REMARKETING MEMORANDUM Dated July 8, 20I6

Transcription

1 REMARKETING MEMORANDUM Dated July 8, 20I6 Remarketing- not a New Issue- Book-Entry-Only CUSIP No.<'> JD8 Ratings: (See "OTHER INFORMATION- Ratings" and PSF Guaranteed: See "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM" herein) In the Original Opinion (hereinafier defined), Bond Counsel (hereinafier defined) rendered an opinion, assuming continuing compliance by the District (hereinafier d~fined) afier the date o(initial delive1y of'the Bonds (hereinafier d~fined) with certain covenants contained in the Order (hereinqfier d~fined) and subject to the matters set.forth under "TAX MATTERS" herein, that interest on the Bonds.for federal income tax pwposes under existing stallltes, regulations, published rulings, and court decisions(/) would be excludable.fi om the gross income of the owners thereofpursuant to section 1113 of the Internal Revenue Code ofi986, as amended to the date o(initial delivery of' the Bonds, and (2) would not be included in computing the alternative minimum taxable income of' the owners thereof Because the Bonds are being convertedji-om the existing Rate Period (d~fined herein) to the New Term Rate Period (defined herein), the Order requires that an Opinion of' Bond Counsel be delivered in connection with such conversion to the Paying Agent/Registrar (defined below) providing that such remarketing will not adversely affect the excludability o_(interest on the Bonds.for.federal income tax pwposes. The Remarketing Agent (defined below) will be allowed to rely on this opinion. See "TAX MATTERS" herein. Additionally, see "THE BONDS Determination o_f'interest Rate; Rate Mode Changes" identuying circumstances when an opinion of nationally recognized bond counsel is required as a condition.for an interest rate mode conversion. Bond Counsel expresses no opinion as to the effect on the excludabilityfi om gross income.for federal income tax pwposes o_lany action requiring such an opinion. $58,095,000 NORTH EAST INDEPENDENT SCHOOL DISTRICT (A Political Subdivision of the State of Texas Located in Bexar County, Texas) VARIABLE RATE UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2013B CONVERSION TO TERM RATE PERIOD OF FIVE YEARS AT A PER ANNUM TERM RATE OF 1.420% (PRICED TO YIELD 1.420% TO MANDATORY TENDER DATE) Originally Dated: June I5, 2013 (Interest accrues from the August I, 20I6 Conversion Date) Mandatory Tender Date: August I, 202I Maturity Date: August I, 2040 The North East Independent School District Variable Rate Unlimited Tax School Building Bonds, Series 2013B (the "Bonds") were initially issued pursuant to an order adopted on June 3, 2013 (the "Order") by the Board of Trustees (the "Board") of the Nm1h East Independent School District (the "District"). The Bonds are cun ently outstanding in the aggregate principal amount of$65,560,000. On August 1, 2016,$7,465,000 in principal amount will be redeemed pursuant to optional and mandatmy redemption provisions applicable thereto, $58,095,000 in Bonds will be mandatorily tendered for purchase, and $58,095,000 in Bonds will be remarketed to a five-year Tenn Rate to provide proceeds to pay the purchase price of the aforementioned mandatorily-tendered Bonds. Interest on the Bonds, while in the new five-year Term Rate mode, is payable initially on February 1, 2017 and on each August 1 and February 1 thereafter through August 1, Capitalized terms used in this Remarketing Memorandum that are not otherwise defined shall have the meaning assigned to such tenns in the Order and by the Remarketing Order (hereinafter defined). See 'THE BONDS- Authority for Issuance" and"- Remarketing Order." The definitive Bonds have been registered and delivered to Cede & Co., the nominee of The Depositmy Trust Company ("DTC") pursuant to the Book-Ently-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or any integral multiple thereof while bearing interest at a Tenn Rate or a Fixed Rate. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Bonds (see "TilE BONDS- Book-Ently-Only-System" herein). The Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas (see "THE BONDS- General- Paying Agent/Registrar"). The Bonds were initially issued as a single Tenn Bond scheduled to mature as shown above and subject to optional and mandatmy redemption prior to stated maturity, in whole or in part, as described herein (see "THE BONDS- Optional Redemption" and"- Mandatmy Redemption"). The Bonds currently bear interest at the Tenn Rate for the one-year Term Rate Period which expires on July 31, Pursuant to an order of the Board adopted on June 13, 2016 (the "Remarketing Order"), the Board has authorized the remarketing of the Bonds to a new five-year Tenn Rate Period (the "New Tenn Rate Period"), which will be effective commencing August 1, The New Term Rate Period for the Bonds shall commence on August 1, 2016 and end on July 31, 2021, and the per annum interest rate for the New Tenn Rate Period is 1.420%. Thereafter, the District expects that the Bonds will again be remarketed and bear interest at a Tenn Rate detennined by a remarketing agent; provided, however, that the interest rate mode applicable to the Bonds may be (a) converted ffom time to time to a Weekly Rate, Monthly Rate, Quarterly Rate, or Semiannual Rate (each, along with a Term Rate, a "Variable Rate") or to a Flexible Rate, (b) be remarketed in another Tenn Rate, or (c) be conve11ed to a Fixed Rate until stated maturity or prior redemption; provided fmther, however, that the District's failure to remarket the Bonds at the end of the New Term Rate Period as cuitently contemplated shall not result in an event of default, but the Bonds shall, until redeemed or remarketed, then bear interest at the "Stepped Rate" as described below. Additionally, the payment of the principal of and interest on the Bonds (but not the purchase price of Bonds at mandatory tender), when due, is guaranteed by the Texas Pennanent School Fund, and, as such, the Bonds are also guaranteed by the Guarantee Program. (See 'THE BONDS- Security" and"- Permanent School Fund Guarantee"; see also "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM"). The Bonds, in the New Term Rate Period are subject to mandatmy tender, without the right of retention on the Conversion Date immediately following the end of the New Tenn Rate Period (such Conversion Date being August 1, 2021 ). All tenders of Bonds must be made to the tender agent, which is U.S. Bank National Association, Dallas, Texas (the "Tender Agent"). In the Order, as amended by the Remarketing Order, the District has covenanted to identify and enter into a contract with a remarketing agent for the Bonds (which is not required to be the Remarketing Agent identified below) prior to the commencement of the requisite remarketing period applicable to the Bonds and to occur before the expiration of the New Term Rate Period. Bonds in a Variable Rate mode (which includes the interest rate mode applicable to the Bonds during the New Term Rate Period) tendered for purchase will be bought using proceeds derived fi mn the remarketing of the Bonds, if any; provided, however, that should the date for the tender of the Bonds occur on an Interest Payment Date, the accrued interest portion of the Purchase Price is to be paid by the District. Until such time as the District redeems or remarkets Bonds that have been unsuccessfully remarketed, such Bonds shall bear interest at the "Stepped Rate", which is defined herein to mean 7.000% per annum, calculated on the basis of twelve 30-day months and the number of days actually elapsed (see 'THE BONDS- Tender Provisions" herein). If the Bonds are converted to a Variable Rate mode other than a Term Rate mode, the District anticipates entering into a standby bond purchase or similar agreement providing liquidity support for the Bonds at such time. No such agreement, however, has been entered into at this time nor is one currently contemplated to be entered into in the future. Pursuant to the Remarketing Order, the District has contracted with Stifel, Nicolaus & Company, lncmvorated to serve as the remarketing agent (the "Remarketing Agent") for the Bonds li-mn their existing Term Rate mode that expires on July 31, 2016 into the New Term Rate Period during which the bonds bear interest at the new New Term Rate. 7/re Bonds were originallv delivered to the initial purchasers, together with the approving opinion a/the Attorney General o(the State a/texas and the initial opinion ofnorton Rose Fulbright US LLP, San Antonio, Texas (formerlv Fulbright & Jaworski L.L.P.). Bond Counsel (see 'Appendix C -Form a/bond Counsel's Original Opinion"}, through the services o/dtc l11e remarketing oft he Bonds will, through the services ofdtc. be available.for defi, ely on August I. 211/6. In connection with the remarketing o(the Bonds. certain/ega/ matters will be passed upon/or the Remarketing Agent by its counsel. Escamilla & Poneck. LLP, Scm Antonio. Texas. STIFEL, NICOLAUS & COMPANY, INCORPORATED (1) CUSlP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. This data is included solely for the convenience of the registered owners of the Bonds, is not intended to create a database and does not serve in any way as a substitute for the CUSIP services. None of the District, the Financial Advisor, or the Remarketing Agent is responsible for the selection or correctness of the CUSIP numbers set forth herein.

2 USE OF INFORMATION This Remarketing Memorandum, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in anyjurisdiction to any pe1:son to whom it is unlawflt! lo make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized by the District to give information or to make any representation other than those contained in this Remarketing Memorandum, and, if given or made, such other information or representations must not be relied upon as having been authorized by either of the foregoing. The information set forth herein has been obtainedji om the District and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the District, the Financial Advisor, or the Remarketing Agent. This Remarketing Memorandum contains, in part, estimates and matters of opinion which are not intended as swtements ofjhct, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Remarketing Memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the ajjhirs of the District or other matters described. NONE OF THE DISTRICT, THE FINANCIAL ADVISOR, OR THE REMARKETING AGENT MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS REMARKETING MEMORANDUM REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM OR THE AFFAIRS OF THE TEXAS EDUCATION AGENCY ("TEA") DESCRIBED UNDER "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM", AS SUCH INFORMATION HAS BEEN PROVIDED BY DTC AND TEA, RESPECTIVELY. The Remarketing Agent has provided the following sentence for inclusion in this Remarketing Memorandum. The Remarketing Agent has reviewed the information in this Remarketing Memorandum in accordance with its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agent does not guarantee the accuracy or completeness of such infonnation. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Remarketing Memorandum nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. This data is included solely for the convenience of the registered owners of the Bonds, is not intended to create a database and does not serve in any way as a substitute for the CUSIP services. None of the District, the Financial Advisor, or the Remarketing Agent is responsible for the selection or cotrectness of the CUSIP numbers set forth herein. THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND IS NOT INTENDED AS A SUMMARY OF THIS OFFERING. INVESTORS SHOULD READ THIS ENTIRE REMARKETING MEMORANDUM, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. [The remainder ofthispage intentionally leji blank! 2

3 TABLE OF CONTENTS REMARKETING MEMORANDUM SUMMARY... 4 DISTRICT OFFICIALS, STAFF AND CONSULTANTS... S THE BOARD OF TRUSTEES... 8 APPOINTED OFFICIALS... 8 CONSULTANTS AND ADVISORS... 8 INTRODUCTION... 9 THEBONDS... 9 THEPERMANENTSCHOOLFUND GUARANTEE PROGRAM STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS CURRENT PUBLIC SCHOOL FINANCE SYSTEM THE SCHOOL FINANCE SYSTEM AS APPLIED TO THE NORTH EAST INDEPENDENT SCHOOL DISTRICT TAX INFORMATION TABLE ] - VALUATION, EXEMPTIONS AND TAX SUPPORTED DEBT TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY TABLE 3 - VALUATION AND TAX SUPPORTED DEBT HISTORY TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY TABLE 5 - TEN LARGEST TAXPAYERS TABLE 6 - TAX ADEQUACY TABLE 7 - ESTIMATED OVERLAPPING DEBT DEBT INFORMATION TABLE 8 -TAX SUPPORTED DEBT SERVICE REQUIREMENTS TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION TABLE 10 - AUTJIORIZED BUT UNISSUED UNLIMITED TAX SCHOOL BUILDING BONDS TABLE ]] - OTHER 0l3LIGA TIONS FINANCIAL INFORMATION TABLE 12- CHANGES IN NET ASSETS TABLE 12-A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY INVESTMENTS TABLE 13 - CURRENT INVESTMENTS TAX MATTERS CONTINUING DISCLOSURE OF INFORMATION OTHER INFORMATION RATINGS EFFECT OF SEQUESTRATION LITIGATION REGISTRATION AND QUALIFICATION OF BONDS FOR SALE LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS LEGAL MA TIERS FINANCIAL ADVISOR CERTIFICATION OF THE REMARKETING MEMORANDUM FORWARD LOOKING STATEMENTS DISCLOSURE REMARKETING MISCELLANEOUS APPENDICES GENERAL INFORMATION REGARDING THE DISTRICT... A EXCERPTS FROM THE ANNUAL FINANCIAL REPORT... B FORM OF BOND COUNSEL'S ORIGINAL OPINION... C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Remarketing Memorandum. 3

4 REMARKETING MEMORANDUM SUMMARY This summary is subject in all respects to the more complete infonnation and definitions contained or incorporated in this Remarketing Memorandum. The offering of the Bonds to potential investors is made only by means of this entire Remarketing Memorandum. No person is authorized to detach this summary from this Remarketing Memorandum or to otherwise use it without the entire Remarketing Memorandum. THE DISTRICT... The North East Independent School District (the "District") is a political subdivision located in Bexar County, Texas. The District is approximately 140 square miles in area (see "INTRODUCTION- Description of the District"). THE BONDS... The Bonds are cun ently outstanding in the aggregate principal amount of $65,560,000. On August I, 2016, $7,465,000 in principal amount will be redeemed pursuant to optional and mandatory redemption provisions applicable thereto, $58,095,000 in Bonds will be mandatorily tendered for purchase, and $58,095,000 in Bonds will be remarketed at the Term Rate described herein to provide proceeds to pay the purchase price of the aforementioned mandatorilytendered Bonds. (See "THE BONDS- General".) RATE PERIODS... The Bonds currently bear interest at the Tenn Rate for a one-year Term Rate Period that expires on July 31, Pursuant to an order of the District's Board of Trustees (the "Board") adopted on June 13, 2016 (the "Remarketing Order"), the Board has authorized the remarketing of the Bonds to a Term Rate Period (the "New Tenn Rate Period"), which will be effective on August I, The New Term Rate Period for the Bonds shall commence on August I, 2016 and end on July 31, 2021, and the per annum interest rate for the New Term Rate Period is 1.420%. Thereafter, the District expects that the Bonds will again be remarketed and bear interest at a Term Rate determined by a remarketing agent; provided, however, that the interest rate mode for the Bonds may be from time to time on a Conversion Date (a) converted to a Weekly Rate, Monthly Rate, Quarterly Rate or Semiannual Rate (each, along with a Term Rate, a "Variable Rate") or a Flexible Rate, (b) remarketed in another Term Rate, or (c) converted to a Fixed Rate until stated maturity or prior redemption (as such terms are defined and described herein); provided further, however, that the District's failure to remarket the Bonds at the end of the New Term Rate Period as currently contemplated shall not result in an event of default, but the Bonds shall, until redeemed or remarketed, then bear interest at the "Stepped Rate" as described herein (see "THE BONDS- Determination of Interest Rates; Rate Mode Changes" herein). PAYING AGENT/REGISTRAR AND TENDER AGENT... The Paying Agent/Registrar and Tender Agent is U.S. Bank National Association, Dallas, Texas. PAYMENT OF INTEREST... Interest on the Bonds in the New Term Rate Period accrues from August I, 2016 and is payable as described herein. (See "THE BONDS- General" herein.) AUHIORITY FOR ISSUANCE... The Bonds were issued pursuant to the Constitution and general Jaws of the State of Texas (the "State"), including Chapter45, as amended, Texas Education Code and Chapter 1371, as amended, Texas Government Code, an election held in the District on November 8, 20 I I, and an order of the District's Board of Trustees adopted on June 3, 2013 (the "Order"). (See "THE BONDS Authority for Issuance''.) AUTHORITY FOR REMARKETING ORDER... The Bonds are being converted and remarketed pursuant to the Remarketing Order. In the Remarketing Order, the Board delegated to certain authorized officials of the District the ability to execute a Conversion Certificate (defined herein) evidencing final terms relating to the remarketing of the Bonds. (See "THE BONDS - Remarketing Order".) This Conversion Certificate was executed by a duly authorized District representative on July 8, SECURITY FOR TilE BoNDS... The Bonds constitute direct and voted obligations of the District, payable from a continuing direct annual ad valorem tax levied, without legal limit as to rate or amount, on all taxable property within the District. Additionally, the payment of the principal of and interest on the Bonds (but not the purchase price of Bonds at mandatory tender), when due, is guaranteed by the Permanent School Fund oftexas. (See 'THE BONDS- Security" and "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM''.) 4

5 OPTIONAL AND MANDATORY REDEMPTION... Prior to conversion to a Fixed Rate, the Bonds are subject to optional and mandatory redemption at par, on the dates and in the manner, as described herein. During the New Term Rate Period, the Bonds are subject to optional and mandatory redemption at the price of par plus accrued, but unpaid, interest to the redemption date, on the dates and in the manner, as described herein. (See "THE BONDS- Optional Redemption" and "THE BONDS- Mandatory Redemption".) TAX EXEMPTION... In the Original Opinion (hereinafter defined) Bond Counsel rendered an opinion, assuming continuing compliance by the District after the date of initial delivery of the Bonds described herein with certain covenants contained in the Order and subject to the matters set forth under "TAX MA TIERS" herein, that interest on the Bonds for federal income tax purposes under existing statutes, regulations, published rulings, and court decisions (I) would be excludable from the gross income of the owners thereof pursuant to section 103 of the Internal Revenue Code of 1986, as amended to the date of initial delivery of the Bonds, and (2) would not be included in computing the alternative minimum taxable income of the owners thereof. (See "TAX MATTERS" herein; additionally, see "THE BONDS- Determination of Interest Rate; Rate Mode Changes" identifying circumstances when an opinion of nationally recognized bond counsel is required as a condition for an interest rate mode conversion.) USE OF PROCEEDS... Proceeds from the sale of the Bonds were originally used to (i) acquire, construct, renovate, improve and equip various school facilities and the purchase of new school buses and (ii) pay the costs of issuance of the Bonds. The proceeds to be derived from this remarketing of the Bonds will be used to repay existing holders of Bonds upon such holders' mandatory tender of the remarketed Bonds and to pay the cost ofremarketing the Bonds. RATINGS... At the time of their initial issuance, the Bonds were rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by S&P Global Ratings ("S&P") by virtue of the guarantee of the Texas Permanent School Fund. The presently outstanding unenhanced unlimited tax-supported debtofthe District is rated "Aa1" by Moody's and "AA-" by S&P. The District has 12 unlimited tax-supported issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P by virtue of the guarantee of the Permanent School Fund of the State of Texas (see "OTHER INFORMATION- Ratings"). The District has one maintenance tax note issue ("Series 2010 Maintenance Tax Notes") that is not further secured by and subject to the Permanent School Fund Guarantee. The Bonds are guaranteed by the corpus of the Texas Permanent School Fund. BOOK-ENTRY-ONLY SYSTEM... The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of the DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of$1 00,000 and any integral multiple of$5,000 in excess thereof while in a Variable Rate mode (excluding a Term Rate mode) or Flexible Rate mode or $5,000 or integral multiples thereof when in a Term Rate mode or a Fixed Rate mode. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. (See "THE BONDS - Book-Entry-Only System".) PAYMENT RECORD... The District has never defaulted on the payment of its general obligation tax-supported debt. OTHER DEBT ISSUES... On November 3, 2015 (the "Election"), the District's voters authorized the District to issue $499,950,000 in unlimited tax-supported bonds, the proceeds of which will be utilized to undertake District-wide improvements and are expected to address the District's capital needs at least through In May 2016, the District established a commercial paper program (the "CP Program") pursuant to which it is authorized to issue commercial paper notes ("Commercial Paper Notes") from time to time and in an aggregate principal amount of not more than $100 million at any one time outstanding pursuant to the authority provided at the Election; provided, however, that the aggregate amount of indebtedness issued to finance authorized projects pursuant to the Election cannot exceed the limits of the Election's authorization related to maximum indebtedness. The District expects to continue issuing its Commercial Paper Notes to provide interim financing for projects authorized by the Election. The District anticipates issuing refunding bonds to restore capacity to the CP Program in the third quarter of20l6. LEGAL OPINION... Norton Rose Fulbright US LLP. DELIVERY... When issued, anticipated on or about Monday, August l,

6 SELECTED FINANCIAL INFORMATION Net Tax Ratio Tax Per Supported Per Supported Fiscal Capita Debt Capita Debt Year Estimated Taxable Taxable Outstanding Tax to Taxable %of Ended District Assessed Assessed at End Supported Assessed Total Tax 6/30 Population< I) Valuation< 2 l Valuation of Year Debt Valuation Collections ,746 $ 28,019,059,238 $ 68,215 $ 1,184,767,690 $ 2, % 98.49% ,965 28,075,612,510 67,495 I,444,538,430 3, % % ,834 29,429,536,333 67,993 I,450,519,128 3, % % ,761 31,549,671,199 71,257 1,381,993,775 3, % 99.95% ,521 34,746,232,639 81,274 I,318,600,000 (3) 3,084 (3) 3.79% (.\) 93.00% ( 4 ) (I) Source: District Officials. (2) Source: District Comprehensive Annual Financial Reports for years ending 2012 through 2015, and Bexar Appraisal District's Certified Totals for Tax Year 2015 (applicable to the District Fiscal Year ending June 30, 2016), subject to change during the ensuing year. (3) Excludes the Series 2010 Maintenance Tax Notes and excludes the District's Commercial Paper Notes. The Commercial Paper Notes may be issued from time to time up to an aggregate principal amount of $100,000,000 outstanding at any time; includes the Bonds at completion of their remarketing. (4) AsofJune1,2016. CHANGES IN NET ASSETS CONSOLIDATED STATEMENT SUMMARY Beginning Net Assets $ 175,716,418 $ 191,962,337 Total Revenue 715,108, ,060,692 Total Expenditures (698, 198,809) (694,595,071) Prior Period Adjustment (86,424,053) (I) (6,711,540) Ending Net Assets $ 106,201,821 $ 175,716,418 Fiscal Year Ended June 30, 2013 $ 223,448, ,982,820 (680,468,579) $ 191,962, $ 206,615, ,177,526 (661,345,375) $ 223,448, $ 210,345, ,844,835 (688,549,262) (2,025,086) $ 206,615,945 Source: The District's Comprehensive Annual Financial Reports. (I) During fiscal year 2015, the District adopted GASB Statement No. 68, Accounting and Reporting for Pensions. With the adoption of this standard, the District must assume their proportionate share of the New Pension Liability of the Teacher Retirement System of Texas (TRS). Adoption of GASB No. 68 required a prior period adjustment to report the effect of GASB 68 retroactively. GENERAL FUND CONSOLIDATED STATEMENT SUMMARY Beginning Balance Total Revenue Total Expenditures Net Funds Available Other Sources/Uses Ending Balance For Fiscal Year Ended June 30, $ 114,118,514 $ 113,878,198 $ 116,753, ,662, ,326, ,328, ,868, ,393, ,910,625 3,794,325 2,932,935 (581,764) (2,812,608) (2,692,619) (2,294,0 13) $ 115,100,231 $ 114,118,514 $ 113,878, $ 89,680,721 $ 71,894, ,372, ,231 ' ,164, ,687,096 28,207,321 19,544,030 (1,134,067) (I,757,578) $ 116,753,975 $ 89,680,721 Source: The District's Comprehensive Annual Financial Reports. /The remainder oft his page intentionallyleji blank/ 6

7 For additional information regarding the District, please contact: Mr. Dan Villarreal, C.P.A. Associate Superintendent for Business Services/ Chief Financial Officer North East Independent School District 8961 Tesoro Drive San Antonio, Texas Telephone: (210) Fax: (21 0) or Mr. Raul Villasenor FirstSouthwest, a Division of Hilltop Securities Inc. 70 Northeast Loop 41 0, Suite 710 San Antonio, Texas Telephone: (210) Fax: (21 0) raul. villasenor@hilltop securities.com [The remainder of this page intentionally left blank] 7

8 DISTRICT OFFICIALS, STAFF AND CONSULTANTS TilE BOARD OF TRUSTEES Board of Trustees Shannon Grona President, District 5 Length of Service 3 Years Tem1 Expires May 2020 Occupation Community Volunteer Brigitte Perkins Vice President, District 7 17Years May 2018 Realtor Sandy Hughey Secretary, District I 15 Years May 2020 Community Volunteer Tony Jaso Trustee, District 6 Newly Elected May2020 Investment Banker Jim Wheat Trustee, District 4 3 Years May2020 Attorney Edd White Trustee, District 2 19 Years May 2018 Retired Sandi Wolff Trustee, District 3 I Year May2018 Public Affairs/Communications APPOINTED OFFICIALS ADMINISTRATIVE OFFICERS POSITION Superintendent Dr. Brian G. Gottardy, Ed.D... Superintendent of Schools I Senior LcadeJ"Ship Team I Ronald Clmy... Associate Superintendent for Operations Dan Villarreal... Associate Superintendent for Business Services/Chief Financial 011icer CONSULTANTS AND ADVISORS General Counsel Schulman, Lopez, Hoffer & Adelstein, L.L.P. San Antonio, Texas Certified Public Accountants... Alonso, Bacarisse, Irvine & Palmer, P.C. San Antonio, Texas Bond Counsel... Norton Rose Fulbright US LLP San Antonio, Texas Financial Advisor.... FirstSouthwest, a Division of Hilltop Securities, Inc. San Antonio, Texas 8

9 REMARKETING MEMORANDUM RELATING TO $58,095,000 NORTH EAST INDEPENDENT SCHOOL DISTRICT (A Political Subdivision of the State of Texas Located Primarily in Bexar County, Texas) VARIABLE RATE UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2013B INTRODUCTION This Remarketing Memorandum (the "Remarketing Memorandum"), which includes the Appendices hereto, provides certain information regarding the remarketing of$58,095,000 North East Independent School District Variable Rate Unlimited Tax School Building Bonds, Series 2013B (the "Bonds"). Except as otherwise indicated herein, capitalized terms used in this Remarketing Memorandum have the same meanings assigned to such terms in the order authorizing the Bonds adopted by the Board (defined herein) on June 3, 2013 (the "Order") and the order authorizing the remarketing of the Bonds adopted by the Board on June 13, 2016 (the "Remarketing Order"), except as otherwise indicated herein. There follows in this Remarketing Memorandum descriptions of the Bonds and certain information regarding the North East Independent School District (the "District") and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the District's Financial Advisor, FirstSouthwest, a Division of Hilltop Securities, Inc. ("FirstSouthwest"), San Antonio, Texas by electronic mail or upon payment of reasonable copying, handling, and delivery charges. This Remarketing Memorandum speaks only as to its date, and the information contained herein is subject to change. A copy of the final Remarketing Memorandum pertaining to the Bonds will be filed with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access ("EMMA") System. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the District's undertaking to provide certain information on a continuing basis. DESCRIPTION OF THE DISTRICT... The District is a political subdivision ofthe State oftexas (the "State") located in Bexar County, Texas. The District covers approximately 140 square miles in area. The District is governed by a seven-member Board of Trustees (the "Board"), the members of which serve staggered four-year terms, with elections being held in May of every even-numbered year. Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools, who is the chief administrative officer of the District. Support services are supplied by consultants and advisors. THE BONDS AUTHORITY FOR ISSUANCE... The Bonds were initially issued in the principal amount of$73,795,000 and an annual ad valorem tax, without legal limit as to rate or amount, has been levied for their payment pursuant to authority conferred by the Constitution and the laws of the State of Texas, including Chapter 45, as amended, Texas Education Code and Chapter 1371, as amended, Texas Government Code ("Chapter 1371"), an election held in the District on November 8, 2011, and the Order. REMARKETING ORDER... On June 13, 2016, the Board adopted the Remarketing Order which authorized the conversion and remarketing of the Bonds from a one-year Term Rate Period expiring July 31, 2016 to a new five-year Term Rate Period (the "New Term Rate Period") which will be effective August 1, 2016 through July 31, During the New Term Rate Period, the Bonds will bear interest at a per annum Tenn Rate of 1.420% (the "New Term Rate"). In the Remarketing Order, the Board delegated to certain authorized officials of the District the ability to execute a conversion certificate (the "Conversion Certificate") evidencing final tenns relating to the remarketing of the Bonds. This Conversion Certificate was executed by a duly authorized District representative on July 8, In addition to the foregoing, the District, in the Remarketing Order, amended certain tenns and provisions of the Order concerning the mechanics relating to the redemption and remarketing of outstanding Bonds. The descriptions of these Bond characteristics within this Remarketing Memorandum incorporate such amended provisions of the Order. The Remarketing Agent, at the time of its settlement of the remarketing of the Bonds into the New Term Rate Period, consented to the amendment of the Order accomplished by the Board's adoption of the Remarketing Order. GENERAL... Authorized Denominations. The Bonds were initially issued and, with respect to the New Term Rate Period are issued, in denominations of $5,000. Subsequently, the Bonds will be issued in denominations of $100,000 and any integral multiples of $5,000 in excess thereof while bearing interest at a Variable Rate or a Flexible Rate unless the interest rate mode on the Bonds remains in a Term Rate or is converted to a Fixed Rate, in which case the Bonds will be issued in denominations of $5,000 or any integral multiple thereof. Calculation o[interes/. Interest on the Bonds bearing interest at the Weekly Rate, Monthly Rate, Quarterly Rate or Flexible Rate will be calculated on the basis of a 365-day or 366-day year, as applicable, for the actual number of days elapsed. Interest on the Bonds bearing interest at the Semiannual Rate, Term Rate, Stepped Rate, or Fixed Rate will be calculated on the basis of a 360-day year of twelve 30-day months. 9

10 Interest Pavment Methods. Interest on the Bonds during a Flexible Rate, a Weekly Rate, Monthly Rate, or Quarterly Rate mode will be paid (a) by check mailed to the registered owners or (b) at the written election of a registered owner delivered to the Paying Agent/Registrar, by federal funds wire transfer within the continental United States. While the Bonds bear interest at a Semiannual Rate, Term Rate or Fixed Rate, interest will be paid by check, sent by first class mail, to the owner of record on the Record Date or by such other customary banking arrangement acceptable to the Paying Agent/Registrar requested by and at the risk and expense of the Owner. Book-Ent1-p System o[registration and Payment. The Bonds will be issued as Book-Entry-Only securities through The Depository Trust Company ("DTC"). Use of the DTC Book-Entry-Only System will effect the timing and receipt of payment of interest on and principal of the Bonds. Sec "THE BONDS- Book-Entry-Only System." Interest Payment Dates. Interest on the Bonds will be paid as indicated in the table under the heading "THE BONDS - Summary of Certain Provisions of the Bonds." Interest accruing on Bonds during the New Term Rate Period will be paid on each February I and August I, commencing February I, While Bonds bear interest at a Weekly Rate, interest will be paid on the first Business Day of each calendar month. While the Bonds bear interest at the Quarterly Rate, interest will be paid on the first Business Day of the third calendar month following the month in which the Quarterly Rate Conversion Date occurs and the first Business Day of each third calendar month thereafter. While the Bonds bear interest at the Term Rate or Semiannual Rate, interest will be paid on the first day of the sixth calendar month following the month in which the Term Rate or Semiannual Rate Conversion Date occurs and the first day of each sixth month thereafter. While the Bonds bear interest at a Flexible Rate, interest will be paid on the last day of each Flexible Rate Period applicable thereto. While Bonds bear interest at the Fixed Rate, interest will be paid on each August I and February I, beginning the first such date occurring after the Fixed Rate Conversion Date. Paying Agent/Registrar. The Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas. In the Order, the District retains the right to replace the Paying Agent/Registrar. The District covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perfonn the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the District agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Tender Agent. U.S. Bank National Association, Dallas, Texas, serves as the tender agent (the "Tender Agent"), for the Bonds. All notices and Bonds required to be delivered to the Tender Agent shall be delivered to U.S. Bank National Association, Attn: Israel Lugo, Noel Road, Suite 800, Dallas, Texas In the event that the Book-Entry-Only System herein is discontinued and registered bonds are issued, all notices and Bonds are required to be delivered to U.S. Bank National Association, Noel Road, Suite 800, Dallas, Texas Remarketing Agent and Remarketing Agreement. In the Order, the District has covenanted to identify and enter into a contract with a qualified financial institution to serve as remarketing agent for the Bonds (the "Remarketing Agent") prior to the commencement of the remarketing of the Bonds, and to retain such Remarketing Agent for so long, as required by the provisions of the Order. Stifel, Nicolaus & Company, Incorporated has been appointed to serve as the Remarketing Agent for the remarketing of the Bonds into the New Term Rate Period. The office of Stifel, Nicolaus & Company, Incorporated for purposes of its duties as Remarketing Agent is 70 Northeast Loop 410, Suite 295, San Antonio, Texas 782!6. After remarketing the Bonds into the New Term Rate Period, the District is not required to engage or maintain a Remarketing Agent until the commencement of the remarketing period in advance of the Term Rate Conversion Date occurring immediately after the expiration of the New Term Rate Period. The District anticipates at that time identifying and contracting with such Remarketing Agent for this subsequent remarketing of Bonds. Pursuant to, and subject to the terms and conditions of, the Remarketing Agreement, dated as of June!3, 2016, between the District and Stifel, Nicolaus & Company, Incorporated, in its capacity as Remarketing Agent for the Bonds in connection with the remarketing of the Bonds into the New Term Rate Period, has agreed to provide firm financial arrangements for such remarketing of Bonds. For this service, Stifel, Nicolaus & Company, Incorporated will be compensated as described herein under the subcaption "OTHER INFORMATION- Remarketing of Bonds". The Remarketing Agreement between the District and Stifel, Nicolaus & Company, Incorporated will terminate upon the successful settlement of the Bonds in the New Term Rate Period. Legality. The Bonds were originally delivered to the initial purchasers, along with the approving opinion of the Attorney General of the State oftexas and subject to the Original Opinion of Bond Counsel, on July 24, (See Appendix C, entitled "FORM OF BOND COUNSEL'S ORIGINAL OPINION", attached hereto.) Pursuant to the Order, Bond Counsel will deliver an opinion upon the conversion of the Bonds from the existing Term Rate Period to the New Term Rate Period to the Paying Agent/Registrar (on which opinion the Remarketing Agent will be allowed to rely) that such conversion and remarketing will not adversely affect the excludability of interest on the Bonds for federal income tax purposes and is in compliance with Texas law)). Pavmenl Record. The District has never defaulted with respect to the payment of its bonded indebtedness. 10

