 12

156 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 have only an incidental use of the County banking system and therefore only pay administrative fees. G. The administrative fee is 11.5 basis points and will be evaluated annually. XIV. Safekeeping All deliverable security transactions, including collateral for repurchase agreements, entered into by the Treasurer shall be conducted on a Delivery-versus-Payment basis (DVP) All deliverable securities shall be held by a third party custodian designated by the Treasurer. The third party custodian shall be required to issue a safekeeping statement to the Treasurer listing the specific instrument, rate, maturity and other pertinent information. XV. Performance Evaluation The Treasurer shall submit monthly, quarterly and annual reports, in compliance with Government Code Sections 53607, and 27134, to the Treasury Oversight Committee, Pool participants and the Board of Supervisors. These reports shall contain sufficient information to permit an informed outside reader to evaluate the performance of the investment program and shall be in compliance with Government Code. This includes the type of investments, name of issuer, maturity date, par and dollar amount of the investment. For the total Pooled Investment Fund, the report will list average maturity, the market value and the pricing source. Additionally, the report will show any funds under the management of contracting parties, a statement of compliance to the Policy and a statement of the Pooled Investments Fund s ability to meet the expected expenditure requirements for the next 6 months. In accordance with GASB Statements 31 and 40, the Treasurer shall provide financial information on the treasury for the County s Comprehensive Annual Financial Report. XVI. Withdrawal Requests for Pool Participants A. Any request to withdraw funds shall be released at no more than 20% per month. B. April and December current secured tax apportionments and property tax revenue which had previously been distributed to redevelopment agencies prior to their dissolution, and which, effective as of February 1, 2012, shall be distributed to Redevelopment Property Tax Trust Funds will be exempt from the 20% withdrawal rule. C. Any additional withdrawal requests will be considered on a case-by-case basis. D. All requests for withdrawals must first be made in writing to the Treasurer, at a minimum, 24 hours in advance. Page 13

157 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 XVII. Internal Controls In accordance with the California Government Code et seq, and (h) et seq, these requests are subject to the Treasurer s consideration of the stability and predictability of the pooled investment fund, or the adverse effect on the interests of the other depositors in the pooled investment fund. The County Treasurer shall establish internal controls to provide reasonable assurance that the investment objectives are met and to ensure that the assets are protected from loss, theft, or misuse. The County Treasurer shall also be responsible for ensuring that all investment transactions comply with the County s investment policy and the California Government Code. The County Treasurer shall establish a process for daily, monthly, quarterly and annual review and monitoring of investment program activity. Daily, the County Treasurer or authorized treasury personnel shall review the investment activity, as well as corresponding custodial and commercial bank balances and positions for compliance with the investment policy and guidelines. The County Controller s Office shall conduct an annual audit of the investment program s activities. It is to be conducted to determine compliance with the County s investment policy and the Government Code. The audit shall be conducted by staff with experience in auditing large, complex investment programs consistent with industry standards as promulgated by the Global Investment Performance Standards (GIPS) adopted by the CFA Institute Board of Governors. A. Investment Authority and Responsibility The responsibility for conducting the County s investment program resides with the Treasurer, who supervises the investment program within the guidelines set forth in this policy. The Treasurer may delegate the authority for day-to-day investment activity to the Assistant Treasurer. B. County Treasury Oversight Committee The Board of Supervisors, in consultation with the Treasurer, hereby establishes the County Treasury Oversight Committee pursuant to California Government Code et seq. Members of the County Treasury Oversight Committee shall be selected pursuant to California Government Code The Treasury Oversight Committee will meet at least three times a year to evaluate general strategies and to monitor results and shall include in its discussions the economic outlook, portfolio diversification, maturity structure and potential risks to the County pool s funds. All actions taken by the Treasury Oversight Committee are governed by rules set out in et seq. of the California Government Code. Members of the County Treasury Oversight Committee must pay particular attention to the California Government Code , , and , which read as follows: Page 14

158 Annual Investment Policy of the Pooled Investment Fund Calendar Year A member may not be employed by an entity that has (a) contributed to the campaign of a candidate for the office of local treasurer, or (b) contributed to the campaign of a candidate to be a member of a legislative body of any local agency that has deposited funds in the county treasury, in the previous three years or during the period that the employee is a member of the committee A member may not directly or indirectly raise money for a candidate for local treasurer or a member of the governing board of any local agency that has deposited funds in the county treasury while a member of the committee A member may not secure employment with bond underwriters, bond counsel, security brokerages or dealers, or with financial services firms, with whom the Treasurer is doing business during the period that the person is a member of the committee or for one year after leaving the committee Committee meetings shall be open to the public and subject to the Ralph M. Brown Act (chapter 9 (commencing with section 54950) of Part 1 of Division 2 of Title 5). C. Reporting The Treasurer will prepare a monthly report for the County pool participants and members of the County Treasury Oversight Committee stating, for each investment: the type of investment, name of the issuer, maturity date, par value of the investment, current market value and the securities S&P/Moody s rating. For the total pooled investment fund, the report will list average maturity, effective duration, cost, the current market value, net gains/losses and the sector and issuer concentrations. In addition, the report will break down distribution by maturities, coupon, duration and both S&P/Moody s ratings. The Treasurer shall prepare a monthly cash flow report which sets forth projections for revenue inflows, and interest earnings as compared to the projections for the operating and capital outflows of depositors. This projection shall be for a minimum of 12 months. All Reports will be available on the County Treasurer s website at D. Annual Audit of Compliance The County Treasury Oversight Committee shall cause an annual audit to be conducted of the portfolio, procedures, reports and operations related to the County pool in compliance with the California Government Code E. Pool Rating The Pool strives to maintain the highest credit rating at all times. Annually, a contract may be requested for a rating from one of the three leading nationally recognized credit rating organizations (S&P, Moody s or Fitch). Page 15

159 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 F. External Investment Advisor An external investment advisor will be contracted to conduct independent monthly compliance reviews of the County s portfolio holdings and provide a monthly written report which will: 1. Verify the accuracy of holdings information 2. Provide summary level information about the portfolio 3. Verify compliance with California Government Code 4. Verify compliance with the County s written Investment Policy 5. List any exceptions or discrepancies identified G. Loss Control While this Investment Policy is based on the Prudent Investor Rule, the Treasurer shall seek to enhance total portfolio return by means of actively managing the portfolio. In any professionally managed portfolio, occasional controlled losses are inevitable and must be realized and judged within the context of overall portfolio performance. Losses shall be allocated as otherwise described in this policy in section XIII, entitled Method of Accounting. H. Credit Quality Should any investment or financial institution represented in the portfolio, be downgraded by any of the major rating services to a rating below those established in this investment policy, the Treasurer must immediately make an informed decision as to the disposition of that asset and will so advise the County Treasury Oversight Committee. The situation will be monitored daily by the Treasurer until final disposition has been made. I. Approved Brokers The Treasurer will maintain a current list of Approved Brokers and Dealers who may conduct business with the County. All financial institutions on the approved list will be evaluated individually, with preference given to primary dealers, who possess a strong capital and credit base appropriate to their operations. The Treasurer will forward a copy of the County Investment Policy to all approved brokers and require written acknowledgment of the policy from the broker. No broker, brokerage, dealer or securities firm is allowed on the approved list if, within any consecutive 48-month period, they have made a political contribution in an amount exceeding the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board, to the local Treasurer, any member of the governing board of the local agency or any candidate for those offices. Page 16