11 INTEREST RATE MODES... Prior to conversion of the interest rate on the Bonds to a Fixed Rate, the Bonds may bear interest in a Flexible Rate mode or a Variable Rate mode effective for periods ("Flexible Rate Periods" in the case of Flexible Rates and "Variable Rate Periods" in the case of Variable Rates) selected or approved by the District. The rate of interest to be borne by the Bonds during any particular Flexible Rate Period or Variable Rate Period will be detennined by the Remarketing Agent as described below under "Detem1ination oflnterest Rates; Rate Mode Changes". The Bonds may bear interest as follows: Flexible Rate Mode. While the Bonds bear interest at Flexible Rates, the interest rate for the Bonds will be determined by the Remarketing Agent in accordance with the Order and will remain in effect for the duration of the Flexible Rate Period (not exceeding 270 calendar days) selected by the Remarketing Agent. While the Bonds are in the Flexible Rate mode, Bonds may have successive Flexible Rate Periods of any duration up to 270 calendar days each and any one Bond may bear interest at a Flexible Rate and for a Flexible Rate Period different from any other Bond. Variable Rate Modes. In accordance with the Order, the Bonds may bear interest at a Variable Rate at the New Term Rate or on a Weekly, Monthly, Quarterly, Semiannual or Term basis with the interest rate for each mode to be determined generally (excepting the conversion dates from one interest rate mode to another interest rate mode) as follows: Weekly Rate. While Bonds bear interest at a Weekly Rate, the interest rate on the Bonds will be determined weekly each Wednesday, which rate will be effective for a seven-day period commencing on the immediately following Thursday. Monthly Rate. While Bonds bear interest at a Monthly Rate, the interest rate will be determined monthly, which rate will be effective for a one-month period commencing on the first Business Day of a calendar month. Quarterly Rate. While Bonds bear interest at a Quarterly Rate, the interest rate will be detennined quarterly, which rate will be effective for a three-month period commencing on the first Business Day of the Quarterly Rate Period. Semiannual Rate. While Bonds bear interest at a Semiannual Rate, the interest rate will be determined semiannually, which rate will be effective for a six-month period commencing on the first calendar day of the Semiannual Rate Period. Term Rate. While Bonds bear interest at a Term Rate, the interest rate will be determined in effect for a tenn of one year or any integral multiple of one year selected by the District commencing on the first calendar day of the Term Rate Period. The interest rate mode selected by the District will remain in effect until changed by the District by notice to the Paying Agent/ Registrar, the Tender Agent and the Remarketing Agent, in accordance with the Order. Notice of changes in interest rate modes will be given as described below. See "Determination oflnterest Rates; Rate Mode Change". DETERMINATION OF INTEREST RATES; RATE MODE CHANGES... New Term Rate Period. The Bonds will bear interest at the New Term Rate for the duration of New Term Rate Period, beginning on August I, 2016 (which is the first day of the New Term Rate Period) through and including July 31, 2021 (which is the last day of the New Term Rate Period). The Interest Payment Dates during the New Term Rate Period will be on February I and August I, commencing on February I, Following the New Term Rate Period, the Bonds will bear interest at the rate or rates, as determined by the Remarketing Agent, dependent upon the interest rate mode in which the Bonds are remarketed and which mode may thereafter be changed from time to time, prior to conversion to a Fixed Rate, in the manner described below. Rate Mode Changes afier New Term Rate Period. While the Bonds bear interest at Flexible Rates or a Variable Rate, the Paying Agent/Registrar is required to give notice to the Owners of all Bonds of the conversion from one interest rate mode to another at the times described below in the table under the caption "Summary of Certain Provisions of the Bonds." Each notice of a change between interest rate modes will be sent by first class mail to each Owner's address as it appears in the registration books of the Paying Agent/Registrar and will state: (a) the effective date and the type of interest rate mode to which the change will be made; (b) the dates by which the Remarketing Agent will determine the Variable Rate or the Flexible Rate and the dates by which the Owners will be notified thereof; (c) if the Bonds will be subject to optional or mandatory tender on the effective date of the change in the interest rate mode, the procedure for such tender, including the date and time that any notices must be received; and (d) the procedure (including form of notice) to be followed if the Owner desires to retain his Bonds. Any conversion (a) from a Flexible Rate, Weekly Rate, Monthly Rate, Quarterly Rate, Semiannual Rate to a Term Rate; (b) from a Term Rate Period of one duration to a Term Rate period of a different duration; (c) from a Term Rate to a Flexible Rate, Weekly Rate, Monthly Rate, Quarterly Rate, or Semiannual Rate; or (d) to a Fixed Rate will be conditioned on delivery of an opinion of nationally recognized bond counsel to the effect that the conversion will not adversely affect the excludability of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. The opinion of Bond Counsel expresses no opinion as to the effect on excludability from gross income for federal income tax purposes of any action taken which requires the receipt of an opinion of a nationally recognized bond counsel. Pursuant to the Order, Bond Counsel will deliver a limited legal opinion relating to the conversion of the Bonds from the existing Term Rate Period to the New Term Rate Period (as previously described under "THE BONDS~ General~ Legality" herein). II

12 Conversion of interest rate modes must take place only on an interest payment date for the interest rate mode then in effect (though payment of the Purchase Price of remarketed Bonds shall occur on the next occurring Business Day if such interest payment date is not a Business Day). In the case of Bonds in the Flexible Rate mode, the conversion date must also be the first Business Day of a month. While in a Term Rate mode, Bonds may be converted to a different interest rate mode only at the expiration of a Term Rate period. Any Owner of Bonds who may be unable to take timely action on any notice should consider whether to make arrangements fm another person to act in his or her stead. Determination o(/nterest Rates. During each Rate Period, the rate of interest on the Bonds will be the rate that the Remarketing Agent determines, under prevailing market conditions on the date of such detem1ination, would result in the market value of the Bonds being at least I 00% of the principal amount thereof. While the Flexible Rate mode is in effect, each Flexible Rate for each Bond will be detem1ined by the Remarketing Agent in connection with the remarketing of Bonds. Such determination will be based on the offer and acceptance of purchase commitments for such Bonds at a Flexible Rate or Rates and for such Flexible Rate Periods that in the judgment of the Remarketing Agent results in such Bonds having a market value equal to I 00% of the principal amount thereof, plus accrued interest, under prevailing market conditions. The determination by the Remarketing Agent of the Flexible Rates or Variable Rate to be bome by the Bonds will be conclusive and binding on the holders of the Bonds, the District, the Paying Agent/Registrar and the Tender Agent. Failure by the Paying Agent/Registrar to give notice to the Bondholders, or any defect therein, will not affect the interest rate borne by the Bonds or the rights of the Owners thereof. In the event that the Remarketing Agent fails to detem1ine the Flexible Rates or the Variable Rate for any reason, the Flexible Rates or the Variable Rate will continue to be such rate or rates in effect for the then current Interest Rate Period. In no event will the interest rate borne by the Bonds exceed the maximum net effective interest rate permitted under Chapter 1204, Texas Govemment Code, as amended. Notice o(rates. Owners will be notified by first-class mail of the Flexible Rates or Variable Rate applicable to the Bonds at the times described below in the table under the caption "Summary of Certain Provisions of the Bonds." TENDER PROVISIONS... During the New Term Rate Period, the Bonds are not provided additional liquidity support pursuant to a Liquidity Facility and are not subject to optional tender during such period. The District, however, has reserved the right to acquire a Liquidity Facility relating to the Bonds, and execute a Liquidity Agreement in connection therewith, in the future. In the event that a Liquidity Facility is acquired, the Bonds will be subject to optional tender in the manner specified in the Order and described below. The Bonds are not subject to optional tender during the New Term Rate Period. The Bonds are subject to mandatory tender; provided, however, that in certain circumstances where there exists no Liquidity Facility relating to the Bonds, which includes the Bonds during the New Term Rate Period, a failure to remarket Bonds subject to mandatory tender will not constitute an event of default and, in such instance, the mandatory tender is deemed rescinded until the Remarketing Agent is able to remarket the Bonds or the District redeems the Bonds, all in accordance with the provisions of the Order. These instances are described below. Optional Tender. While a Bank, if any, is obligated to advance funds to facilitate the purchase of Bonds pursuant to a Liquidity Agreement and the Bonds bear interest at a Variable Rate or Flexible Rate, as applicable, the owners of the Bonds may tender their Bonds to the Tender Agent for purchase at the Purchase Price as summarized below in the table under the caption "Summary of Certain Provisions of the Bonds." Payment of the Purchase Price of Bonds to be purchased upon an optional tender as described herein will be made by the Tender Agent at its Corporate Trust Office or by bank wire transfer in immediately available funds. Interest on any Bond that the Owner thereof has elected to tender for purchase and that is not tendered on the identified date of purchase, but for which there has been irrevocably deposited with the Tender Agent an amount sufficient to pay the Purchase Price thereof, will cease to accrue interest on such identified date of purchase. The Owner of such untendered Bond will not be entitled to any payment other than the Purchase Price for such Bond, and such untendered Bond will no longer be outstanding or entitled to the benefits of the Order, except for the payment of the Purchase Price thereof from money held by the Tender Agent for such payment. On the optional Purchase Date, the Tender Agent is required to authenticate and deliver substitute Bonds in lieu of such untendered Bonds. Mandmory Tender. The Bonds are required to be tendered for purchase to the Tender Agent, without the right of retention, after the end of the New Term Rate Period on August I, The Bonds are required to be tendered on the effective date of any change between interest rate modes, subject, however, to the right of Owners to elect to retain their Bonds in certain circumstances, at the discretion of the Dist1ict, as described below in the table under the caption "Summary of Certain Provisions of the Bonds". If the District has granted the option of retention, any Owner electing to retain Bonds will have no right to tender such Bonds prior to the effective elate of the change in interest rate mode, and such election to retain will be inevocable and binding upon the Owner and all subsequent Owners of such Bonds. Each Bond bearing interest at a particular Flexible Rate must be tendered by the Owner for purchase at the expiration of the term of the Flexible Rate Period for that Bond; provided, however, that the Owner has the right to elect to retain his investment in the Bond by irrevocable written notice delivered to the Tender Agent not later than 3:00 PM, Eastern Time on the Business Day described below in the table; provided further, however, that the Owners do not have the right 12

13 to retain possession of their investment in the Bonds upon commencement of the Fixed Rate Period or upon the occurrence of certain events of default under a Liquidity Agreement, if any. In the event an Owner of a Bond bearing interest at a Flexible Rate desires to retain his investment, the Owner must present his Bond to the Tender Agent who will authenticate and deliver a substitute Bond having the same principal amount as the old Bond and a term equal to the new Flexible Rate Period. The Bonds are also required to be tendered for purchase to the Tender Agent on the Fixed Rate Conversion Date as described below under "THE BONDS- Conversion to Fixed Rate" or upon the occurrence of an event of default under the Liquidity Agreement, if any. Owners of Bonds shall not have the right to elect to retain their Bonds on the Fixed Rate Conversion Date or upon the occurrence of an event of default under a Liquidity Agreement, if any. Payment of the Purchase Price of Bonds to be purchased upon mandatory tender as described herein will be made by the Tender Agent at its Corporate Trust Office or by wire transfer in immediately available funds. If the Bonds are subject to mandatory tender because of an interest rate conversion occurring at the end of the New Term Rate Period, or because of a conversion to a new Term Rate Period from an existing Term Rate Period (and there then exists no Liquidity Facility relating to the Bonds and there was no Liquidity Facility upon the commencement of the then-expiring Tenn Rate Period or the District has not granted such option of retention), then the Bonds shall be subject to mandatory tender on the Variable Rate Conversion Date; provided, however, that in the event that such Bonds are not converted and remarketed to new purchasers on the scheduled date of mandatory tender, the District shall have no obligation to purchase the Bonds tendered on such date, the failed conversion and remarketing shall not constitute an event of default under the Order or the Bonds, the mandatory tender will be deemed to have been rescinded for that date with respect to the Bonds subject to such failed remarketing only, and such Bonds (i) will continue to be Outstanding, (ii) will be purchased upon the availability of funds to be received from the subsequent remarketing of such Bonds, (iii) will bear interest at the Stepped Rate during the Stepped Rate Period, (iv) will be subject to redemption and mandatory tender for purchase on any date during the Stepped Rate Period upon which a conversion occurs (which shall occur at the District's discretion upon delivery of at least one day's notice to the holders of Bonds bearing interest at the Stepped Rate), and (v) will be deemed to continue in the then-applicable Variable Rate period for all other purposes of the Order, though bearing interest during such time at the Stepped Rate until remarketed or redeemed in accordance with the terms of the Order. In the event of a failed conversion and remarketing as described above, the District has covenanted in the Order to cause the Bonds to be converted and remarketed on the earliest reasonably practicable date on which they can be sold at par, in such interest rate mode or modes as the District directs, at a rate not exceeding the Highest Lawful Rate. The Remarketing Order provides that the Stepped Rate means a rate per annum equal to 7.000%, calculated on the basis of twelve 30 day months and the number of days actually elapsed. Interest on any Bond that the Owner has not elected to continue to own after a mandatory purchase date and that is not tendered on the mandatory purchase date, but for which there has been irrevocably deposited with the Tender Agent an amount sufficient to pay the Purchase Price thereof, will cease to accrue on the mandatory Purchase Date. Thereafter, the Owner of such Bond will not be entitled to any payment other than the Purchase Price for such Bond from money held by the Tender Agent for such payment, and such Bond will not otherwise be outstanding or entitled to the benefits of the Order. On the mandatory Purchase Date, the Tender Agent will authenticate and deliver substitute Bonds in lieu of such untendered Bonds. Remarketing and Purchase. In the event an Owner exercises its right to optionally tender its Bonds, or if any Bonds become subject to mandatory tender, the Remarketing Agent is required to use its best efforts (unless a higher standard has been agreed to by the Remarketing Agent and the District) to sell such Bonds at a price equal to not less than 100% of the principal amount thereof plus accrued interest, if any, on the forthcoming optional or mandatory purchase date or as quickly as possible thereafter. The Purchase Price of Bonds tendered for purchase is required to be paid by the Tender Agent from money derived from the remarketing of such Bonds by the Remarketing Agent. If sufficient funds are not available for the purchase of all tendered Bonds, no purchase will be consummated. SUMMARY OF CERTAIN PROVISIONS OF THE BONDS... The table below summarizes the following information with respect to Bonds bearing interest at Flexible Rates (see footnote (I) on page 15), at a Weekly Rate, Monthly Rate, Quarterly Rate, Semiannual Rate, or Term Rate: (a) (b) (c) (d) (e) (f) the dates on which interest will be paid (the "Interest Payment Dates"), the date each interest rate will be detennined (the "Rate Detennination Date''), the date each interest rate will become effective (the "Effective Date of Rate"), the period of time each interest rate will be in effect (the "Flexible Rate Period/Rate Period"), the requirements for notice to Owners of interest rate adjustments (the 'Written Notice of Rate"), the dates on which Owners may tender their Bonds for purchase to the Tender Agent and the notice requirements therefor (the "Optional Purchase Dates; Owner's Notice of Optional Tender''), 13

14 (g) (h) (i) Ul the requirements for physical delivery of tendered Bonds and payment provision therefor ("Physical Delivery of and Payment for Bonds Subject to Optional and Mandatory Tender"), the notice requirements in order to change from one interest rate mode to a ditterent interest rate mode ("Written Notice of Rate Mode Change"), the date on which Bonds are subject to mandat01y tender for purchase in the event of a change from one interest rate mode to a different interest rate mode or in the event of a change from one Flexible Rate Period to another Flexible Rate Period ("Mandatory Purchase Date Upon Rate Mode Change or Upon Flexible Rate Period Change"), and the provisions relating to each Owner's right to elect to retain his or her Bonds in the event the Bonds are subject to mandatory tender as described above (the "Owner's Election to Retain Bonds Upon Rate Mode Change When Converting to Designated Rate or Upon Flexible Rate Period Change"). All times shown in the following table are Eastern Time. A "Business Day" is defined in the Order to be a day on which (a) banks located in New York, New York and in San Antonio, Texas are not required or authorized by law or executive order to close for business and (b) the New York Stock Exchange is not closed. Any payments required to be made on any day which is not a Business Day may be made instead on the next succeeding Business Day, and no interest shall accme on such payments in the interim. [The remainder ofthis page intentionally lefl blank} 14

15 I Weekl;yRate II Monthl;y Rate II Quarterl;y Rate II Semiannual Rate II TermRateO> I Interest Payment Dates First Business Day of First Business Day of First Business Day of First calendar day of sixth First calendar day of sixth each calendar month. each calendar month. third calendar month after calendar month after calendar month after Effective Date of Rate Effective Date of Rate Effective Date of Rate and and first Business Day of and first day of every first day of every sixth month every third month sixth month thereafter. thereafter. thereafter. Rate Detennination Date Weekly Rate detennined Monthly Rate detennined Quarterly Rate Semiannual Rate Tenn Rate detennined by by 12:00 Noon by 12:00 Noon on detennined by 12:00 detennined by 12:00 12:00 Noon on Business Day Wednesday, or if Business Day Noon on Business Day Noon on Business Day itmnediately preceding Wednesday is not a immediately preceding hmnediately preceding immediately preceding Effective Date of Rate. Business day, the Effective Date of Rate. Effective Date of Rate. Effective Date of Rate. Business Day immediately preceding the Effective Date of Rate. Effective Date of Rate; Thursday following each First Business Day of First Business Day of First calendar day of each First calendar day of each Flexible Rate Period/Rate Rate Detennination Date; each calendar month; each Quarterly Rate Semiannual Rate Period: Tenn Rate Period; Tenn Rate Period Weekly Rate effective Monthly Rate effective Period; Quarterly Rate Semiannual Rate effective until the end of the through Wednesday of until the end of the last effective until the end of effective until the end of last day prior to the next week. day prior to the first the last day thereof. the last day prior to the designated anniversary (one Business Day of next first day of sixth calendar or more whole years) of calendar month. month thereafter. Effective Date of Rate. Written Notice of Rate Paying Agent/Registrar Paying Agent/Registrar Paying Agent/Registrar Paying Agent/Registrar Paying Agent/Registrar to to mail owner monthly to mail owner notice of to mail owner notice of to mail owner notice of mail owner notice of Tenn confinnation statement Monthly Rate promptly Quarterly Rate promptly Semiannual Rate Rate promptly after Rate within 7 Business Days after Rate Detennination after Rate Determination promptly after Rate Detennination Date. after Interest Payment Date. Date. Detennination Date. Date. Optional Purchase Dates; Purchase on any Effective Any Interest Payment Any Interest Payment Any Interest Payment None if there exists no Owner's Notice of Date of Rate; Written Date; Written notice to Date; Written notice to Date; Written notice to Liquidity Facility; otherwise, Optional Tender notice to Tender Agent by Tender Agent by owner at Tender Agent by owner at Tender Agent by owner at first day of next Rate Period; owner at or prior to 3:00 or p1ior to 3:00 PM on or prior to 3:00 PM on or prior to 3:00 PM on Written notice to Tender PM on any Business Day any Business Day at least any Business Day at least any Business Day at least Agent by owner at or prior to not less than 7 Business 7 Business Days prior to 7 Business Days prior to 7 Business Days prior to 3:00 PM on any Business Days prior to optional optional Purchase Date. optional Purchase Date. optional Purchase Date. Day at least 7 Business Days Purchase Date. prior to optional Purchase Date. (I) The Order also provides for a flexible Rate for a tenn not to exceed 270 days. To convert to the Flexible Rate mode, the District, among other matters, must confinn the existing ratings with each Rating Agency to provide for the payment of interest by beyond 180 days. Based upon these conditions precedent, no further discussion concerning the flexible Rate mode is provided in the above table.

16 Physical Delivety* of and Payment of Bonds Subject to Optional Tender *(subject to DTC procedures) Physical Delivery* of and Payment of Bonds Subject to Mandat01y Tender *(subject to DTC procedures) Written Notice of Rate Mode Change Mandat01y Purchase Date upon Rate Mode Change or upon Flexible Rate Period Chan 'C Recission of Mandatory Tender Notice upon failed remarketing; No Event of Default; Bonds bear interest at Stepped Rate during Stepped Rate Period Owner's Election to Retain* upon Rate Mode Change when Converting to Designated Rate or upon Flexible Rate Period Change *(subject to District's prospective grant of retention ri )ht) I Weekly Rate I To Tender Agent by 5:00 PM on Business Day prior to designated purchase If change to Flexible, Monthly or longer rate, Paying Agent/Registrar to mail owners notice at least 30 days prior to Effective Date of Rate Mode Change. Effective Date of Rate Mode Change (the conversion date). NIA Change to Weekly from Monthly or longer rate: owner may elect to retain Bonds upon written notice delivered to Tender Agent no later than 3:00 PM on Business Day at least 15 clays (7 of conversion from a Flexible Rate) prior to Effective Date of Rate. Monthly Rate To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30 PM date; payment by 2:30 PM on designated purchase on designated date. To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30PM, on purchase date. purchase date. To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30PM, on purchase date. Paying Agent/Registrar to mail notice to owners at least 30 days prior to Effective Date of Rate Mode Change. Effective Date of Rate Mode Change (the conversion date). NIA Quarterly Rate To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30 PM on designated purchase elate. To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30PM, on purchase date. Paying Agent/Registrar to mail notice to owners at least 30 days plior to Effective Date of Rate Mode Change. Effective Date of Rate Mode Change (the conversion date). NIA Semiannual Rate To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30 PM on designated purchase date. To Tender Agent by 5:00 PM on Business Day prior to designated purchase date; payment by 2:30PM, on purchase date. Paying Agent/Registrar to mail notice to owners at least 30 days prior to Effective Date of Rate Mode Change. Effective Date of Rate Mode Change (the conversion date). Change to Monthly from Change to Qum1erly from Change to Semiannual any mode: owner may any mode: owner may from any mode: owner elect to retain Bonds upon elect to retain bonds upon may elect to retain Bonds written notice delivered to written notice delivered to upon written notice Tender Agent no later than 3:00 PM on Business Day at least 7 days prior to Tender Agent no later than 3:00 PM on Business Day at least 13 days prior to delivered to Tender Agent no later than 3:00 PM on Business Day at least 15 Effective Date of Rate. Effective Date of Rate. days prior to Effective Date of Rate. NIA Term Rate"' To Tender Agent by 5:00PM on Business Day prior to designated purchase date; payment by 2:30 PM on designated purchase date. To Tender Agent by 5:00PM on Business Day prior to designated purchase date; payment by 2:30 PM, on purchase date. Paying Agent/Registrar to mail notice to owners at least 30 days prior to Effective Date of Rate Mode Change. Effective Date of Rate Mode Change (the conversion date). Term Rate Mode Bonds subject to mandatory tender because of an interest rate conversion to a new Term Rate Period and there then exists no related Liquidity Facility (nor was there upon the commencement of the thenexpirin 1 Term Rate Petiod). Change to Term from any mode: if a right to retain has been granted by the District, owner may elect to retain Bonds upon written notice delivered to Tender Agent no later than3:00 PM on Business Day at least 15 days prior to Effective Date of Rate. I (I) See footnote fi om prior page.

17 CONVERSION TO FIXED RATE... The Order provides that at the option of the District the Bonds bearing interest at a Variable Rate or Flexible Rate may be converted in whole or in part to a Fixed Rate or Rates on any Interest Payment Date. In the event of a partial conversion, the Paying Agent/Registrar shall select by lot or other customary random method the Bonds to be converted to a Fixed Rate. Solely and exclusively with respect to the Remarketing Agent's setting of Fixed Rates on the Bonds to be converted on the Fixed Rate Conversion Date, the Remarketing Agent shall determine the rates for such converted Bonds that will cause such Bonds to have a market value, net of costs of issuance and remarketing fees, equal to not less than the principal amount of Bonds. In addition, the District may reserve the right, exercisable at its sole option, to seek competitive bids on the Fixed Rate Conversion Date. Upon conversion to a Fixed Rate mode, the Bonds will be issued in authorized denominations of$5,000 and integral multiples thereof for any one maturity. To exercise its option, the District must deliver to the Paying Agent/Registrar, the Remarketing Agent (if any), and the Tender Agent written notice at least 45 calendar days prior to the interest payment date on which the Fixed Rate mode is to become effective (the "Fixed Rate Conversion Date"). The Bonds converted to a Fixed Rate on a Fixed Rate Conversion Date shall mature, be subject to redemption and have the same terms and features (other than the right of Owners to tender their Bonds for purchase) as set forth in the Order with respect to Bonds bearing interest at a Variable Rate and Flexible Rate. Notwithstanding the previous sentence, in connection with a conversion to a Fixed Rate, the District may elect, at its sole option, to provide for serial maturities, revised redemption provisions and other terms applicable to the pricing of the Bonds on and after the Fixed Rate Conversion Date. If the District so elects, the serial maturities for the Bonds converted to a Fixed Rate shall be determined on the basis of providing similar relative principal payments on such Bonds (after giving pro rata effect for any prior sinking fund redemptions of the Bonds, if any, not then converted) in order to effectuate a pro rata allocation of the mandatory redemption schedule as set forth in "THE BONDS- Mandatory Redemption" below between the Bonds to be converted to a Fixed Rate and the Bonds remaining in a Variable Rate or Flexible Rate. In addition, the District must deliver to the Paying Agent/Registrar prior to the Fixed Rate Mode Conversion Date an opinion of nationally recognized bond counsel to the effect that the conversion to the Fixed Rate Mode is authorized under the provisions of the Order and will not adversely affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes. The Paying Agent/Registrar is required to give notice by mail to all Owners of the conversion to a Fixed Rate Mode not less than 30 calendar days prior to the Fixed Rate Conversion Date. Such notice is required to (a) specify the Fixed Rate Conversion Date and the dates by which the District will determine and the Paying Agent/Registrar will notify the Owners of the Fixed Rate Bonds; (b) state that the Bonds will be subject to mandatory tender for purchase on the Fixed Rate Conversion Date without the right of the Owners to retain their Bonds, and (c) specify the redemption provisions and other terms applicable to the Bonds after the Fixed Rate Conversion Date. In advance of the Fixed Rate Conversion Date in accordance with the Order, the Remarketing Agent will, in consultation with and subject to the approval of the District, determine the Fixed Rate or Rates and give notice thereof to the Paying Agent/Registrar. The Paying Agent/Registrar will then give notice of such Fixed Rate or Rates by first class mail to the Tender Agent and the Owners of the Bonds. After the Fixed Rate Conversion Date, the Owners of converted Bonds will have no right to tender their Bonds for purchase. OPTIONAL REDEMPTION... The Bonds in the New Term Rate Period are subject to redemption at the option of the District on any Interest Payment Date, commencing February 1, 2017, in whole or in part, at a redemption price equal to the principal amount thereof, plus accrued interest to the redemption date. After conversion to a Fixed Rate, the Bonds are subject to redemption at the option of the District, in whole or in part, on the dates and at the redemption prices determined by the District on the Fixed Rate Conversion Date. The Paying Agent/Registrar is required to cause notice of any redemption of Bonds to be mailed to each Owner of Bonds to be redeemed at the respective addresses appearing in the registration books for the Bonds. Notice of redemption is required to (i) be mailed at least 20 days prior to the redemption date with respect to Bonds bearing interest at a Term Rate or at a Fixed Rate; (ii) identify the Bonds to be redeemed (specifying the numbers assigned to the Bonds); (iii) specify the redemption date and the redemption price; and (iv) state that (a) on the redemption date the Bonds called for redemption will be payable at the corporate trust office of the Paying Agent/Registrar and (b) from the redemption date interest will cease to accrue. For a redemption to occur on the Interest Payment Date immediately succeeding the conclusion of the New Term Rate Period, the notice of mandatory tender on such date shall satisfy any notice of redemption requirements. If notice of redemption is given as described above and if due provision for the payment of the redemption price is made, then the Bonds that are to be redeemed thereby will automatically be deemed to have been redeemed prior to their scheduled maturities and will not bear interest after the redemption date, nor will they be regarded as being outstanding except for the right of the Owner thereof to receive the redemption price from the Paying Agent/Registrar. Notwithstanding the forgoing, and while the Bonds bear interest at a Stepped Rate, such Bonds are callable on any date, at the option of the District upon delivery of written notice to the owners thereof at least one day prior to such date of redemption. 17

18 MANDATORY REDEMPTION Scheduled Mandatory Redemption. The Bonds are subject to mandatory redemption prior to stated maturity as follows: Date August I, 2017 August I, 2018 August 1, 2019 August 1, 2020 August I, 2021 August I, 2022 August I, 2023 August I, 2024 August I, 2025 August 1, 2026 August I, 2027 August I, 2028 Mandatory Redemption Redemption Date $1,305,000 August 1, ,370,000 August 1, ,440,000 August I, ,510,000 August I, ,585,000 August I, ,665,000 August I, 2034 I,750,000 August I, ,835,000 August I, ,930,000 August 1, ,025,000 August 1, ,125,000 August I, ,235,000 August 1, 2040 * Redemption $ 2,345,000 2,460,000 2,585,000 2,715,000 2,850,000 2,995,000 3,140,000 3,300,000 3,465,000 3,635,000 3,820,000 4,010,000 * Scheduled final maturity. The principal amount of Bonds required to be redeemed pursuant to the operation of such mandatory redemption provisions shall be reduced, at the option of the District, by the principal amount of any Bonds which, at least 50 days prior to the mandatory redemption date (I) shall have been defeased or acquired by the District and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the District with money in the Bond Fund, or (3) shall have been redeemed pursuant to the optional redemption provisions set forth above and not thereto for credited against a mandatory redemption requirement. Special Mandatory Redemption. While the Bonds are Outstanding and accruing interest at a Flexible Rate or a Variable Rate which includes a period longer than the period for which taxes are then being assessed, the District may, at its discretion and in accordance with and as permitted by the Order, budget for such fiscal year and levy taxes for the payment of interest on the Bonds based on an interest rate on the Bonds equal to the actual rate borne thereby or 5.00% per annum; provided, however, the actual rate shall be used if it exceeds 5.00% per annum. At the end of the fiscal year in which the District levies a tax based on the interest rate on the Bonds being equal to 5.00%, the District shall determine whether the interest paid on the Bonds in such fiscal year is less than an amount equal to 5.00%.!fin such circumstance the amount of interest paid on the Bonds is less than an amount equal to a 5.00% interest rate, the District shall cause the difference between the amount budgeted at a 5.00% interest rate and the amount paid on the Bonds ("Excess Interest Funds") to be allocated and appropriated for the payment of a special mandatory redemption of Bonds on the first August I next following the end of such fiscal year; provided the amount of such Excess Interest Funds is equal to or greater than $100,000. In each fiscal year when the amount of Excess Interest Funds is equal to or greater than $1 00,000, the District shall cause Bonds in a principal amount equivalent to the Excess Interest Funds to be redeemed on the August I next following the end of such fiscal year at the redemption price of par plus accrued interest to the date of redemption. The mandatory redemption of Bonds in accordance with the provisions of this paragraph shall be in addition to the amount of Bonds to be mandatorily redeemed as set forth in the schedule above in the years shown. On or before June 15 of each year preceding each mandatory redemption date the Bonds are to be mandatorily redeemed, the District will notify the Paying Agent/Registrar in writing of the principal amount of Bonds to be mandatorily redeemed with Excess Interest Funds on the following August I, and instruct the Paying Agent/Registrar to select by lot or other customary random selection method the Bonds or portions thereof to be redeemed. Nonn~s OF REDEMPTION AND DTC NOTICES... All notices of redemption shall (i) specify the date of redemption for the Bonds, (ii) identify the Bonds to be redeemed and, in the case of a portion of the principal amount to be redeemed, the principal amount thereof to be redeemed, (iii) state the redemption price, (iv) state the Bonds, or the portion of the principal amount thereof, to be redeemed, shall become due and payable on the redemption date specified, and the interest thereof, or on the portion of the principal amount thereof to be redeemed, shall cease to accrue from and after the redemption date, and (v) specify that payment of the redemption price for the Bonds, or the principal amount thereof to be redeemed, shall be made at the designated corporate trust office of the Paying Agent/Registrar only upon presentation and surrender thereof by the registered owner.!fa Bond is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given or waived as provided in the Order, such Bonds (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the redemption date designated in such notice, interest on said Bonds (or the principal amount thereof to be redeemed) called for redemption shall cease to accrue and such Bonds shall not be deemed to be outstanding. 18

19 The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System is used for the Bonds will send any notice of redemption, notice of proposed amendment to the Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised or any such notice. Redemption of portions of the Bonds by the District will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account ofdtc participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection ofbonds to be redeemed will not be governed by the Order and will not be conducted by the District or the Paying Agent/Registrar. Neither the District nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. See "THE BONDS- Book-Entry-Only System" herein. SECURITY... The Bonds are direct obligations of the District and are payable as to both principal and interest from annual ad valorem taxes levied on all taxable property within the District, without legal limitation as to rate or amount, as provided in the Order. Additionally, the payment of the principal of and interest on the Bonds (but not the purchase price of Bonds at mandatory tender), when due, is guaranteed by the corpus of the Texas Permanent School Fund. See "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM," "STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS," and "CURRENT PUBLIC SCHOOL FINANCE SYSTEM" herein. PERMANENT SCHOOL FUND GUARANTEE. In connection with their initial issuance, the Bonds were guaranteed under the Guarantee Program for School District Bonds (Chapter 45, Subchapter C, of the Texas Education Code). The Bonds remain guaranteed under such Program subsequent to their remarketing into the New Term Rate Period. In the event of default, registered owners will receive covered payments from the corpus ofthe Texas Permanent School Fund (see "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM"). In the event the District defeases any of the Bonds, the payment of such defeased Bonds will cease to be guaranteed by the Texas Permanent School Fund Guarantee. BOOK-ENTRY-ONLY SYSTEM... This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and accredited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Remarketing Memorandum. The District, Remarketing Agent, and Financial Advisor believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants (defined herein), (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners (defined herein), or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Remarketing Memorandum. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee). One fully-registered certificate will be issued for each maturity of the Bonds in the aggregate principal amount of each such maturity and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning ofthe New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity, corporate and municipal debt issues, and money market instruments from over I 00 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC''). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants" and, together with the Direct Participants, the "DTC Participants"). DTC has a Standard & Poor's rating of"aa+. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at 19

20 Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC' s records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the Book-Entiy-Only System for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative ofdtc. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. A Beneficial Owner shall give notice to elect to have its Bonds purchased or tendered, through its Participant, to Tender Agent, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds, on DTC's records, to Tender Agent. The requirement for physical delivery of Bonds in connection with a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Bonds to Tender Agent's DTC account. Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail infom1ation from the District or the Paying Agent/Registrar, on payable dates in accordance with their respective holdings shown on DTC's records. Payments by DTC Participants to Beneficial Owners will be governed by standing instructions and customary practices, as in the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such DTC Participant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC, is the responsibility of the District, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the District and the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system ofbook-entry transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered. Use of Certain Terms in Other Sections of this Remarluting Memorandum. In reading this Remarketing Memorandum it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Remarketing Memorandum to registered owners should be read to include the person for which the DTC Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the District, the Financial Advisor or the Remarkcting Agent. 20

21 Effect of Termination of Book-EIIfry-Only System. In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the District, printed Bonds will be issued to the holders and the Bonds will be subject to transfer, exchange and registration provisions as set forth in the Order and summarized under "THE BONDS - Transfer, Exchange and Registration" below. TRANSFER, EXCHANGE AND REGISTRATION... In the event the Book-Entry-Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Bonds surrendered for exchange or transfer. See 'THE BONDS- Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. Neither the District nor the Paying Agent/Registrar shall be required to transfer or exchange any Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. REPLACEMENT BONDS... If any Bond is mutilated, destroyed, stolen or lost, a new Bond oflike kind and in the same amount as the Bond so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Bond, such new Bond will be delivered only upon surrender and cancellation of such mutilated Bond. In the case of any Bond issued in lieu of and in substitution for a Bond which has been destroyed, stolen, or lost, such new Bond will be delivered only (a) upon filing with the District and the Paying Agent/Registrar evidence satisfactory to establish to the District and the Paying Agent/Registrar that such Bond has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the District and the Paying Agent/Registrar with bond or indemnity satisfactory to them. The person requesting the authentication and delivery of a new Bond must comply with such other reasonable regulations as the Paying Agent/Registrar may prescribe and pay such expenses as the Paying Agent/Registrar may incur in connection therewith. DEFEASANCE... The Order provides for the defeasance of the Bonds when the payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof(whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (I) money sufficient to make such payment, (2) Government Obligations (defined below), certified, in the case of a net defeasance, by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Bonds, or (3) a combination of money and Government Obligations together so certified sufficient to make such payment; provided, however, that no certification by an independent accounting firm of the sufficiency of deposits shall be required in connection with a gross defeasance of Bonds. The District has additionally reserved the right in the Order, subject to satisfying the requirements of (I) and (2) above, to substitute other Government Obligations for the Government Obligations originally deposited, to reinvest the uninvested money on deposit for such defeasance and to withdraw for the benefit of the District money in excess of the amount required for such defeasance. The Order provides that "Government Obligations" means (a) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the District authorizes the defeasance, are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, or (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that on the date the governing body of the District adopts or approves the proceedings authorizing the financial arrangements have been refunded and are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent. There is no assurance that the ratings for United States Treasury securities acquired to defease any Bonds, or those for any other Government Obligations, will be maintained at any particular rating category. Upon such deposit as described above, such Bonds will no longer be regarded to be outstanding obligations for purposes of applying any limitation on indebtedness or for purposes of taxation. After finn banking and financial arrangements for the discharge and final payment of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the tenns of the Bonds are extinguished; provided, however, that, the District's right to redeem Bonds defeased to stated maturity is not extinguished if the District has reserved the option, to be exercised at the time of the defeasance of the Bonds, to call for redemption, at an earlier date, those Bonds which have been defeased to their stated maturity date, if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. 21