160 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 J. Transaction Settlement Payment of settlement in a securities transaction will be against delivery only. A due bill or other substitution will not be acceptable. All securities purchased from the brokers/dealers must be held in safekeeping by the County s safekeeping agent or designated third party. K. Internal Controls The Treasurer has established a system of controls designed to prevent losses of pooled funds due to fraud, employee error, and misrepresentations by third parties, and unanticipated changes in financial markets or imprudent actions by employees of the County. The controls include: 1. Procedures for investment activity which includes separation of duties for transaction authority, accounting and operations and requires clear documentation of activity. 2. Custodial safekeeping as prescribed in California Government Code Independent audit, both external and internal. 4. Clear delegation of authority. 5. Written confirmations of all telephone transactions. 6. Establishment of written ethical standards and rules of behavior. XVIII. Execution of Investment Authority A. All transactions are documented as to date, time and vendor, signed by the originator and include the following information: 1. Buy or sell 2. Specific description of security involved (CUSIP) 3. Settlement date 4. Price 5. The total amount of funds involved 6. On non-treasury or agency transactions a notation will be made on the transaction ticket of competitive bids and offers 7. Broker/dealer B. Information in A must be provided to the Investment Specialist for the following purpose: 1. To contact the dealer to verify the information on the trade with the dealer s instructions. Any misunderstanding must be clarified prior to settlement. 2. To provide the County s custodian bank with the specifics of the pending transaction to assure a smooth settlement. Page 17

161 Annual Investment Policy of the Pooled Investment Fund Calendar Year To compare with the daily custodian transaction report to assure there are no errors. 4. To generate the internal entries necessary for the movement of funds to complete the transaction. 5. To compare with the broker s confirmations when received. C. At the end of each day, the Investment Specialist summarizes all of the current day transactions in a Daily Cash Flow Report available immediately the following morning. This report includes: 1. A summary of all the day s investment transaction 2. A listing of the day s incoming and outgoing wires 3. A listing of the day s state automatics and other deposits received 4. If the pool has Repos out, the current earnings rate statement 5. An estimate of the total anticipated clearings for the day D. A best effort will be made to obtain a minimum of three prices from different brokers before executing a security transaction whenever possible. Exceptions will occur with Treasuries. In those cases the Bloomberg screen will be printed as close to the actual executed price as possible. In the case of money market, agencies or corporate securities, a best effort will be made to obtain differential bids and offers. E. Repurchase Agreements All Repurchase Agreements with approved dealers will be governed by a Public Securities Association (PSA) agreement that has been approved in writing by the Treasurer. F. Confirmations resulting from securities purchased or sold under a Repurchase Agreement shall state the exact and complete nomenclature of the underlying securities bought or sold, as well as the term structure (i.e. maturity) of the transaction. G. Securities on loan and their corresponding investments under the County Security Lending Program must be monitored daily by the Investment Specialist to assure the Assistant Treasurer has a list of those securities that are out on loan. Interest earned will be monitored daily and compared to the monthly report of earnings by the custodial bank. H. The assets of the County shall be held in safekeeping by the County s safekeeping agent, or secured through third-party custody and safekeeping procedures. A due bill or other substitution will not be acceptable. I. Safekeeping procedures shall be reviewed annually by the Treasurer s office and an external auditor. Surprise audits of safekeeping and custodial procedures must be conducted at least once a year. J. Security Lending: The custodial bank may be authorized to lend out up to 20% of the portfolio within the guidelines of this policy. Guidelines for securities lending Page 18

162 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 and the investment of collateral are attached to this policy as Schedule 1. Securities on loan must be monitored daily by the Treasurer s office to assure that the Treasurer has a list of those securities that are out on loan. Interest earned will be monitored daily and compared to the monthly report of earnings by the custodial bank. K. Voluntary Participants will be accepted for participation in the San Mateo County Pooled Fund if they meet the following requirements: 1. A public agency 2. Domiciled in the County of San Mateo. 3. Agree to abide by the approved San Mateo County Pooled Fund Investment Policy Statement. 4. Acknowledge changes to the policy annually in writing and meet the minimum balance requirements (250K). L. Agencies whose jurisdiction includes San Mateo County, but are not domiciled in San Mateo County, may participate in the San Mateo County Pooled Fund with the approval of the Treasurer and the County Treasury Oversight Committee. XIX. Disaster Recovery The San Mateo County Treasurer s Disaster Recovery Plan includes critical phone numbers and addresses of key personnel as well as active bankers and brokers/dealers. Portable devices have been issued to key personnel for communicating between staff, banks and broker/dealers. The plan includes an offsite location to be communicated at the time of readiness if our offices are uninhabitable. In the event investment staff is unable to invest the portfolio, the custodial bank will automatically sweep all un-invested cash into a collateralized account at the end of the business day. Union Bank is currently the pools bank. Should this guarantee program not be extended, a collateralized account will be set up. Until normal operations of the Treasurer s office have been restored, the limitations on the size of an individual issuer and the percentage restrictions by investment type would be allowed to exceed those approved in this Investment Policy. XX. Ethics and Conflict of Interest The Treasurer and all investment personnel shall refrain from personal business activity which could create a conflict with proper execution of the investment program or which could impair the ability to execute impartial investment decisions. The Treasurer and all investment personnel shall disclose to the Treasury Oversight Committee any material financial interests in financial institutions which conduct business with San Mateo County and shall disclose any material financial investment positions which could be related in a conflicting manner to the performance of San Mateo County s investment portfolio. Page 19

163 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 XXI. Limits on Honoraria, Gifts and Gratuities In accordance with California Government Code Section 27133, this policy establishes limits for the Treasurer; individuals responsible for management of the portfolios; and members of the Treasury Oversight Committee; select individual investment advisors and broker/dealers who conduct day-to-day investment trading activity. Any individual who receives an aggregate total of gifts, honoraria and gratuities in excess of $50 in a calendar year from a broker/dealer,bank or service provider to the Pooled Investment Fund must report the gifts, dates and firms to the designated filing official and complete the appropriate State forms. No individual designated in a conflict of interest code may receive aggregate gifts, honoraria and gratuities in a calendar year in excess of the amount specified in Section (a) of Title 2, Division 6 of the California Code of Regulations. Gifts from a single source are subject to a $420 limit. Any violation must be reported to the State Fair Political Practices Commission. Comparison and Interpretation of Credit Ratings 1 Long Term Debt Ratings Rating Interpretation Moody s Standard & Poor s Fitch Best-Quality grade Aaa AAA AAA High-Quality Grade Aa1 Aa2 Aa3 AA+ AA AA- AA+ AA AA- Upper Medium Grade Medium Grade Speculative Grade A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 A+ A A- BBB+ BBB BBB- BB+ BB BB- Page 20 A+ A A- BBB+ BBB BBB- BB+ BB BB- Low Grade B1 B2 B3 B+ B B- B+ B B- Poor Grade to Default Caa CCC+ CCC In Poor Standing - - Highly Speculative Default Ca C Default CCC CCC- CC D - - CC - DDD DD D

164 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 Short Term/Commercial Paper Investment Grade Ratings Rating Moody s Standard & Fitch Interpretation Poor s Superior Capacity P-1 A-1+/A-1 F1+/F1 Strong Capacity P-2 A-2 F2 Acceptable Capacity P-3 A-3 F3 1 These are general credit rating guidelines and are for information only Page 21

165 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 GLOSSARY OF TERMS ACCRUED INTEREST Interest that has accumulated but has not yet been paid from the most recent interest payment date or issue date to a certain date. BANKERS ACCEPTANCE A time bill of exchange drawn on and accepted by a commercial bank to finance the exchange of goods. When a bank accepts such a bill, the time draft becomes, in effect, a predated, certified check payable to the bearer at some future specified date. Little risk is involved for the investor because the commercial bank assumes primary liability once the draft is accepted. BASIS POINT One basis point is equal to 1/100 of one percent. For example, if interest rates increase from 4.25% to 4.50%, the difference is referred to as a 25-basis-point increase. BENCHMARK A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio s investments. BID The price at which a buyer offers to buy a security. BOND A bond is essentially a loan made by an investor to a division of the government, a government agency or a corporation. The bond is a promissory note to repay the loan in full at the end of a fixed time period. The date on which the principal must be repaid is the called the maturity date or maturity. In addition, the issuer of the bond, that is, the agency or corporation receiving the loan proceeds and issuing the promissory note, agrees to make regular payments of interest at a rate initially stated on the bond. Bonds are rated according to many factors, including cost, degree of risk and rate of income. BOOK VALUE The value of a held security as carried in the records of an investor. May differ from current market value of the security. BROKER/DEALER Any person engaged in the business of effecting transactions in securities in this state for the account of others or for her/his own account. Broker/dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of her/his own issue. CALLABLE SECURITIES An investment security that contains an option allowing the issuer to retire the security prior to its final maturity date. COMMERCIAL PAPER Short-term, unsecured promissory notes issued in either registered or bearer form and usually backed by a line of credit with a bank. Maturities do not exceed 270 days and generally average days. COUPON RATE The annual rate of interest payable on a security expressed as a percentage of the principal amount. COVERED BOND A covered or mortgage bond is an on-balance sheet obligation of the issuing institution. Page 22

166 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 Typically, a covered bond receives the legal structure, the issuer s backing and the pledge of quality assets, should the issuer fail to qualify for a higher rated bond. CREDIT RISK The risk to an investor that an issuer will default in the payment of interest and/or principal on a security. CURRENT YIELD The annual income from an investment divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor s cost, current yield is unrelated to the actual return the investor will earn if the security is held to maturity. CUSIP NUMBERS CUSIP is an acronym for Committee on Uniform Security Identification Procedures. CUSIP numbers are identification numbers assigned each maturity of a security issue and usually printed on the face of each individual security in the issue. The CUSIP numbers are intended to facilitate identification and clearance of securities. DISCOUNT The amount by which the par value of a security exceeds the price paid for the security. DIVERSIFICATION Dividing investment funds among a variety of securities offering independent returns. DURATION The weighted average time to maturity of a bond where the weights are the present values of future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. EARNINGS APPORTIONMENT The quarterly interest distribution to the Pool Participants where the actual investment costs incurred by the Treasurer are deducted from the interest earnings of the Pool. FAIR VALUE The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. FEDERAL FUNDS Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend Fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds. FEDERAL FUNDS RATE Interest rate at which banks lend federal funds to each other. FEDERAL OPEN MARKET COMMITTEE (FOMC) This committee sets Federal Reserve guidelines regarding purchases and sales of government securities in the open market as a means of influencing the volume of bank credit and money. FIDUCIARY An individual who holds something in trust for another and bears liability for its safekeeping. FLOATING RATE NOTE A debt security whose interest rate is reset periodically (monthly, quarterly, annually) and is based on a market index (e.g. Treasury bills, LIBOR, etc.). FUTURES Commodities, which are sold to be delivered at a future date INTEREST The amount earned while owning a debt security, generally calculated as a percentage of the principal amount. Page 23

167 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 INVERSE FLOATING RATE NOTES Variable-rate notes whose coupon and value increase as interest rates decrease. LIQUIDITY The ease with which investments can be converted to cash at their present market value. Liquidity is significantly affected by the number of buyers and sellers trading a given security and the number of units of the security available for trading. LOCAL AGENCY INVESTMENT FUND (LAIF) The State of California investment pool in which money of local agencies is pooled as a method for managing and investing local funds. MARKET RISK Market risk is the risk that investments will change in value based on changes in general market prices. MARKET VALUE The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establishes each party s rights in the transaction. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower. MATURITY The date upon which the principal of a security becomes due and payable to the holder. MONEY MARKET MUTUAL FUND A mutual fund with investments directed in short-term money market instruments only, which can be withdrawn daily without penalty. MUNICIPAL BOND Debt obligation of a state or local government entity OPTION A contract that provides the right, but not the obligation, to buy or to sell a specific amount of a specific security within a predetermined time period. A call option provides the right to buy the underlying security. A put option provides the right to sell the underlying security. The seller of the contracts is called the writer. PAR The stated maturity value, or face value, of a security. PAR VALUE The stated or face value of a security expressed as a specific dollar amount marked on the face of the security; the amount of money due at maturity. Par value should not be confused with market value. PREMIUM The amount by which the price paid for a security exceeds the security s par value. PRIME RATE A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate. RATE OF RETURN The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond and the current income return. REPURCHASE AGREEMENT OR RP OR REPO An agreement consisting of two simultaneous transactions whereby the investor purchases securities from a bank or dealer and the bank or dealer agrees to repurchase the securities at Page 24

168 Annual Investment Policy of the Pooled Investment Fund Calendar Year 2013 the same price on a certain future date. The interest rate on a RP is that which the dealer pays the investor for the use of his funds. Reverse repurchase agreements are the mirror image of the RPs when the bank or dealer purchases securities from the investor under an agreement to sell them back to the investor. SAFEKEEPING A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held by the bank in the customer s name. SECURITIES LENDING A transaction wherein the Treasurer s Pool transfers its securities to broker/dealers and other entities for collateral which may be cash or securities and simultaneously agrees to return the collateral for the same securities in the future. SETTLEMENT DATE The date on which the purchase or sale of securities is executed. For example, in a purchase transaction, the day securities are physically delivered or wired to the buyer in exchange for cash is the settlement date. STRIPs Bonds, usually issued by the U.S. Treasury, whose two components, interest and repayment of principal, are separated and sold individually as zero-coupon bonds. Strips are an acronym for Separate Trading of Registered Interest and Principal of Securities. TRADE DATE The date and time corresponding to an investor s commitment to buy or sell a security. U.S. AGENCY OBLIGATIONS Federal agency or United States government-sponsored enterprise obligations, participants, or other instruments. The obligations are issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises. Issuers include: Fannie Mae, Farmer Mac, Federal Farm Credit Banks, Freddie Mac, Federal Home Loan Banks, Financing Corporation, Tennessee Valley Authority, Resolution Trust Funding Corporation, World Bank, Inter-American Development Bank and PEFCO. U.S. TREASURY OBLIGATIONS (TREASURIES) Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk and are the benchmark for interest rates on all other securities in the U.S. and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds. WEIGHTED AVERAGE MATURITY The remaining average maturity of all securities held in a portfolio. YIELD The rate of annual income return on an investment, expressed as a percentage. Yield does not include capital gains. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. ZERO-COUPON BOND A bond on which interest is not payable until maturity (or earlier redemption), but compounds periodically to accumulate to a stated maturity amount. Zero-coupon bonds are typically issued at a discount and repaid at par upon maturity. Page 25

169 COUNTY OF SAN MATEO SUMMARY OF INVESTMENTS See following page. E-2

170 (THIS PAGE INTENTIONALLY LEFT BLANK)

171 DATE: July 23, 2013 TO: FROM: SUBJECT: San Mateo County Pool Participants Sandie Arnott, Treasurer-Tax Collector June, 2013 Monthly/Quarterly Investment Reports The following are the gross pool earnings for fiscal year : Month - June 0.73% 4 th Quarter 0.73% Fiscal Year End % The current average maturity of the portfolio is 1.97 years with an average duration of 1.92 years. The current size of the pool is $ Billion. The largest non-government aggregate position currently held in the pool as of fiscal year end is Wells Fargo & Company at 2.8%. The portfolio holds no derivative products. The anticipated pool earnings for fiscal year should be approximately.75% The San Mateo County Pool complies with Government Code Section 53646, which requires the ability to meet its expenditure requirements for the next six months. I certify, and our investment advisor, PFM Asset Management, confirms these reports are in compliance with the investment policy dated Calendar Year Please visit our website if you wish to review PFM s monthly compliance report: If you have any questions regarding any of these reports, please call Charles Tovstein or me at (650) Best regards, 1