22 Defeasance will cancel the Permanent School Fund Guarantee with respect to those defeased Bonds. AMENDMENTS... The District, may, without the consent of or notice to any holders of the Bonds, from time to time and at any time, amend the Order in any manner nul detrimental to the interests of the holders of the Bonds, including the curing of any ambiguity, inconsistency, or fonnal defect or omission herein. In addition, the District may, with the written consent of holders of the Bonds holding a majority in aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order; provided, however, that, without the consent of all holders of outstanding Bonds, no such amendment, addition, or rescission shall (I) extend the time or times of payment of the principal of, premium, if any, and interest on the Bonds, reduce the principal amount thereof, the purchase or redemption price therefor, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of, premium, if any, or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required to be held by holders for consent to any such amendment, addition, or rescission. RECORD DATE FOR INTEREST PAYMENT... The record date ("Record Date") for determining the party to whom interest on the Bonds is payable on any Interest Payment Date means (i) with respect to Bonds bearing interest at a Weekly Rate, Monthly Rate, or Quarterly Rate, or at a Flexible Rate, the close of business on the Business Day immediately preceding the Interest Payment Date and (ii) with respect to Bonds bearing interest at the New Term Rate or a Semiannual Rate, Term Rate, or Fixed Rate, the close ofbusiness on the fifteenth day of the month immediately preceding such Interest Payment Date. BONDHOLDERS' REMEDIES... If the District defaults in the payment of principal, interest, or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation or perfonnance of any other covenants, conditions, or obligations set fmih in the Order, and the State fails to honor the Permanent School Fund Guarantee as hereinafter discussed, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Bonds, if there is no other available remedy at law to compel performance of the Bonds or Order and the District's obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the Bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S. W. 3d 325 (Tex. 2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Chapter I 37 I, which pertains to the issuance of public securities by issuers such as the District, permits the District to waive sovereign immunity in the proceedings authorizing the issuance of the Bonds. Notwithstanding its reliance upon the provisions of Chapter 1371 in connection with the issuance of the Bonds (as further described under the caption "THE BONDS- Authority for Issuance"), the District has not waived the defense of sovereign immunity with respect thereto. Because it is unclear whether the Texas legislature has effectively waived the District's sovereign immunity from a suit for money damages outside of Chapter 1371, Bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Furthem10re, the District is eligible to seek relieffrom its creditors under Chapter 9 of the United States Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. See "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM'' herein for a description of the procedures to be followed for payment of the Bonds by the Permanent School Fund in the event the District fails to make a payment on the Bonds when clue. Bond Counsel's Original Opinion notes that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors and general principles of equity that permit the exercise of judicial discretion. ORIGINAL USE OF BOND PROCEEDS; USE OF REMARI<ETING PROCEEDS... Proceeds from the sale of the Bonds were originally used to (i) acquire, construct, renovate, improve and equip various school facilities and the purchase of new school buses and (ii) pay the costs of issuance of the Bonds. The proceeds to be derived from this remarketing of the Bonds will be used to repay existing holders of Bonds upon such holders' mandatory tender of the remarketed Bonds and to pay the costs ofremarketing the Bonds. 22

23 THEPERMANENTSCHOOLFUNDGUARANTEEPROGRAM This disclosure statement provides information relating to the program (the "Guarantee Program") administered by the Texas Education Agency (the "TEA") with respect to the Texas Permanent School Fund guarantee of tax-supported bonds issued by Texas school districts and the guarantee of revenue bonds issued by or for the benefit of Texas charter districts. The Guarantee Program was authorized by an amendment to the Texas Constitution in 1983 and by Subchapter C of Chapter 45 of the Texas Education Code, as amended (the "Act"). While the Guarantee Program applies to bonds issued by or for both school districts and charter districts, as described below, the Act and the program rules for the two types of districts have some distinctions. For convenience of description and reference, those aspects of the Guarantee Program that are applicable to school district bonds and to charter district bonds are referred to herein as the "School District Bond Guarantee Program" and the "Charter District Bond Guarantee Program," respectively. Some of the information contained in this Section may include projections or other forward-looking statements regarding future events or the future financial performance of the Texas Permanent School Fund (the "PSF" or the "Fund"). Actual results may differ materially from those contained in any such projections or forward-looking statements. HISTORY AND PURPOSE... The PSF was created with a $2,000,000 appropriation by the Texas Legislature (the "Legislature") in 1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 stipulated that certain lands and all proceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land and rights to the PSF. In 1953, the U.S. Congress passed the Submerged Lands Act that relinquished to coastal states all rights of the U.S. navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years oflitigation ( ), the U.S. Supreme Court on May 31, 1960, affirmed Texas' historic three marine leagues (10.35 miles) seaward boundary. Texas proved its submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws and treaties dating back to All lands lying within that limit belong to the PSF. The proceeds from the sale and the mineral-related rental of these lands, including bonuses, delay rentals and royalty payments, become the corpus of the Fund. Prior to the approval by the voters of the State of an amendment to the constitutional provision under which the Fund is established and administered, which occurred on September 13, 2003 (the "Total Return Constitutional Amendment"), and which is further described below, the PSF had as its main sources of revenues capital gains from securities transactions and royalties from the sale of oil and natural gas. The Total Return Constitutional Amendment provides that interest and dividends produced by Fund investments will be additional revenue to the PSF. The State School Land Board ("SLB") maintains the land endowment of the Fund on behalf of the Fund and is authorized to manage the investments of the capital gains, royalties and other investment income relating to the land endowment. The SLB is a three member board, the membership of which consists of the Commissioner of the Texas General Land Office (the "Land Commissioner") and two citizen members, one appointed by the Governor and one by the Texas Attorney General (the "Attorney General"). The Texas Constitution describes the PSF as "permanent" and "perpetual." Prior to the approval by Total Return Constitutional Amendment, only the income produced by the PSF was to be used to complement taxes in financing public education. On November 8, 1983, the voters of the State approved a constitutional amendment that provides for the guarantee by the PSF of bonds issued by school districts. On approval by the State Commissioner of Education (the "Commissioner"), bonds properly issued by a school district are fully guaranteed by the corpus of the PSF. See "The School District Bond Guarantee Program." In 20 II, legislation was enacted that established the Charter District Bond Guarantee Program as a new component of the Guarantee Program. That legislation authorized the use of the PSF to guarantee revenue bonds issued by or for the benefit of certain openenrollment charter schools that are designated as "charter districts" by the Commissioner. On approval by the Commissioner, bonds properly issued by a charter district participating in the Program are fully guaranteed by the corpus of the PSF. As described below, the implementation of the Charter District Bond Guarantee Program was deferred pending receipt of guidance from the Internal Revenue Service (the "IRS") which was received in September 2013, and the establishment of regulations to govern the program, which regulations became effective on March 3, See "The Charter District Bond Guarantee Program." State law also permits charter schools to be chartered and operated by school districts and other political subdivisions, but bond financing of facilities for school district-operated charter schools is subject to the School District Bond Guarantee Program, not the Charter District Bond Guarantee Program. While the School District Bond Guarantee Program and the Charter District Bond Guarantee Program relate to different types of bonds issued for different types of Texas public schools, and have different program regulations and requirements, a bond guaranteed under either part of the Guarantee Program has the same effect with respect to the guarantee obligation of the Fund thereto, and all guaranteed bonds are aggregated for purposes of determining the capacity of the Guarantee Program (see "Capacity Limits for the Guarantee Program"). The Charter District Bond Guarantee Program as enacted by State law has not been reviewed by any court, nor has the Texas Attorney General been requested to issue an opinion, with respect to its constitutional validity. The sole purpose of the PSF is to assist in the funding of public education for present and future generations. Prior to the adoption of the Total Return Constitutional Amendment, all interest and dividends produced by Fund investments flowed into the Available School Fund (the "ASF"), where they are distributed to local school districts and open-enrollment charter schools based on average daily attendance. Any net gains from investments of the Fund accrue to the corpus of the PSF. Prior to the approval by the voters 23

24 of the State of the Total Retum Constitutional Amendment, costs of administering the PSF were allocated to the ASF. With the approval of the Total Return Constitutional Amendment, the administrative costs of the Fund have shifted from the ASF to the PSF. In fiscal year 2015, distributions to the ASF amounted to $ per student and the total amount distributed to the ASF was $ million. Audited financial information for the PSF is provided annually through the PSF Comprehensive Annual Financial RepOii (the "Annual Report"), which is filed with the Municipal Securities Rulemaking Board ("MSRB"). The Annual Report includes the Message of the Executive Administrator of the Fund (the "Message") and the Management's Discussion and Analysis ("MD&A"). The Annual Report for the year ended August 3I, 2015, as filed with the MSRB in accordance with the PSF undertaking and agreement made in accordance with Rule 15c2-12 ("Rule 15c2-12") of the federal Securities and Exchange Commission (the "SEC"), as described below, is hereby incorporated by reference into this disclosure. Infonnation included herein for the year ended August 31, 2015 is derived from the audited financial statements of the PSF, which are included in the Annual Report when it is filed and posted. Reference is made to the Annual Report for the complete Message and MD&A for the year ended August 31, 2015 and for a description of the financial results of the PSF for the year ended August 31, 2015, the most recent year for which audited financial information regarding the Fund is available. The 2015 Annual Report speaks only as of its date and the TEA has not obligated itself to update the 2015 Annual Report or any other Annual Report. The TEA posts each Annual Report, which includes statistical data regarding the Fund as of the close of each fiscal year, the most recent disclosure for the Guarantee Program, the Statement of Investment Objectives, Policies and Guidelines of the Texas Permanent School Fund, which is codified at 19 Texas Administrative Code, Chapter 33 (the "Investment Policy"), monthly updates with respect to the capacity of the Guarantee Program (collectively, the "Web Site Materials") on the TEA web site at and with the MSRB at Such monthly updates regarding the Guarantee Program are also incorporated herein and made a part hereof for all purposes. In addition to the Web Site Materials, the Fund is required to make quarterly filings with the SEC under Section 13(f) of the Securities Exchange Act of Such filings, which consist of a list of the Fund's holdings of securities specified in Section 13(f), including exchangetraded (e.g., NYSE) or NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies and certain convertible debt securities, is available from the SEC at A list of the Fund's equity and fixed income holdings as of August 31 of each year is posted to the TEA web site and filed with the MSRB. Such list excludes holdings in the Fund's securities lending program. Such list, when filed, is incorporated herein and made a part hereoffor all purposes. THE TOTAL RETURN CONSTITUTIONAL AMENDMENT... The Total Retum Constitutional Amendment approved a fundamental change in the way that distributions are made to the ASF from the PSF. The Total Return Constitutional Amendment requires that PSF distributions to the ASF be determined using a total-retum-based formula instead of the current-income-based formula, which was used from 1964 to the end of the 2003 fiscal year. The Total Retum Constitutional Amendment provides that the total amount distributed from the Fund to the ASF: (1) in each year of a State fiscal biennium must be an amount that is not more than 6% of the average of the market value of the Fund, excluding real property (the "Distribution Rate"), on the last day of each of the sixteen State fiscal quarters preceding the Regular Session of the Legislature that begins before that State fiscal biennium (the "Distribution Measurement Period"), in accordance with the rate adopted by: (a) a vote of two-thirds of the total membership of the State Board of Education ("SBOE"), taken before the Regular Session of the Legislature convenes or (b) the Legislature by general law or appropriation, if the SBOE does not adopt a rate as provided by clause (a); and (2) over the ten-year period consisting of the current State fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment assets of the Fund over the same ten-year period (the "Ten Year Total Return"). In April 2009, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-0707 (2009) ("GA-0707"), at the request of the Chairman of the SBOE with regard to certain matters pertaining to the Distribution Rate and the determination of the Ten Year Total Retum. In GA-0707 the Attorney General opined, among other advice, that (i) the Ten Year Total Retum should be calculated on an annual basis, (ii) a contingency plan adopted by the SBOE, to permit monthly transfers equal in aggregate to the annual Distribution Rate to be halted and subsequently made up if such transfers temporarily exceed the Ten Year Total Return, is not prohibited by State law, provided that such contingency plan applies only within a fiscal year time basis, not on a biennium basis, and (iii) that the amount distributed from the Fund in a fiscal year may not exceed 6% of the average of the market value of the Fund or the Ten Year Total Return. In accordance with GA-0707, in the event that the Ten Year Total Return is exceeded during a fiscal year, transfers to the ASF will be halted. However, if the Ten Year Total Return subsequently increases during that biennium, transfers may be resumed, if the SBOE has provided for that contingency, and made in full during the remaining period of the biennium, subject to the limit of 6% in any one fiscal year. Any shortfall in the transfer that results from such events from one biennium may not be paid over to the ASF in a subsequent biennium as the SBOE would make a separate payout detennination for that subsequent biennium. In detennining the Distribution Rate, the SBOE has adopted the goal of maximizing the amount distributed from the Fund in a manner designed to preserve "intergenerational equity." lntergenerational equity is the maintenance of endowment purchasing power to ensure that endowment spending keeps pace with inflation, with the ultimate goal being to ensure that current and future generations are given equal levels of purchasing power. In making this determination, the SBOE takes into account various considerations, and relies particularly upon its external investment consultant, which undertakes a probability analysis for long term projection periods that includes certain assumptions. Among the assumptions used in the analysis are a projected rate of growth of the average daily scholastic attendance State-wide, the projected contributions and expenses of the Fund, projected returns in the capital markets and a projected inflation rate. See "20 II Constitutional Amendmenf' below for a discussion of the historic and current Distribution Rates, and a description of amendments made to the Texas Constitution on November 8, 20 II that may affect Distribution Rate decisions. 24

25 Since the enactment of a prior amendment to the Texas Constitution in 1964, the investment of the Fund has been managed with the dual objectives of producing current income for transfer to the ASF and growing the Fund for the benefit of future generations. As a result of this prior constitutional framework, prior to the adoption of the 2004 asset allocation policy the investment of the Fund historically included a significant amount of fixed income investments and dividend-yielding equity investments, to produce income for transfer to the ASF. With respect to the management of the Fund's financial assets portfolio, the single most significant change made to date as a result of the Total Return Constitutional Amendment has been new asset allocation policies adopted from time to time by the SBOE. The SBOE generally reviews the asset allocations during its summer meeting in even numbered years. The first asset allocation policy adopted by the SBOE following the Total Return Constitutional Amendment was in February 2004, and the policy was reviewed and modified or reaffirmed in the summers of2006, 2008,2010,2012 and The Fund's investment policy provides for minimum and maximum ranges among the components of each of the three general asset classifications: equities, fixed income and alternative asset investments. The 2004 asset allocation policy decreased the fixed income target from 45% to 25% of Fund investment assets and increased the allocation for equities from 55% to 75% of investment assets. Subsequent asset allocation policies have continued to diversify Fund assets, and have added an alternative asset allocation to the fixed income and equity allocations. The alternative asset allocation category includes real estate, real return, absolute return and private equity components. Alternative asset classes diversify the SBOE-managed assets and are not as correlated to traditional asset classes, which is intended to increase investment returns over the long run while reducing risk and return volatility of the portfolio. The most recent asset allocation, from 2014, consists of (i) an equity allocation of 40% (with large cap equities targeted at 16%, small/mid cap equities at 5% and emerging and international large cap equities 19%), (ii) a fixed income allocation of 19% (including a 7% allocation for emerging market debt) and (iii) an alternative asset allocation of 41% (which includes a private equity allocation of I 0% and a real estate allocation of 8% ). For a variety of reasons, each change in asset allocation for the Fund, including the 2014 modifications, have been implemented in phases, and that approach is likely to be carried forward when and if the asset allocation policy is again modified. At August 31, 2015, the Fund's financial assets portfolio was invested as follows: 44.96% in public market equity investments; 14.43% in fixed income investments; I 0.80% in absolute return assets; 5.11% in private equity assets; 6.30% in real estate assets; 6.44% in risk parity assets; 5.55% in real return assets; 6.04% in emerging market debt; and 0.37% in cash. In July 2012 and April 2013, the SBOE also realigned the management of certain of the investment portfolios within the absolute return allocation of the alternative investments and its private equity asset class. These alignments in investment portfolios have created strategic relationships between the external manager and investment staff of the PSF, which has reduced administrative costs with respect to those portfolios. The Attorney General has advised the SBOE in Op. Tex. Att'y Gen. No. GA-0998 (2013) ("GA-0998"), that the PSF is not subject to requirements of certain State competitive bidding laws with respect to the selection of investments. In GA-0998, the Attorney General also advised that the SBOE generally must use competitive bidding for the selection of investment managers and other third party providers of investment services, such as record keeping and insurance, but excluding certain professional services, such as accounting services, as State law prohibits the use of competitive bidding for specified professional services. GA-0998 provides guidance to the SBOE in connection with the direct management of alternative investments through investment vehicles to be created by the SBOE, in lieu of contracting with external managers for such services, as has been the recent practice of the PSF. The PSF staff and the Fund's investment advisor are tasked with advising the SBOE with respect to the implementation of the Fund's asset allocation policy, including the timing and manner of the selection of any external managers and other consultants. In accordance with the Texas Constitution, the SBOE views the PSF as a perpetual institution, and the Fund is managed as an endowment fund with a long-term investment horizon. Under the total-return investment objective, the Investment Policy provides that the PSF shall be managed consistently with respect to the following: generating income for the benefit of the public free schools oftexas, the real growth of the corpus of the PSF, protecting capital, and balancing the needs of present and future generations of Texas school children. As described above, the Total Return Constitutional Amendment restricts the annual pay out from the Fund to the total-return on all investment assets of the Fund over a rolling ten-year period. State law provides that each transfer of funds from the PSF to the ASF is made monthly, with each transfer to be in the amount of one-twelfth of the annual distribution. The heavier weighting of equity securities relative to fixed income investments has resulted in greater volatility of the value of the Fund. Given the greater weighting in the overall portfolio of passively managed investments, it is expected that the Fund will reflect the general perforn1ance returns of the markets in which the Fund is invested. The asset allocation of the Fund's financial assets portfolio is subject to change by the SBOE from time to time based upon a number of factors, including recommendations to the SBOE made by internal investment staff and external consultants, changes made by the SBOE without regard to such recommendations and directives of the Legislature. Fund performance may also be affected by factors other than asset allocation, including, without limitation, the general perfom1ance of the securities markets in the United States and abroad; political and investment considerations including those relating to socially responsible investing; application of the prudent person investment standard, which may eliminate certain investment opportunities for the Fund; management fees paid to external managers and embedded management fees for some fund investments; and limitations on the number and compensation of internal and external investment staff, which is subject to legislative oversight. The Guarantee Program could also be impacted by changes in State or federal law or the implementation of new accounting standards. 25

26 MANAGEMENT AND ADMINISTRATION OF THE FUND... The Texas Constitution and applicable statutes delegate to the SBOE the authority and responsibility for investment of the PSF's financial assets. In investing the Fund, the SBOE is charged with exercising the judgment and care under the circumstances then prevailing which persons of ordinary pmdence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income therefrom as well as the probable safety of their capital. The SBOE has adopted a "Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund," which is codified in the Texas Administrative Code beginning at 19 TAC section The Total Return Constitutional Amendment provides that expenses of managing the PSF are to be paid "by appropriation" from the PSF. In January 2005, at the request of the SBOE, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA (2005), that the Total Return Constitutional Amendment requires that SBOE expenditures for managing or administering PSF investments, including payments to external investment managers, be paid from appropriations made by the Legislature, but that the Total Return Constitutional Amendment does not require the SBOE to pay from such appropriated PSF funds the indirect management costs deducted from the assets of a mutual fund or other investment company in which PSF funds have been invested. Texas law assigns control of the Fund's land and mineral rights to the three-member SLB, which consists of the elected Commissioner of the General Land Office ("GLO"), an appointee of the Governor, and an appointee of the Attorney General. Administrative duties related to the land and mineral rights reside with the GLO, which is under the guidance of the Commissioner of the GLO. In 2007, the Legislature established the real estate special fund account of the PSF (the "Real Estate Account") consisting of proceeds and revenue from land, mineral or royalty interest, real estate investment, or other interest, including revenue received from those sources, that is set apart to the PSF under the Texas Constitution and laws, together with the mineral estate in riverbeds, channels, and the tidelands, including islands. The investment of the Real Estate Account is subject to the sole and exclusive management and control of the SLB and the Land Commissioner, who is also the head of the GLO. The 2007 legislation presented constitutional questions regarding the respective roles of the SBOE and the SLB relating to the disposition of proceeds of real estate transactions to the ASF, among other questions. Amounts in the investment portfolio of the PSF are taken into account by the SBOE for purposes of determining the Distribution Rate. An amendment to the Texas Constitution was approved by State voters on November 8, 2011, which permits the SLB to make transfers directly to the ASF, see "20 II Constitutional Amendment" below. The SBOE contracts with its securities custodial agent to measure the performance of the total return of the Fund's financial assets. A consultant is typically retained for the purpose of providing consultation with respect to strategic asset allocation decisions and to assist the SBOE in selecting external fund management advisors. The SBOE also contracts with financial institutions for custodial and securities lending services. The SBOE has established the Committee of Investment Advisors, which consists of independent investment experts each appointed by a member of the SBOE to closely advise the respective SBOE member on investment issues. As noted above, the Texas Constitution and applicable statutes make the SBOE responsible for investment of the PSF's financial assets. By law, the Commissioner is appointed by the Governor, with Senate confirmation, and assists the SBOE, but the Commissioner can neither be hired nor dismissed by the SBOE. The Executive Administrator of the Fund is also hired by and reports to the Commissioner. Moreover, although the Fund's Executive Administrator and his staff implement the decisions of and provide information to the School Finance/PSF Committee of the SBOE and the full SBOE, the SBOE can neither select nor dismiss the Executive Administrator. TEA's General Counsel provides legal advice to the Executive Administrator and to the SBOE. The SBOE has also engaged outside counsel to advise it as to its duties over the Fund, including specific actions regarding the investment of the PSF to ensure compliance with fiduciary standards, and to provide transactional advice in connection with the investment of Fund assets in non-traditional investments. CAPACITY LIMITS FOR THE GUARANTEE PROGRAM... The capacity ofthe Fund to guarantee bonds under the Guarantee Program is limited in two ways: by State law (the "State Capacity Limit") and by regulations and a notice issued by the IRS (the "IRS Limit"). Prior to May 20, 2003, the State Capacity Limit was equal to two times the lower of cost or fair market value of the Fund's assets, exclusive of real estate. During the 78th Regular Session of the Legislature in 2003, legislation was enacted that increased the State Capacity Limit by 25%, to two and one halftimes the lower of cost or fair market value of the Fund's assets as estimated by the SBOE and certified by the State Auditor, and eliminated the real estate exclusion from the calculation. Prior to the issuance of the IRS Notice (defined below), the capacity of the program under the IRS Limit was limited to two and one-halftimes the lower of cost or fair market value of the Fund's assets adjusted by a factor that excluded additions to the Fund made since May 14, During the 2007 Texas Legislature, Senate Bill 389 ("SB 389") was enacted providing for additional increases in the capacity of the Guarantee Program, and specifically providing that the SBOE may by rule increase the capacity of the Guarantee Program ti"om two and one-halftimes the cost value of the PSF to an amount not to exceed five times the cost value of the PSF, provided that the increased limit does not violate federal law and regulations and does not prevent bonds guaranteed by the Guarantee Program from receiving the highest available credit rating, as determined by the SBOE. SB 389 further provides that the SBOE shall at least annually consider whether to change the capacity of the Guarantee Program. Since 2005, the Guarantee Program has twice reached capacity under the IRS Limit, and in each instance the Guarantee Program was closed to new bond guarantee applications until relief was obtained from the IRS. The most recent closure of the Guarantee Program commenced in March 2009 and the Guarantee Program reopened in February 2010 on the basis of receipt ofthe IRS Notice. 26

27 On December 16,2009, the IRS published Notice (the "IRS Notice") stating that the IRS will issue proposed regulations amending the existing regulations to raise the IRS limit to 500% of the total cost of the assets held by the PSF as of December 16, In accordance with the IRS Notice, the amount of any new bonds to be guaranteed by the PSF, together with the then outstanding amount of bonds previously guaranteed by the PSF, must not exceed the IRS limit on the sale date of the new bonds to be guaranteed. The IRS Notice further provides that the IRS Notice may be relied upon for bonds sold on or after December 16, 2009, and before the effective date of future regulations or other public administrative guidance affecting funds like the PSF. On September 16,2013, the IRS published proposed regulations (the "Proposed IRS Regulations")' that, among other things, would enact the IRS Notice. The preamble to the Proposed IRS Regulations provides that issuers may elect to apply the Proposed IRS Regulations, in whole or in part, to bonds sold on or after September 16, 2013, and before the date that final regulations become effective. The IRS Notice and the Proposed IRS Regulations establish a static capacity for the Guarantee Program based upon the cost value of Fund assets on December 16, 2009 multiplied by five. On December 16,2009, the cost value of the Guarantee Program was $23,463,730,608 (estimated and unaudited), thereby producing an IRS Limit of approximately $117.3 billion. The State Capacity Limit is detennined on the basis of the cost value of the Fund from time to time multiplied by the capacity multiplier detennined annually by the SBOE, but not to exceed a multiplier of five. The capacity of the Guarantee Program will be limited to the lower of the State Capacity Limit or the IRS Limit. On May 21, 2010, the SBOE modified the regulations that govern the School District Bond Guarantee Program (the "SDBGP Rules"), and increased the State Law Capacity to an amount equal to three times the cost value of the PSF. Such modified regulations, including the revised capacity rule, became effective on July I, The SDBGP Rules provide that the Commissioner may reduce the multiplier to maintain the AAA credit rating of the Guarantee Program, but provide that any changes to the multiplier made by the Commissioner are to be ratified or rejected by the SBOE at the next meeting following the change. See "Valuation of the PSF and Guaranteed Bonds," below. During fiscal year 2015, PSF staff was tasked with undertaking due diligence with the rating agencies that currently rate the Bond Guarantee Program (see "Ratings of Bonds Guaranteed Under the Guarantee Program" below) regarding ratings maintenance for the Fund in anticipation of consideration by the SBOE of an amendment to the SDBGP Rules and CDBGP Rules (as defined below) to provide for an increase in the multiplier that establishes the State law capacity limitation. At its September 2015 meeting, the SBOE voted to modify the SDBGP Rules and the CDBGP Rules to increase the State Law Capacity from 3 times the cost value multiplier to 3.25 times. At that meeting, the SBOE also approved a new 5% capacity reserve for the Charter District Bond Guarantee Program. As originally approved, the change to the State Law Capacity would have been effective August 22, However, at its meeting in November, 2015, the SBOE took action to make the change to the State Law Capacity effective on February I, Since July 1991, when the SBOE amended the Guarantee Program Rules to broaden the range of bonds that are eligible for guarantee under the Guarantee Program to encompass most Texas school district bonds, the principal amount of bonds guaranteed under the Guarantee Program has increased sharply. In addition, in recent years a number of factors have caused an increase in the amount ofbonds issued by school districts in the State. See the table "Permanent School Fund Guaranteed Bonds" below. Effective September I, 2009, the Act provides that the SBOE may annually establish a percentage of the cost value of the Fund to be reserved from use in guaranteeing bonds. The capacity of the Guarantee Program in excess of any reserved portion is referred to herein as the "Capacity Reserve." The SDBGP Rules provide for a minimum Capacity Reserve for the overall Guarantee Program of no less than 5%, and provide that the amount of the Capacity Reserve may be increased by a majority vote of the SBOE. The CDBGP Rules provide for an additional 5% reserve of CDBGP capacity. The Commissioner is authorized to change the Capacity Reserve, which decision must be ratified or rejected by the SBOE at its next meeting following any change made by the Commissioner. The current Capacity Reserve is noted in the monthly updates with respect to the capacity of the Guarantee Program on the TEA web site at which are also filed with the MSRB. Based upon historical performance of the Fund, the legal restrictions relating to the amount of bonds that may be guaranteed has generally resulted in a lower ratio of guaranteed bonds to available assets as compared to many other types of credit enhancements that may be available for Texas school district bonds and charter district bonds. However, changes in the value of the Fund due to changes in securities markets, investment objectives of the Fund, an increase in bond issues by school districts in the State or legal restrictions on the Fund, the implementation of the Charter District Bond Guarantee Program, or an increase in the calculation base of the Fund for purposes of making transfers to the ASF, among other factors, could adversely affect the ratio of Fund assets to guaranteed bonds and the growth of the Fund in general. It is anticipated that the issuance of the IRS Notice and the Proposed IRS Regulations will likely result in a substantial increase in the amount of bonds guaranteed under the Guarantee Program. The implementation of the Charter School Bond Guarantee Program is also expected to increase the amount of guaranteed bonds. The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program (the Annual Report). The State Auditor audits the financial statements of the PSF, which are separate from other State financial statements. Tm.: SCHOOL DISTRICT BOND GUARANTEE PROGRAM... The School District Bond Guarantee Program requires an application be made by a school district to the Commissioner for a guarantee of its bonds. If the conditions for the School District Bond Guarantee Program are satisfied, the guarantee becomes effective upon approval of the bonds by the Attorney General and remains in effect until the guaranteed bonds are paid or defeased, by a refunding or otherwise. 27

28 In the event of default, holders of guaranteed school district bonds will receive all payments due from the corpus of the PSF. Following a determination that a school district will be or is unable to pay maturing or matured principal or interest on any guaranteed bond, the Act requires the school district to notify the Commissioner not later than the fifth day before the stated maturity date of such bond or interest payment. Immediately following receipt of such notice, the Commissioner must cause to be transferred from the appropriate account in the PSF to the Paying Agent/Registrar an amount necessary to pay the maturing or matured principal and interest. Upon receipt of funds for payment of such principal or interest, the Paying Agent/Registrar must pay the amount due and forward the canceled bond or evidence of payment of the interest to the State Comptroller of Public Accounts (the "Comptroller"). The Commissioner will instruct the Comptroller to withhold the amount paid, plus interest, from the first State money payable to the school district. The amount withheld will be deposited to the credit of the PSF. The Comptroller must hold such canceled bond or evidence of payment of the interest on behalf of the PSF. Following full reimbursement of such payment by the school district to the PSF with interest, the Comptroller will cancel the bond or evidence of payment ofthe interest and forward it to the school district. The Act permits the Commissioner to order a school district to set a tax rate sufficient to reimburse the PSF for any payments made with respect to guaranteed bonds, and also sufficient to pay future payments on guaranteed bonds, and provides certain enforcement mechanisms to the Commissioner, including the appointment of a board of managers or annexation of a defaulting school district to another school district. If a school district fails to pay principal or interest on a bond as it is stated to mature, other amounts not due and payable are not accelerated and do not become due and payable by virtue of the district's default. The School District Bond Guarantee Program does not apply to the payment of principal and interest upon redemption ofbonds, except upon mandatory sinking fund redemption, and does not apply to the obligation, if any, of a school district to pay a redemption premium on its guaranteed bonds. The guarantee applies to all matured interest on guaranteed school district bonds, whether the bonds were issued with a fixed or variable interest rate and whether the interest rate changes as a result of an interest reset provision or other bond order provision requiring an interest rate change. The guarantee does not extend to any obligation of a school district under any agreement with a third party relating to guaranteed bonds that is defined or described in State law as a "bond enhancement agreement" or a "credit agreement," unless the right to payment of such third party is directly as a result of such third party being a bondholder. In the event that two or more payments are made from the PSF on behalf of a district, the Commissioner shall request the Attorney General to institute legal action to compel the district and its officers, agents and employees to comply with the duties required of them by law in respect to the payment of guaranteed bonds. The SBOE has approved and modified the SDBGP Rules in recent years, most recently in May Generally, the SDBGP Rules limit guarantees to certain types of notes and bonds, including, with respect to refunding bonds issued by school districts, a requirement that the bonds produce debt service savings, and that bonds issued for capital facilities of school districts must have been voted as unlimited tax debt of the issuing district. The Guarantee Program Rules include certain accreditation criteria for districts applying for a guarantee of their bonds, and limit guarantees to districts that have less than the amount of annual debt service per average daily attendance that represents the 90th percentile of annual debt service per average daily attendance for all school districts, but such limitation will not apply to school districts that have enrollment growth of at least 25% over the previous five school years. The SDBGP Rules are codified in the Texas Administrative Code at 19 TAC section 33.65, and are available at CHARTER DISTRICT BOND GUARANTEE PROGRAM... The Charter District Bond Guarantee Program became effective March 3, The SBOE published final regulations in the Texas Register that provide for the administration of the Charter District Bond Guarantee Program (the "CDBGP Rules"). The CDBGP Rules are codified at 19 TAC section 33.67, and are available at /ritter. tea. state. tx. us/rul es/tac/ chapter03 3/ ch03 3 a.html# The Charter District Bond Guarantee Program has been authorized through the enactment of amendments to the Act, which provide that a charter holder may make application to the Commissioner for designation as a "charter district" and for a guarantee by the PSF under the Act of bonds issued on behalf of a charter district by a non-profit corporation. If the conditions for the Charter District Bond Guarantee Program are satisfied, the guarantee becomes effective upon approval of the bonds by the Attorney General and remains in effect until the guaranteed bonds are paid or defeased, by a refunding or otherwise. The capacity of the Charter District Bond Guarantee Program is limited to the amount that equals the result of the percentage of the number of students enrolled in open-enrollment char1er schools in the State compared to the total number of students enrolled in all public schools in the State multiplied by the available capacity of the Guarantee Program. Available capacity is defined as the maximum amount under SBOE rules, less Capacity Reserve and minus existing guarantees. The CDBGP Rules authorize the Commissioner to detem1ine that ratio based on information provided to the TEA by school districts and open-enrollment charter schools, and the calculation will be made annually, on or about March I of each year. As of May 2015 (the most recent date for which data is available), the percentage of students enrolled in open-enrollment charter schools (excluding charter schools authorized by school districts) to the total State scholastic census was approximately 4.36%. As of December, 2015, there were 188 active open-enrollment char1er schools in the State, and there were 654 charter school campuses operating under such charters (though as of such date, 19 of such campuses' operations have not begun serving students for various reasons). Section , Texas Education Code, as amended by the Legislature in 2013, provides that the Commissioner may grant not more than 215 charters through the end of fiscal year 2014, with the number increasing in each fiscal year thereafter through 2019 to a total number of 305 charters permitted by the statute. While legislation limits the number of charters that may be granted, it does not limit the number of campuses that may operate under a particular charter. For information regarding the capacity of the Guarantee Program, see capacity Limits for the Guarantee Program. The Act provides that the Commissioner may not approve the guarantee of 28