172 SAN MATEO COUNTY PORTFOLIO July 23, 2013 Table of Contents GASB Factor Report 3 Month End Pool Earnings Report 4 Quarter End Pool Earnings Report 5 Fiscal Year End Pool Earnings Report 6 Fixed Income Distribution 7-8 Portfolio Appraisal 9-17 Realized Gains and Losses 18 Diversification Report 19 Asset Allocation Graph 20 Credit Quality Graph-Moody Rating 21 Credit Quality Graph-S&P Rating 22 Pooled Funds Participants Graph Months Cash-Flow Projection 24 Historical Yield Curves Total Return 31 SMC Pool vs. LAIF 32 2

173 Sandie Arnott TREASURER-TAXCOLLECTOR TREASURER- TAX COLLECTOR - REVENUE SERVICES Charles M. Tovstein ASSISTANT TREASURER Robin N. Elliott ASSISTANT TAX COLLECTOR July 17, 2013 RE: GASB FAIR MARKET VALUE FACTOR AS OF 06/30/13 SAN MATEO COUNTY INVESTMENT POOL As of June 30, 2013, the GASB fair market value factor for the San Mateo County Investment Pool is County Center, 1 51 Floor, Redwood City, CA Treasurer (650) Fax: (650) Tax Collector (650) Fax: (650) Revenue Services (650) Fax: (650)

174 COUNTY OF SAN MATEO ESTIMATED SUMMARY OF POOL EARNINGS JUNE 2013 Par Value Gross Earnings Fixed Income Securities Maturing > 1 year U S Treasury Notes $300,000,000 $195, Federal Agencies 813,750, , Corporate Notes 436,000, , Floating Rate Securities 212,000, , $1,761,750,000 $1,021, Short Term Securities Maturing < 1 year U S Treasury Notes $90,000,000 $3, Federal Agencies 608,000,000 94, Corporate Notes 53,750,000 67, Floating Rate Securities 117,500,000 40, LAIF 38,000,000 6, Commercial Paper 198,000,000 25, U S Treasury Bills 100,000,000 3, Repurchase Agreements 101,500, $1,306,750,000 $242, Total Accrued Interest $3,068,500,000 $1,264, Realized Gain/Loss & Interest Received U S Treasury Notes $157, Federal Agencies 78, Corporate Notes 283, Floating Rate Securities 39, U S Treasury Bills Repurchase Agreements 7, Total Realized Income $566, TOTAL GROSS POOL RATE/EARNINGS* 0.73% $1,830, POOL 1 NET EARNINGS RATE* 0.56% POOL 2 NET EARNINGS RATE* 0.59% POOL 3 NET EARNINGS RATE* 0.61% * - Earnings %'s are based on JUNE 2013 Average Daily Balance Pool 1 & 2 rates include banking charges 4

175 COUNTY OF SAN MATEO ESTIMATED SUMMARY OF POOL EARNINGS 4TH QUARTER ENDING JUNE 30, 2013 Par Value Gross Earnings Fixed Income Securities Maturing > 1 year U S Treasury Notes $300,000,000 $374, Federal Agencies 813,750, , Corporate Notes 436,000, , Floating Rate Securities 212,000, , $1,761,750,000 $2,292, Short Term Securities Maturing < 1 year U S Treasury Notes $90,000,000 $4, Federal Agencies 608,000, , Corporate Notes 53,750, , Floating Rate Securities 117,500,000 80, LAIF 38,000,000 18, Commercial Paper 198,000,000 49, U S Treasury Bills 100,000,000 10, Repurchase Agreements 101,500, $1,306,750,000 $536, Total Accrued Interest $3,068,500,000 $2,828, Realized Gain/Loss & Interest Received U S Treasury Notes $1,038, Federal Agencies 562, Corporate Notes 931, Floating Rate Securities 217, LAIF 9, U S Treasury Bills 10, Commercial Paper 24, Repurchase Agreements 66, Total Realized Income $2,861, GROSS POOL RATE/EARNINGS* 0.73% $5,689, POOL BREAKDOWN Pool 1 Pool 2 Pool 3 TOTAL Average Balance $441,821, $874,219, $1,825,510, $3,141,551, Gross Earnings $800, $1,583, $3,306, $5,689, Admin Fees ($126,675.80) ($250,649.65) ($523,396.23) ($900,721.68) Bank Fees ($53,294.90) ($35,529.93) $0.00 ($88,824.83) Net Earnings $620, $1,297, $2,782, $4,700, Net Earnings % 0.56% 0.60% 0.61% 0.60% Earnings %'s are based on Q average daily balance of investment pools. Pool 1 and Pool 2 are charged with bank fees associated with their disbursement/depository activity. 5

176 COUNTY OF SAN MATEO ESTIMATED SUMMARY OF POOL EARNINGS FISCAL YEAR ENDED JUNE 30, 2013 Gross Earnings Fixed Income Securities Maturing > 1 year U S Treasury Notes $1,209, Federal Agencies 2,628, Corporate Notes 4,192, Floating Rate Securities 566, $8,597, Short Term Securities Maturing < 1 year U S Treasury Notes $422, Federal Agencies 1,267, Corporate Notes 162, Floating Rate Securities 309, LAIF 93, Commercial Paper 83, U S Treasury Bills 13, Repurchase Agreements 9, $2,363, Total Accrued Interest $10,961, Realized Gain/Loss & Interest Received U S Treasury Notes $4,117, Federal Agencies 2,658, Corporate Notes 4,204, Floating Rate Securities 707, LAIF 21, U S Treasury Bills 13, Commercial Paper 86, Repurchase Agreements 573, Total Realized Income $12,383, GROSS POOL RATE/EARNINGS* 0.82% $23,344, POOL BREAKDOWN Pool 1 Pool 2 Pool 3 TOTAL Average Balance $362,058, $829,164, $1,639,405, $2,830,629, Gross Earnings $2,985, $6,838, $13,520, $23,344, Admin Fees ($416,367.74) ($953,539.56) ($1,885,316.09) ($3,255,223.39) Bank Fees ($183,078.34) ($122,052.22) $0.00 ($305,130.56) Net Earnings $2,386, $5,762, $11,634, $19,784, Net Earnings % 0.66% 0.69% 0.71% 0.70% Earnings %'s are based on FY average daily balance of investment pools. Pool 1 and Pool 2 are charged with bank fees associated with their disbursement/depository activity. 6

177 SAN MATEO COUNTY TREASURER'S OFFICE FIXED INCOME DISTRIBUTION - SETTLED TRADES SAN MATEO COUNTY POOL June 30, 2013 Summary Information Totals Weighted Averages Par Value 3,068,500,000 Average YTM 0.65 Market Value 3,062,992, Average Maturity (yrs) 1.97 Total Cost 3,069,295, Average Coupon (%) 0.65 Net Gain/Loss -6,302, Average Duration 1.92 Annual Income 19,931, Average Moody Rating Aa1/P-1 Accrued Interest 5,098, Average S&P Rating AA/A-1 Number of Issues 151 Distribution by Maturity % Bond Average Average Average Maturity Number Mkt Value Holdings Y T M Coupon Duration Under 1 Yr 46 1,308,602, % Yr - 3 Yrs ,515, % Yrs - 5 Yrs ,240, % Yrs - 7 Yrs 2 69,634, % 5.0 Distribution by Coupon % Bond Average Average Average Coupon % Number Mkt Value Holdings Y T M Coupon Duration Under 1% 99 2,195,943, % 1.5 1% - 3% ,779, % 3.2 3% - 5% 3 31,269, % 1.4 Distribution by Duration % Bond Average Average Average Duration Number Mkt Value Holdings Y T M Coupon Duration Under 1 Yr 46 1,308,602, % Yr - 3 Yrs ,614, % Yrs - 5 Yrs ,775, % 4.3 7

178 SAN MATEO COUNTY TREASURER'S OFFICE FIXED INCOME DISTRIBUTION - SETTLED TRADES SAN MATEO COUNTY POOL June 30, 2013 Distribution by Moody Rating % Bond Average Average Average Rating Number Mkt Value Holdings Y T M Coupon Duration Aaa 87 2,088,850, % 2.0 Aa ,717, % 2.6 Aa ,523, % 2.3 Aa ,919, % 2.0 A ,036, % 1.8 A2 7 93,096, % 3.2 A3 3 23,926, % 2.3 P ,898, % 0.1 Not Rated 1 38,022, % 0.0 Distribution by S&P Rating % Bond Average Average Average Rating Number Mkt Value Holdings Y T M Coupon Duration AAA 6 75,722, % 1.9 AA+ 93 2,203,552, % 2.0 AA 8 72,450, % 2.9 AA ,336, % 1.8 A ,056, % 2.6 A 3 24,040, % 1.7 A- 2 19,913, % 2.4 A ,994, % 0.1 A ,904, % 0.2 Not Rated 1 38,022, % 0.0 ** MARKET VALUE ON THE FIXED INCOME DISTRIBUTION REPORT INCLUDES ANY ACCRUED INTEREST THAT A SECURITY HAS EARNED. TOTAL COST DOES NOT REFLECT AMORTIZATIONS OR ACCRETIONS BUT INCLUDES PURCHASED ACCRUED INTEREST. MONTHLY TRANSACTION SUMMARY REPORT IS AVAILABLE UPON REQUEST. 8

179 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets COMMERCIAL PAPER UNION BANK NA 50,000, ,999, ,999, ,999, A % Due GOOGLE INC 25,000, ,998, ,998, ,998, A % Due TOYOTA MOTOR CREDIT CORPORATION 25,000, ,987, ,995, ,995, A % Due WELLS FARGO & COMPANY 23,000, ,985, ,995, ,995, A % Due UNION BANK NA 25,000, ,993, ,994, ,994, A % Due DEUTSCHE BANK FINL. LLC 25,000, ,979, ,988, ,988, A % Due DEUTSCHE BANK FINL. LLC 25,000, ,910, ,926, ,926, A % Due ,000, ,853, ,898, ,898, LOCAL AGENCY INVESTMENT FUND LAIF 38,000, ,000, ,000, , ,022, % Due REPURCHASE AGREEMENTS REPURCHASE AGREEMENT(U.S. TREAS NTS COLLAT) 0.100% Due ,500, ,500, ,500, ,500, AA UNITED STATES TREASURY-BILLS UNITED STATES TREAS BILL 50,000, ,999, ,999, ,999, AA % Due UNITED STATES TREAS BILL 50,000, ,977, ,992, ,992, AA % Due ,000,000 99,977, ,992, ,992, UNITED STATES TREASURY-NOTES UNITED STATES TREAS NTS 65,000, ,607, ,307, , ,605, AA % Due UNITED STATES TREAS NTS 25,000, ,051, ,014, , ,045, AA % Due UNITED STATES TREAS NTS 25,000, ,999, ,979, , ,992, AA % Due UNITED STATES TREAS NTS 25,000, ,892, ,015, , ,033, AA % Due UNITED STATES TREAS NTS 150,000, ,751, ,960, , ,116, AA % Due

180 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets UNITED STATES TREAS NTS 50,000, ,839, ,140, , ,181, AA % Due UNITED STATES TREAS NTS 50,000, ,910, ,781, , ,952, AA % Due ,000, ,052, ,199, , ,926, FEDERAL AGENCY - FLOATING RATE SECURITIES FEDERAL HOME LOAN MORTGAGE CORP. - FLOATER 0.202% Due ,000, ,000, ,015, , ,018, AA FEDERAL AGENCY SECURITIES FEDERAL HOME LOAN BANK DISCOUNT CORP % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION DISCOUNT 0.000% Due FEDERAL HOME LOAN BANK DISCOUNT CORP % Due FEDERAL HOME LOAN BANK DISCOUNT CORP % Due FEDERAL HOME LOAN BANK DISCOUNT CORP % Due FEDERAL NATIONAL MORTGAGE 50,000, ,000, ,000, ,000, AA ,000, ,991, ,000, ,000, AA ,000, ,991, ,999, ,999, AA ,000, ,995, ,999, ,999, AA ,000, ,992, ,999, ,999, AA ,000, ,994, ,036, , ,149, AA ASSOCIATION 1.250% Due FREDDIE DISCOUNT 35,000, ,996, ,998, ,998, AA % Due FEDERAL HOME LOAN BANK - DISCOUNT NOTE 25,000, ,995, ,998, ,998, AA % Due FEDERAL HOME LOAN BANK 35,000, ,951, ,019, , ,079, AA % Due FEDERAL HOME LOAN BANK - DISCOUNT NOTE 0.000% Due FEDERAL HOME LOAN BANK DISCOUNT CORP % Due FEDERAL HOME LOAN BANK DISCOUNT CORP. 25,000, ,994, ,997, ,997, AA ,000, ,995, ,998, ,998, AA ,000, ,985, ,997, ,997, AA

181 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets 0.000% Due FEDERAL HOME LOAN MORTGAGE CORPORATION 20,000, ,987, ,014, , ,027, AA % Due FEDERAL HOME LOAN BANK 22,000, ,942, ,020, , ,111, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 10,000, ,995, ,029, , ,031, AA % Due FREDDIE DISCOUNT 5,000, ,995, ,997, ,997, AA % Due FREDDIE DISCOUNT 25,000, ,982, ,985, ,985, AA % Due FEDERAL HOME LOAN BANK 37,000, ,992, ,037, , ,095, AA % Due FREDDIE DISCOUNT 25,000, ,982, ,983, ,983, AA % Due FEDERAL HOME LOAN BANK-M ,000, ,000, ,993, , ,996, AA % Due FEDERAL HOME LOAN BANK 20,000, ,997, ,992, ,992, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 1.125% Due FEDERAL HOME LOAN MORTGAGE CORPORATION 1.000% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.625% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 10,000, ,986, ,090, ,091, AA ,000, ,973, ,182, , ,250, AA ,000, ,995, ,042, , ,052, AA ,000, ,999, ,060, , ,063, AA % Due FEDERAL HOME LOAN BANK 10,000, ,988, ,993, , ,005, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION ,000, ,012, ,996, , ,017, AA % Due FEDERAL HOME LOAN BANK - M ,000, ,000, ,998, , ,004, AA % Due FEDERAL HOME LOAN BANK 40,000, ,964, ,943, , ,979, AA % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due ,500, ,500, ,523, , ,537, AA

182 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets FEDERAL HOME LOAN MORTGAGE ,000, ,000, ,994, , ,004, AA CORPORATION % Due FEDERAL HOME LOAN MORTGAGE 10,000, ,972, ,023, , ,034, AA CORPORATION 0.500% Due FEDERAL FARM CREDIT BANK 26,000, ,919, ,007, , ,009, AA % Due FEDERAL HOME LOAN MORTGAGE ,000, ,071, ,956, , ,029, AA CORPORATION % Due FEDERAL HOME LOAN BANK 15,000, ,995, ,983, , ,991, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.375% Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION ,000, ,000, ,906, , ,919, AA ,000, ,941, ,860, , ,862, AA ,000, ,148, ,065, , ,142, AA ,000, ,000, ,009, , ,024, AA ,000, ,000, ,009, , ,023, AA ,000, ,977, ,887, , ,912, AA % Due FEDERAL HOME LOAN BANK 35,000, ,938, ,606, , ,608, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.375% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION - B 0.700% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 10,000, ,965, ,879, , ,897, AA ,000, ,000, ,961, , ,972, AA ,000, ,981, ,114, , ,146, AA % Due FEDERAL FARM CREDIT BANK ,000, ,000, ,929, , ,933, AA % Due FEDERAL HOME LOAN BANK-M ,000, ,000, ,886, , ,889, AA