29 refunding or refinanced bonds under the Charter District Bond Guarantee Program in a total amount that exceeds one-half of the total amount available for the guarantee of charter district bonds under the Charter District Bond Guarantee Program. On February 27, 2015, the Attorney General issued an opinion (Op. Tex. Att'y Gen. No. KP-0005 (2015)) in response to a request by the Commissioner for clarification of Section , Texas Education Code ("Section "), which defines how the capacity of the Charter District Bond Guarantee Program should be calculated. In the opinion, the Attorney General ruled that the proper method for determining charter district capacity is a limitation on the total amount of charter district bonds that the Commissioner may approve for guarantee in the cumulative amount. The opinion rejected an alternative reading of the statute that would have imposed a limitation on the total amount of charter district bonds that the Commissioner may approve each month, but not a cumulative limitation, and which, over time, could produce Charter District Bond Guarantee Program guarantees potentially exceeding the charter student ratio limitation in Section In accordance with the Act, the Commissioner may not approve charter district bonds for guarantee if such guarantees will result in lower bond ratings for public school district bonds that are guaranteed under the School District Bond Guarantee Program. To be eligible for a guarantee, the Act provides that a charter district's bonds must be approved by the Attorney General, have an unenhanced investment grade rating from a nationally recognized investment rating firm, and satisfy a limited investigation conducted by the TEA. With respect to the Charter District Bond Guarantee Program, the Act establishes a bond guarantee reserve fund in the State treasury (the "Charter District Reserve Fund"). Each charter district that has a bond guaranteed must annually remit to the Commissioner, for deposit in the Charter District Reserve Fund, an amount equal to 1/10 of one percent of the principal amount of guaranteed bonds outstanding. The Commissioner has approved a rule governing the calculation and payment amounts into the Charter District Reserve Fund. That rule has been codified at 19 TAC , and is available at /ritter. tea. state. tx.us/rules/tac/chapter033/ch033aa.html#33.l 001. The Charter District Bond Guarantee Program does not apply to the payment of principal and interest upon redemption of bonds, except upon mandatory sinking fund redemption, and does not apply to the obligation, if any, of a charter district to pay a redemption premium on its guaranteed bonds. The guarantee applies to all matured interest on guaranteed charter district bonds, whether the bonds were issued with a fixed or variable interest rate and whether the interest rate changes as a result of an interest reset provision or other bond resolution provision requiring an interest rate change. The guarantee does not extend to any obligation of a charter district under any agreement with a third party relating to guaranteed bonds that is defined or described in State law as a "bond enhancement agreement" or a "credit agreement," unless the right to payment of such third party is directly as a result of such third party being a bondholder. The Act provides that immediately following receipt of notice that a charter district will be or is unable to pay maturing or matured principal or interest on a guaranteed bond, the Commissioner is required to instruct the Comptroller to transfer from the Charter District Reserve Fund to the district's paying agent an amount necessary to pay the maturing or matured principal or interest. If money in the Charter District Reserve Fund is insufficient to pay the amount due on a bond for which a notice of default has been received, the Commissioner is required to instruct the Comptroller to transfer from the PSF to the district's paying agent the amount necessary to pay the balance of the unpaid maturing or matured principal or interest. If a total of two or more payments are made under the Charter District Bond Guarantee Program on charter district bonds and the Commissioner determines that the charter district is acting in bad faith under the program, the Commissioner may request the Attorney General to institute appropriate legal action to compel the charter district and its officers, agents, and employees to comply with the duties required of them by law in regard to the guaranteed bonds. As is the case with the School District Bond Guarantee Program, the Act obligates the Commissioner to instruct the Comptroller to withhold the amount paid with respect to the Charter District Bond Guarantee Program, plus interest, from the first State money payable to a charter district that fails to make a guaranteed payment on its bonds. The amount withheld will be deposited, first, to the credit of the PSF, and then to restore any amount drawn from the Charter District Reserve Fund as a result of the non-payment. The CDBGP Rules provide that the PSF may be used to guarantee bonds issued for the acquisition, construction, repair, or renovation of an educational facility for an open-enrollment charter holder and equipping real property of an open-enrollment charter school and/or to refinance promissory notes executed by an open-enrollment charter school, each in an amount in excess of $500,000 the proceeds of which loans were used for a purposes described above (so-called new money bonds) or for refinancing bonds previously issued for the charter school that were approved by the attorney general (so-called refunding bonds). Refunding bonds may not be guaranteed under the Charter District Bond Guarantee Program if they do not result in a present value savings to the charter holder. The CDBGP Rules provide that an open-enrollment charter holder applying for charter district designation and a guarantee of its bonds under the Charter District Bond Guarantee Program satisfy vmious provisions of the regulations, including the following: It must (i) have operated at least one open-enrollment charter school with enrolled students in the State for at least three years; (ii) agree that the bonded indebtedness for which the guarantee is sought will be undertaken as an obligation of all entities under common control of the open-enrollment charter holder, and that all such entities will be liable for the obligation if the openenrollment charter holder defaults on the bonded indebtedness, provided, however, that an entity that does not operate a charter school in Texas is subject to this provision only to the extent it has received state funds from the open-enrollment charter holder; (iii) have had completed for the past three years an audit for each such year that included unqualified or unmodified audit opinions; and (iv) have received an investment grade credit rating within the last year. Upon receipt of an application for guarantee under 29

30 the Charter District Bond Guarantee Program, the Commissioner is required to conduct an investigation into the financial status of the applicant charter district and of the accreditation status of all open-enrollment charter schools operated under the charter, within the scope set forth in the CDBGP Rules. Such financial investigation must establish that an applying charter district has a historical debt service coverage ratio, based on annual debt service, of at least 1.1 for the most recently completed fiscal year, and a projected debt service coverage ratio, based on projected revenues and expenses and maximum annual debt service, of at least 1.2. The failure of an open-enrollment charter holder to comply with the Act or the applicable regulations, including by making any material misrepresentations in the charter holder's application for charter district designation or guarantee under the Charter District Bond Guarantee Program, constitutes a material violation of the open-enrollment charter holder's charter. Beginning in July 2015, TEA began limiting new guarantees under the Charter District Bond Guarantee Program to conform to the Act and, subsequently, with CDBGP Rules that require the maintenance of a capacity reserve for the Chatier District Bond Guarantee Program. Since that time, TEA has not approved guarantees under the Charter District Bond Guarantee Program. New guarantees under the Charter District Bond Guarantee Program will not be approved until new capacity for that Program becomes available, which could occur as a result of Fund investment performance, the scheduled increase in the Guarantee Program multiplier, growth in the relative percentage of students enrolled in open-enrollment charter schools to the total State scholastic census, or a combination of such circumstances. RATINGS OF BONDS GUARANTEED UNDER TilE GUARANTEE PROGRAM... Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. rate bonds guaranteed by the PSF "Aaa," "AAA" and "AAA," respectively. Not all districts apply for multiple ratings on their bonds, however. See "OTHER INFORMATION- Ratings" herein. VALUATION OF TilE PSF AND GUARANTEED BONDS... Fiscal Year Ended8/ Permanent School Fund Valuations Book Valuel 1 l $24,789,514,408 25,164,537,463 25,599,296,902 27,596,692,541 29,085,524,714( 2 ) Market ValueOl $29,900,679,571 31,287,393,884 33,163,242,374 38,445,519,225 36,217,270,220( 2 ) (I) SLB managed assets are included in the market value and book value ofthe Fund. In determining the market value of the PSF from time to time during a fiscal year, the TEA uses cun ent, unaudited values for TEA managed investment portfolios and cash held by the SLB. With respect to SLB managed assets shown in the table above, market values of land and mineral interests, internally managed real estate, investments in externally managed real estate funds and cash are based upon infonnation reported to the PSF by the SLB. The SLB reports that information to the PSF on a quarterly basis. The valuation of such assets at any point in time is dependent upon a variety of factors, including economic conditions in the State and nation in general, and the values of these assets, and, in particular, the valuation of mineral holdings administered by the SLB, can be volatile and subject to material changes from period to period. At August 31, 2015, land, mineral assets, internally managed discretionary real estate, external discretionary real estate investments and cash managed by the SLB had book values of approximately $44.80 million, $13.42 million, $ million, $1.91 billion and $2.60 billion, respectively, and market values of approximately $ million, $2.14 billion, $ million, $1.89 billion and $2.6 billion, respectively. (2) At November 30,2015, the PSF had a book value of$29,01 0,996,323 and a market value of$36,372,415,414 (November 30, 2015 values are based on unaudited data). [The remainder of this page intentionally leji blank] 30

31 At 8/31 20ll Permanent School Fund Guaranteed Bonds Principal Amountt'l $52,653,930,546 53,634,455,141 55,218,889,156 58,364,350,783 63,955,449,047( 2 ) (I) Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds (zero coupon securities). The amount shown excludes bonds that have been refunded and released from the Guarantee Program. The TEA does not maintain records of the accreted value of capital appreciation bonds that are guaranteed under the Guarantee Program. (2) As of August 31, 2015, the TEA expected that the principal and interest to be paid by school districts over the remaining life of the bonds guaranteed by the Guarantee Program is $103,722,905,410, of which $39,767,456,363 represents interest to be paid. At August 31, 2015, there were $63,955,449,047 of bonds guaranteed under the Guarantee Program and the capacity of the Guarantee Program was $87,256,574,142 based on the three times cost value multiplier approved by the SBOE on May 21,2010. Such capacity figures include the Reserve Capacity for the Guarantee Program. As a result of the SBOE actions in November 2015 described above, the State Law Capacity will increase effective February I, 2016 from a cost value multiplier of 3 times to 3.25 times. Based on the cost value of the Fund at August 31, 2015, had such increase been effective at that date, it would have produced a State Law Capacity of$94,527,955,321. Permanent School Fund Guaranteed Bonds by Category(!) School District Bonds Charter District Bonds Totals Number Principal Number Principal Number Principal Of Amount Of Amount Of Amount At 8/31 Issues Guaranteed Issues Guaranteed Issues Guaranteed 2014( 2 ) 2,869 $58,061,805, $302,545,000 2,879 $58,364,350, ,089 63,197,514, ,935,500 3,117 63,955,449,047 (I) Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds (zero coupon securities). The amount shown excludes bonds that have been refunded and released from the Guarantee Program. (2) Fiscal 2014 was the first year of operation of the Charter District Bond Guarantee Program. At November 30, 2015 (based on unaudited data), there were $64,436,407,282 of bonds guaranteed under the Guarantee Program, representing 3,144 school district issues, aggregating $63,607,587,282 in principal amount and 29 charter district issues, aggregating $828,820,000 in principal amount. At November 30, 2015, the capacity of the Charter District Bond Guarantee Program was $795,479,046 (based on unaudited data). DISCUSSION AND ANALYSIS PERTAINING TO FISCAL YEAR ENDED AUGUST 31, The following discussion is derived from the Annual Report for the year ended August 31, 2015, including the Message of the Executive Administrator of the Fund and the Management's Discussion and Analysis contained therein. Reference is made to the Annual Report, when filed, for the complete Message and MD&A. Investment assets managed by the fifteen member SBOE are referred to throughout this MD&A as the PSF(SBOE) assets. As of August 31,2015, the Fund's land, mineral rights and certain real assets are managed by the three-member SLB and these assets are referred to throughout as the PSF(SLB) assets. The current PSF asset allocation policy includes an allocation for real estate investments, and as such investments are made, and become a part of the PSF investment portfolio, those investments will be managed by the SBOE and not the SLB. At the end of fiscal 2015, the Fund balance was $33.8 billion, a decrease of $1.1 billion from the prior year, primarily due to disbursement of $0.8 billion in support of public education. During the year, the SBOE continued implementing the long tern1 strategic asset allocation, diversifying the PSF(SBOE) with the intent to strengthen the Fund. The asset allocation is projected to increase returns over the long run while reducing risk and portfolio return volatility. The one year, three year, five year and ten year annualized total returns for the PSF(SBOE) assets were -3.36%, 7.27%, 8.95% and 5.99% respectively (total return takes into consideration the change in the market value of the Fund during the year as well as the interest and dividend income generated by the Fund's investments). In addition, the SLB continued its shift into externally managed real asset investment funds and the one year, three year, and five year annualized total returns for the PSF(SLB) real assets, including cash, were 5.79%, 7.69%, and 8.83% respectively. The market value of the Fund's assets is directly impacted by the perfonnance of the various financial markets in which the assets are invested. The most important factors affecting investment perfonnance are the asset allocation decisions made by the SBOE and SLB. The current SBOE long term asset allocation policy allows for diversification of the PSF(SBOE) portfolio into alternative asset classes whose returns are not as positively correlated as traditional asset classes. The implementation of the long term asset allocation will occur over several fiscal years and is expected to provide incremental total return at reduced risk. As of August 31, 2015, the PSF(SBOE) portion of the Fund had diversified into emerging market large cap international equities, absolute return funds, real estate, private equity, risk parity, real return Treasury Inflation-Protected Securities, real return commodities, and emerging market debt. Emerging international equities secuiities will be strategically added commensurate with the economic 31

32 environment and the goals and objectives of the SBOE. As of August 3 I, 2015, the SBOE had approved and the PSF(SBOE) made capital commitments to real estate investments in the amount of$2.32 billion and capital commitments to four private equity limited partnerships in the total amount of$2.35 billion. Unfunded commitments at August 3 I, 2015 were $801 million in real estate and $982 million in private equity. The PSF(SLB) portfolio is generally characterized by three broad categories: ( 1) discretionary real assets investments, (2) sovereign and other lands, and (3) mineral interests. Discretionary real assets investments consist of externally managed real estate, infrastructure, and energy/minerals investment funds; internally managed direct real estate investments, and cash. Sovereign and other lands consist primarily of the lands set aside to the PSF when it was created. Mineral interests consist of all of the minerals that are associated with PSF lands. The investment focus of PSF(SLB) discretionary real assets investments has shifted from internally managed direct real estate investments to extemally managed real assets investment funds. The PSF(SLB) makes investments in certain limited partnerships that legally commit it to possible future capital contributions. At August 3 I, 2015, the remaining commitments totaled approximately $1.95 billion. The PSF(SBOE)'s investment in public equity securities experienced a return of -4.4% during the f]scal year ended August 31, The PSF(SBOE)'s investment in domestic fixed income securities produced a retum of 1.5% during the fiscal year and absolute return investments yielded a return of2.6%. The PSF(SBOE) real estate and private equity investments returned 13.0% and 13.0%, respectively. Risk parity assets produced a return of -9.5%, while real return assets yielded -15.3%. Emerging market debt produced a retum of The emerging market equity asset class initiated during the year yielded a -15.3% retum since inception. Combined, all PSF(SBOE) asset classes produced an investment return of -3.36% for the fiscal year ended August 31, 2015, overperforming the benchmark index of -3.7% by approximately 35 basis points. All PSF(SLB) real assets (including cash) returned 5.79% for the fiscal year ending August 31,2015. For fiscal year 20 I 5, total revenues, inclusive of unrealized gains and losses and net of security lending rebates and fees, totaled - $144.lmillion, a decrease of$5.4 billion from fiscal year 2014 earnings of$5.3 billion. This decrease reflects the performance of the securities markets in which the Fund was invested in fiscal year In fiscal year 2015, revenues earned by the Fund included lease payments, bonuses and royalty income received from oil, gas and mineral leases; lease payments from commercial real estate; surface lease and easement revenues; revenues from the resale of natural and liquid gas supplies; dividends, interest, and securities lending revenues; the net change in the fair value of the investment portfolio; and, other miscellaneous fees and income. Expenditures are paid from the Fund before distributions are made under the total return formula. Such expenditures include the costs incurred by the SLB to manage the land endowment, as well as operational costs of the Fund, including external management fees paid from appropriated funds. Total operating expenditures, net of security lending rebates and fees, increased 40.1% for the fiscal year ending August 31, This increase is primarily attributable to the operational costs related to managing alternative investments clue to diversification of the Fund, and from generally lower margins on sales of purchased gas. The Fund supports the public school system in the State by distributing a predetermined percentage of its asset value to the ASF. For fiscal years 2014 and 2015, the distribution from the SBOE to the ASF totaled $838.7 million and $838.7 million, respectively. There was no contribution to the ASF by the SLB in fiscal year At the end of the 20 I 5 fiscal year, PSF assets guaranteed $ billion in bonds issued by 846 local school districts and charter districts, the latter of which entered into the Program during the 2014 fiscal year. Since its inception in I 983, the Fund has guaranteed 6,164 school district and charter district bond issues totaling $138.5 billion in principal amount. During the 20 I 5 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program increased by 238, or 8.3%. The dollar amount of guaranteed school and charter bond issues outstanding increased by $5.6 billion or 9.6%. The guarantee capacity of the Fund increased by $4.24 billion, or 5.4%, during fiscal year 2015 due to growth in the cost basis of the Fund CONSTITUTIONAL AMENDMENT... On November 8, 201 I, a referendum was held in the State as a result of legislation enacted that year that proposed amendments to various sections of the Texas Constitution pertaining to the PSF. At that referendum, voters of State approved non-substantive changes to the Texas Constitution to clarify references to the Fund, and, in addition, approved amendments that effected an increase to the base amount used in calculating the Distribution Rate from the Fund to the ASF, and authorized the SLB to make direct transfers to the ASF, as described below. The amendments approved at the referendum included an increase to the base used to calculate the Distribution Rate by adding to the calculation base certain discretionary real assets and cash in the Fund that is managed by entities other than the SBOE (at present, by the SLB). The value of those assets were already included in the value of the Fund for purposes of the Guarantee Program, but prior to the amendment had not been included in the calculation base for purposes of making transfers from the Fund to the ASF. While the amendment provided for an increase in the base for the calculation of approximately S2 billion, no new resources were provided for deposit to the Fund. As described under "The Total Return Constitutional Amendment" the SBOE is prevented from approving a Distribution Rate or making a pay out from the Fund if the amount distributed would exceed 6% of the average of the market value of the Fund, excluding real property in the Fund, but including discretionary real asset investments on the last day of each of the sixteen State fiscal quarters preceding the Regular Session of the Legislature that begins before that State fiscal biennium or if such pay out would exceed the Ten Year Total Return. The new calculation base is required to be used to determine all payments to the ASF from the Fund beginning with the 20 I 2- I 3 biennium. 32

33 If there are no reductions in the percentage established biennially by the SBOE to be the Distribution Rate, the impact of the increase in the base against which the Distribution Rate is applied will be an increase in the distributions from the PSF to the ASF. As a result, going forward, it may be necessary for the SBOE to reduce the Distribution Rate in order to preserve the corpus of the Fund in accordance with its management objective of preserving intergenerational equity. The Distribution Rates for the Fund were set at 3.5%, 2.5%, 4.2%, 3.3% and 3.5% for each of two year periods , , , and , respectively. In September 2015, in accordance with the Distribution Rate determination, the SBOE approved the distribution of $1.056 billion to the ASF in fiscal year 2016, which represents a per student distribution of$217.51, based on 2015 final student average daily attendance of 4,854,882. Changes in the Distribution Rate for each biennial period has been the result of a number of financial and political reasons, as well as commitments made by the SLB in some years to transfer certain sums to the ASF. As an illustration of the impact of the broader base for the Distribution Rate calculation, PSF management calculates that the effect on transfers made by the SBOE in was an increase in the total return distribution by approximately $73.7 million in each year of that biennium. If the SBOE were to maintain a Distribution Rate in future years at the level set for , as the value of the real asset investments increase annually, distributions to the ASF would increase in the out years, and the increased amounts distributed from the Fund would be a loss to either the investment corpus of the PSF managed by SBOE or, should the SLB increase its transfers to the SBOE to cover this share of the distribution, to the assets managed by the SLB. In addition, the changes made by the amendment are expected to reduce the compounding interest in the Fund that would be derived if those assets remained in the corpus of the Fund. Other factors that may affect the corpus of the Fund that are associated with this change include the decisions that are made by the SLB or others that are, or may in the future be, authorized to make transfers of funds from the PSF to the ASF. While the SBOE has oversight of the Guarantee Program, it will not have the decision-making power with respect to all transfers to the ASF, as was the case in the past, which could adversely affect the ability of the SBOE to optimally manage its portion of the PSF assets. The constitutional amendments approved on November 8, 2011 also provide authority to the GLOor any other entity other than the SBOE that has responsibility for the management of land or other properties of the Fund to detennine whether to transfer an amount each year from Fund assets to the ASF revenue derived from such land or properties, with the amount transferred limited to $300 million. Any amount transferred to the ASF by an entity other than the SBOE is excluded from the 6% Distribution Rate limitation applicable to SBOE transfers. OTHER EVENTS AND DISCLOSURES... The State Investment Ethics Code governs the ethics and disclosure requirements for financial advisors and other service providers who advise certain State governmental entities, including the PSF. In accordance with the provisions of the State Investment Ethics Code, the SBOE periodically modifies its code of ethics, which occurred most recently in May The SBOE code of ethics includes prohibitions on sharing confidential information, avoiding conflict of interests and requiring disclosure filings with respect to contributions made or received in connection with the operation or management of the Fund. The code of ethics applies to members of the SBOE as well as to persons who are responsible by contract or by virtue of being a TEA PSF staff member for managing, investing, executing brokerage transactions, providing consultant services, or acting as a custodian of the PSF, and persons who provide investment and management advice to a member of the SBOE, with or without compensation under certain circumstances. The code of ethics is codified in the Texas Administrative Code at 19 TAC sections 33.5 et seq., and is available on the TEA web site at /ritter. tea. state. tx. us/rules/tac/ chapter033/ ch03 3 a.html# Since 2007, TEA has made supplemental appropriation requests to the Legislature for the purpose of funding the implementation of the 2008 Asset Allocation Policy, but those requests have been denied or partly funded. In the 2011 legislative session, the Legislature approved an increase of 31 positions in the full-time equivalent employees for the administration of the Fund, which was funded as part of an $18 million appropriation for each year of the biennium, in addition to the operational appropriation of $11 million for each year of the biennium. The TEA has begun increasing the PSF administrative staff in accordance with the 2011 legislative appropriation, and the TEA received an appropriation of$30.0 million and $30.2 million for the administration of the PSF for fiscal years 2014 and 2015, respectively, and $30.2 million for each of the fiscal years 2016 and As of August 31, 2015, certain lawsuits were pending against the State and/or the GLO, which challenge the Fund's title to certain real property and/or past or future mineral income from that property, and other litigation arising in the normal course of the investment activities of the PSF. Reference is made to the Annual Report, when filed, for a description of such lawsuits that are pending, which may represent contingent liabilities of the Fund. The SBOE is a named defendant in litigation described in the Official Statement pertaining to the Bonds that has challenged the constitutionality of the Texas public school finance system, and which, among other relief requested, seeks an injunction to prohibit the State and its officials from distributing any funds under the current finance system until a constitutional system is created. The case was filed in State District Court, which has issued a ruling, and that ruling has been appealed to the State Supreme Court. The TEA does not anticipate that the security for payment of bonds guaranteed under the Guarantee Program would be adversely affected by such litigation. 33

34 PSF CONTINUING DISCLOSURE UNDERTAKING... The SBOE has adopted an investment policy rule (the "TEA Rule") pertaining to the PSF and the Guarantee Program. The TEA Rule is codified in Section I of the TEA Investment Procedure Manual, which relates to the Guarantee Program and is posted to the TEA web site at /tea. texas. gov/finance ~and~ Gran ts/texas_permanent~ Schoo I~ Fund/Texas ~p ennanent~ Schoo I ~Fund~ Disclosure~ Statement ~ -~Bond_Guarantee~Program/. The most recent amendment to the TEA Rule was adopted by the SBOE on November 19, 2010, and is summarized below. Through the adoption of the TEA Rule and its commitment to guarantee bonds, the SBOE has made the following agreement for the benefit of the issuers, holders and beneficial owners of guaranteed bonds. The TEA (or its successor with respect to the management of the Guarantee Program) is required to observe the agreement for so long as it remains an "obligated person," within the meaning of Rule 15c2-12, with respect to guaranteed bonds. Nothing in the TEA Rule obligates the TEA to make any filings or disclosures with respect to guaranteed bonds, as the obligations of the TEA under the TEA Rule pertain solely to the Guarantee Program. The issuer or an "obligated person" of the guaranteed bonds has assumed the applicable obligation under Rule 15c2-12 to make all disclosures and filings relating directly to guaranteed bonds, and the TEA takes no responsibility with respect to such undertakings. Under the TEA agreement, the TEA will be obligated to provide annually certain updated financial information and operating data, and timely notice of specified material events, to the MSRB. The MSRB has established the Electronic Municipal Market Access ("EMMA") system, and the TEA is required to file its continuing disclosure information using the EMMA system. Investors may access continuing disclosure information filed with the MSRB at and the continuing disclosure filings of the TEA with respect to the PSF can be found at or by searching for "Texas Permanent School Fund Bond Guarantee Program" on EMMA. ANNUAL REPORTS... The TEA will annually provide certain updated financial information and operating data to the MSRB. The information to be updated includes all quantitative financial information and operating data with respect to the Guarantee Program and the PSF of the general type included in this Official Statement under the heading "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM." The infonnation also includes the Annual Report. The TEA will update and provide this information within six months after the end of each fiscal year. The TEA may provide updated information in full text or may incorporate by reference certain other publicly-available documents, as pennitted by Rule 15c2-12. The updated information includes audited financial statements of, or relating to, the State or the PSF, when and if such audits are commissioned and available. Financial statements of the State will be prepared in accordance with generally accepted accounting principles as applied to state governments, as such principles may be changed from time to time, or such other accounting principles as the State Auditor is required to employ from time to time pursuant to State law or regulation. The financial statements of the Fund were prepared to confonn to U.S. Generally Accepted Accounting Principles as established by the Governmental Accounting Standards Board. The Fund is reported by the State of Texas as a permanent fund and accounted for on a current financial resources measurement focus and the modified accrual basis of accounting. Measurement focus refers to the definition of the resource flows measured. Under the modified accrual basis of accounting, all revenues reported are recognized based on the criteria of availability and measurability. Assets are defined as available if they are in the form of cash or can be converted into cash within 60 days to be usable for payment of current liabilities. Amounts are defined as measurable if they can be estimated or otherwise determined. Expenditures are recognized when the related fund liability is incurred. The State's current fiscal year end is August 31. Accordingly, the TEA must provide updated information by the last day of Februmy in each year, unless the State changes its fiscal year. If the State changes its fiscal year, the TEA will notify the MSRB of the change. MATERIAL EVENT NOTICES... The TEA will also provide timely notices of certain events to the MSRB. Such notices will be provided not more than ten business days after the occurrence of the event. The TEA will provide notice of any of the following events with respect to the Guarantee Program: (I) principal and interest payment delinquencies; (2) non-payment related defaults, if such event is material within the meaning of the federal securities laws; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the IRS of proposed or final detern1inations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the taxexempt status of the Guarantee Program, or other material events affecting the tax status of the Guarantee Program; (7) modifications to rights of holders of bonds guaranteed by the Guarantee Program, if such event is material within the meaning of the federal securities laws; (8) bond calls, if such event is material within the meaning of the federal securities laws, and tender offers; (9) defeasances; (I 0) release, substitution, or sale of property securing repayment of bonds guaranteed by the Guarantee Program, if such event is material within the meaning of the federal securities laws; (II) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the Guarantee Program (which is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Guarantee Program in a proceeding under the United States 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 Guarantee Program, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Guarantee Program); ( 13) the consummation of a merger, consoliclation, or acquisition involving the Guarantee Program or the sale of all or substantially 34

35 all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) the appointment of a successor or additional trustee with respect to the Guarantee Program or the change of name of a trustee, if such event is material within the meaning of the federal securities laws. (Neither the Act nor any other law, regulation or instrument pertaining to the Guarantee Program make any provision with respect to the Guarantee Program for bond calls, debt service reserves, credit enhancement, liquidity enhancement, early redemption or the appointment of a trustee with respect to the Guarantee Program.) In addition, the TEA will provide timely notice of any failure by the TEA to provide information, data, or financial statements in accordance with its agreement described above under"annual Reports." AVAILABILITY OF INFORMATION... The TEA has agreed to provide the foregoing information only to the MSRB and to transmit such infonnation electronically to the MSRB in such format and accompanied by such identifying information as prescribed by the MSRB. The information is available from the MSRB to the public without charge at LIMITATIONS AND AMENDMENTS... The TEA has agreed to update information and to provide notices of material events only as described above. The TEA has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The TEA makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The TEA disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the TEA to comply with its agreement. The continuing disclosure agreement of the TEA is made only with respect to the PSF and the Guarantee Program. The issuer of guaranteed bonds or an obligated person with respect to guaranteed bonds may make a continuing disclosure undertaking in accordance with Rule 15c2-12 with respect to its obligations arising under Rule 15c2-12 pertaining to financial and operating data concerning such entity and notices of material events relating to such guaranteed bonds. A description of such undertaking, if any, is included elsewhere in the Official Statement. This continuing disclosure agreement may be amended by the TEA from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the TEA, but only if(!) the provisions, as so amended, would have permitted an underwriter to purchase or sell guaranteed bonds in the primary offering of such bonds in compliance with Rule 15c2-12, taking into account any amendments or interpretations of Rule 15c2-12 since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregate principal amount of the outstanding bonds guaranteed by the Guarantee Program consent to such amendment or (b) a person that is unaffiliated with the TEA (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the holders and beneficial owners of the bonds guaranteed by the Guarantee Program. The TEA may also amend or repeal the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provision of Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions ofthis sentence would not prevent an underwriter from lawfully purchasing or selling bonds guaranteed by the Guarantee Program in the primary offering of such bonds. COMPLIANCE WITH PRIOR UNDERTAKINGS... During the last five years, the TEA has not failed to substantially comply with its previous continuing disclosure agreements in accordance with Rule 15c2-12. SEC EXEMPTIVE RELIEF... On February 9, 1996, the TEA received a letter from the Chief Counsel of the SEC that pertains to the availability of the "small issuer exemption" set forth in paragraph ( d)(2) ofrule 15c2-12. The letter provides that Texas school districts which offer municipal securities that are guaranteed under the Guarantee Program may undertake to comply with the provisions of paragraph (d)(2) of Rule 15c2-12 if their offerings otherwise qualify for such exemption, notwithstanding the guarantee of the school district securities under the Guarantee Program. Among other requirements established by Rule 15c2-12, a school district offering may qualify for the small issuer exemption if, upon issuance of the proposed series of securities, the school district will have no more than $10 million of outstanding municipal securities. STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS LITIGATION RELATING TO THE TEXAS PUBLIC SCJIOOL FINANCE SYSTEM... On seven occasions in the last thirty years, the Texas Supreme Court (the "Court") has issued decisions assessing the constitutionality of the Texas public school finance system (the "Finance System"). The litigation has primarily focused on whether the Finance System, as amended by the Texas Legislature (the "Legislature") from time to time (i) met the requirements of article VII, section I of the Texas Constitution, which requires the Legislature to "establish and make suitable provision for the support and maintenance of an efficient system of public free schools," or (ii) imposed a statewide ad valorem tax in violation of article VIII, section 1-e of the Texas Constitution because the statutory limit on property taxes levied by school districts for maintenance and operation purposes had allegedly denied school districts meaningful discretion in setting their tax rates. In response to the Court's previous decisions, the Legislature enacted multiple laws that made substantive changes in the way the Finance System is funded in efforts to address the prior decisions declaring the Finance System unconstitutional. 35

36 On May 13, 2016, the Court issued its opinion in the most recent school finance litigation, Morath, et.al v. The Texas Taxpayer and Student Fairness Coalition, eta!., No (Tex. May 13, 20 16) ("Morath"). The plaintiffs and intervenors in the case had alleged that the Finance System, as modified by the Legislature in part in response to prior decisions of the Court, violated article VII, section I and article VIII, section 1-e of the Texas Constitution. In its opinion, the Court held that "[d]espite the imperfections of the current school funding regime, it meets minimum constitutional requirements." The Court also noted that: Lawmakers decide iflaws pass, and judges decide if those laws pass muster. But our lenient standard of review in this policy-laden area counsels modesty. The judicial role is not to second-guess whether our system is optimal, but whether it is constitutional. Our Byzantine school funding "system" is undeniably imperfect, with immense room for improvement. But it satisfies minimum constitutional requirements. POSSIBLE EFFECTS OF CHANGES IN LAW ON DISTRICT BONDS... The Court's decision in Morath upheld the constitutionality of the Finance System but noted that the Financing System was "undeniably imperfect." While not compelled by the Morath decision to reform the Finance System, the Legislature could enact future changes to the Finance System. Any such changes could benefit or be a detriment to the District. lf the Legislature enacts future changes to, or fails adequately to fund the Finance System, or if changes in circumstances otherwise provide grounds for a challenge, the Finance System could be challenged again in the future. In its 1995 opinion in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995), the Court stated that any future determination of unconstitutionality "would not, however, affect the district's authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system's unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions" (collectively, the "Contract Clauses"), which prohibit the enactment of laws that impair prior obligations of contracts. Although, as a matter oflaw, the Bonds, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of future legislation, or any litigation that may be associated with such legislation, on the District's financial condition, revenues or operations. While the enactment of future legislation to address school funding in Texas could adversely affect the financial condition, revenues or operations of the District, the District does not anticipate that the security for payment of the Bonds, specifically, the District's obligation to levy an unlimited debt service tax and any Pennanent School Fund guarantee of the Bonds would be adversely affected by any such legislation. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM." CURRENT PUBLIC SCHOOL FINANCE SYSTEM OVERVIEW... The following language constitutes only a summary of the Finance System as it is currently structured. For a more complete description of school finance and fiscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. Funding for school districts in the State is provided primarily from State and local sources. State funding for all school districts is provided through a set of funding formulas comprising the "Foundation School Program," as well as two facilities funding programs. Generally, the Finance System is designed to promote wealth equalization among school districts by balancing State and local sources of funds available to school districts. In paiiicular, because districts with relatively high levels of property wealth per student can raise more local funding, such districts receive less State aid, and in some cases, are required to disburse local fimds to equalize their overall funding relative to other school districts. Conversely, because districts with relatively low levels of property wealth per student have limited access to local funding, the Finance System is designed to provide more State funding to such districts. Thus, as a school district's property wealth per student increases, State funding to the school district is reduced. As a school district's property wealth per student declines, the Finance System is designed to increase that district's State funding. The Finance System provides a similar equalization system for facilities funding wherein districts with the same tax rate for debt service raise the same amount of combined State and local funding. Facilities funding for debt incurred in prior years is expected to continue in future years; however, State funding for new school facilities has not been consistently appropriated by the Texas Legislature, as further described below. Local funding is derived from collections of ad valorem taxes levied on property located within each district's boundaries. School districts are authorized to levy two types of property taxes: a limited M&O tax to pay current expenses and an unlimited interest and sinking fund ("I&S") tax to pay debt service on bonds. Generally, under current law, M&O tax rates are subject to a statutory maximum rate of $1.17 per $100 of taxable value for most school districts (although a few districts can exceed the $1. 17 limit as a result of authorization approved in the 1960s). Current law also requires school districts to demonstrate their ability to pay debt service on outstanding indebtedness through the levy of an ad valorem tax at a rate of not to exceed $0.50 per $100 of taxable property at the time bonds are issued. Once bonds are issued, however, disllicts may levy a tax to pay debt service on such bonds unlimited as to rate or amount (see "TAX INFORMATION- Tax Rate Limitations'' herein). As noted above, because property values vary widely among school districts, the amount oflocal fimding generated by the same tax rate is also subject to wide variation among school districts. LOCAL FUNDING FOR SCHOOL DISTRICTS... The primary source oflocal funding for school districts is collections from ad valorem taxes levied against taxable property located in each school district. Prior to reform legislation that became effective during the fiscal year (the "Reform Legislation"), the maximum M&O tax rate for most school districts was generally limited to $1.50 per $100 of taxable value. At the time the Reform Legislation was enacted, the majority of school districts were levying an M&O tax rate of $1.50 per $1 00 of taxable value. The Reform Legislation required each school district to "compress" its tax rate by an amount equal to the "State Compression Percentage... For fiscal years through , the State Compression Percentage has been set at 66.67%, effectively setting the maximum compressed M&O tax rate tor most school districts at $