183 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets 0.750% Due FEDERAL HOME LOAN MORTGAGE CORPORATION 1.000% Due FEDERAL NATIONAL MORTGAGE 15,000, ,000, ,926, , ,935, AA ,000, ,022, ,929, , ,944, AA ASSOCIATION - B 1.000% Due FEDERAL HOME LOAN BANK-M ,000, ,000, ,969, ,970, AA % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION - B 1.125% Due FEDERAL HOME LOAN MORTGAGE CORPORATION 1.000% Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION - B 1.100% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION % Due FEDERAL HOME LOAN MORTGAGE CORPORATION % Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.875% Due FEDERAL HOME LOAN MORTGAGE CORPORATION-B 1.000% Due FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.875% Due ,000, ,068, ,860, ,861, AA ,000, ,922, ,865, ,865, AA ,000, ,184, ,001, , ,111, AA ,000, ,273, ,081, , ,986, AA ,000, ,150, ,018, , ,097, AA ,000, ,222, ,030, , ,143, AA ,750, ,771, ,683, , ,700, AA ,000, ,110, ,321, , ,404, AA ,500, ,624, ,613, , ,744, AA ,000, ,999, ,730, , ,749, AA ,000, ,000, ,870, , ,875, AA ,000, ,955, ,741, , ,744, AA

184 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets FEDERAL NATIONAL MORTGAGE 5,000, ,986, ,854, , ,871, AA ASSOCIATION 0.875% Due FEDERAL HOME LOAN BANK - M ,000, ,028, ,797, , ,840, AA % Due FEDERAL HOME LOAN MORTGAGE ,000, ,000, ,882, , ,898, AA CORPORATION-B 1.200% Due FEDERAL NATIONAL MORTGAGE ,500, ,500, ,436, , ,444, AA ASSOCIATION - B 1.125% Due FEDERAL NATIONAL MORTGAGE ,500, ,500, ,270, , ,283, AA ASSOCIATION - B 1.000% Due FEDERAL NATIONAL MORTGAGE 28,000, ,940, ,060, , ,087, AA ASSOCIATION 0.875% Due FEDERAL NATIONAL MORTGAGE ,000, ,083, ,580, , ,682, AA ASSOCIATION - B 1.500% Due ,396,750,000 1,398,434, ,391,543, ,546, ,394,089, FLOATING RATE SECURITIES TORONTO-DOMINION BANK FLOATER 35,000, ,000, ,004, , ,033, AA % Due TORONTO-DOMINION BANK FLOAT 20,000, ,000, ,032, , ,057, AA % Due TOYOTA MOTOR CREDIT 10,000, ,000, ,020, , ,034, AA CORPORATION-FLOATER 0.678% Due PROCTER & GAMBLE CO. - FLOATER 20,000, ,000, ,990, , ,997, AA % Due PROCTER & GAMBLE CO. - FLOATER 12,500, ,500, ,496, , ,499, AA % Due CISCO SYSTEMS INC. - FLOATER 20,000, ,000, ,040, , ,044, A % Due BERKSHIRE HATHAWAY INC.- FLOATER 20,000, ,000, ,075, , ,101, AA % Due ROYAL BANK OF CANADA - FLOATER 10,000, ,000, ,083, , ,100, AA % Due WALT DISNEY COMPANY/THE - FLOATER 15,000, ,000, ,988, , ,993, A % Due COCA-COLA CO./THE 6,000, ,000, ,000, , ,001, AA % Due UNITED TECHNOLOGIES CORP. 5,000, ,000, ,030, , ,033, A

185 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets 0.787% Due WELLS FARGO & COMPANY - FLOATER 10,000, ,952, ,954, , ,962, A % Due GENERAL ELECTRIC CAPITAL 10,000, ,000, ,059, , ,080, AA CORPORATION - FLOATER 0.905% Due BANK OF NEW YORK MELLON 20,000, ,000, ,984, , ,991, A % Due ROYAL BANK OF CANADA 10,000, ,000, ,016, , ,020, AA % Due BANK OF NOVA SCOTIA 20,000, ,000, ,989, , ,994, A % Due RABOBANK NEDERLAND 8,000, ,000, ,017, , ,019, AA % Due APPLE INC. 20,000, ,000, ,983, , ,993, AA % Due WELLS FARGO & COMPANY 25,000, ,000, ,871, , ,875, A % Due TORONTO DOMINION BANK 8,000, ,000, ,000, , ,011, AA % Due APPLE INC. 15,000, ,000, ,935, , ,948, AA % Due MERCK & CO INC. 10,000, ,000, ,980, , ,988, AA % Due ,500, ,452, ,554, , ,781, CORPORATE COVERED BONDS ROYAL BANK OF CANADA 25,000, ,985, ,852, , ,863, AAA % Due CORPORATE BONDS GENERAL ELECTRIC CAPITAL 10,000, ,080, ,032, , ,086, AA CORPORATION 1.875% Due MICROSOFT CORPORATION 13,750, ,778, ,764, , ,795, AAA % Due JOHNSON & JOHNSON 10,000, ,988, ,075, , ,090, AAA % Due WAL-MART STORES INC. 10,000, ,998, ,239, , ,279, AA % Due GOOGLE INC 10,000, ,997, ,073, , ,087, AA % Due TORONTO-DOMINION BANK 7,500, ,482, ,551, , ,598, AA % Due IBM CORP. 15,000, ,983, ,073, , ,095, AA

186 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets 0.875% Due GENERAL ELECTRIC CAPITAL CORPORATION 10,000, ,989, ,196, , ,298, AA % Due IBM CORP. 15,000, ,926, ,987, , ,020, AA % Due BERKSHIRE HATHAWAY INC. 10,000, ,982, ,401, , ,524, AA % Due TOYOTA MOTOR CREDIT CORPORATION 10,000, ,987, ,454, , ,465, AA % Due WELLS FARGO & COMPANY 20,000, ,960, ,227, , ,377, A % Due ANHEUSER-BUSCH INBEV WOR 4,000, ,992, ,999, , ,013, A % Due MICROSOFT CORPORATION 17,000, ,538, ,384, , ,457, AAA % Due BANK OF NOVA SCOTIA 15,000, ,999, ,935, , ,960, A % Due WAL-MART STORES INC. 10,000, ,945, ,194, , ,221, AA % Due ROYAL BANK OF CANADA 15,000, ,996, ,978, , ,998, AA % Due VERIZON COMMUNICATIONS 5,000, ,999, ,966, , ,972, A % Due BANK OF MONTREAL 7,000, ,993, ,991, , ,999, A % Due GENERAL ELECTRIC CAPITAL CORPORATION 20,000, ,163, ,494, , ,558, AA % Due AT&T INC. 15,000, ,995, ,931, , ,941, A % Due COSTO WHOLESALE CORP. 11,000, ,986, ,978, , ,982, A % Due GENERAL ELECTRIC CAPITAL CORPORATION 20,000, ,935, ,889, , ,984, AA % Due WESTPAC BANKING CORP. 15,000, ,982, ,946, , ,012, AA % Due BERKSHIRE HATHAWAY FIN. 7,000, ,999, ,966, , ,988, AA % Due WAL-MART STORES INC. 7,000, ,995, ,953, , ,962, AA % Due APPLE INC. 15,000, ,972, ,838, , ,849, AA % Due IBM CORP. 25,000, ,929, ,647, , ,664, AA

187 SAN MATEO COUNTY TREASURER'S OFFICE PORTFOLIO APPRAISAL SAN MATEO COUNTY POOL June 30, 2013 Call Call Market Value Date Price Unit Total Mark Market Accrued + Pct et Security One One Quantity Cost Cost Price Value Interest Accrued Interest S&P Assets 0.450% Due JOHNSON & JOHNSON 4,500, ,717, ,659, , ,671, AAA % Due GOOGLE INC 7,000, ,961, ,234, , ,251, AA % Due IBM Corp 6,000, ,965, ,150, , ,201, AA % Due PROCTER & GAMBLE CO. CB 5,000, ,959, ,062, , ,089, AA % Due BERKSHIRE HATHAWAY INC. 20,000, ,999, ,212, , ,371, AA % Due TOYOTA MOTOR CREDIT CORPORATION 10,000, ,994, ,710, , ,739, AA % Due WELLS FARGO & COMPANY 8,000, ,985, ,802, , ,866, A % Due TORONTO DOMINION BANK 12,000, ,991, ,647, , ,675, AA % Due MICROSOFT CORP. 5,000, ,996, ,835, , ,843, AAA % Due APPLE INC. 20,000, ,890, ,205, , ,237, AA % Due BERKSHIRE HATHAWAY FIN. 8,000, ,995, ,736, , ,749, AA % Due CHEVRON CORPORATION 10,000, ,000, ,908, , ,910, AA % Due ,750, ,040, ,338, ,558, ,897, TOTAL PORTFOLIO 3,068,500,000 3,069,295, ,057,894, ,098, ,062,992, ** TOTAL COST DOES NOT REFLECT AMORTIZATIONS OR ACCRETIONS BUT INCLUDES PURCHASED ACCRUED INTEREST. MARKET PRICES ARE DOWNLOADED THROUGH (IDC) INTERACTIVE DATA CORP. 17

188 SAN MATEO COUNTY TREASURER'S OFFICE REALIZED GAINS AND LOSSES - SETTLED TRADES SAN MATEO COUNTY POOL From Through Gain Or Loss Open Close Cost Date Date Quantity Security Basis Proceeds Short Term Long Term TOTAL GAINS 489, , TOTAL LOSSES 0 0 TOTAL REALIZED GAIN/LOSS 598, **THESE ARE GROSS PRINCIPAL FIGURES ONLY. THEY DO NOT REFLECT ANY AMORTIZATIONS OR ACCRETIONS OR ACCRETIONS. THE COST BASIS DOES NOT REFLECT ANY PURCHASED ACCRUED INTEREST. 18

189 DIVERSIFICATION REPORT June 28, 2013 Portfolio Par Value 3,068,500, Corp. Bond FLTR Corporate Bond Covered Bond Comm. Paper Cert. Deposit TOTAL % to Portf Apple 35,000,000 35,000,000 70,000, % Anheuser-Busch 4,000,000 4,000, % AT&T Company 15,000,000 15,000, % Bank of Montreal 7,000,000 7,000, % Bank of New York 20,000,000 20,000, % Bank of Nova Scotia 20,000,000 15,000,000 35,000, % Berkshire Hathwy 20,000,000 45,000,000 65,000, % Chevron Corp 10,000,000 10,000, % Cisco Systems Inc. 20,000,000 20,000, % Coca Cola/KO 6,000,000 6,000, % Costco Wholesale Corp 11,000,000 11,000, % Deutsche Bank 50,000,000 50,000, % General Elec. Captl Corp. 10,000,000 60,000,000 70,000, % Google Inc. 17,000,000 25,000,000 42,000, % IBM Corp. 61,000,000 61,000, % Johnson & Johnson 14,500,000 14,500, % Merck 10,000,000 10,000, % Microsoft Corp. 35,750,000 35,750, % Procter & Gamble Co. 32,500,000 5,000,000 37,500, % Rabo Bank 8,000,000 8,000, % Royal Bank of Canada 20,000,000 15,000,000 25,000,000 60,000, % Toronto Dominion Bank 63,000,000 19,500,000 82,500, % Toyota Motor Credit 10,000,000 20,000,000 25,000,000 55,000, % United Technologies Corp 5,000,000 5,000, % Union Bank 75,000,000 75,000, % Verizon Communications 5,000,000 5,000, % Wal Mart Stores 27,000,000 27,000, % Walt Disney 15,000,000 15,000, % Wells Fargo 35,000,000 28,000,000 23,000,000 86,000, % Westpacc 15,000,000 15,000, % 329,500, ,750,000 25,000, ,000, ,017,250, % 19

190 San Mateo County Treasurer - Asset Allocation as of June 30, 2013 Corporate Securities 26.8% Repurchase Agreements 3.3% Asset Allocation LAIF 1.2% U.S. Treasury 15.8% Government Agency 46.3% Commercial Paper 6.5% Sector: Market Value:* U.S. Treasury 484,919, % Government Agency 1,419,108, % Commercial Paper 197,898, % Corporate Securities 821,542, % Repurchase Agreements 101,500, % LAIF 38,022, % Totals 3,062,992, % *Market Values listed include accrued interest for the reported period. 20

191 San Mateo County Treasurer - Credit Quality as of May 31, 2013 S & P RATING A 13.0% Not Rated 1.2% AAA 2.5% AA 83.3% Rating: Market Value:* AAA 75,722, % AA 2,551,338, % A 397,908, % Not Rated 38,022, % Totals 3,062,992, % *Market Values listed include accrued interest for the reported period. 21

192 San Mateo County Treasurer - Credit Quality as of June 30, 2013 MOODY RATING P-1 6.5% Not Rated 1.2% A 7.2% Aa 16.9% Aaa 68.2% Rating: Market Value:* Aaa 2,088,850, % Aa 519,160, % A 219,060, % P-1 197,898, % Not Rated 38,022, % Totals 3,062,992, % *Market Values listed include accrued interest for the reported period. 22

193 San Mateo County Treasurer - Pool Participants Summary of Assets Held as of June 30, 2013 Pool Participants All other SMCO Funds 33.9% School Districts 30.8% SMCO Trans. Authority/JPB 9.2% Cities 10.0% Bay Area Air Quality Mgmt. 5.1% Special Districts 4.4% SMC Community College 6.6% Participants: $ % School Districts 954,785, % SMC Community College 205,039, % Cities 310,950, % Special Districts 136,906, % Bay Area Air Quality Mgmt. 158,703, % SMCO Trans. Authority/JPB 284,804, % All other SMCO Funds 1,050,114, % Totals 3,101,304, % Voluntary Participants 28.7% Involuntary Participants 71.3% 23