37 per $100 of taxable value. The State Compression Percentage is set by legislative appropriation for each State fiscal biennium or, in the absence of legislative appropriation, by the Commissioner. School districts are pennitted, however, to generate additional local funds by raising their M&O tax rate by up to $0.04 above the compressed tax rate without voter approval (for most districts, up to $1.04 per $100 of taxable value). In addition, if the voters approve a tax rate increase through a local referendum, districts may, in general, increase their M&O tax rate up to a maximum M&O tax rate of $1.17 per $100 of taxable value and receive State equalization funds for such taxing effort (see "TAX INFORMATION- Public Hearing and Rollback Tax Rate" herein). Elections authorizing the levy ofm&o taxes held in certain school districts under older laws, however, may subject M&O tax rates in such districts to other limitations (see "TAX INFORMATION- Tax Rate Limitations" herein). STATE FUNDING FOR SCJIOOL DISTRICTS... State funding for school districts is provided through the Foundation School Program, which provides each school district with a minimum level of funding (a "Basic Allotment") for each student in average daily attendance ("ADA"). The Basic Allotment is calculated for each school district using various weights and adjustments based on the number of students in average daily attendance and also varies depending on each district's compressed tax rate. This Basic Allotment formula determines most of the allotments making up a district's basic level of funding, referred to as 'Tier One" of the Foundation School Program. The basic level of funding is then "enriched" with additional funds known as "Tier Two" of the Foundation School Program. Tier Two provides a guaranteed level of funding for each cent of local tax effort that exceeds the compressed tax rate (for most districts, M&O tax rates above $1.00 per $100 oftaxable value). The Finance System also provides an Existing Debt Allotment ("EDA") to subsidize debt service on eligible outstanding school district bonds and an Instructional Facilities Allotment ("IF A") to subsidize debt service on newly issued bonds. IF A primarily addresses the debt service needs of property-poor school districts. A New Instructional Facilities Allotment ("NIFA") also is available to help pay operational expenses associated with the opening of a new instructional facility; however, NIFA awards were not funded by the Legislature for either the or the State fiscal biennium. In 2015, the 84th Texas Legislature did appropriate funds in the amount of $1,445,100,000 for the State fiscal biennium for an increase in the Basic Allotment, EDA, IFA, and NIFA support, as further described below. Tier One and Tier Two allotments represent the State's share of the cost ofm&o expenses of school districts, with local M&O taxes representing the district's local share. EDA and IFA allotments supplement a school district's local I&S taxes levied for debt service on eligible bonds issued to construct, acquire and improve facilities. Tier One and Tier Two allotments and existing EDA and IF A allotments are generally required to be funded each year by the Texas Legislature. Since future-year IFA awards were not funded by the Texas Legislature for the fiscal biennium or the school year and debt service assistance on school district bonds that are not yet eligible for EDA is not available, debt service on new bonds issued by districts to construct, acquire and improve facilities must be funded solely from locall&s taxes. For the school year, the Texas Legislature has appropriated $55,500,000 for IF A allotments. Tier One allotments are intended to provide all districts a basic level of education necessary to meet applicable legal standards. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that basic program at a level of its own choice; however, Tier Two allotments may not be used for the payment of debt service or capital outlay. As described above, the cost of the basic program is based on an allotment per student known as the "Basic Allotment". For fiscal years and , the Basic Allotment is $5,140 for each student in average daily attendance. The Basic Allotment is then adjusted for all districts by several different weights to account for inherent differences between school districts. These weights consist of(i) a cost adjustment factor intended to address varying economic conditions that affect teacher hiring known as the "cost of education index", (ii) district-size adjustments for small and mid-size districts and (iii) an adjustment for the sparsity of the district's student population. The cost of education index and district-size adjustments applied to the Basic Allotment, create what is referred to as the "Adjusted Allotment". The Adjusted Allotment is used to compute a "regular program allotment," as well as various other allotments associated with educating students with other specified educational needs. Tier Two supplements the basic funding of Tier One and provides two levels of enrichment with different guaranteed yields (i.e., guaranteed levels of funding by the State) depending on the district's local tax effort. The first six cents of tax effort that exceeds the compressed tax rate (for most districts, M&O tax rates ranging from $I.O I to $1.06 per $100 of taxable value) will, for most districts, generate a guaranteed yield of$74.28 and $77.53 per cent per weighted student in average daily attendance ("WADA") for the fiscal year and fiscal year , respectively. The second level of Tier Two is generated by tax effort that exceeds the district's compressed tax rate plus six cents (for most districts eligible for this level of funding, M&O tax rates ranging from $I.06 to $I.I7 per $100 of taxable value) and has a guaranteed yield per cent per WADA of$31.95 for fiscal years 20I5-I6 and 20I6-I7. Propertywealthy school districts that have an M&O tax rate that exceeds the district's compressed tax rate plus six cents are subject to recapture above this tax rate level at the equivalent wealth per student of$3i9,500 (see ' Wealth Transfer Provisions" below). Because districts with compressed rates ofless than $I.OO have not been receiving the full Basic Allotment, the 84th Texas Legislature amended the Foundation School Program to enable some districts (known as "fractionally funded districts") to increase their Tier I participation by moving the district's local tax effort that would be equalized under Tier 2 at $31.95 per penny to the Tier I Basic Allotment. The compressed tax rate of a school district that adopted a 2005 M&O Tax Rate below the maximum $I.50 tax rate for the 2005 tax year can now include the portion of a district's current M&O tax rate in excess of the first six cents above the district's compressed tax rate until the district's compressed tax rate is equal to the state maximum compressed tax rate of $I.OO, thereby eliminating the penalty against the Basic Allotment. For these districts, each one cent ofm&o tax levy above the district's compressed tax rate plus six cents, will have a guaranteed yield based on Tier One funding instead of the $31.95 Tier Two yield for the fiscal year 37

38 20 I 5-16 and fiscal year These conversions are optional for each applicable district in the and fiscal years and are automatic beginning in the fiscal year. In addition to the operations funding components of the Foundation School Program discussed above, the Foundation School Program provides a facilities fi.mding component consisting of the Instructional Facilities Allotment (IF A) program and the Existing Debt Allotment (EDA) program. These programs assist school districts in funding facilities by, generally, equalizing a district's I&S tax effort. The IF A guarantees each awarded school district a specified amount per student (the "!FA Guaranteed Yield") in State and local funds for each cent of tax effort to pay the principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instmctional facilities. The guaranteed yield per cent of local tax effort per student in ADA has been $35 since this program first began in To receive an IF A award, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with IF A state assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of(!) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in ADA. The!FA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. Once a district receives an IF A award for bonds, it is entitled to continue receiving State assistance for such bonds without reapplying to the Commissioner. The guaranteed level of State and local funds per student per cent of local tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. For the fiscal years through , no funds were appropriated for new IF A awards by the Texas Legislature, although all prior awards were funded throughout such periods. The 84th Texas Legislature appropriated funds in the amount of$55,500,000 for new!fa awards to be made during the fiscal year only. State financial assistance is provided for certain existing eligible debt issued by school districts through the EDA program. The EDA guaranteed yield (the "EDA Yield") is the same as the!fa Guaranteed Yield ($35 per cent of local tax effort per student in ADA), subject to adjustment as described below. For bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance was less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations granted to the Commissioner under State law. The po11ion of a district's local debt service rate that qualifies for EDA assistance is limited to the first 29 cents of debt service tax (or a greater amount for any year provided by appropriation by the Texas Legislature). In general, a district's bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final fiscal year of the preceding State fiscal biennium or (ii) the district levied taxes to pay the principal of and interest on the bonds for that fiscal year. Each biennium, access to EDA funding is detennined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives IFA funding. A district may also qualify for a NIFA allotment, which provides assistance to districts for operational expenses associated with opening new instructional facilities. For the and State fiscal biennia, no funds were appropriated by the Texas Legislature for new NIFA allotments. The 84th Texas Legislature did appropriate funds in the amount of$23,750,000 for each of the and fiscal years for NIF A allotments LEGISLATION... Since the enactment of the Refonn Legislation in2006, most school districts in the State have operated with a "target" funding level per student ("Target Revenue") that is based upon the "hold harmless" principles embodied in the Reform Legislation. This system of Target Revenue was superimposed on the Foundation School Program and made existing funding formulas substantially less important for most school districts. The Reform Legislation was intended to lower M&O tax rates in order to give school districts "meaningful discretion" in setting their M&O tax rates, while holding school districts harmless by providing them with the same level of overall funding they received prior to the enactment of the Reform Legislation. Under the Target Revenue system, each school district is generally entitled to receive the same amount of revenue per student as it did in either the or fiscal year (under existing laws prior to the enactment of the Reform Legislation), as long as the district adopted an M&O tax rate that was at least equal to its compressed rate. The reduction in local M&O taxes resulting from the mandatory compression ofm&o tax rates under the Reform Legislation, by itself, would have significantly reduced the amount oflocal revenue available to fund the Finance System. To make up for this shortfall, the Reform Legislation authorized Additional State Aid for Tax Reduction ("ASATR") for each school district in an amount equal to the difference between the amount that each district would receive under the Foundation School Program and the amount of each district's Target Revenue funding level. However, in subsequent legislative sessions, the Texas Legislature has gradually reduced the reliance on ASATR by increasing the funding formulas. This phase-out of ASATR began with actions adopted by the 83rd Texas Legislature. Beginning with the school year, the statutes authorizing ASA TR are repealed LEGISLATION... As a general matter, the 84th Texas Legislature did not enact substantive changes to the Finance System. However, of note, Senate Joint Resolution I, passed during the 84th Texas Legislature, proposed a constitutional amendment increasing the mandatory homestead exemption for school districts from $15,000 to $25,000 and requiring that the tax limitation for taxpayers who are age 65 and older or disabled be reduced to reflect the additional exemption. The amendment was approved by the voters at an election held on November 3, 2015, and became effective for the tax year beginning January I, Senate Bill I, which was also passed during the 84th Texas Legislature and was signed by the Governor on June 15, 20 I 5, provides for additional state aid to hold school districts hannless for tax revenue losses resulting from the increased homestead exemption. Any hold-harmless funding for future biennia must be approved in a subsequent legislative session, and the District can make no representation that such funding will occur. 38

39 Senate Bill I also prohibits a school district from reducing the amount of or repealing an optional homestead exemption that was in place for the 2014 tax year (fiscal year 2015) for a period ending December 31, An optional homestead exemption reduces both the tax revenue and State aid received by a school district. WEALTH TRANSFER PROVISIONS... Some districts have sufficient property wealth per student in WADA ("wealth per student") to generate their statutory level of funding through collections of local property taxes alone. Districts whose wealth per student generates local property tax collections in excess of their statutory level of funding are referred to as "Chapter 41" districts because they are subject to the wealth equalization provisions contained in Chapter 41 of the Texas Education Code. Chapter 41 districts may receive State funds for certain competitive grants and a few programs that remain outside the Foundation School Program, as well as receiving ASATR until their overall funding meets or exceeds their Target Revenue level of funding. Otherwise, Chapter 41 districts are not eligible to receive State funding. Furthennore, Chapter 41 districts must exercise certain options in order to reduce their wealth level to equalized wealth levels of funding, as determined by formulas set forth in the Reform Legislation. For most Chapter 41 districts, this equalization process entails paying the portion of the district's local taxes collected in excess of the equalized wealth levels of funding to the State (for redistribution to other school districts) or directly to other school districts with a wealth per student that does not generate local funds sufficient to meet the statutory level of funding, a process known as "recapture". The equalized wealth levels that subject Chapter 41 districts to wealth equalization measures for fiscal year are set at (i) $514,000 per student in W ADA with respect to that portion of a district's M&O tax effort that does not exceed its compressed tax rate (for most districts, the first $1.00 per $100 of taxable value) and (ii) $319,500 per WADA with respect to that portion of a district's M&O tax effort that is beyond its compressed rate plus $.06 (for most districts, M&O taxes levied above $1.06 per $100 in taxable value). M&O taxes levied above $1.00 but below $1.07 per $100 of taxable value are not subject to the wealth equalization provisions of Chapter 41. Chapter 41 districts with a wealth per student above the lower equalized wealth level but below the higher equalized wealth level must equalize their wealth only with respect to the portion of their M&O tax rate, if any, in excess of $1.06 per $100 of taxable value. Chapter 41 districts may be entitled to receive ASATR from the State in excess of their recapture liability of $514,000 for the and school years, and certain of such districts may use their ASATR funds to offset their recapture liability. Under Chapter 41, a district has five options to reduce its wealth per student so that it does not exceed the equalized wealth levels: (I) a district may consolidate by agreement with one or more districts to form a consolidated district; all property and debt of the consolidating districts vest in the consolidated district; (2) a district may detach property from its territory for annexation by a propertypoor district; (3) a district may purchase attendance credits from the State; (4) a district may contract to educate nonresident students from a property-poor district by sending money directly to one or more property-poor districts; or (5) a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O taxes or both M&O taxes and J&S taxes. A Chapter41 district may also exercise any combination of these remedies. Options (3), (4) and (5) require prior approval by the Chapter 41 district's voters; certain Chapter 41 districts may apply ASATR funds to offset recapture and to achieve the statutory wealth equalization requirements, as described above, without approval from voters. A district may not adopt a tax rate until its effective wealth per student is at or below the equalized wealth level. If a district fails to exercise a permitted option, the Commissioner must reduce the district's property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district's existing debt. The Commissioner has not been required to detach property in the absence of a district failing to select another wealth-equalization option. THE SCHOOL FINANCE SYSTEM AS APPLIED TO THE NORTH EAST INDEPENDENT SCHOOL DISTRICT The District's wealth per student for the school year is more than the equalized wealth value. The District first exceeded the wealth per student equalized wealth level in Section , as amended, Texas Education Code ("Section ") states that if a school district's wealth per student exceeds the equalized wealth level for the first time in the school year or later, that district's board of trustees may authorize the Commissioner to withhold from certain State revenues to which such district is otherwise entitled an amount equal to that district's cost to purchase attendance credits in an amount sufficient to reduce its wealth per student to the equalized wealth level for the subject school year. The Board has authorized the Commissioner to withhold State revenues pursuant to Section ; however, as a result of the "hold harmless" provisions of the Refonn Legislation and modifications to school district funding enacted through legislation enrolled in 2013, this authorization has not resulted in State funding to which the District is otherwise entitled being withheld (see "STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Legislation".) A district's wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District's wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district's combined property tax base, and the District's ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial perfonnance of the annexing district. 39

40 TAX INFORMATION AD VALOREM TAX LAw... The appraisal of property within the District is the responsibility of the Bexar Appraisal District (the "Appraisal District"). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law requires the appraised value of a residence homestead to be based solely on the property's value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (l) the market value of the property, or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The District may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the District by petition filed with the Appraisal Review Board. Reference is made to the VTCA, Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Certain residence homestead exemptions from ad valorem taxes for public school purposes are mandated by Section 1-b, Article VIII, and State law and apply to the market value of residence homesteads in the following sequence: $25,000; and an additional $10,000 for those 65 years of age or older, or the disabled. A person over 65 and disabled may receive only one $10,000 exemption, and only one such exemption may be received per family, per residence homestead. State law also mandates a freeze on taxes paid on residence homesteads of persons 65 years of age or older which receive the $10,000 exemption. Such residence homesteads shall be appraised and taxes calculated as on any other property, but taxes shall never exceed the amount imposed in the first year in which the property received the $10,000 exemption. The freeze on ad valorem taxes on the homesteads of persons 65 years of age or older and the disabled is also transferable to a different residence homestead. If improvements (other than repairs or improvements required to comply with governmental requirements) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Also, a surviving spouse of a taxpayer who qualifies for the freeze on ad valorem taxes is entitled to the same exemption so long as (i) the taxpayer died in a year in which he qualified for the exemption, (ii) the surviving spouse was at least 55 years of age when the taxpayer died and (iii) the property was the residence homestead of the surviving spouse when the taxpayer died and the property remains the residence homestead of the surviving spouse. Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons 65 years of age or over or of disabled persons to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year. The school property tax limitation provided by the constitutional amendment and enabling legislation apply to the 2007 and subsequent tax years. In addition, under Section 1-b, Article VIII, and State law, the goveming body of a political subdivision, at its option, may grant: (i) An exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; (ii) An exemption of up to 20% of the market value of residence homesteads; minimum exemption $5,000. After the exemption described in (i) above is authorized, such exemption may be repealed or decreased or increased in amount (a) by the goveming body of the political subdivision or (b) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the exemption listed in (i) above for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual's spouse and (iii) the 40

41 property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of$12,000. The freeze on taxes paid on residence homesteads of persons 65 years of age and older was extended to include the resident homesteads of "disabled" persons, including the right to transfer the freeze to a different residence homestead. A "disabled" person is one who is "under a disability for purposes of payment of disability insurance benefits under the Federal Old Age, Survivors and Disability Insurance". Section of the Texas Property Tax Code states that a disabled veteran who receives from the United States Department of Veterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. Furthermore, following the approval by the voters at a November 8, 2011 statewide election, effective January 1, 2012, the surviving spouse of a deceased veteran who had received a disability rating of 100% is entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. Following the approval by the voters at a November 5, 2013 statewide election, a partially disabled veteran or the surviving spouse of a partially disabled veteran is entitled to an exemption equal to the percentage of the veteran's disability, if the residence was donated at no cost to the veteran by a charitable organization. Also approved by the November 5, 2013 election, was a constitutional amendment providing that the surviving spouse of a member of the armed forces who is killed in action is entitled to a property tax exemption for all or part of the market value of such surviving spouse's residences homestead, if the surviving spouse has not remarried since the service member's death and said property was the service member's residence homestead at the time of death. Such exemption is transferable to a different property of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on the prior residence in the last year in which such exemption was received. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-l. The freeze on ad valorem taxes on the homesteads of persons 65 years of age or older for general elementary and secondary public school purposes is also transferable to a different residence homestead exemption. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM Legislation" for a description of legislative changes made during the 84 1 h Texas Legislature that resulted in an increase in the minimum amount of residential homestead exemption. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the goveming body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section 1-j of the Texas Constitution provides for "freeport property" to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Notwithstanding such exemption, counties, school districts, junior college districts and cities may tax such tangible personal property provided official action to tax the same was taken before April I, Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of "goods-in-transit." "Goods-intransit" is defined by the Texas Property Tax Code as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and outboard motor, heavy equipment and manufactured housing inventory. The Property Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goodsin-transit exemptions for items of personal property. A city may create a tax increment financing district ("TIF") within the city with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with the city to contribute all or part of future ad valorem taxes levied and collected against the "incremental value" (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing taxing units. Effective 41

42 September I, 200 I, school districts may not enter into tax abatement agreements under the general statute that pem1its municipalities and counties to initiate tax abatement agreements. Credit will not be given by the Commissioner of Education in determining a district's property value wealth per student for (I) the appraisal value, in excess of the "frozen" value, of property that is located in a tax increment financing zone created after May 31, 1999 (except in certain limited circumstances where the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units that levy ad valorem taxes in the zone of its intention to create the zone and the zone is created and has its final project and financing plan approved by the municipality prior to August 31, 1999) or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for school districts to grant limitations on appraised property values and provide ad valorem tax credits to certain corporations and limited liability companies to encourage economic development within the district. Generally, during the last eight years of the ten-year term of a tax limitation agreement, the school district may only levy and collect ad valorem taxes for maintenance and operation purposes on the agreed-to limited appraised property value. The taxpayer is entitled to a tax credit from the school district for the amount of taxes imposed during the first two years of the tax limitation agreement on the appraised value of the property above the agreed-to limited value. Additional State funding is provided to a school district for each year of such tax limitation in the amount of the tax credit provided to the taxpayer. During the first two years of a tax limitation agreement, the school district may not adopt a tax rate that exceeds the district's rollback tax rate (see "TAX INFORMATION- Public Hearing and Rollback Tax Rate" and "TAX INFORMATION- District Application oftax Code"). TAX RATE LIMITATIONS... A school district is authorized to levy maintenance and operation ("M&O") taxes subject to approval of a proposition submitted to district voters under Section (d) of the Texas Education Code, as amended. The maximum M&O tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the succeeding paragraphs. The maximum voted M&O tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on October 3, 1995under Chapter 20, Texas Education Code (now codified at Section , Texas Education Code). The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50 and (B) the sum of (I) the rate of $0.17, and (2) the product of the "State Compression Percentage" multiplied by $1.50. The State Compression Percentage has been set, and will remain, at 66.67% for fiscal year The State Compression Percentage is set by legislative appropriation for each State fiscal biennium or, in the absence oflegislative appropriation, by the Commissioner. For a more detailed description of the State Compression Percentage, see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM- Local Funding for School Districts." Furthermore, a school district cannot annually increase its tax rate in excess of the district's "rollback tax rate" without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. See 'TAX INFORMATION- Public Hearing and Rollback Tax Rate." A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of one or more propositions submitted to the voters under Section (b)(l), Texas Education Code, as amended, which provides a tax unlimited as to rate or amount for the supp01i of school district bonded indebtedness (see "THE BONDS -Security"). Section , Texas Education Code, as amended ("Section "), requires a district to demonstrate to the Texas Attomey General that it has the prospective ability to pay its maximum annual debt service on a proposed issue of bonds and all previously issued bonds, other than bonds approved by district voters at an election held on or before April I, 1991 and issued before September I, 1992 (or debt issued to refund such bonds, collectively, "exempt bonds"), from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account EDA and!fa allotments to the district, which effectively reduces the district's local share of debt service, and may also take into account Tier One funds allotted to the district. The District is required to deposit any State allotments provided solely for payment of debt service into the District's interest and sinking fund upon receipt of such amounts. In addition, the District must, prior to levying an interest and sinking fund tax rate that exceeds $0.50 per $100 of assessed valuation, credit to the interest and sinking fund other State assistance, including Tier One funds that may be used for either operating purposes or for payment of debt service, in an amount equal to the amount needed to demonstrate compliance with the threshold tax rate test and which is received or to be received in that year. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay refunding bonds issued pursuant to Chapter 1207, Texas Govemment Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds (other than bonds issued to refund exempt bonds) are included in maximum annual debt service for calculation of the $0.50 threshold tax rate test when applied to subsequent bond issues. The Bonds are issued for school building purposes pursuant to Chapter 45, Texas Education Code as new debt and are subject to the threshold tax rate test. Under current law, a district may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier of the tax year five years after the current tax year or the tax year in which the final payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax at a rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the Texas Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used State assistance other than EDA or!fa allotment funding or projected property values to satisfy this threshold test. 42

43 PUBLIC HEARING AND ROLLBACK TAX RATE... In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district's "rollback tax rate" without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (I) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. The rollback tax rate for a school district is the lesser of(a) the sum of(!) the product of the district's "State Compression Percentage" for that year multiplied by $1.50, (2) the rate of$0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of(!) the district's effective maintenance and operations tax rate, (2) the product of the district's State Compression Percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM- Local Funding for School Districts" for a description of the "State Compression Percentage"). If for the preceding tax year a district adopted an M&O tax rate that was less than its effective M&O tax rate for that preceding tax year, the district's rollback tax for the current year is calculated as if the district had adopted an M&O tax rate for the preceding tax year equal to its effective M&O tax rate for that preceding tax year. The "effective maintenance and operations tax rate" for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. Section of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section of the Texas Education Code. Section (e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section (b ), (c) and (d) and if such failure to comply was not in good faith. Section (e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. A district may adopt its budget after adopting a tax rate for the tax year in which the fiscal year covered by the budget begins if the district elects to adopt its tax rate before receiving the certified appraisal roll. A district that adopts a tax rate before adopting its budget must hold a public hearing on the proposed tax rate followed by another public hearing on the proposed budget rather than holding a single hearing on the two items. PROPERTY AssESSMENT AND TAX PAYMENT... Property within the District is generally assessed as of January I of each year. Business inventory may, at the option of the taxpayer, be assessed as of September I. Oil and gas reserves are assessed on the basis of pricing information contained in the most recently published Early Release Overview of the Annual Energy Outlook published by the United States Energy Information Administration, as well as appraisal formulas developed by the State Comptroller of Public Accounts. Effective January I, 2016, the valuation assessment of oil and gas reserves depends upon pricing information in either the standard edition of the Annual Energy Outlook or, if the most recently published edition of the Annual Energy Outlook was published before December I of the preceding calendar year, the Short-Tenn Energy Outlook report published in January of the current calendar year. Taxes become due October I of the same year, and become delinquent on February I of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first installment due on February I of each year and the final installment due on August I. PENALTIES AND INTEREST... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty lnterestlbl Total February 6% 1% 7% March April 8 3 II May June July 271a) 6 33 (a) Includes additional penalty of up to 20% assessed after July I in order to defray attomey collection expenses. (b) Interest continues to accrue after July I at the rate of I% per month until paid. Taxes levied by the District are a personal obligation of the owner of the property. On January I of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the District, having the power to tax the property. The District's tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders ofliens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any time after taxes on property 43

44 become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same propetty. The ability of the District to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, adverse market conditions, taxpayer redemption rights, or bankruptcy proceedings which restrain the collection of a taxpayer's debt. Federal bankruptcy law provides that an automatic stay of actions by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankmptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes ft om attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes arc paid as an administrative expense ofthc estate in bankruptcy or by order ofthe bankruptcy court. DISTRICT APPLICATION OF TAX CODE... The Appraisal District has the responsibility for appraising property in the District as well as other taxing units in Bexar County, Texas. The Appraisal District is governed by a board of directors appointed by members of the governing bodies of various political subdivisions within the county. Propetty within the District is assessed as of January I of each year, taxes become due October I of the same year and become delinquent on February I of the following year. The Board has elected to grant an additional exemption of residence homestead of a person 65 years of age or older and cettain disabled persons in the amount of $10,000. The Board has elected to grant an additional local option exemption of residence homestead of a person 65 years of age or older in the amount of$13,330. The District has taken official action to tax "freeport property" located within the District. The District does not currently tax goods-in-transit. The District does not tax personal property not used in the production of income, such as personal automobiles. The District's taxes are collected by the Bexar County Tax Assessor-Collector. The District does not give discounts for early payment. The District does not participate in any tax increment financing zones. The District has not granted any tax abatements. [The remainder of this page intentionally!eji blank) 44

45 TABLE 1 - VALUATION, EXEMPTIONS AND TAX SUPPORTED DEBT 2015/16 Market Valuation Established by Bexar Appraisal District (includes exempt property) Less Exemptions/Reductions at 100% Market Value: $25,000 Residential Homestead Exemptions (State Mandated) Over-65/Disabled Exemptions Disabled Veterans Disabled Persons Productivity Loss Leased Vehicles Community Housing Development Value Lost to 10% Residential Cap Exempt Low Income Housing Other Pollution Control 2015/16 Taxable Assessed Valuation $2,037,478, ,807, ,029,436 16,680, ,107, ,114, ,693, ,945, ,928,557 28,864,290 2,893,226 11,338,820 $ 39,539,115,801 4,792,883,162 $ 34,746,232,639 Debt Payable from Unlimited Ad Valorem Taxes as of June 1, 2016 Unlimited TaxBonds(I) The Bonds Debt Payable from Unlimited Ad Valorem Taxes $1,260,505,000 58,095,000 $ 1,318,600,000 Interest and Sinking Fund as ofjune 1, 2016( 2 ) Ratio of Tax Supported Debt to Taxable Assessed Valuation $ 96,937, % 2016 Estimated Population - 427,521 Per Capita Taxable Assessed Valuation - $81,274 Per Capita Debt Payable from Unlimited Ad Valorem Taxes- $3,084 ( 1) Excludes the District's hereinafter-defined Commercial Paper Notes. The Commercial Paper Notes may be issued from time to time up to an aggregate principal amount $100,000,000 outstanding at any time. (2) Unaudited. [The remainder of this page intentionally lefl blank} 45

46 TABLE 2 -TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value for Fiscal Year Ended June 30, %of Categmy Amount Total Amount Total Amount Total Real, Residential, Single-Family $22,877,853, % $20,743,684, % $ 19,277,960, % Real, Residential, Multi-Family 3,564,853, % 3,028,422, % 2,692,611, % Real, Vacant Lots/Tracts 496,164, % 408, I 07, % 415,773,80 I 1.26% Real, Acreage (Land Only) 161,781, % 163,982, % 359,102, % Real, Farm and Ranch Improvements 148,923, % 172,030, % 244, % Real, Commercial 8, I 07,242,30 I 20.50% 6,825,040, % 6,346,984, % Real, Industrial 88,480, % 79,099, % 90,009, % Real, Oil, Gas and Other Mineral Reserves 11,200, % 13,096, % 0.00% Real and Tangible Personal, Utilities 116,143, % 104,709, % 98,000, % Tangible Personal, Commercial 2,313,089, % 2,230,038, % 2,158,995, % Tangible Personal, lndustiial 311,246, % 258,571, % 250,843, % Tangible Personal, Mobile Homes 27,335, % 26,006, % 25,214, % Special Inventory 153,697, % 143,102, % 142,902, % Real Propet1y, Invent my( I) 84,146, % 99,622, % 105,719, % Exempt I,076,956, % I,020,026,50 I 2.89% I,026,360, % Total Appraised Value Before Exemptions $39,539,115, % $35,315,540, % $ 32,990,723, % Adjustments (207,559,783) (164,999,066) Less: Total Exemptions/Reductions (4,792,883,162) (3,558,309,110) (3,396, 188,409) Taxable Assessed Value $ 34,746,232,639 $31,549,671,199 $29,429,536,333 Taxable Appraised Value for Fiscal Year Ended June 30, %of %of Categoty Amount Total Amount Total Real, Residential, Single-Family $ 18,768,937, % $ 18,703,567, % Real, Residential, Multi-Family 2,225,875, % 2,238,168,30 I 7.12% Real, Vacant Lots/Tracts 406,800, % 419,644, % Real, Acreage (Land Only) 357,831, % 361,755, % Real, Fann and Ranch Improvements 11,356, % 11,260, % Real, Commercial 6,071,637, % 6,020,048, % Real, Industrial 78,532, % 56,632, % Real, Oil, Gas and Other Mineral Reserves 0.00% Real and Tangible Personal, Utilities 104,459, % 112,927, % Tangible Personal, Commercial 2,137,904, % 2,158,454, % Tangible Personal, Industrial 257,237, % 253,395, 'Yo Tangible Personal, Mobile Homes 27,110, % 27,369, % Special Inventory 123,331, % 116,593, % Real Propetty, lnventori I) 101,115, % 96,038, % Exempt 950,770, % 861,990, % Total Appraised Value Before Exemptions $31,622,902, % $ 31,437,845, % Adjustments (172,021,246) (138,924,583) Less: Total Exemptions/Reductions (3,375,268,256) (3,279,862,128) Taxable Assessed Value $28,075,612,510 $ 28,019,059,238 (I) Real property, inventory in the hands of developers or builders; each group of properties in this categoty is appraised on the basis of its value as a whole as a sale to another developer or builder. NOTE: Valuations shown are certified taxable assessed values reported by the Appraisal District. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. 46

47 TABLE 3 - VALUATION AND TAX SUPPORTED DEBT HISTORY Net Tax Ratio of Net Tax Supported Supported Net Tax Fiscal Taxable Debt Debt Supported Year Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 6/30 Population<tl Valuation< 2 l Per Capita ofyear< 3 l Valuation< 3 l Capita(3l ,746 $ 28,019,059,238 $ 68,215 $ 1,184,767, % $ 2, ,965 28,075,612,510 67,495 1,444,538, % 3, ,834 29,429,536,333 67,993 1,450,519, % 3, ,761 31,549,671,199 71,257 1,381,993, % 3, ,521 34,746,232,639 81,274 1,318,600,000 (4) 3.79% (4) 3,084 (4) (1) Source: District Officials. (2) Source: District Comprehensive Annual Financial Reports for years ending 2012 through 2015, and Bexar Appraisal District's Certified Totals for Tax Year 2015 (applicable to District Fiscal Year ending June 30, 2016), subject to change during the ensuing year. (3) Excludes the Series 2010 Maintenance Tax Notes and excludes the District's Commercial Paper Notes. The Commercial Paper Notes may be issued from time to time up to an aggregate principal amount of $100,000,000 outstanding at any time. (4) Includes the Bonds. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Interest Year and Ended Tax Local Sinking %Current %Total 6/30 Rate Maintenance Fund Tax Levy Collections Collections 2012 $ $ $ $ 380,983, % 98.49% ,505, % % ,976, % % ,926, % 99.95% ,344, % (l) 93.00% (l) (1) AsofJune1,2016. TABLE 5 - TEN LARGEST TAXPAYERS 2015/16 % oftotal Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation VHS San Antonio Partners LP Real Estate $ 255,791, % Methodist Healthcare System Medical 252,526, % H.E.B. Grocery Company LP Grocery Stores 186,078, % North Star Mall Inc. Retail 178,503, % Wai-Mart Stores Inc #2404 Retail 137,016, % Cole OFC of San Antonio (Ridgewood Parkway) Real Estate 126,000, % DDR DB SA Ventures LP Real Estate I 00,075, % Frankel Family Trust Investment 89,750, % PN Plaza Investments LP Real Estate 89, I 58, % Santikos Legacy Ltd. Real Estate 70,465, % $ I,485,368, % 47

48 TAX-SUPPORTED DEBT LIMITATION... Section , Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding "new debt" of the district, ti-om a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduce the district's local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt service on bonds approved by district voters at an election held on or before April I, 1991 and issued before September I, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. The Bonds were originally issued as "new money" bonds and were, therefore, subject to the $0.50 tax rate test at initial issuance. TABLE 6 -TAX ADEQUACY(!) Principal and Interest Requirements for the Period Ended August 31, $ Interest and Sinking Fund Tax Rate@ 98% Collections( 2 ).. $ 109,691,868 $ 127,692,405 (I) Excludes the District's Commercial Paper Notes and the Series 2010 Maintenance Tax Notes. The Commercial Paper Notes may be issued from time to time up to an aggregate principal amount of $100,000,000 outstanding at any time. Includes the Bonds. (2) Assumes an estimated $34,746,232,639 Net Taxable Value in TABLE 7 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the District are paid out of ad valorem taxes levied by such entities on properties within the District. Such entities are independent of the District and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax obligations ("Tax Debt") was clevelopecl from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the District, the District has not inclepenclently verified the accuracy or completeness of such information, and no person should rely upon such infonnation as being accurate or complete. Furthermore, certain of the entities listed may have issued aclclitional obligations since the elate hereof, and such entities may have programs requiring the issuance of substantial amounts of aclclitional obligations, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the District. District's 2015/2016 Total Overbpping Authorized Taxable 2015/2016 Tax Estimated Tax Supported But Unissued Assessed Tax Supported % Debt Debt As Of Taxing J u1is diet ion Value Rate Debt Applicable As of6/l/ /2016 Alamo Community College District $ 131,026,907,607 $ $ 440,520, % $ 119,821,440 $ Balcones Heights, City of 250,464, , % 179,961 Bexar County 116,007,640, ,272,850, % 4,154,215,200 37,265,887 Bexar County Hospital District 134,117,908, ,470, % 187,807,840 Cibolo Canyons Special Improvement District 752,206, ,840, % 10,762, ,115,000 Hill Country Villa!,>e, City of 324,587, , % 572,000 Live Oak, City of I,044,811,56! ,770, % 6,990,347 San Antonio, City of 90,592,113, I,490,695, % 474,935,427 74,441,002 Terrell Hills, City of I,335,514, ,920, % I,000,824 North East Independent School District 34,746,232, I, ,000 (I) % I,318,600,000 (I) 399,950,000 (2) Total Direct and Overlapping Net Tax Supported Debt $ 6,274,885,983 Ratio of Direct and Overlapping Net Tax Sup ported Debt to Taxable Assessed Valuation 18.06% Per Capita Overlapping Net Tax Supported Debt 14,677 (I) Excludes the Series 20 I 0 Maintenance Tax Notes and excludes the District's Unlimited Tax Commercial Paper Notes, Series A. The Commercial Paper notes may be issued from time to time up to an aggregate principal amount of $100,000,000 outstanding at any time; includes the Bonds. (2) Excludes$! 00,000,000 in maximum capacity for the District's Commercial Paper Notes. See 'Table I 0- Authorized but Unissued Unlimited Tax Bonds" herein. Includes the Bonds. 48

49 DEBT INFORMATION TABLE 8 - TAX SUPPORTEI) DEHT SERVICE REQUIREJ\1ENTS( 11 Period Percent of Ending Outstanding Debt"> The Bonds''> Total Principal 8/31(2) Principal Interest Total Principal Interest Total Debt Service Retired 20i'6 $ 53,510,000 56,181, ,691,868 $ $ 109,691, ,155,000 52,195, ,350,955 1,305, ,949 2,129,949 l 02,480, ,620,000 49,882,130 91,502,130 1,370, ,418 2,176,418 93,678, ,630,000 50,922,605 94,552,605 I,440, ,964 2,226,964 96,779, % ,370,000 51,844,780 97,214,780 1,510, ,516 2,276,516 99,491, ,860,000 49,895,205 97,755,205 I,585, ,074 2,330, ,085, ,685,000 47,396,455 98,081,455 1,665,000 3,561,950 5,226, ,308, ,265,000 44,742,974 98,007,974 1,750,000 3,445,400 5,195, ,203, ,285,000 42,112, ,397,074 1,835,000 3,322,900 5,157, ,554, % ,705,000 39,341,543 98,046,543 1,930,000 3,194,450 5,124, ,170, ,185,000 36,125,086 98,310,086 2,025,000 3,059,350 5,084, ,394, ,410,000 32,894,855 98,304,855 2,125,000 2,917,600 5,042, ,347, ,555,000 29,696,105 98,251,105 2,235,000 2,768,850 5,003, ,254,955 'D ,720,000 26,571,839 98,291,839 2,345,000 2,612,400 4,957, ,249, % ,205,000 23,614,306 84,819,306 2,460,000 2,448,250 4,908,250 89,727, ,715,000 20,769,600 74,484,600 2,585,000 2,276,050 4,861,050 79,345, ,325,000 18,059,513 74,384,513 2,715,000 2,095,100 4,810,100 79,194, ,375,000 15,449,250 73,824,250 2,850,000 1,905,050 4,755,050 78,579, ,640,000 12,743,475 66,383,475 2,995,000 I,705,550 4,700,550 71,084, % ,565,000 10,505,656 55,070,656 3,140,000 1,495,900 4,635,900 59,706, ,840,000 8,643,600 47,483,600 3,300,000 1,276,100 4,576,100 52,059, ,480,000 6,875,350 47,355,350 3,465,000 1,045,100 4,510,100 51,865, ,995,000 5,030,750 19,025,750 3,635, ,550 4,437,550 23,463, ,650,000 4,234,150 18,884,150 3,820, ,100 4,368, I 00 23,252, % ,335,000 3,399,600 18,734,600 4,010, ,700 4,290,700 23,025, ,065,000 2,525,350 18,590,350 18,590, ,855,000 1,608,600 16,463,600 16,463, ,840, ,600 8,625,600 8,625, ,420, ,400 4,729,400 4,729, % 1,267,260, ,357,673 $2,011,617,673 58,095,000 44,691,271 I 02,786,271 $ 2,114,403,944 (I) Excludes the Disttict's Commercial Paper Notes. 1lte Commercial Paper Notes may be issued from time to time up to an aggregate ptincipal amount of$100,000,000 outstanding at any time. (2) 'Ille District's fiscal year is June 30, however for purposes of tax rate levy the table shown above utilizes the pctiod ending August 31. (3) Excludes the Distiict's Se1ies 20 I 0 Maintenance Tax Notes (see "Other Obligations" appeating under Table II herein). Interest calculated at a "tenn" rate of 2.000% through July 31, 2018 and at the "stepped rate" of7.000% per annum thereafter for the Sc1ics 2013A Yatiable Rate Unlimited Tax School Building Bonds. Interest calculated at an initial "term" rate of2.000% through July 3 I and at the "stepped rate" of 7.000% per annum thereafter for the Se1ies 2014 Ya1iable Rate Unlimited Tax School Building Bonds. (4) Interest calculated at the Tcnn Rate of 1.420% through August and at the Stepped Rate of7.000% per annum thereafter.

50 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION Principal and Interest Requirements for the Period Ended August 31, $ Interest and Sinking Fund Tax Rate@ 98% Collection( I).... $I 02,480,904 $131,876,182 (I) Assumes an estimated $35,884,675,461 Net Taxable Value in TABLE 10 - AUTHORIZED BUT UNISSUED UNLIMITED TAX SCHOOL BUILDING BONDS Arnount Amount Date Amount Previously Being Unissued Purpose Authorized Authorized Issued Issued Balance Construction and Equipping of School Buildings and Purchase of New School Buses 11/2/15 $499,950,000 II) $ 100,000,000 l'l $ $ 399,950,000 ( 1) Voted and authorized bonds are issued solely for the purpose of constructing, equipping, and renovating school buildings, purchase sites for future schools, and paying costs of issuance. (2) Represents the entirety ofthe $100,000,000 capacity ofthe District's Commercial Paper Notes which may be issued from time to time up to an aggregate principal amount of$ I 00,000,000 outstanding at any time. ANTICIPATED ISSUANCE OF UNLIMITED TAX DEBT... On November 3, 2015 (the "Election"), the District's voters authorized the District to issue $499,950,000 in unlimited tax-supported bonds, the proceeds of which will be utilized to undertake District-wide improvements and are expected to address the District's capital needs at least through In May 2016, the District established a commercial paper program (the "CP Program") pursuant to which it is authorized to issue commercial paper notes ("Commercial Paper Notes") from time to time and in an aggregate principal amount of not more than $100 million at any one time outstanding pursuant to the authority provided at the Election; provided, however, that the aggregate amount of indebtedness issued to finance authorized projects pursuant to the Election cannot exceed the limits of the Election's authorization related to maximum indebtedness. The District expects to continue issuing its Commercial Paper Notes to provide interim financing for projects authorized by the Election. The District anticipates issuing refunding bonds to restore capacity to the CP Program in the third quarter of2016. [The remainder of this page intentionally lcji blank/ 50

51 TABLE 11- OTHER OBLIGATIONS GENERAL... In addition to voter authorized ad valorem tax-supported debt, the District may also enter into other financial obligations, including maintenance tax notes payable from its collection of maintenance taxes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes. The District currently has no other such debt outstanding. On November 17, 2010, the District initially delivered its $37,545,000 Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2010 (Direct Pay Subsidy Notes) (hereinbefore defined as the "Series 20I 0 Maintenance Tax Notes") to provide funds for certain capital maintenance items to District facilities. The Series 2010 Maintenance Tax Notes were issued as "qualified school construction bonds" and "qualified bonds" under that Code and, as such, the District is entitled to receive from the United States Department of the Treasury (the "Treasury") a debt service subsidy payment in the form of a refundable tax credit (the "Subsidy") in an amount equal to the scheduled interest on the Series 2010 Maintenance Tax Notes when due. The Series 2010 Maintenance Tax Notes mature on August I, No sinking fund has been established for payment of the Series 2010 Maintenance Tax Notes when due. An amortization schedule for the Series 20IO Maintenance Tax Notes is provided as follows: Petiod Ending Series 2010 Maintenance Tax Notes 8/31 Principal Interest Less: Subsid/ 1 ) Total 2016 $ $ 1,967,358 $ (1,833,578) $ 133, ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (1,967,358) ,967,358 (I,967,358) ,967,358 (1,967,358) ,545,000 1,967,358 (1,967,358) 37,545,000 $ 37,545,000 $ 23,608,296 $ (23,474,516) $ 37,678,780 (1) Subsidy shown in an amount that takes into account the automatic 6.8% reduction in federal spending for fiscal year 2016 (known as "Sequestration"), but does not take into account the potential impact of future reductions (which are possible and were recently approved by Congress). See "OTHER INFORMATION -Effect of Sequestration" herein. The District has determined that the reduced amount of the Subsidy to be received from the Treasury in relation to the Notes as a result of Sequestration will not have a material impact on the financial condition of the District or its ability to pay regularly scheduled debt service on Series 20 I 0 Maintenance Tax Notes when and in the amounts due and owing. EMPLOYEE RETIREMENT PLAN AND OTHER POST-EMPLOYMENT BENEFITS... The District's employees participate in a retirement plan (the "Plan") with the State that is administered by the Teacher Retirement System of Texas ("TRS"). State contributions are made to cover costs of the TRS retirement plan up to certain statutory limits. The District is obligated for a portion oftrs costs relating to employee salaries that exceed the statutory limit. For the fiscal year ended June 30,2015, the State contributed $19,122,484 to TRS on behalf of the District's employees and the District paid an additional $6,142,569 for salaries above the statutory minimum. The District no longer offers a post-employment retirement benefit and, as a result, has established unfunded liabilities for "Other Post Employment Retirement Benefits" as defined in GASB Statement No. 45 in the amount of $180,414 as of June 30, (For more detailed information concerning the TRS retirement plan, see APPENDIX 8, "Excerpts from the District's Comprehensive Annual Financial Report"- Note H, Note I and Note J.) The District contributes to the Texas Public School Retired Employees Group Insurance Program ("TRS-Care"), a cost-sharing multiple-employer defined benefit postemployment health care plan administered by TRS. TRS-Care provides health care coverage for certain persons (and their dependents) who retired under TRS. For the fiscal year ended June 30, 2015, the State contributed $4,032,391 to TRS-Care, District employees paid $2,621,054 and other contributions to the plan made from private grants and from the District were $2,232,162 (see APPENDIX 8, "Excerpts from the District's Comprehensive Annual Financial Report" Note I). 51

52 The District also offers medical, dental, and life insurance coverage to certain retirees who have continued their coverage with the District's insurance plans since their retirement. The option to continue coverage is no longer offered; thereby, pmiicipation in the plan is limited to those who retired prior to August 31, The District's annual cost of the Other Post-Employment Benefits ("OPEB") and net OPEB obligations for the fiscal years ended June 30,2015,2014, and 2013 are included in the following table. (For more information regarding the District's OPEB liability (see APPENDIX B, "Excerpts from the District's Comprehensive Annual Financial Report"- Note J). June 30, 2015 June 30, 2014 June 30, 2013 Annual Required Contribution ("ARC") $ 215,814 $ 205,114 $ 314,448 Interest on Prior Year Net OPEB (Benefit)/Obligation 7,369 8,422 5,579 Adjustment to the ARC (7,040) (8,045) (7,652) Annual OPEB Cost 216, , ,375 Retiree Claims Paid (219,953) (231,811) (227,380) Increase/(Decrease) in Net OPEB Obligation $ (3,81 0) $ (26,320) $ 84,995 Net OPEB (Benefit)/Obligation at June 30 $ 180,414 $ 184,224 $ 210,544 Percentage of ARC Contributed 101.8% 112.8% 72.8% [The remainder of this page intentionally left blank.] 52

53 FINANCIAL INFORMATION TABLE 12 - CHANGES IN NET ASSETS Fiscal Years Ended June 30, Revenues: Program Revenues: Charges for Services $ 22,951,187 $ 23,009,831 $ 23,307,999 $ 22,783,928 $ 22,628,635 Operating Grants and Contributions 79,819,596 76,009,927 74,047,791 93,390, ,842,030 General Revenues: Maintenance and Operations Taxes 316,681, ,557, ,377, ,835, ,283,586 Debt Service Taxes 121,999, ,290, ,892,617 98,024,700 97,815,240 State Aid -Formula Grants 159,179, ,877, ,227, ,075, ,635,705 Grants and Contribntions Not Restricted 6,954,975 7,427,927 7,396,355 7,146,480 5,308,935 Investment Eamings 1,102,680 1,541, ,398 3,008,213 2,210,106 Miscellaneous Local & lntennediate 4,457,969 4,879,436 4,905,166 3,865,677 4,042,857 Transfers In (Out) 1,960, ,693 88,691 47,652 77,741 Total Revenues $715,108,265 $685,060,692 $ 648,982,820 $678,177,526 $686,844,835 Expenses: lnstmction $375,521,024 $362,123,810 $353,732,386 $362,214,813 $ 376,479,406 lnstmctional Resources & Media Services I 1,529,428 11,199,028 11,901,993 11,264,201 12,323,296 Curriculum and Staff Development 16,663,996 16,126,028 16,249,269 15,741,780 17,301,176 lnstmctional Leadership 6,736,551 6,834,558 6,699,437 6,421,877 7,179,781 School Leadership 35,390,638 33,846,679 32,016,145 31,110,802 33,019,232 Gnidance, Counseling & Evaluation Services 20,218,076 19,573,975 18,910,505 18,826,969 19,843,188 Social Work Services 4,017,672 3,929,030 4,005,192 3,910,851 4,300,158 Health Services 7,782,708 7,790,141 7,562,427 7,304,746 7,921,828 Student (Pupil) Transpmiation 20,486,754 20,603,626 19,450,575 19,620,934 20,182,957 Food Services 33,228,511 33,148,289 33,459,342 31,703,494 30,085,326 Co-cunicular/ExtracmTicular Activities 16,990,955 15,678,891 15,278,416 15,185,517 15,038,573 General Administration 11,028,060 10,952,520 10,113,105 10,239,863 11,020,485 Plant Maintenance and Operations 62,443,927 58,851,185 56,631,517 55,143,500 58,741,653 Secmity and Monitoring Services 4,307,086 2,912,196 4,300,053 3,697,076 4,467,534 Data Processing Services 17,801,725 22,803,154 25,374,479 4,304,519 6,420,067 Community Services 500, , ,031 2,490, ,511 Debt Service 50,729,694 64,949,036 61,547,471 59,725,519 60,916,646 lnstmctional Shared Service An angements 406, , , , ,125 Juvenile Justice Altemative Ed. Prg. 78,657 70, , , ,333 Prope1ty Appraisal Services 2,335,660 2,197,327 2,129,848 1,914,188 2,180,987 Total Expenses $ 698,198,809 $ 694,595,071 $ 680,468,579 $661,345,375 $ 688,549,262 Increase (Decrease) in Net Position 16,909,456 (9,534,379) (31,485,759) 16,832,151 (I,704,427) Net Position- July I (Beginning) 175,716, ,962, ,448, ,615, ,345,458 Prior Period Adjustment (86,424,053) (I) (6,711,540) (2,025,086) Net Position- June 30 (Ending) $106,201,821 $175,716,418 $ 191,962,337 $223,448,096 $206,615,945 Source: The District's Comprehensive Annual Financial Reports. (I) During fiscal year 2015, the District adopted GASB Statement No. 68, Accounting and Reporting for Pensions. With the adoption of this standard, the District must assume their proportionate share of the New Pension Liability of the Teacher Retirement System of Texas (TRS). Adoption of GASB No. 68 required a prior period adjustment to report the effect ofgasb 68 retroactively. [The remainder of this page intentionally left blank! 53

54 TABLE 12-A - G"NERAL FUND REVENU"S AND EXPENDITUR" HISTORY Fiscal Years Ended June 30, I Revenues: Local and Intermediate Sources $ 323,560, I I 7 $ 303,821,814 $ 289,488,980 $ 286,737,278 $ 286,859,952 State Sources I 81,054, ,466, ,595,432 I 90,250,77 I 195,325,6 I 7 F edera1 Sources 7,048,002 7,037,889 7,244,449 6,384,150 6,045,557 Total Revenues $ 511,662,489 $ 493,326,195 $ 471,328,861 $483,372,199 $488,231,126 Expenditures: Instruction $ 314,364,610 $ 303,216,383 $ 294,197,105 $ 280,669,0 I 5 $287,261,498 lnst. Resources and M celia 8,596,661 8,380,874 8,055,426 7,979,421 9,105,059 Ctmiculum and lnstmctional Staff Development 13,154,547 12,326,672 11,996,204 10,266,198 9,289,388 Instructional Leadership 5,838,417 5,802,769 5,714,637 5,397,822 5,930,620 School Leadership 34,034,618 32,394,789 30,429,782 29,313,593 30,678,510 Guidance, Counseling and Evaluation Services 18,269,067 17,855,451 16,968,761 16,754,183 17,369,335 Social Work Services 2,441,364 2,355,176 2,273,258 2,369,370 2,546,938 Health Services 7,471,777 7,374,174 7,162,197 6,700,956 7,114,071 Student (Pupil) Transpmiation 17,952,885 18,168,457 16,927,410 17,090,119 17,238,935 Food Services 41,126 27,195 6,142 20,962 42,492 Cocurricular!Extracurricular Activities 10,937,982 9,696,938 9,419,305 8,999,769 9,250,711 General Administration 11,282,025 10,923,229 9,922,156 10,204,973 10,641,994 Facilities Maintenance and Operatio1 51,232,456 50,166,609 47,998,644 49,017,586 51,399,271 Security and Monitoring Services 4,654,370 4,305,349 3,951,590 3,919,013 4,376,263 Data Processing Services 4,520,579 4,362,428 3,953,172 3,821,576 3,486,930 Community Services 181, , , , ,636 Facility Acquisition and Construction 73,115 5,000 8,000 Instructional Shared Service An angements 406, , , , ,125 Payments to Juvenile Justice Altemative Education Program 78,657 70, , ,060 I 76,333 Other lntegovernmental Charges 2,335,660 2,197,327 2,129,848 1,914,188 2,180,987 Total Expenditures $ 507,868, I 64 $ 490,393,260 $ 471,910,625 $455,164,878 $ 468,687,096 Other Resources and (Uses) $ (2,812,608) $ (2,692,6 I 9) $ (2,294,013) $ (I,134,067) $ (I,757,578) Excess (Deficiency) of Revenues Over Expenditures $ 981,717 $ 240,316 $ (2,875,777) $ 27,073,254 $ 17,786,452 Beginning Fund Balance on July I $ 114,118,514 $ I 13,878, I 98 $ 116,753,975 $ 89,680,72 I $ 71,894,269 Ending Fund Balance on June30 $ 115,100,231 $ I 14,118,514 $ I 13,878,198 $ I 16,753,975 $ 89,680, ~ - Source: The District's Comprehensive Annual Financial Reports. [The remainder o{!his page intenlionally lefl blank/ 54

55 INVESTMENTS The District invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Board. Both State law and the District's investment policies are subject to change. LEGAL INVESTMENTS... Under Texas law, the District is authorized to invest in (I) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6) bonds issued, assumed or guaranteed by the State oflsrael; (7) certificates of deposit meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (I) through (6) or in any other manner and amount provided by law for District deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (I), and are placed through a primary government securities dealer or a financial institution doing business in the State oftexas, (9) securities lending programs if (i) the securities loaned under the program are I 00% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses(!) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (I) through (6) above, clauses (II) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State oftexas; and (iv) the agreement to lend securities has a term of one year or less, (I 0) certain bankers' acceptances with the remaining term of270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-I" or "P-1" or the equivalent by at least one nationally recognized credit rating agency, (II) commercial paper with a stated maturity of270 days or less that is rated at least "A-I" or "P-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$! for each share, and (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity ofless than two years, invest exclusively in obligations described in the this paragraph (except for those described in clause (6)), and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than "AAA" or its equivalent, and conform to the requirements relating to the eligibility of investment pools to receive and invest funds. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than "AAA" or "AAA-m" or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-l et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a tern1 up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: ( 1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under the program are collateralized, a loan made under the program allows for tennination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses ( 1) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm not less than "A" or its equivalent, or (c) cash invested in obligations that are described in clauses(!) through (6) and (10) through (12) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time the investment is made with the Agency or a third party designated by the Agency; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a tenn of one year or less. 55

56 As a school district that qualifies as an "issuer" under Chapter 1371, as amended, Texas Government Code, the District is also authorized to purchase, sell, and invest its funds in corporate bonds. State law defines "corporate bonds'' as senior secured debt obligations issued by a domestic business entity and rated not lower than "AA-" or the equivalent by a nationally recognized investment rating fim1. The term does not include a bond that is convertible into stocks or shares in the entity issuing the bond (or an affiliate or subsidy thereof) or any unsecured debt. Corporate bonds must finally mature not later than 3 years from their date of purchase by the school district. A school district may not (I) invest more than 15% of its monthly average fund balance (excluding bond proceeds, reserves, and other funds held for the payment of debt service) in corporate bonds; or (2) invest more than 25% of the funds invested in corporate bonds in any one domestic business entity (including subsidiaries and affiliates thereof). Corporate bonds held by a school district must be sold if they are at any time downgraded below "AA-" (or the equivalent thereof) or, with respect to a corporate bond rated "AA-" (or the equivalent thereof), such corporate bond is placed on negative credit watch. Corporate bonds are not an eligible investment for a public funds investment pool. To invest in corporate bonds, an eligible school district must first (i) amend its investment policy to authorize corporate bonds as an eligible investment, (ii) adopt procedures for monitoring rating changes in corporate bonds and liquidating an investment in corporate bonds, and (iii) identify funds eligible to be invested in corporate bonds. As of the date of this Official Statement, the District has taken the steps necessary to allow for investing in corporate bonds but has not made any investments in that type of instrument. INVESTMENT POLICIES... Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All District funds must be invested consistent with a fonnally adopted "Investment Strategy Statement" that specifically addresses each funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (I) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, District investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly the investment officers of the District shall submit an investment report detailing: (I) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) state law. No person may invest District funds without express written authority from the Board oftrustees. ADmTIONAL PROVISIONS... Under Texas law, the District is additionally required to: (I) annually review its adopted policies and strategies, (2) adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution, (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the District and the business organization that are not authorized by the District's investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the tem1 of the reverse purchase agreement; (8) restrict the investment in no load mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements, and (I 0) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. /The remainder ofrhis page inrenriona//y /efl blank/ 56

57 TABLE 13- CURRENT INVESTMENTS( I) As of June I, 2016, the District's investable funds were invested in the following categories: %of Funds Book Description Invested Value Certificate of Deposit 0.14% $ 480,000 Commercial Paper 15.35% 52,930,915 FAMCA 0.58% 2,007,43 I FFCB 4.06% 13,996,893 FHLB 7.11% 24,521,332 FHLMC 2.32% 8,005,796 FNMA 1.74% 6,007,622 Municipal Bond 13.75% 47,404,604 Local Government Investment Pools 54.95% 189,472,552 Total % $344,827,145 As of such date, June 1, 2016,92.17% of the District's investment portfolio will mature within 12 months. The market value of the investment portfolio was approximately $344,914,726, % of its purchase price. No funds of the District are invested in derivative securities; i.e, securities whose rate of return is determined by reference to some other instrument, index, or commodity. (I) Unaudited. Local Government Investment Cooperative ("LOGIC") is a local government investment pool for whom FirstSouthwest Asset Management provides customer service and marketing for the pool. LOGIC currently maintains a "AAAm" rating from S&P and has an investment objective of achieving and maintaining a stable net asset value of $1.00 per share. Daily investments or redemptions of funds are allowed by the participants. LOGIC operates in a manner consistent with the SEC's Rule 2a-7 of the Investment Company Act of 1940, to the extent such rule is applicable to its operations. Accordingly, LOGIC uses the amortized cost method permitted by SEC Rule 2a-7 to report net assets and share prices since that amount approximates fair value. The investment activities of LOGIC are administered by third party advisors. There is no regulatory oversight by the State over LOGIC. TAX MATTERS TAX EXEMPTION... Bond Counsel stated in an opinion (the "Original Opinion") dated July 24,2013, that, as of such date, interest on the Bonds for federal income tax purposes (I) would be excludable from gross income, as defined in section 61 of the Internal Revenue Code ofl986, as amended to the dateofsuch opinion (the "Code"), pursuant to section I 03 of the Code and existing regulations, published rulings, and court decisions, and (2) would not be included in computing the alternative minimum taxable income of the owners thereof A form of Bond Counsel's Original Opinion is reproduced as Appendix C hereto. The statutes, regulations, rulings, and court decisions on which such opinion was based are subject to change. Bond Counsel's Original Opinion does not cover the effect on excludability of interest of subsequent action under the terms of the Order may be taken only upon receipt of an opinion of counsel of nationally recognized standing in the field of municipal bond Jaw. Bond Counsel's Original Opinion assumed continued compliance with covenants contained in the Order related to exclusion from gross income interest on the Bonds for federal income tax purposes and relied upon representations and certifications of the District made in the certificate dated the date of initial delivery of the Bonds pertaining to the use, expenditure, investment of the proceeds of the Bonds. If the District failed or fails to comply with the covenants in the Order or if the foregoing representations should be detennined to be inaccurate or incomplete, interest on the Bonds may become taxable from the date of initial delivery of the Bonds, regardless of the date on which the event causing such taxability occurs. Because the Bonds are being converted from an existing Term Rate Period to the New Term Rate Period, which is a Term Rate Period under the Order, the Order requires that an Opinion of Bond Counsel be delivered to the Paying Agent/Registrar in connection with such conversion (on which the Remarketing Agent will be allowed to rely) (see "THE BONDS - General - Legality"). In the Original Opinion, Bond Counsel expressed no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C eamings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a financial asset securitization investment trust, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase 57

58 or carry, or who have paid or incmred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Bond Counsel has not expressed any opinion as to the treatment for federal income tax purposes of the interest paid by any liquidity provider on the Bonds or, other than the Opinion of Counsel delivered in connection with the conversion of the Bonds into the New Term Rate Period, the effect on the excludability from gross income for federal income tax purposes of any action taken under the Order which requires that the District shall have received an opinion of counsel nationally recognized in the field of municipal finance to the effect that such action will not adversely affect the excludability of the interest on the Bonds from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes. The Order provides that prior to taking certain actions, including converting the interest rate on the Bonds from one rate mode to another rate mode, the District must have received such an opinion. Bond Counsel's Original Opinion was and is not a guarantee of a result, but represented its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the District described above. No ruling was sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the Original Opinion and Bond Counsel's Original Opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the Issuer as the "taxpayer," and the owners of the Bonds would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the District may have different or conflicting interests from the owners of the Bonds. Public awareness of any audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome. TAx CHANGES... Existing law may change to reduce or eliminate the benefit to Registered Owners of the exclusion of interest on the Bonds from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors with respect to any proposed or future changes in tax law. TAX ACCOUNTING TREATMENT OF PREMIUM BONDS... The initial public offering price to be paid for certain Bonds as a result of their remarketing may be greater than the stated redemption price of such Bonds at maturity (the "Premium Bonds"). An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and its stated redemption price at maturity constitutes premium to the initial purchaser of such Premium Bonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium with respect to the Premium Bonds. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity. Purchasers of Premium Bonds should consult with their own tax advisors with respect to the detennination of amortizable bond premium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Bonds. CONTINUING DISCLOSURE OF INFORMATION In the Order, the District has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the District will be obligated to provide certain updated financial inforn1ation and operating data annually, and timely notice of specified events, to the Municipal Securities Rulemaking Board (the "MSRB") through its EMMA system, where it will be available to the general public, free of charge, at ANNUAL REPORTS... The District will file certain updated financial information and operating data with the MSRB. The infom1ation to be updated includes all quantitative financial infonnation and operating data with respect to the District of the general type included in this Official Statement under Tables numbered I through 6 and 8 through 13 and in Appendix B. The District will update and provide this infom1ation within six months after the end of each fiscal year ending in and after The financial information and operating data to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's EMMA Internet Web site or filed with the SEC, as permitted by SEC Rule 15c2-12 (the "Rule''). The updated infonnation will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the District may be required to employ from time to time pursuant to State law or regulation. 58

59 The District's current fiscal year end is June 30. Accordingly, it must provide updated information by December in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will file notice of the change with the MSRB. NOTICES OF CERTAIN EVENTS... The District will file with the MSRB notice of any of the following events with respect to the Bonds in a timely manner (and not more than 10 business days after occurrence of the event): (I) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perfonn; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or detenninations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders ofthe Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (I 0) release, substitution, or sale of property securing repayment of the Bonds, if material; (II) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the District, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional paying agent/registrar or the change of name of a paying agent/registrar, if material. With respect to the Bonds in the New Term Rate Period, neither the Bonds nor the Order make any provision for debt service reserves, credit enhancement (except with respect to the Permanent School Fund guarantee), or liquidity enhancement. In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports". The District will provide each notice described in this paragraph to the MSRB. For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the District in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District. A VAl LABILITY OF INFORMATION... Effective July 1, 2009 (the "EMMA Effective Date"), the SEC implemented amendments to the Rule which approved the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities infonnation repositories with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the District in accordance with its undertaking made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. With respect to debt of the District issued prior to the EMMA Effective Date, the District remains obligated to make annual required filings, as well as notices of material events, under its continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information depository (the "SID")). Prior to the EMMA Effective Date, the Municipal Advisory Council of Texas (the "MAC") had been designated by the State and approved by the SEC staff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRB pursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documents and related information posted to EMMA's website simultaneously with such posting. Until the District receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the District has detennined, in reliance on guidance from the MAC, that making its continuing disclosure filings solely with the MSRB will satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to the EMMA Effective Date. LIMITATIONS AND AMENDMENTS... The District has agreed to update inforn1ation and to provide notices of certain events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such inforn1ation or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the District to comply with its agreement. The District may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the District (such as nationally recognized bond counsel) detennines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The District may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and 59

60 to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. If the District so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMI'LIANCE WITH PRIOR UNDERTAKINGS... During the past five years, the District has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule. RATINGS OTHER INFORMATION At the time of their initial issuance, the Bonds were rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by S&P Global Ratings ("S&P") by virtue of the guarantee of the Texas Permanent School Fund. The presently outstanding unenhanced unlimited tax-supported debt of the District is rated "A a!" by Moody's and "AA-" by S&P without regard to credit enhancement. The District has 12 unlimited tax-supported issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P by virtue of the guarantee of the Permanent School Fund of the State of Texas (see "OTHER INFORMATION- Ratings"). The District has one maintenance tax note issue ("Series 2010 Maintenance Tax Notes") that is not further secured by and subject to the Permanent School Fund Guarantee. The Bonds are guaranteed by the corpus of the Texas Permanent School Fund. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the District makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by any or all of such rating companies, if in the judgment of any or all of such companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Bonds. EFFECT OF SEQUESTRATION The District has determined that the reduced amount of refundable tax credit payments to be received from the United States Treasury in relation to its outstanding Series 20 I 0 Maintenance Tax Notes designated as "qualified school construction bonds" and "qualified bonds" under the Code as a result of the automatic reductions in federal spending effective March 1, 2013 pursuant to the Budget Control Act of 2011 (commonly referred to as "Sequestration"), and extensions thereof pursuant to the Bipartisan Budget Act of2013, signed into law by the President on December 26, 2013, will not have a material impact on the financial condition of the District or its ability to pay regularly scheduled debt service on its outstanding obligations when and in the amounts due and owing. Under current law, Sequestration is scheduled to continue through President Obama's 2017 Fiscal Year budget proposes the repeal of Sequestration, but this is only a proposal and has not been acted upon by Congress. Assuming Congress does not repeal Sequestration, the percentage reduction that will be applied to payments of issuers of direct-pay bonds for the United States' fiscal year 2017 will be 6.9%. LITIGATION Except as disclosed in this Official Statement the District is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the financial statements of the District. At the time of the initial delivery of the Bonds, the District will provide the Underwriter with a certificate to the effect that no litigation of any nature has been filed or is then pending challenging the issuance of the Bonds or that affects the payment and security of the Bonds or in any other manner questioning the issuance, sale or delivery of said Bonds. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act oftexas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The District assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption fi om securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least ' A'' or its equivalent as to investment quality by a national rating agency (see "OTHER 60

61 INFORMATION - Ratings" herein). In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with capital of at least one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. The District has made nci investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. The District has made no review oflaws in other states to detennine whether the Bonds are legal investments for various institutions in those states. LEGAL MA TIERS At the time of the initial issuance of the Bonds, the District furnished a complete transcript of proceedings incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the District, and based upon examination of such transcript of proceedings, the approving Original Opinion of Bond Counsel with respect to the Bonds issued in compliance with the provisions of the Order, which Original Opinion is attached to the Remarketing Memorandum as Appendix C. Though it represents the Financial Advisor and the Remarketing Agent from time to time in connection with matters unrelated to the Bonds, Bond Counsel was engaged by and only represents the District with respect to the remarketing of the Bonds. Bond Counsel did not take part in the preparation of the Remarketing Memorandum and such finn has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that, in its capacity as Bond Counsel, such finn has reviewed the infonnation describing the Bonds in the Remarketing Memorandum to verify that such description conforms to the provision of the Order. The legal fee to be paid Bond Counsel for services rendered in connection with this remarketing of the Bonds is contingent upon the remarketing of the Bonds. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Bonds, or which would affect the provisions made for their payment or security, or in any manner questioning the validity ofbonds was also furnished. In connection with the remarketing of the Bonds, certain legal matters will be passed upon for the Remarketing Agent by its counsel, Escamilla & Poneck, LLP, San Antonio, Texas. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. FINANCIAL ADVISOR FirstSouthwest is employed as "Financial Advisor'' to the District in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery ofthe Bonds. FirstSouthwest, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the infonnation, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the District has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the inforn1ation in this Official Statement in accordance with, and as part of, its responsibility to the District and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. CERTIFICATION OF TilE REMARKETING MEMORANDUM At the time of the remarketing of the Bonds, the Remarketing Agent will be fumished a certificate, executed by proper officer(s), acting in their official capacity, to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the District contained in this Remarketing Memorandum, and any addenda, supplement or amendment thereto, on the date of such Remarketing Memorandum, and on the date of the initial delivery of the Bonds, were and are hue and correct in all material respects; (b) insofar as the District and its affairs, including its financial affairs, are concemed, such Remarketing Memorandum did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) insofar as the descriptions and statements, including financial data, of or pertaining to entities, other than the District, and their activities contained in such Remarketing Memorandum are concemed, such statements and data have been obtained from sources which the District believes to be reliable and the District has no reason to believe that they are untrue in any material respect; and (d) there has been no material adverse change in the financial condition of the District since the date of the last audited financial statements of the District. 61

62 FORWARD LOOKING STATEMENTS DISCLOSURE The statements contained in this Remarketing Memorandum, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Remarketing Memorandum are based on information available to the District on the elate hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other govemmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Remarketing Memorandum will prove to be accurate. REMARKETING Stifel, Nicolaus & Company, Incorporated, as the Remarketing Agent for the Bonds from the existing Term Rate Period to the New Term Rate Period, has agreed, subject to certain conditions, to remarket the Bonds, at the price and interest rate indicated on the cover page hereof, in exchange for compensation in the amount of $257, The Remarketing Agent will be obligated to remarket all ofthe Bonds if any Bonds are remarketed. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Remarketing Agent and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Remarketing Agent. The Remarketing Agent has provided the following sentence for inclusion in this Remarketing Memorandum. The Remarketing Agent has reviewed the infonnation in this Remarketing Memorandum in accordance with, and as part of, its responsibility to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agent does not guarantee the accuracy or completeness of such information. In 2013 and 2014, the Remarketing Agent donated to the North East Educational Foundation which collaborates with the District. MISCELLANEOUS The financial data and other information contained herein have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Remarketing Memorandum are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purpoii to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. References to web site addresses presented herein are for inf01111ational purposes only and may be in the form of a hyper! ink solely for the reader's convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Remarketing Memorandum for purposes of, and as that term is defined in, Rule 15c2-12. The Remarketing Order authorizing the remarketing of the Bonds also approved the form and content of this Remarketing Memorandum, and any addenda, supplement or amendment thereto, and authorized its fujiher use in the reoffering of the Bonds by the Remarketing Agent. As such, the Remarketing Memorandum has been approved by the Board for distribution in accordance with the provisions of the United States Securities and Exchange Commission Rule codified at 17 C.F.R. Section c2-12. ATfEST: Is! Shannon Grona President, Board oftmstees North East Independent School District Is/ Sandy Hughey Secretary, Board oftrustees North East Independent School District 62

63 APPENDIX A GENERAL INFORMATION REGARDING THE DISTRICT

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65 GENERAL INFORMATION REGARDING THE DISTRICT THE DISTRICT The information contained in this Appendix relating to the District is intended solely to provide certain general information concerning the District. The District presently operates the following campus: HIGH SCHOOLS CHURCHILL JOHNSON LEE MACARTHUR MADISON REAGAN ROOSEVELT ACADEMY OF CREATIVE EDUCATION INTERNATIONAL SCHOOL OF THE AMERICAS ALTERNATIVE HIGH SCHOOL SIZE(acres) (I) (I) (I) AVERAGE DAILY ATTENDANCE( 2 l 2,847 2,911 2,424 2,297 3,090 3,233 2, MIDDLE SCHOOLS BRADLEY BUSH DRISCOLL EISENHOWER GARNER HARRIS HILL JACKSON KRUEGER LOPEZ NIMITZ TEJEDA WHITE WOOD ALTERNATIVE MIDDLE SCHOOL (I) 1,180 1, , , ,040 1,168 1,148 1, , (I) Sites without listed acreage share sites with other facilities. (2) Estimated Average Daily Attendance for the school year. [The remainder of this page intentionally leji blank/ A-I

66 AVERAGE DAILY ELEMENTARY SCHOOlS -~IZE(acrcs)~- ATTENDANCE< 2 l B UL VERDE CREEK CAMELOT CANYON RIDGE CASTLE HILLS CIBOLO GREEN CLEAR SPRING COKER COLONIAL HILLS DELL VIEW EAST TERRELL HILLS ELDORADO ENCINO PARK FOX RUN HARDY OAK HARMONY HILLS HIDDEN FOREST HUEBNER JACKSON-KELLER LARKSPUR LAS LOMAS LONGS CREEK MONTGOMERY NORTHERN HILLS NORTHWOOD OAK GROVE OAK MEADOW OLMOS REDLAND OAKS REGENCY PLACE RIDGEVIEW ROAN FOREST ROYAL RIDGE SERNA STAHL STEUBING RANCH STONE OAK THOUSAND OAKS TUSCANY HEIGI-lTS VINEYARD RANCH WALZEM WEST AVENUE WETMORE WILDERNESS OAK WILSHIRE WINDCREST WOODSTONE ALTERNATIVE ELEM EN TAR Y (I) 8 OTHER PROGRAMS 151 TOTAL 64,136 (I) Sites without listed acreage share sites with other facilities. (2) Estimated Average Daily Attendance for the school year. A-2