194 (IN 000'S) ROLLING YEAR PROJECTED CASHFLOW ROLLING YEAR PROJEC JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTAL CASH IN: Taxes: Secured $689.0 $0.0 $98.0 $134,309.9 $256,953.8 $444,663.4 $47,062.0 $32,865.4 $134,290.3 $279,678.0 $5,460.1 $1,765.3 $1,337,835.2 Unsecured $9,216.7 $28,811.9 $17,869.2 $496.1 $340.5 $114.8 $16.1 $0.0 $3.3 $0.0 $1.7 $0.0 $56,870.3 Supplemental $1,025.5 $219.6 $52.2 $443.5 $2,663.5 $4,986.3 $977.9 $139.7 $96.7 $0.0 $125.5 $0.0 $10,730.4 Mixed $6,037.7 $25,264.3 $14,834.4 $16,364.7 $17,180.1 $66,345.8 $20,610.8 $25,656.8 $57,670.2 $165,810.2 $7,638.4 $9,519.8 $432,933.2 Automatics $31,699.1 $35,391.8 $31,522.7 $30,397.2 $34,502.9 $35,549.9 $28,277.3 $39,845.1 $29,661.8 $29,892.8 $37,749.4 $38,580.4 $403,070.4 Automatics - Schools Appt $33,446.4 $37,969.2 $22,740.6 $8,305.8 $10,260.1 $24,985.7 $11,665.4 $8,816.3 $5,087.3 $3,116.3 $8,177.6 $46,261.1 $220,831.7 Unscheduled Sub. (Lockbox) $12,573.9 $32,567.2 $37,976.6 $29,624.9 $22,445.1 $23,062.0 $16,879.7 $22,843.8 $31,100.9 $24,269.6 $27,732.9 $35,387.5 $316,464.1 Treasurer's Deposit $61,959.2 $72,480.8 $56,483.1 $97,489.1 $82,913.2 $87,302.5 $88,871.4 $71,569.1 $69,567.5 $137,518.2 $90,713.3 $117,156.1 $1,034,023.5 Hospitals (Treasurer's Office) $633.7 $551.9 $607.8 $717.6 $589.9 $490.4 $642.0 $591.6 $390.7 $932.3 $364.7 $280.3 $6,792.9 Revenue Services $213.1 $205.5 $183.5 $203.9 $181.4 $149.7 $204.9 $179.1 $231.9 $212.5 $187.2 $192.6 $2,345.3 Housing Authority $649.4 $506.1 $651.4 $328.2 $577.7 $532.0 $529.9 $488.0 $518.7 $483.4 $27,901.4 $2,939.0 $36,105.2 TRAN/OTHER Deposits-county $15,894.8 $122.0 $2,916.4 $2,476.1 $7,579.5 $62,546.5 $3,172.8 $4,091.1 $410.2 $16,456.6 $3,108.4 $5,264.8 $124,039.2 TRAN/OTHER Deposits-schools $10,095.3 $29.9 $3,506.8 $356.8 $118.7 $119.0 $1,971.7 $2,044.4 $2,865.9 $13,076.4 $2,624.3 $3,623.6 $40,432.8 Bond/BANS Proceeds $928.0 $2,462.6 $5.5 $19,736.0 $38,050.9 $119.2 $1.5 $3,163.4 $0.0 $31,969.7 $35,897.3 $67,958.2 $200,292.3 Retirement Deposit $0.0 $35.2 $0.0 $7,000.0 $5,500.0 $0.0 $0.0 $0.0 $4,000.0 $8,000.0 $9,500.0 $10,500.0 $44,535.2 Coupon Interest $1,309.0 $1,795.6 $1,884.7 $937.1 $1,918.3 $879.6 $2,103.9 $1,934.2 $1,635.7 $919.9 $8,372.1 $1,101.2 $24,791.3 LAIF WDRWL $10,030.9 $10,030.9 TOTAL CASH IN: $186,370.8 $238,413.6 $191,332.8 $349,186.9 $481,775.6 $751,846.8 $222,987.3 $214,228.0 $347,562.0 $712,335.9 $265,554.3 $340,529.9 $4,302,123.9 CASH OUT: Tax Apportionments: checks ($515.0) $0.0 $0.0 $0.0 ($12,003.3) ($131,361.6) ($38,770.6) ($15,795.6) ($12,010.4) ($74,387.4) ($456.3) ($1,496.9) ($286,797.1) Outside Withdrawals ($18,602.2) ($29,368.4) ($7,600.0) ($10,530.0) ($16,900.3) ($63,569.4) ($9,673.3) ($14,428.1) ($9,300.0) ($47,023.6) ($19,530.6) ($24,210.0) ($270,735.9) Returned Checks/Miscellaneous ($36.5) ($539.9) ($101.6) ($109.1) ($314.9) ($854.5) ($73.7) ($223.9) ($184.6) ($1,267.2) ($83.0) ($121.6) ($3,910.5) TRAN/Other Payments-county ($53,037.7) ($8,000.0) ($652.6) ($5,191.4) ($4,145.6) ($1,400.6) ($12,140.9) ($84.1) ($325.6) ($11,298.5) ($7,091.0) ($5,579.0) ($108,947.0) TRAN/Other Payments-schools ($429.8) ($12,666.6) ($1,942.8) ($31,364.0) ($12,500.0) ($9,045.7) ($17,332.1) ($4,541.3) ($2,413.2) ($1,480.5) ($33,005.5) ($34,827.5) ($161,549.0) GO Bond Payments ($3,242.5) ($22,670.5) ($40,981.9) ($3,474.1) $0.0 ($117.7) ($9,997.5) ($9,627.3) ($14,768.9) ($1,678.3) $0.0 ($117.2) ($106,675.9) Housing Authority ($3,597.5) ($5,942.3) ($2,627.7) ($2,975.0) ($3,302.5) ($3,890.6) ($2,551.1) ($3,162.0) ($2,926.5) ($2,968.7) ($3,290.1) ($3,277.1) ($40,511.1) Payroll-county ($38,766.4) ($38,971.9) ($32,845.7) ($32,563.1) ($44,151.9) ($37,402.4) ($33,066.8) ($32,848.4) ($33,008.6) ($35,862.7) ($34,533.9) ($33,049.8) ($427,071.6) schools ($30,943.5) ($30,325.8) ($39,688.9) ($44,777.0) ($44,200.7) ($57,960.6) ($31,379.2) ($51,128.5) ($63,234.2) ($40,596.9) ($54,280.8) ($67,306.5) ($555,822.6) retirement ($12,099.9) ($12,105.9) ($13,375.4) ($11,853.4) ($11,693.9) ($12,062.5) ($63,621.2) ($11,737.5) ($12,438.1) ($12,829.4) ($12,438.1) ($12,551.0) ($198,806.3) School Vendors ($58,416.8) ($57,924.2) ($45,210.1) ($69,151.0) ($44,140.0) ($67,703.2) ($38,106.9) ($49,531.5) ($51,984.6) ($48,940.5) ($49,474.6) ($58,865.9) ($639,449.3) Controllers EDP ($66,016.4) ($51,824.2) ($47,597.6) ($69,127.8) ($65,393.6) ($52,773.1) ($56,872.3) ($61,725.6) ($48,150.2) ($78,887.8) ($75,238.1) ($94,528.3) ($768,135.0) SMCCCD ($11,154.0) ($10,212.1) ($16,950.8) ($14,895.0) ($12,062.1) ($15,745.1) ($10,212.8) ($13,595.1) ($12,512.4) ($10,891.7) ($11,146.8) ($3,910.4) ($143,288.3) Other ARS Debits ($18,326.7) ($16,022.6) ($14,537.3) ($19,505.5) ($20,186.6) ($18,678.6) ($16,273.6) ($19,247.8) ($23,146.8) ($30,219.0) ($34,310.9) ($17,700.5) ($248,155.9) TOTAL CASH OUT: ($315,184.9) ($296,574.4) ($264,112.4) ($315,516.4) ($290,995.4) ($472,565.6) ($340,072.0) ($287,676.7) ($286,404.1) ($398,332.2) ($334,879.7) ($357,541.7) ($3,959,855.5) TOTAL ESTIMATED CASH FLOW ($128,814.1) ($58,160.8) ($72,779.6) $33,670.5 $190,780.2 $279,281.2 ($117,084.7) ($73,448.7) $61,157.9 $314,003.7 ($69,325.4) ($17,011.8) $342,268.4 QUARTERLY CASH FLOW TOTALS ($259,754.5) $503,731.9 ($129,375.5) ($17,011.8) **MATURING SECURITIES $400,000.0 $193,000.0 $97,750.0 $70,000.0 $42,000.0 $10,000.0 $142,000.0 $82,500.0 $20,000.0 $0.0 $30,000.0 $80,000.0 $1,167,250.0 ** Excludes any overnight investment Possible Calls $150,000.0 $90,750.0 $175,500.0 $0.0 $30,000.0 $0.0 $0.0 $30,000.0 $10,000.0 $7,500.0 $0.0 $0.0 $493,750.0 State Funding Removed ($206,533.5) ($164,089.0) ($165,019.4) ($34,657.4) $123,572.1 $195,683.6 ($173,907.1) ($144,953.9) ($4,692.1) $256,725.0 ($142,985.3) ($137,240.8) ($598,097.8) 24

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