67 District Attendance Average daily attendance in the District in recent years has been as follows: 1993/ , / , /96 41, /97 42, / , /99 44, / , / , / , / , /04 52, /05 53, / , / , / , / , , / , / , , , / , /16(!)... 64,136 ( 1) Estimated. The District encompasses approximately 140 square miles in north and northeast Bexar County, Texas (the "County"). The District was founded in 1949 and has been operating as an independent school district since The District is now in the top ten largest districts in the State oftexas with an enrollment of67,780 for the school year. The District is an urban-suburban community with a household population of over 420,000 and a strong business-commercial-residential base. All grades and campuses are fully accredited by the Texas Education Agency ("TEA"). The District tailors its instructional programs to enrich and expand student learning and exposure to the tenets of responsible citizenship. The Board of Trustees sets the tone for instruction and service to students and patrons with its mission statement and goals. The District's achievements continue to be heralded in local, state and national publications. The success of the District is evidenced in high standardized test scores, Advanced Placement Program participation and abundant scholarships and awards presented to the District's students. The District enjoys a well-deserved reputation for academic and financial excellence and continues to receive numerous accolades for the performance of its students. Most recently, the District has been recognized for the following: The District received a rating of Passed on the Schools Financial Integrity Rating System of Texas (FIRST) earning 30 of a possible 30 points. This is the 13'h year in a row the District has earned the State's highest financial accountability rating. The District's administrative costs as a percent of instructional costs for was 4.90 percent. This was the lowest of all districts in Bexar County and places the District in the top three percent of all Texas school districts. ln , the District had 13 National Merit Finalists, 15 National Merit Semifinalists, 69 Commended Scholars, 58 Hispanic Scholars, and three Achievement Scholars. Almost 95 percent ofthe District's 2015 graduates planned to attend a two-year, four-year, trade, technical or business school/institution. They received $70.8 million in scholarship offers. In 2015, the District graduated 818 Summa Cum Laude students (100+ average). In 2015, the Washington Post included eight District high schools on its list of America's Most Challenging High Schools. (Churchill, International School of the Americas, Johnson, Lee, MacArthur, Madison, Reagan and Roosevelt). Six of the District's high schools were deemed as some of the best in the nation, according to U.S. News & World Report's 2015 ranking: International School ofthe Americas (Gold National Rank: 317/State Rank: 47); Johnson High School (Silver National Rank: 748/State Rank: 84); Reagan High School (Silver National Rank: 782/State Rank: 89); MacArthur High School (Silver National Rank: 1670/State Rank:!56); Lee High School (Silver National Rank: 1968/State Rank: 172); Roosevelt High School (Awarded with Bronze status). In 2015, the District's Board of Trustees was named one of five Honor Boards from all across Texas by the Texas Association of School Administrators. They were selected for this honor because of their commitment to students, a code of ethics and positive relationships. A-3

68 BEXAR COUNTY The County was organized in 1836 as one of the original counties of the Republic oftexas and is now the fourth most populous of the 254 counties in the State. The County has an area of approximately I,248 square miles and is located in south central Texas and is a component of the San Antonio-New Braunfels MSA. The principal city within the County is San Antonio, which is the county seat. The diversified economic base of the County is composed of financial services, healthcare, agriculture, manufacturing, construction, military, and tourism. The County's proximity to Mexico provides favorable conditions for intemational business relations with the country in the areas of agriculture, tourism, manufacturing, wholesale and retail markets. Industry ranges from the manufacturing of apparel, food products, aircraft, electronics and pharmaceuticals to iron and steel products and oil well equipment. San Antonio is a major insurance center in the southwest, serving as the headquarters for several insurance companies, including United Services Automobile Association. EMPLOYMENT AND WAGES BY INDUSTRY- BEXAR COUNTY(I)(Z) Fourth Quarter Natural Resources and Mining 5,107 6,431 5,176 3,686 2,971 Construction 38,479 36,931 33,957 32,523 33,047 Manufacturing 34,040 34,353 34,500 35,735 35,074 Trade, Transportation & Utilities 142, , , , ,512 Information 20,092 20,562 19,844 19,255 18,043 Financial Activities 74,534 71,689 68,665 66,011 63,589 Professional and Business Services 110,786 I 09, , ,512 96,814 Education and Health Services 133, , , , ,253 Leisme and Hospitality 107,377 I 02, ,240 96,100 91,786 Other Services 23,745 22,318 22,291 23,862 22,991 Unclassified State Government 18,430 18,123 17,114 18,600 18,306 Local Government 91,577 90,144 87,767 86,014 85,758 Total Employment 800, , , , ,288 Total Wages $9,962,614,307 $8,993,451,014 $ 8,416,438,904 $8,111,500,671 $7,707,802,504 (I) Source: Texas Workforce Commission. (2) Statistics do not include Federal employees or their wages. LABOR FORCE STATISTICS FOR BEXAR COUNTY( I) 2016( 2 ) 2015( 3 ) 2014( 3 ) 2013( 3 ) 201i 3 l Civilian Labor Force 888, , , , ,280 Total Employed 858, , , , ,992 Total Unemployed 29,765 33,500 40,494 49,454 53,288 Unemployment Rate 3.4% 3.8% 4.7% 5.8% 6.3% %Unemployed (Texas) 4.2% 4.5% 5.1% 6.2% 6.7% %Unemployed (U.S.) 4.7% 5.3% 6.2% 7.4% 8.1% (l) Source: Texas Employment Commission. (2) As of April (3) Average annual statistics. /The remainder o{!his page inlenlional/y /eji blank] A-4

69 APPENDIXB EXCERPTS FROM THE NORTH EAST INDEPENDENT SCHOOL DISTRICT ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2015 The information contained in this Appendix consists of excerpts from the North East Independent School District Annual Financial Report for they ear Ended June 30, 2015, and is not intended to be a complete statement of the District's financial condition. Reference is made to the complete Report for further infom1ation.

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71 I Independent Auditor's Report Board of Trustees North East Independent School District San Antonio, Texas Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of North East Independent School District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility {Or the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement Saint James Place, Suite 100, Houston, Texas Main Fax NW Loop 410, Suite 725, San Antonio, Texas Main Fax

72 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatements of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of North East Independent School District as of June 30, 2015, and the respective changes in financial position, and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America and the respective budgetary comparison for the general fund. Emphasis o[matter As described in Note I. E to the financial statements, in 2015, the District adopted new accounting guidance, GASB Statement No. 68, Accounting and Reportingfor Pensions. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the inforn1ation because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 2

73 Other!J~formation Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise North East Independent School District's basic financial statements. The introductory section, combining and individual non-major fund financial statements, schedules required by Texas Education Agency and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the basic financial statements. The combining and individual non-major fund financial statements, schedules required by the Texas Education Agency, and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual non-major fund financial statements, schedules required by Texas Education Agency, and the schedule of expenditures of federal awards are fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 9, 2015, on our consideration of North East Independent School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering North East Independent School District's internal control over financial reporting and compliance. Certified Public Accountants San Antonio, Texas November 9,

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75 North East Independent School District Management's Discussion and Analysis Year Ended June 30, 2015 (Unaudited) In this section of the Comprehensive Annual Financial Report, North East Independent School District (the District) discusses and analyzes its financial performance for the year ended June 30, Please read this section in conjunction with the transmittal letter, the independent auditors' report, and the District's Basic Financial Statements. FINANCIAL HIGHLIGHTS Governmental Accounting Standards Board Statement (GASB) No. 68, Accounting and Financial Reporting for Pensions, went into effect for The major effects of the implementation were as follows: o a decrease of Government-wide net position of $86.4 million as a prior period restatement, reflecting the effect of the new standard to the District's June 30, 2014 net position; o an increase to noncurrent liabilities of $75.2 million; o an increase to deferred outflow of resources of$16.9 million; o an increase to deferred inflows of resources of$23.0 million; o an increase to government-wide expenses of$6.9 million. More information regarding the change to pension reporting can be found in Footnote IV H to the financial statements. Government-wide net position totaled $119.9 million as of June 30, This was a decrease of $71.0 million from the previous year, reflective of an increase of $15.4 million from operations and the decrease of $86.4 million from the prior period restatement discussed above. The District's total assets decreased $60.8 million from the previous year, primarily due to a decrease in cash and investments of $137.6 million and an increase of $76.8 million in capital assets, as the District continued to renovate and construct new building as part of its bond program. The decrease in cash and investments also relates to the decrease in non-current liabilities of $51.4 million (net of the effect of the GASB No. 68 recognition of $75.2 million in net pension liability) as the District continues to pay down its bond obligations. 5

76 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 Total liabilities increased $21.3 million with $75.2 million of the increase due to the implementation of GASB 68, as noted above. Had the statement been in effect in the previous year, the District's net pension liability as of June 30, 2014 would have been $92.4 million. Exclusive of the change to net pension liability, liabilities decreased $53.9 million, due to lower bonds payable and interest payable. Government-wide expenses increased $3.6 million from the previous year, with the most significant increases being a district-wide salary increase for all employees, a State mandated increase to the District's pension contributions, and the effect to operating expenses for the implementation ofgasb 68, as noted above. «> The General Fund ended the year with a fund balance of $115.1 million, which is $1.0 million more than the previous year-end. The unassigned portion of fund balance increased by $0.9 million to $112.6 million. The fund balance amount available for operations is equal to approximately 2.7 months of daily operations. e During fiscal year , the District issued $533.9 million in bonded debt. The debt issuances consisted of $466.6 million in refunding debt and $67.3 million in remarketed variable rate debt. The refunding debt defeased $491.1 million in existing debt resulting in a reduction of its debt service obligations of $94.1 million. 6

77 North East Independent School District Management's Discussion and Analysis Year Ended June 30, 2015 USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The two major categories of statements are the government-wide statements and the fund financial statements. The government-wide financial statements include the Statement of Net Position and the Statement of Activities. These statements provide information about the activities of the District as a whole and present a longer-term view of the District's property and debt obligations and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a private business enterprise. The fund financial statements report the District's operations in more detail than the governmentwide statements by providing information about the District's most significant funds. For governmental activities, these statements indicate how services were financed for the short term and identify the resources that remain for future spending. The fund financial statements reflect the flow of current financial resources and supply the basis for tax levies and the appropriations budget. The fund financial statements for proprietary activities reflect how the District's goods or services were charged to District departments or to external customers and how the sales revenues covered the expenses of the goods or services. The fiduciary statements provide financial information about activities for which the District acts solely as a trustee or agent for the benefit of those outside of the District. The notes to the financial statements provide narrative explanations or additional data needed for full disclosure in the government-wide statements or the fund financial statements. The combining statements for Nonmajor Governmental Funds provide additional information about the District's individual funds. The Federal Awards Section contains data used by monitoring or regulatory agencies to determine the District's compliance with the terms of grant awards. 7

78 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 The Statement of Net Position and the Statement of Activities The primary purpose ofthe government-wide financial statements (the Statement ofnet Position and the Statement of Activities) is to show positive or negative changes in the District's financial condition as a result of this fiscal year's activities. The Statement of Net Position includes all District assets and liabilities at the end of the year while the Statement of Activities includes all revenues and expenses generated by the District's operations for the fiscal year. These statements reflect private sector accounting practices based on full accrual reporting for revenues and expenses. The District's revenues are divided as follows: (1) program revenues provided by outside parties who share the costs of some programs, such as tuition from students outside the District or U.S. Department of Education grants to assist low-income children or those with disabilities; and (2) general revenues provided by local taxpayers or the Texas Education Agency's (TEA) State foundation program. All District assets are reported whether they serve the current year or future years. Liabilities are considered regardless of whether they must be paid in the current or future years. The District's net position (the difference between assets and liabilities) provide one measure of the District's financial health, or financial position. Over tinie, increases or decreases in the District's net position is one indicator of whether its financial health is improving or deteriorating. To fully assess the overall health of the District, one should also consider nonfinancial factors, such as changes in the District's average daily attendance, changes in its property tax base, the condition of the District's facilities, as well as the District's academic rating. Exclusive of the prior period adjustment, the District experienced a slight increase in government-wide net position. The District's property tax base valuation increased by 7.2% from the prior year. The tax rate for the District's operations remained at $1.04 per hundred dollars of valuation for fiscal year which is the same rate for the past eight fiscal years. The resulting increase in property tax revenue was $27.8 million. State aid remained flat for The District's growth in prior years, along with the age and condition of several facilities, has necessitated the renovation of existing facilities and construction of additional facilities. The need for additional or improved facilities is continually reassessed to ensure that our students are best served. The growth is evidenced by the increases in capital assets. 8

79 North East Independent School District Management's Discussion and Analysis Year Ended June 30, 2015 In the Statement of Net Position and the Statement of Activities, the District's operations are categorized into two types of activities: Governmental activities: Most ofthe District's basic services are reported here, including instruction, counseling, co-curricular activities, food services, transportation, maintenance, community services, and general administration. Property taxes, tuition, fees, and state and federal grants finance most of these activities. Business-type activities: Revenue-generating activities are reported here. The North East Aquatics and Tennis Fund is a business activity that charges its customers a fee to use the facilities at the Josh Davis Natatorium and adjacent tennis facilities. Uniform Rental is also a business activity that charges participants for uniform rental in various Fine Arts programs. Property Management is responsible for managing and renting District facilities to the general public. This activity is also responsible for disposal of obsolete or surplus assets. The Preschool Program for Children with Disabilities Fund provides daycare services for children with disabilities and for children of District employees. The final business-type activity is the Community Education program, which offers courses to the general public for a fee in addition to operating an after-school care program for children. Fund Financial Statements The fund financial statements provide detailed information about the most significant funds, not the District as a whole. Laws and contracts require the District to establish some funds, such as grants received under the U. S. Department of Education's No Child Left Behind Act. The District's administration establishes many other funds to help it control and manage funding for particular purposes (like campus activities). The District's two types of funds-governmental and proprietary-use different accounting approaches: Governmental Funds: Most of the District's basic services are reported in governmental funds. These funds use modified accrual accounting, which measures the receipt and disbursement of cash and all other financial assets that can be readily converted to cash, and repm1s balances available for future spending. The governmental fund statements provide a detailed short-term view of the District's general operations and the basic services it provides. Reconciliation schedules following each of the fund financial statements describe the differences between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds. 9

80 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 Proprietary Funds: These funds report activities where the District charges users (whether outside customers or other units of the District) for services. Proprietary funds use the same full accrual accounting methods employed in the Statement ofnet Position and the Statement of Activities. The District has two types of proprietary funds: enterprise funds and internal service funds. Enterprise funds are reported as business-type activities in the governmentwide statements. The District's Enterprise Funds provide goods and services to external parties and include: Property Management Uniform Rental Community Education Preschool Program for Children with Disabilities North East Aquatics and Tennis Internal Service Funds provide supplies and services for the District's other funds and include: Document Management & Printing Services Health Insurance Data Processing Center Network Technology Services Dental Insurance Workers' Compensation Insurance Rolling Owner Controlled Insurance Program Unemployment Compensation Insurance Police Services Reporting the District's Fiduciary Responsibilities The District is the trustee, or fiduciary, for money raised by student activity programs, employee groups, and donations for specific purposes where both the principal and earnings may be expended. All of the District's fiduciary activities, Student Activity Funds, Central Office Fund, and the Private Purpose Trust Fund for Scholarships, are reported in a separate Statement of Fiduciary Net Position. These resources are excluded from the District's other financial statements since the District cannot use these assets to finance its operations. The District's only fiduciary responsibility is to ensure that the assets reported in these funds are used for their intended purposes. 10

81 North East Independent School District Management's Discussion and Analysis Year Ended June 30, 2015 GOVERNMENT-WIDE FINANCIAL ANALYSIS This analysis focuses on Governmental Activities Net Position (Table I). The District's Net Position attributable to governmental activities are reported at $106.2 million as of June 30, Net position decreased $69.5 million from the prior year mainly due to a prior period adjustment. The prior period adjustment reduced net assets by $86.4 million by recognizing a net pension liability and associated pension expense in conjunction with the implementation of a new accounting standard. Current assets decreased as payments were made on existing debt. Capital assets also increased from the prior year due to continued construction in the existing bond program. Overall, the District's investment in capital assets to meet its infrastructure needs represents 75.0% of the total assets. The District capitalized $134.8 million in expenditures during the fiscal year, with the majority of that amount being capitalized as buildings and improvements. The remaining 25.0% is comprised mainly of cash, cash equivalents and investment balances. The amount of bond proceeds invested for future construction totals $131.3 million. Debt payable to bond holders represents the District's major liabilities. The total bond debt represents 89.2% of the District's total liability to outside interests. The remaining amount is comprised of amounts owed to vendors, employees, and for actuarially determined liabilities related to the District's self-funded insurance liabilities and its net pension liability. The District's net investment in capital assets decreased $2.0 million as the growth in capital assets is offset by related debt and the accumulated depreciation/amortization on those assets. II

82 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 Table I NET POSITION (In Thousands) Percent Governmental Activities Change Change Current and Other Assets $ 455,681.8 $ 593,284.3 $ (137,602.5) -23.2% Capital Assets I,370,942.7 I,294, , % Total Assets I,826, ,887,4I5.5 (60,791.0) -3.2% Deferred Outflows 6I, , ,585.1 IOO% Other Liabilities II4,065.I 116,6I3.2 (2,548.I) -2.2% Long Term Liabilities 1,645,I90.2 1,62I, , % Total Liabilities I,759,255.3 I,737, I,293.5 I.2% Deferred Int1ows 23,0I5.3 23,0I5.3 IOO% Net Position: Net Investment in Capital Assets ,296.1 (1,958.9) % Restricted 102, , , % Unrestricted 3,I ,911.7 (69,806.4) -95.7% Governmental Net Position $ 106,201.8 $ I75,716.4 $ (69,514.6) -39.6% Business-Type Activities Current and Other Assets $ 4,6I4.8 $ 6,023.9 $ (1,409.1) % Capital Assets 9, ,374.0 (18.7) -0.2% Total Assets 13, ,397.9 (1,427.8) -9.3% Other Liabilities % Total Liabilities 236.I I % Net Position: Net Investment in Capital Assets 9, ,374.0 (18.7) -0.2% Unrestricted 4, ,833.7 (I,455.0) -24.9% Business-Type Net Position $ 13,734.0 $ 15,207.7 $ (1,473.7) -9.7% Government-Wide Totals Current and Other Assets $ 460,296.6 $ 599,308.2 $ (139,011.6) -23.2% Capital Assets 1,380, ,303, , % Total Assets 1,840, ,902,813.4 (62,218.8) -3.3 % Deferred Outflows 61, , , % Other Liabilities 114, ,803.4 (2,502.2) -2.1% Long Term Liabilities I,645, I,621, , % Total Liabilities 1,759, ,738, I, % Deferred Inflows 23, , % Net Position: Net Investment in Capital Assets 9, ,670.1 (J,977.6) -16.9% Restricted 102, , , % Unrestricted 7, ,745.4 (71,261.4) % Government-Wide Net Position $ 119,935.8 $ 190,924.1 $ (70,988.3) % 12

83 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 GOVERNMENTAL ACTIVITIES FINANCIAL ANALYSIS Changes in Governmental Activities Net Position are presented in Table II. The District's Governmental Activities revenues were $713.1 million, an increase of 4.2 percent from the prior year. The District's two main sources of revenue are aid from the State and local property tax revenues. These two sources comprise approximately 84% of government-wide revenue as shown in Figure A-1 below. Revenues increased by $28.6 million from the prior year. The increase in revenue is due to an increase in property tax revenue as a result of a 7.2 percent increase in the value of the property tax base. 100% Figure A-I Governmental Activities Revenues by Source 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% :--,.'"> '),~ ~ '),~ :--,."> 'V~ The expenses for governmental activities totaled $698.2 million, an increase of $3.6 million over the prior year. This is primarily due to a raise in employee salaries given during the fiscal year, and an increase to the required district contribution to the state's pension fund. 13

84 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 Table II CHANGES IN GOVERNMENTAL ACTIVITIES NET POSITION (In Thousands) Total Total Change in Percent Amount Change Program Revenues: Charges for Services $ 22,951.2 $ 23,009.8 $ (58.6) -0.3 % Operating Grants and Contributions 79, , , % General Revenues: Property Taxes General 438, , , % State Aid 159,179.4!60,877.6 (I,698.2) -1.1% Grants & Contributions not Restricted 6, ,427.9 (472.9) -6.4% Investment Earnings 1, ,541.2 ( 438.5) -28.5% Miscellaneous 4, ,879.4 ( 421.4) -8.6 % Total Revenues 713, , , % Expenses: Instruction, Media and Curriculum 403, , , % Instructional and School Leadership 42, , , % Student Support 102, , , % General Administration I 1, , % Plant Maintenance, Security and Data Processing 84, ,566.5 (13.8) 0.0% Community Services % Debt Services 50, ,949.0 (14,219.3) -21.9% Intergovernmental Charges 2, ,891.1 (70.0) -2.4% Total Expenses 698, , , % Increase or (Decrease) in Net Position Before Transfers 14,948.9 (10,001.1) 24, % Transfers In 1, , % Change in Net Position 16,909.5 (9,534.4) 26, % Beginning Net Position 175, ,962.3 (16,245.9) -8.5 % Prior Period Adjustment (86,424.1) (6,711.5) (79,712.6) % Ending Net Position $ 106,201.8 $ 175,716.4 $ (69,514.6) -39.6% 14

85 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 BUSINESS-TYPE ACTIVITIES FINANCIAL ANALYSIS Net position attributable to business-type activities decreased slightly to $13.7 million (Table III). There are five Enterprise Funds working to support the school district and the needs of its community. Community Education is by far the best perfonner, generating $8.7 million in revenue. Table III BUSINESS ACTIVITIES CHANGES IN NET POSITION (In Thousands) Program Revenues: Charges for Services Property Management Uniform Rentals Community Education Preschool Program for Children with Disabilities NEAT Total Program Revenues $ Total $ , ,756.7 Total $ , ,129.8 Change in Amount ( 160.5) (11.1) Percent Change (21.03)% 1.3 % 9.7% 4.7% (1.4)% 6.2 % Expenses: Property Management Uniform Rentals Community Education Preschool Program for Children with Disabilities NEAT Total Expenses , , , ,064.3 (64.7) (3.0) (8.1)% 63.0 % 2.7 % (0.5)% 2.7 % 2.0% Increase or (Decrease) in Net Position Before Transfers % Transfers Out (1,960.6) (466.7) (1,493.9) % Change in Net Position (1,473.7) ( 401.2) ( 1,072.5) % Beginning Net Position 15, ,608.9 ( ) -2.6 % Ending Net Position $ 13,734.0 $ 15,207.7 $ (1,473.7) (9.7)% 15

86 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 FUND FINANCIAL ANALYSIS As the District completed the fiscal year, the Governmental Funds reported a combined fund balance of $324.0 million, which is approximately $143.6 million less than last year's total of $467.6 million. The primary reason for the Governmental Fund's decrease in fund balance is due to the expenditures in the Capital Projects Fund for the construction of school facilities and related equipment. All related bond proceeds were received in previous years. The General Fund had a slight increase in fund balance. Revenue from property taxes increased due to increased property values. The increase was offset by the additional salary expense incurred due to a raise given to employees and for increased District share of pension contributions. The Debt Service Fund had a net increase in fund balance of $2.9 million. This increase was due to the effects of issuing refunding debt and the transfer in of funds from the General Fund to set aside principal payments for the Qualified School Construction Bonds. These bonds are not due until 2027 but the District is proactively setting aside amounts assigned to pay the principal when they become payable. The increase in fund balance was budgeted for in order to meet debt service requirements and maintain a low tax rate for citizens. The I&S tax rate remained at $ per hundred dollars of valuation for fiscal year The Board of Trustees adopts the budgets of the General, Debt Service, and National School Breakfast and Lunch Program funds. Over the course of the year, the Board revised the District's budget six times. These budget amendments are categorized into three classifications: (1) increase to the fund balance; (2) decrease to the fund balance; and (3) no change to the fund balance. This allowed the District to adjust its budget as circumstances and needs changed during the year. The net effect of the budget amendments during the year was to increase appropriations by approximately $18.5 million. The major change to budgeted appropriations was an increase to appropriations in the Debt Service Fund to reflect District contributions toward the refunding transactions that occurred throughout the year. Actual expenditures were less than the final budget in the General Fund by $19.I million, or 3.6%, mainly attributable to budgeted salaries for positions that were vacant for all or part of the year. Actual expenditures were less than the final budget in the National School Breakfast and Lunch Program Fund by $1.8 million, or 5.4%, attributable to budgeted salaries for positions that were vacant for all or part of the year and various purchase orders not being filled prior to yearend. Actual expenditures in the Debt Service fund were less than the final budget by less than 1%. 16

87 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets As ofjune 30, 2015, the District had $1.4 billion, net of accumulated depreciation/amortization, invested in a broad range of capital assets, including facilities and equipment for instruction, transportation, athletics, administration, maintenance, and construction in progress. This represents a net decrease of $62.2 million from fiscal year See Footnote IV E for more detailed analysis of the year's capital asset activity. This year's government-wide capital asset major additions included (at historical cost): Land Buildings and Improvements Furniture and Equipment Construction in Progress $ 2,052,109 4,602,487 5,629, ,276,990 $ 136,561,427 Debt At year-end, the District had $1.57 billion in bonds outstanding and unamortized issuance premiums. The District's general obligation bonds have received the highest rating possible from the national rating agencies because of the Permanent School Fund guarantee of the District's debt. Other obligations include accrued vacation pay, sick leave, workers compensation accrued liability, a net other post-employment benefit (OPEB) liability, and a TRS net pension liability. Detailed information about the District's long-term liabilities is presented (Footnote IV L) in the Notes to the Financial Statements. NEXT YEAR'S BUDGETS AND RATES The District still faces significant uncertainty regarding its revenue despite the gains in State aid from the 2014 legislative session. Hundreds of school districts brought suit against the State of Texas, arguing the funding model in place is inadequate, inequitable, and creates an unconstitutional statewide property tax. The State district judge ruled in favor of the school districts on all counts in August The Texas Attorney General has appealed the case to the Texas Supreme Court. A final decision may not be known until late

88 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 At $1.04 per hundred dollars of assessed valuation, the District's M&O tax rate is at the State's maximum rate without voter approval. Any additional M&O tax rate exceeding $1.04 will require voter approval up to a maximum ceiling of $1.17. The District is considered a property wealthy school district under Chapter 41 of the Texas Education Code. Under these provisions, the District's State aid will be reduced to offset a portion of any tax revenue from a tax rate above $1.06 per hundred dollars of valuation to help fund property poor school districts. This restriction further limits the District's ability to increase revenue from increases in property tax revenue. The future local share of the financial needs of the District will depend upon the willingness of its taxpayers to increase the local tax rate if additional funding is required to meet the educational needs of the District's students. The following figure illustrates the projected (2016) and historical (2015 and prior) sources of the District's operating revenue. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% \,(o "\.>~ General Fund Revenue By Source \,';,...,~ y 0 Mise Local. State & Federal Revt..'llue 0 Stnte Formula Grants El Prope1ty Taxes The I&S tax rate for the fiscal year lowered to $ per hundred dollars of assessed valuation. The tax rate was determined by calculating the rate required to meet debt service obligations given the assessed value of real, business and personal property within the District's boundaries and reflects the changes in debt service requirements associated with bonds issued to build and improve the District's infrastructure. 18

89 North East Independent School District Management's Discussion and Analysis Year Ended June 30,2015 For fiscal year , the Board oftrustees adopted a break-even general fund budget. The budgeted appropriations increased $9.7 million compared to the final budget. The increase is mainly due to salary increases for all employees. The District estimates that the actual surplus for fiscal year will be $12.5 million. The difference between the deficit in the adopted budget and the forecasted deficit is due to the District's active management of the budget throughout the year and conservative estimates of staffing of vacant positions. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide citizens, taxpayers, customers, investors and creditors with a year-end picture of the District's finances. If you have questions about this report or need additional financial information, contact the Associate Superintendent for Business Services/Chief Financial Officer, Dan Villarreal, C.P.A., RTSBA, North East Independent School District, 8961 Tesoro Drive, San Antonio, Texas,

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91 Basic Financial Statements

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93 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2015 EXHIBIT A-1 Data Control Codes Governmental Activities ASSEIS 1110 Cash and Cash Equivalents $ 178,257, Current Investments 209,086, Property Taxes Receivable (Delinquent) 21,205, Allowance for Uncollectible Taxes (1 '726,297) 1240 Due from Other Governments 41,842, Accrued Interest 538, Internal Balances 716, Due from Fiduciary Funds 26, Other Receivables, net 927, Inventories 4,805, Other Current Assets 1,749 Capital Assets: 1510 Land 94,704, Buildings, Net 1,082,423, Furniture and Equipment, Net 25,966, Construction in Progress 167,849, Total Assets 1,826,624,538 DEFERRED OUTFLOWS OF RESOURCES 1701 Deferred Charge for Refunding 44,951, Deferred Outflow Related to TRS 16,896, Total Deferred Outflows of Resources 61,847,827 LIABILI1IES 2110 Accounts Payable 16,180, Interest Payable 21,406, Payroll Deductions & Withholdings 3,852, Accrued Wages Payable 56,784, Due to Fiduciary Funds 181, Due to Other Governments 23, Due to Student Groups 1, Accrued Expenses 13,617, Unearned Revenue 1,717,789 Noncurrent Liabilities 2501 Due Within One Year 52,920, Due in More Than One Year 1,517,330, Net Pension Liability (District's Share) 75,237, Total Liabilities 1,759,255,252 DEFERRED INFLOWS OF RESOURCES 2605 Deferred Inflow Related to TRS 23,015, Total Deferred Inflows of Resources 23,015,292 NEfPOSI'IlON 3200 Net Investment in Capital Assets 337,201 Restricted: 3820 Restricted for Federal and State Programs 9,838, Restricted for Debt Service 3880 Restricted for Scholarships 3900 Unrestricted 3000 Total Net Position $ 92,720, ,000 3,105, ,201,821 Primary Government Business Type Activities $ 5,218,504 (716,771) 113,068 2,547,600 6,574, ,288 13,970,092 42,921 90,733 7,396 13,970 81, ,105 9,355,291 4,378,696 $ 13,733,987 Total $ 183,475, ,086,203 21,205,048 (1,726,297) 41,842, ,530 26,523 1,040,628 4,805,487 1,749 97,251,982 1,088,997,510 26,199, ,849,198 1,840,594,630 44,951,105 16,896,722 61,847,827 16,223,182 21,406,659 3,852,922 56,875, ,528 30,647 15,824 13,617,072 1,798,874 52,920,968 1,517,330,997 75,237,231 1,759,491,357 23,015,292 23,015,292 9,692,492 9,838,392 92,720, ,000 7,483,985 $ 119,935,808 The notes to the financial statements are an integral part of this statement. 23

94 Data Control Codes NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Expenses Charges for Services Program Revenues Primary Government: GOVERNMENTAL ACTIVITIES: II Instruction $ 375,521,024 $ 5,094,590 $ 12 Instructional Resources and Media Services II,529, CtuTiculmn and StatT Development 16,663, , Instructional Leadership 6,736, School Leadership 35,390, , Guidance, CDlmseling and Evaluation Services 20,218, Social Work Services 4,017, Health Services 7,782, Student Transportation 20,486, Food Services 33,228,511 12,858, Extracurricular Activities 16,990,955 2,191, General Administration II,028, Facilities Maintenance and Operations 62,443,927 16, Secmity and Monitoring Services 4,307, Data Processing Services 17,801, Community Services 500,935 I,104, Debt Service- Interest on Long Tenn Debt 36,878, Debt Service - Bond Issuance Cost and Fees 13,850, Instructional Shared Services Arrangements 406, Juvenile Justice Alternative Education Program 78, Property Tax Appraisal Services 2,335,660 [TG] Total Governmental Activities: 698,198,809 22,951,187 4 Operating Grants and Contributions 40,744, ,749 4,224,111 1,267,610 I,740,262 2,633,703 1,811, , ,455 19,949, , ,900 2,949, , , ,505 79,819,596 BUSINESS-TYPE ACTIVITIES: 01 Property Management 02 Uniform Rentals 03 Commtmity Education 04 Preschool Prgm for Children W/ Disabilities 06 North East Aquatics & Tennis [TB] Total Business-Type Activities: 734, ,708 8,000, , ,497 10,269, ,736 63,227 8,684, , ,267 10,756,661 [TP] TOTALPRIMARYGOVERNMENT: $ 708,468,609 $ 33,707,848 $ 79,819,596 Data Control Codes MT DT SF GC IE Ml FR General Revenues: Taxes: Property Taxes, Levied for General Purposes Property Taxes, Levied for Debt Service State Aid- Formula Grants Grants and Contributions not Restricted Investment Earnings Miscellaneous Local and Intermediate Revenue Transfers In (Out) TR Total General Revenues & Transfers CN NB PA NE Change in Net Position Net Position- Beginning Prior Period Adjustment Net Position--Ending The notes to the financial statements are an integral part of this statement. 24

95 EXHIBIT B-1 Net (Expense) Revenue and Changes in Net Position Governmental Activities Primary Govemment Business Type Activities Total $ (329,682,274) $ $ (II,102,679) (II,633,705) (5,468,941) (32,770,906) (17,584,373) (2,205,765) (7,306,720) (19,534,299) (420,462) (14,523,507) (10,119,160) (59,477,734) (3,894,993) (17,480,501) I,328,756 (36,878,928) (13,850,766) (406,752) (78,657) (2,3 35,660) (595,428,026) (329,682,274) (II,102,679) (II,633,705) (5,468,941) (32,770,906) (17,584,373) (2,205,765) (7,306,720) (19,534,299) (420,462) (14,523,507) (10,119,160) (59,477,734) (3,894,993) (17,480,501) 1,328,756 (36,878,928) (13,850,766) (406,752) (78,657) (2,335,660) (595,428,026) (131,485) (53,481) 684,459 (46,402) 33, ,861 (131,485) (53,481) 684,459 (46,402) 33, ,861 (595,428,026) 486,861 (594,941,165) $ 316,681, ,999, ,179,444 6,954,975 I,I 02,680 4,457,969 I,960,594 (1,960,594) 6 I 2,337,482 (1,960,594) 16,909,456 (1,473,733) 175,716,418 15,207,720 (86,424,053) I 06,20 I,821 $ 13,733,987 $ 316,681, ,999, ,179,444 6,954,975 1,102,680 4,457, ,376,888 15,435, ,924,138 (86,424,053) 119,935,808 25

96 Data Control Codes NORTH EAST INDEPENDENT SCHOOL DISTRICT BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, General Ftmd Debt Service Capital Fund Projects ASSETS 1110 Cash and Cash Equivalents $ 1120 Investments -Current 1220 Property Taxes -Delinquent 1230 Allowance for Uncollectible Taxes (Credit) 1240 Receivables fi om Other Governments 1250 Accrued Interest 1260 Due fi om Other Funds 1290 Other Receivables 1300 Inventmics 1490 Other CuiTent Assets 1000 Total Assets $ LIABILITIES 2110 Accounts Payable $ 2150 Payroll Deductions and Withholdings Payable 2160 Accmed Wages Payable 2170 Due to Other Funds 2180 Due to Other Governments 2190 Due to Student Groups 2200 Accmed Expenditures 2300 Unearned Revenues 2000 Total Liabilities DEFERRED INFLOWS OF RESOURCES 2601 Unavailable Revenue- Property Taxes 2600 Total Deferred Inflows of Resources FUND BALANCES Nonspendable Fund Balance: 3410 Inventories 3415 Long-Term Loans/Notes Receivable Restricted Fund Balance: 3450 Federal or State Funds Grant Restiiction 3470 Capital Acquisition and Contractural Obligation 3480 Retirement of Long-Term Debt 3490 Other Restricted Fund Balance Committed Fund Balance: 3545 Other Committed Fund Balance Assigned Fund Balance: 3590 Other Assigned Fund Balance 3600 Unassigned Fund Balance 3000 Total Fund Balances 31,998,187 92,318,681 15,637,604 (1,295,100) 34,519, ,324 23,592, ,312 2,455,320 1, ,033,005 4,361,468 3,852,922 53,659,242 15,667,953 15,381 1,854 35,055 77,593,875 7,338,899 7,338,899 2,455, ,644, ,100,231 $ 36,651,086 $ 79,943,767 51,382,403 52,516,067 5,567,444 (431,197) 97, ,160 6,435, ,718 30,520 13,723 $ 99,732,859 $ 132,747,435 $ $ 11,159, ,968,779 7,140 9,324,283 7,150 34,453,123 2,443,449 2,443,449 90,277,490 7,004,770 98,294,312 97,282,260 98,294, Total Liabilities, DcfctTedlnf1ows & Fund Balances $ 200,033,005 $ 99,732,859 $ 132,747,435 The notes to the financial statements are an integral part of this statement. 26

97 EXHIBIT C-1 Other Funds Total Governmental Funds $ 10,277,021 $ 158,870,061 5,905, ,122,433 21,205,048 ( 1 '726,297) 7,323,511 41,842,633 18, ,670 1,789,823 31,984,796 17, ,869 1,428,438 3,883,758 1,749 $ 26,759,421 $ 459,272,720 $ 302,211 $ 15,823,615 3,852,922 2,293,413 55,952,780 9,132,626 38,769, ,064 1,854 9,324,283 1,682,734 1,717,789 13,411, ,465,675 9,782,348 9,782,348 51,430 2,506, , ,000 9,786,962 9,786,962 98,294,312 90,277,490 25,248 25,248 3,284,254 3,284,254 7,004, ,644,911 13,347, ,024,697 $ 26,759,421 $ 459,272,720 27

98 NORTH EAST INDEPENDENT SCHOOL DISTR!Cf RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2015 EXHIBIT C-2 Total Fund Balances- Governmental Funds l The District uses internal service funds to charge the costs of certain activities, such as self-insurance and printing, to appropriate functions in other funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net position. The net effect of this consolidation is to increase net position. $ 324,024,697 37,718,039 2 Capital assets used in governmental activities are not fmancial resources and therefore are not reported in govermnental funds. At the beginning of the year, the cost of these assets was $1,835,187,803 and the accumulated depreciation was ($550,067,690). In addition, long-tenn liabilities, including bonds payable, are not due and payable in the current period, and, therefore are not reported as liabilities in the funds. Also not included are the deferred charges for issuance of refunding bonds (listed as deferred outflows of resources). The net effect of including the beginning balances for capital assets (net of depreciation) and long-term debt in the governmental activities is to (decrease) net position. 3 Current year capital outlays and long-tenn debt principal payments are expenditures in the fund fmancial statements,but they should be shown as increases in capital assets and reductions in long-term debt in the government-wide financial statements. The net effect of including the 2015 capital outlays and debt principal payments is to increase net position. Included in items related to debt is the recognition of the District's proportionate share of the net pension liability required by GASB 68 and the change in deferred inflow and outflow realted to TRS Pension Liability. This led to a net increase in net position. 4 The 2015 depreciation expense increases accumulated depreciation. The net effect of the current year's depreciation is to decrease net position. (333,729,965) 125,784,325 (57,377,623) 5 Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing unavailable revenue from propetiy taxes as revenue, eliminating interfund transactions, reclassifying the proceeds of bond sales as an increase in bonds payable, and recognizing the liabilities associated with maturing long-tenn debt and interest. The net effect of these reclassifications and recognitions is to increase net position. 19 Net Position of Governmental Activities $ 9,782, ,201,821 The notes to the financial statements arc an integral part of this statement. 28

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100 Data Control Codes NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, General Fund 50 Debt Service Ftmd 60 Capital Projects REVENUES: 5700 Local and Intermediate Sources 5800 State Program Revenues 5900 Federal Program Revenues $ 323,560, ,054,370 7,048,002 $ 122,723,287 I,830,973 $ 435, , Total Revenues EXPENDITURES: Current: 0011 Instruction 0012 Instructional Resources and Media Services 0013 Curricu!tun and Instructional Staff Development 0021 Instructional Leadership 0023 School Leadership 0031 Guidance, Cotmseling and Evaluation Services 0032 Social Work Services 0033 Health Services 0034 Student Transportation 0035 Food Services 0036 ExtracmTicular Activities 0041 C,eneral Administration 0051 Facilities Maintenance and Operations 0052 Security and Monitoring Services 0053 Data Processing Services 0061 Community Services Debt Service: 0071 Principal on Long Term Debt 0072 Interest on Long Term Debt 0073 Bond Issuance Cost and Fees Capital Outlay: 0081 Facilities Acquisition and Construction Intergovernmental: 0093 Instructional Shared Service Arrangements 0095 Juvenile Justice Alternative Education Program 0099 Property Tax Appraisal 6030 Total Expenditures 1100 Excess (Deficiency) of Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES): 7901 Reftmding Bon cis Issued 7912 Sale of Real and Personal Property 7915 Transfers In 7916 Premium or Discotmt on Issuance of Bonds 8911 Transfers Out (Use) 8940 Payment to Bond Rcftmding Escrow /\gent (Usc) 7080 Total Other Financing Sources (Uses) 1200 Net Change in Fund Balances 0100 Fund Balance- July 1 (Beginning) 511,662, ,364,610 8,596,661 13,154,547 5,838,417 34,034,618 18,269,067 2,441,364 7,471,777 17,952,885 41,126 10,937,982 II,282,025 51,232,456 4,654,370 4,520, ,496 73, ,752 78,657 2,335, ,868,164 3,794, ,185 (2,972,793) (2,812,608) 981,717 I 14,118, ,554,260 52,580,000 60,576,951 13,850, ,007,717 (2,453,457) 533,930,000 1,700,000 60, I 68,687 (14,664) (590,396,103) 5,387,920 2,934,463 94,347, , ,128, ,128,153 ( 150,489,248) 1,809,392 I,809,392 (148,679,856) 246,974, Fund Balance- June 30 (Ending) $ 115,100,231 $ 97,282,260 $ 98,294,312 The notes to the financial statements are an integral part of this statement. 30

101 EXHIBIT C-3 Other Ftmds Total Governmental Ftmds $ 20,214,998 $ 466,933,518 9,041, ,300,039 46,775,001 55,653,976 76,031, ,887,533 32,537, ,902,321 24,458 8,621,119 3,747,903 16,902,450 1,051,684 6,890, ,498 34,142,116 1,812,845 20,081,912 1,659,525 4,100, ,893 7,583,670 69,849 18,022,734 30,930,936 30,972,062 65,151 11,003, ,022 11,431,047 1,864,348 53,096, ,371 4,781,741 4,520, , ,023 52,580,000 60,576,951 13,850,766 99, ,300, ,752 78,657 2,335,660 74,691, ,695,857 1,340,056 (147,808,324) 533,930,000 10,964 10, ,670,177 60,168,687 (195,126) (3,182,583) (590,396,103) (183,562) 4,201,142 1,156,494 (143,607,182) 12,191, ,631,879 $ 13,347,894 $ 324,024,697 31

102 EXHIBIT C-4 NORTH EAST INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30,2015 Total Net Change in Fund Balances -Governmental Funds The District uses internal service funds to charge the costs of certain activities, such as self-insurance and printing, to appropriate functions in other funds. The net income (loss) of internal service funds are reported with govermnental activities. The net effect of this consolidation is to increase net position. $ (143,607,182) 5,437,040 Current year capital outlays and long-term debt principal payments are expenditures in the fund fmancial statements, but they should be shown as increases in capital assets and reductions in long-tenn debt in the govermnent-wide fmancial statements. The net effect of including the 2015 capital outlays and debt principal payments is to increase net position. Also included in items related to debt is the recognition of the District's proportionate share of the net pension liability required by GASB 68, a Deferred Resource Inflow related to TRS, and a Deferred Resource Outflow related to TRS. This led to an increase in net position. Depreciation is not recognized as an expense in govermnental funds since it does not require the use of current fmancial resources. The net effect of the current year's depreciation is to decrease net position. 125,784,325 (57,377,623) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing unavailable revenue from property taxes as revenue, adjusting current year revenue to show the revenue earned from the current year's tax levy, eliminating interfund transactions, reclassifying the proceeds of bond sales, and recognizing the liabilities associated with maturing long-tenn debt and interest. The net effect of these reclassifications and recognitions is to increase net position. A prior period adjustment related to the beginning TRS pension liability decreased net position. 248,843 (86,424,053) Change in Net Position of Governmental Activities $ 16,909,456 The notes to the tinancial statements are an integral part of this statement. 32

103 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL- GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2015 EXHIBITC-5 Data Control Codes Original Budgeted Amounts Final Actual Amounts (GAAP BASIS) Variance With Final Budget Positive or (Negative) REVENUES: 5700 Local and Intennediate Sources $ 320,780, State Program Revenues 183,476, Federal Program Revenues 7,180,275 $ 322,494, ,598,007 7,161,481 $ 323,560, ,054,370 7,048,002 $ 1,065,897 (I,543,637) (113,479) 5020 Total Revenues 511,437, ,253, ,662,489 (591,219) EXPENDITURES: Current: 0011 Instmction 322,819, Instmctional Resources and Media Services 8,709, Curriculum and Instmctional StaffDevelopment 13,607, Instmctional Leadership 5,977, School Leadership 34,263, Guidance, Counseling and Evaluation Services 19,430, Social Work Services 2,501, Health Services 7,942, Student Transportation 18,416, Food Services 3, Extracunicular Activities 10,262, General Administration 12,669, Facilities Maintenance and Operations 55,521, Security and Monitoring Services 4,900, Data Processing Services 4,215, Community Services 288,858 Capital Outlay: 0081 Facilities Acquisition and Constmction 325,467,505 8,958,517 13,807,651 6,018,114 34,779,329 19,324,482 2,518,374 7,716,727 18,914,271 50,840 11,060,298 11,960,277 53,587,614 4,787,574 4,636, , , ,364,610 8,596,661 13,154,547 5,838,417 34,034,618 18,269,067 2,441,364 7,471,777 17,952,885 41,126 10,937,982 11,282,025 51,232,456 4,654,370 4,520, ,496 73,115 11,102, , , , ,711 1,055,415 77, , ,386 9, , ,252 2,355, , ,149 40,046 28,985 Intergovernmental: 0093 Instmctional Shared Service Arrangements 400, Juvenile Justice Alternative Education Program 412, Prope1ty Tax Appraisal 2,348, , ,069 2,392, ,752 78,657 2,335, ,416 44,412 57, Total Expenditures 524,691, ,996, ,868,164 19,127, Excess (Deficiency) of Revenues Over (Under) (13,254,859) Expenditures ( 14, 742,387) 3,794,325 18,536,712 OTHER FINANCING SOURCES (USES): 7915 Transfers In 636, Transfers Out (Usc) (2,818,000) 636,512 (3,097,843) 160,185 (2,972, 793) (476,327) 125, Total Other Financing Sources (Uses) (2, 181,488) (2,461,331) (2,812,608) (351,277) 1200 Net Change in Fund Balances (15,436,347) (17,203,718) 981,717 18,185, Fund Balance- July 1 (Beginning) 114,118, ,118, ,118, Fund Balance- June 30 (Ending) $ 98,682,167 $ 96,914,796 $ 115,100,231 $ 18,185,435 The notes to the financial statements are an integral part ofthis statement. 33

104 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF NEf POSITION PROPRIEf ARY FUNDS JUNE 30,2015 Busincss~Typc Activities- EXHIBIT D-1 Governnx:ntal Activities- ASSETS Cunent Assets: Cash and Cash Equivalents Investments - Cunent Due from Other Governments Accrued Interest Due from Other Funds Other Receivables Inventories Total Current Assets Noncurrent Assets: Capital Assets: Land Buildings and Improvements Depreciation on Buildings Furniture and Equipment Depreciation on Furniture and Equipment Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities: Accounts Payable Short Term Workers Compensation Payable Accrued Wages Payable Due to Other Funds Due to Other Governments Due to Student Groups Accrued Expenses Unearned Revenues Total Current Liabilities Noncunent Liabilities: Workers Compensation- Due in More than One Year Total Noncurrent Liabilities Total Enterprise Funds $ 5,218, , ,068 5,579,712 2,547,600 10,325,760 (3,751,357) 525,893 (292,605) 9,355,291 14,935,003 42,921 90, ,911 7,396 13,970 81,085 1,201,016 Total Internal Service Funds $ 19,387,244 6,963, ,860 9,881, , ,729 37,531, ,379 (373,207) 18,506,131 (10,173,312) 8,442,991 45,974, , ,000 16,189 2,534, ,292,789 7,500, , ,111 Total Liabilities 1,201,016 8,256,778 NET POSITION Net Investment in Capital Assets Unrestricted Net Position 9,355,291 4,378,696 8,442,991 29,275,048 Total Net Position $ 13,733,987 $ 37,718,039 The notes to the financial statements are an integral part of this statement. 34

105 OPERATING REVENUES: NORTH EAST INDEPENDENT SCHOOLDISTRICf STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE30, 2015 Business-Type Activities- Total Enterprise Funds Local and Intennediate Sources $ 10,206,045 State Program Revenues 422,398 Federal Revenues Total Operating Revenues 10,628,443 OPERATING EXPENSES: Payroll Costs 7,627,649 Professional and Contracted Services 890,214 Supplies and Materials 596,544 Other Ooerating Costs 671J20 Depreciation Expense 477,814 Total Operating Expenses 10,263,341 Operating Income 365,102 NONOPERATING REVENUES (EXPENSES): Gain in Sale of Real and Personal Property 128,218 Earnings from Temporary Deposits & Investments (Loss) on Sale of Real and Personal Property Non-operating Expenses (6,459) Total Nonoperating Revenues (Expenses) 121,759 Income Before Transfers 486,861 Transfer In Transfers Out (1,960,594) Change in Net Position (1,473,733) Total Net Position- July 1 (Beginning) 15,207,720 EXHIBIT D-2 Govenurental Activities- Total Internal Service Funds $ 79,140, , ,754 80,858,838 11,421,481 5,081,684 2,216, ,884,985 76,914,054 3,944,784 1,022 27,431 (9, 197) 19,256 3,964,040 1,473,000 5,437,040 32,280,999 Total Net Position- June 30 (Ending) $ 13,733,987 $ 37,718,039 The notes to the financial statements are an integral pa11 of this statement. 35

106 Cash Flows from Operating Activities: Cash Received from User Charges Cash Payments to Employees for Services Cash Payments for Insurance Claims Cash Payments to Suppliers Cash Payments for Other Operating Expenses Cash Payments to Other Funds- Operating Expenses Net Cash Provided by (Used for) Operating Activities Cash Flows from Non-Carital Financing Activities: Transfers Out Transfers In Gain- Sale on Real Property Noncapital Net Cash Provided by (Used for) Non-Capital Financing Activities Cash Flows from Carita! & Related Financing Activities: Acquisition of Capital Assets Nonoperating Expenses Gain on Sale of Capital Assets Net Cash Provided by (Used for) Capital & Related Financing Activities Cash Flows from Investing Activities: Purchase of Investment Securities Proceeds from Sale & Maturities of Securities Interest and Dividends on Investments Net Cash Provided by (Used for) Investing Activities NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2015 $ Business-Type Activities Total Enterprise Funds EXHIBIT D-3 (Cont'd) Activities- Total Internal Service Funds 10,366,675 $ 78,642,063 (7,233, 766) (I 0,665,849) (55, 120,427) (2,141,975) (8,959,622) (705,283) 74,255 (3,808,054) 1,065,189 (617,172) (I,960,594) 128,218 1,473,000 (I,832,376) 1,473,000 (458,728) ( 1,326, 165) (6,459) 1,103 (465,187) (1,325,062) (5,485,000) 3,989,486 35,065 (I,460,449) Net Decrease in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year $ (1,232,374) ( 1,929,683) 6,450,878 21,316,927 5,218,504 $ 19,387,244 The notes to the financial statements arc an integral part of this statement. 36

107 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2015 EXHIBIT D-3 Reconciliation of Operating Income to Net Cash Provided by (Used for) Operating Activities: Operating Income: Adjustments to Reconcile Operating Income to Net Cash Provided by (Used For) Operating Activities: Depreciation Effect of Increases and Decreases in Current Assets and Liabilities: Decrease (increase) in Receivables Decrease (increase) in Inventories Decrease (increase) in Due From Other Funds Increase (decrease) in Accounts Payable Increase (decrease) in Due to Other Governments Increase (decrease) in Accrued Wages Payable Increase (decrease) in Due to Other Funds Increase (decrease) in Unearned Revenues Increase (decrease) in Accrued Expenses Increase (decrease) in Workers Comp Payable Net Cash Provided by (Used for) Operating Activities $ Business-Type Activities Total Enterprise Ftmds 365, ,813 42,420 (234,301) 15,902 37,267 (28,245) 366,439 22,792 $ 1,065,189 Govemn~ental Activities- Total Internal Service Flillds $ 3,944,784 1,884,985 (243,822) 131,155 (2,029,312) (902,692) 131 4,399 1,252,194 ( 4,548,078) 12,789 (123,705) $ (617,172) The notes to the tinancial statements are an integral part of this statement. 37

108 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF FIDUCIARY NET POSITION FIDUCIARY FUNDS JUNE 30, 2015 EXHIBIT E-1 Private Purpose Trust Fund Agency Funds ASSETS Cash and Cash Equivalents Due fi"om Other Funds Other Receivables Total Assets $ 274,589 $ 2,131,915 3, , ,589 $ 2,310,553 LIABILITIES Accounts Payable Due to Other Funds Due to Student Groups Total Liabilities $ 59,373 26,523 2,224,657 $ 2,310,553 NET POSITION Unrest1icted Net Position Total Net Position $ 277, ,589 The notes to the financial statements arc an integral part of this statement. 38

109 NORTH EAST INDEPENDENT SCHOOL DISTRICT STATEMENT OF CHANGES IN FIDUCIARY FUND NET POSITION FIDUCIARY FUNDS FOR THE YEAR ENDED JUNE 30,2015 EXHIBIT E-2 Private Purpose Trust Fund ADDITIONS: Local and Intennediate Sources Total Additions DEDUCTIONS: Other Operating Costs Total Deductions $ 71,428 71,428 49,482 49,482 Change in Net Position 21,946 Total Net Position -July 1 (Beginning) 255,643 Total Net Position - June 30 (Ending) $ 277,589 The notes to the financial statements are an integral part ofthis statement. 39

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111 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES North East Independent School District (the District) is a public educational agency operating under the applicable Jaws and regulations of the State of Texas. It is governed by a seven member Board of Trustees (the Board) elected by registered voters of the District. The District prepares its basic financial statements in conformity with generally accepted accounting principles (GAAP) promulgated by the Governmental Accounting Standards Board (GASB) and other authoritative sources identified in GASB Statement No. 56, and it complies with the requirements of the appropriate version of Texas Education Agency's Financial Accountability System Resource Guide (F ASRG) and the requirements of contracts and grants of agencies from which it receives funds. A. REPORTING ENTITY The Board has governance responsibilities over all activities related to public elementary and secondary education within the jurisdiction of the District. The Board is elected by the public, has the authority to make decisions, appoint administrators and managers, significantly influence operations, and has primary accountability for fiscal matters. As such, the District is not included in any other governmental "reporting entity" as defined by GASB Statement No. 14, The Financial Reporting Entity. There are no component units included within the reporting entity. The District receives funding from local, state, and federal government sources and must comply with the requirements of these funding source entities. B. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS The Statement of Net Position and the Statement of Activities are government-wide financial statements. They report information on all of the District's nonfiduciary activities with most of the interfund activities removed. Governmental activities include programs supported primarily by taxes, state foundation funds, grants and other intergovernmental revenues. Business-type activities include operations funded mainly by fees and charges to third parties. The Statement of Activities demonstrates how other people or entities that participate in programs the District operates have shared in the payment of the direct costs. Direct costs are identifiable with a specific function. Program revenues of the District include charges for services and operating grants and contributions. Charges for services consist of charges to customers or applicants that purchase, use, or directly benefit from goods or services provided by a given function or segment of the District. Examples include tuition paid by students not residing in the District, school lunch charges, etc. Operating grants and contributions include amounts paid by organizations outside the District to help meet the operational or capital requirements of a given function. Examples include grants under the Elementary and Secondary Education Act. If revenue is not a program revenue, it is a general revenue used to support all of the District's functions. Taxes are considered general revenues. 41

112 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 R GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS (continued) During the course of operations the government has activity between funds for various purposes. Any residual balances outstanding at year end are reported as due from/to other funds and advances to/from other funds. While these balances are reported in fund financial statements, certain eliminations are made in the preparation of the government-wide financial statements. Balances between the funds included in governmental activities (i.e., the governmental and internal service funds) are eliminated so that only the net amount is included as internal balances in the governmental activities column. Similarly, balances between the funds included in business-type activities (i.e., the enterprise funds) are eliminated so that only the net amount is included as internal balances in the business-type activities column. The fund financial statements report the financial condition and results of operations for three fund categories - governmental, proprietary, and fiduciary. Since the resources in the fiduciary funds cannot be used for District operations, they are not included in the government-wide statements. The District considers some governmental funds major and reports their financial condition and results of operations in a separate column. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. All other revenues and expenses are nonoperating. C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION The government-wide financial statements use the economic resources measurement focus and the accrual basis of accounting, as do the proprietary fund and fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements use the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets, current liabilities and fund balances are included on the balance sheet. Operating statements of these funds present net increases and decreases in current assets (i.e., revenues and other financing sources and expenditures and other financing uses). 42

113 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION (continued) The modified accrual basis of accounting recognizes revenues in the accounting period in which they become both measurable and available, and it recognizes expenditures in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest and principal on long-term debt, which is recognized when due. The expenditures related to certain compensated absences and claims and judgments are recognized when the obligations are expected to be liquidated with expendable available financial resources. The District considers all revenues available if they are collectible within 60 days after year end. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Grant fund revenues are considered to be earned to the extent of expenditures made under the provisions of the grant. Accordingly, when such funds are received, they are recorded as deferred revenues until related and authorized expenditures have been made. If balances have not been expended by the end of the project period, grantors sometimes require the District to refund all or part of the unused amount. Permanent funds report resources that are restricted to the extent that only earnings and not principal may be used for purposes that support the District or its students. The Proprietary Funds are accounted for on a flow of economic resources measurement focus and utilize the accrual basis of accounting. This basis of accounting recognizes revenues in the accounting period in which they are earned and become measurable and expenses in the accounting period in which they are incurred and become measurable. With this measurement focus, all assets and all liabilities associated with the operation ofthese funds are included on the Statement of Net Position. The total net position is segregated into net investment in capital assets, restricted net position, and unrestricted net position. Agency Funds utilize the accrual basis of accounting but do not have a measurement focus as they report only assets and liabilities. 43

114 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION (continued) The District's accounts 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 by providing a separate set of self-balancing accounts which are comprised of each fund's assets, liabilities, equity, revenues, and expenditures or expenses. The District reports the following major governmental funds: General Fund -The General Fund is used to account for financial resources used for general operations. It is the basic fund of the school system and covers all activities for which a special fund has not been established. Any fund balances are considered resources available for current operations. All general tax revenues and other receipts not allocated by law or contractual agreement to some other fund are accounted for in this fund. Debt Service Fund - This fund is used to account for the payment of principal and interest on long-term general obligation debt of the District. Local property taxes are the main source of revenue for this fund. Capital Projects Fund - The proceeds from long-term debt financing and revenues and expenditures related to authorized construction and other capital asset acquisitions are accounted for in a capital projects fund. Additionally, the District reports the following fund type(s): Governmental Funds: Special Revenue Funds- These funds are used to account for resources restricted to, or committed for, specific purposes by a grantor. Federal and state financial assistance generally is accounted for in a special revenue fund. Generally, unused balances are returned to the grantor at the close of specified project periods. Permanent Fund - This fund is used to account for donations received to fund scholarships for the District's students. The principal received is invested and the earnings are used to provide scholarships. 44

115 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION (continued) Proprietary Funds: Enterprise Funds - These funds are used to account for operations financed and operated in a manner similar to private business enterprises, where the intent is that costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The District's non-major Enterprise Funds are: Property Management Uniform Rentals Community Education Preschool Program for Children with Disabilities North East Aquatics and Tennis Internal Service Funds -These funds are conceived to be self-supporting. Revenues are earned mainly from sales of services to the schools and operating departments of the District. The District's Internal Service Funds are: Document Management & Printing Services Health Insurance Data Processing Center Network Technology Services Dental Insurance Workers' Compensation Insurance Rolling Owner Controlled Insurance Program Unemployment Compensation Insurance Police Services Fiduciary Funds: Private-Purpose Trust Funds- The District utilized these funds to report resources held in trust for others where the principal and interest benefit the District or its students where the principal and earnings may be used. Scholarships Agency Funds -The District accounts for resources held for others in a custodial capacity in agency funds. The District's Agency Funds are: Student Activity Central Office 45

116 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 D. OTHER ACCOUNTING POLICIES 1. Cash and cash equivalents include cash and highly liquid investments such as ce1iificates of deposits, money market funds, local government investment pools, Treasury bills, and commercial paper that have a maturity from time of purchase of three months or less. (See Note IV A for more details.) 2. Inventories of supplies on the balance sheet are carried at cost, which is determined principally by the average cost method, while inventories of food commodities are recorded at fair values supplied by the United States Department of Agriculture (USDA). Inventories are considered expenditures or expenses as they are consumed. Supplies are used for almost all functions of activity, while food commodities are used only in the food service program. Although commodities are received at no cost, their fair value is supplied by the USDA and recorded as inventory and deferred revenue when received. When requisitioned, inventory and deferred revenue are relieved, expenditures are charged, and revenue is recognized for an equal amount. 3. In the government-wide financial statements and for proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the straight line interest method. Bonds payable are reported net ofthe applicable unamortized bond premium or discount. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are rep01ied as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 4. The District's policies provide for accumulation of vacation time for certain hourly employees provided it is taken prior to the calendar year-end. The accumulated vacation payable at June 30,2015 and 2014 was $815,751 and $901,408, respectively. The policies also provide for accumulation of State personal and sick leave, which includes salary-related payments, that are payable upon resignation for employees having served the District for ten consecutive years and who are eligible to receive benefits under the Texas Teacher Retirement System. (See Note IV G for more details.) 46

117 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 D. OTHER ACCOUNTING POLICIES (continued) 5. Capital assets, which include land, buildings, furniture and equipment, and intangible assets, are reported in the applicable columns in the government-wide financial statements. Capital assets are defined by the District as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. (See Note IV E for more details.) The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Intangible assets consist of internally generated software and commercially available software that required modification prior to being put into service by the District. Intangible assets are reported in the furniture and equipment category in the financial statements and footnotes. Amortization is reported along with depreciation expense in the financial statements and in the footnotes. Buildings, furniture and equipment of the District are depreciated/amortized using the straight line method over the following estimated useful lives: Assets Buildings and Improvements Furniture and Equipment Software Years Bond proceeds not spent are restricted for purposes approved by the voters in the District's bond election and include the following: construction, technology improvements, bus purchases and library improvements. 7. The District is self-funded in four areas which include the following: Health Insurance Dental Insurance Workers' Compensation Insurance Unemployment Compensation Insurance 47

118 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 D. OTHER ACCOUNTING POLICIES (continued) 8. In the fund financial statements, governmental funds report fund balance as nonspendable ifthe amounts cannot be spent because they are either not in spendable form or are legally or contractually required to remain intact. Restrictions of fund balance are for amounts that are restricted to specific purposes by an external entity (creditors, grantors, governmental regulations) or the restriction is imposed by law through constitutional provision or enabling legislation. Commitments of fund balance represent amounts that can only be used for specific purposes pursuant to constraints imposed by the District's Board. Assignments of fund balance are amounts set aside by the District's Superintendent or his designee with the intent they be used for specific purposes. 9. When the District incurs an expense for which it may use either restricted or unrestricted assets, it uses the restricted assets first unless unrestricted assets will have to be returned because they were not used. 10. The Data Control Codes refer to the account code structure prescribed by the Texas Education Agency (TEA) in the F ASRG. TEA requires school districts to display these codes in the financial statements in order to insure accuracy in building a Statewide database for policy development and funding plans. 11. Investments are valued at fair value. 12. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items within the deferred expenditures (expenses) line item in both government-wide and fund financial statements. 13. School districts are required to report all expenses by function, except certain indirect expenses. General administration and data processing service functions (data control codes 41 and 53, respectively) include expenses that are indirect expenses of other functions. These indirect expenses are not allocated to other functions. 14. The fiduciary net position ofthe Teacher Retirement System oftexas (TRS) has been determined using the flow of economic resources measurement focus and full accrual basis of accounting. This includes for purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, pension expense, and information about assets, liabilities and additions to/deductions from TRS's fiduciary net position. Benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments ofthe system are reported at fair value. 48

119 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 D. OTHER ACCOUNTING POLICIES (continued) 15. In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/ expenditure) until then. The District has several items that qualify for reporting in this category. One is the deferred charge on refunding prior debt issuances reported in the government-wide statement of net position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The District has only one type of item, which arises only under a modified accrual basis of accounting that qualifies for reporting in this category. Accordingly, the item, unavailable revenue, is reported only in the governmental funds balance sheet. The governmental funds report unavailable revenues from one sources: property taxes. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. 16. Fund balance amounts that are restricted, committed, or assigned are considered to have been spent when an expenditure is incurred for the purpose for which the fund balance was restricted, committed or assigned. If an expenditure is incurred that meets the criteria in more than one fund balance category, then the District considers that the fund balance is relieved in the following order: restricted, committed, assigned and then unassigned. Commitments of fund balance may only be established (and modified or rescinded) by a resolution of the Board. The commitment may only be relieved by incurring expenditures for that purpose or by resolution of the Board. Assignments of fund balance are established (and modified or rescinded) by the Superintendent or his designee and may only be relieved by incurring expenditures for that purpose or as authorized by the Superintendent. 17. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from these estimates. 49

120 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Do OTHER ACCOUNTING POLICIES (continued) 18. Certain amounts have been reclassified from prior presentations at June 30, 2014 to conform to classifications at June 30, There is no effect on previously reported change in net position K CHANGE IN ACCOUNTING POLICY During fiscal year 2015, the District changed accounting policies related to reporting of net pension liability, deferred outflows of resources, and deferred inflows of resources in a statement of net financial position by adopting GASB Statement No. 68 "Accounting and Financial Reporting for Pensions - an Amendment of GASB Statement No. 27." Accordingly, the effect of the accounting change is reported on the statement of net position, and the statement of activities for the current year. Ilo Ao RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUNDS BALANCE SHEET AND THE GOVERNMENT WIDE STATEMENT OF NET POSITION Exhibit C-2 provides the reconciliation between the fund balance for total governmental funds on the Governmental Fund Balance Sheet and the net position for governmental activities as reported in the government-wide Statement ofnet Position. One element of that reconciliation explains that capital assets are not financial resources and are therefore not reported in governmental funds. In addition, long-term liabilities, including bonds payable, are not due and payable in the current period and are not reported as liabilities in the funds. The details of capital assets and long-term debt (excluding internal service fund activity) at the beginning of the year are on the following page: 50

121 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 A. EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUNDS BALANCE SHEET AND THE GOVERNMENT WIDE STATEMENT OF NET POSITION (continued) Capital Assets at the Beginning of the Year Historic Cost Accumulated Depreciation/ Amortization Net Value at the Beginning of the Year Change in Net Position Land Buildings and Improvements Furniture and Equipment Construction in Progress Capital Assets Total $ $ 92,288,143 $ 1,580,610,932 49,892, ,396,136 1,835,187,803 $ - $ 517,793,632 32,274, ,067,690 $ 92,288,143 1,062,817,300 17,618, ,396,136 1,285,120,113 $ 1,285,120,113 Accrued Liabilities at the Beginning of the Year Payable at the Beginning of the Year Bonds Payable Interest Payable Vacation Payable Compensated Absences OPEB Net Obligation/(Benefit) Deferred Charge for Loss on Refunding Debt Issuance Change in Net Assets $ $ 1,616,319,231 24,042, ,408 3,665, ,224 (26,262,716) 1,618,850,078 ( 1,618,850,078) Net Adjustment to Net Position $ (333,729,965) 51

122 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 B. EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES AND THE GOVERNMENT-WIDE STATEMENT OF ACTIVITIES Exhibit C-4 provides a reconciliation between the net changes in fund balance as shown on the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances and the changes in net position of governmental activities as reported on the government-wide Statement of Activities. One element of that reconciliation explains that current year capital outlays and debt principal payments are expenditures in the fund financial statements but should be shown as increases in capital assets and decreases in long-term debt in the government-wide statements. This adjustment affects both the net position balance and the change in net position. The details ofthis adjustment, excluding internal service fund activity, are as follows: Changes in Capital Assets Amount Adjustments to Changes in Net Assets Adjustments to Net Position Land Buildings and Improvements Furniture and Equipment Construction in Progress Total Capital Outlay $ $ 2,052,109 4,204,908 4,242, ,276, ,776,132 $ 364,130 68,459,798 (68,823,928) $ $ 134,776,132 Debt Payments Bond Principal Accretion on Capital Appreciation Bonds Change in Bond Interest Payable Premiums on Bond Issuance Net Change Due to Bond Issuance/Refunding Amortization of Premiums and Loss on Refunding Change in vacation payable, compensated absences payable, & OPEB liability Change in TRS Pension liability Change in Deferred Intlow/Outflow for TRS Total Debt Payments Total Adjustment to Net Position $ $ 52,580,000 ( 493,076) 2,635,930 ( 60, 168,687) 56,466,103 21, (I 92,520) (75, ) (6,118,570) (8,991,807) (8,991,807) $ $ 125,784,325 52

123 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 III. STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY A. BUDGETARYDATA The official budget was prepared for adoption for the General Fund, Debt Service Fund, and the National Breakfast and Lunch Program Fund, which is included within the Nonmajor Governmental Funds. The budget is prepared using the modified accrual basis of accounting. The following procedures are used in establishing the budgetary data reflected in the basic financial statements: a. Prior to June 20, the District prepares a budget for the next fiscal year beginning July 1. The operating budget includes proposed expenditures and the means of financing them. b. A meeting of the Board is called for the purpose of adopting the proposed budget. Public notice of the meeting must be given ten days prior to the actual meeting. c. Prior to July I, the budget is legally enacted through passage of a resolution by the Board. Once a budget is approved, it can be amended at the fund level by approval of a majority of the members of the Board. The Board has authorized the administration through resolution to provide budgetary control at the functional expenditure level. Funds may be transferred between functions without Board approval when there is no effect to the overall fund balance. The cumulative effect of such transfers is approved by the Board in a subsequent budget amendment. Budget amendments are included on the Board agenda periodically throughout the fiscal year. Each amendment must have Board approval. All amendments are reflected in the official minutes of the Board and are made prior to fiscal year-end as required by law. Each budget is controlled by the budget manager at the revenue and expenditure function/object level. The budget should not be exceeded at the function level which is the line-item level shown in the basic financial statements. Budgeted amounts are as amended by the Board. All budget appropriations lapse at year-end even if they have related encumbrances. Encumbrances are commitments to purchase goods or services that were not fully executed at year-end. Encumbrance accounting is utilized to ensure effective budgetary control and accountability. While encumbrances lapse at year end, valid outstanding encumbrances (those whose terms will be completed in the next year) are re-appropriated and become part of the subsequent year's budget. 53

124 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 A. BUDGETARY DATA (continued) Original Amended Budget Increase Budget App1 opriation (Decrease) Appropriation General Fund $ 524,691,861 $ 2,304,234 $ 526,996,095 National Breakfast and Lunch Program Fund 35,039,535 (478,000) 34,561,535 Debt Service Fund 111,066,096 16,681, ,748,001 $ 670,797,492 $ 18,508,139 $ 689,305,631 A reconciliation of fund balances for both appropriated budget and non-appropriated budget Nonmajor Governmental Funds at June 30, 2015 is as follows: Appropriated Budget Fund National Breakfast and Lunch Program Fund Non-appropriated Budget Funds All Nonmajor Governmental Funds Fund Balance $ 9,227,185 4,120,709 $ 13,347,894 IV. DETAILED NOTES ON ALL FUNDS A. DEPOSITS AND INVESTMENTS The District's funds are required to be deposited under the terms of a depository contract or invested under the terms of the Public Funds Investment Act (PFIA). The depository bank places for safekeeping and trust with the District's agent bank approved pledged securities in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. 54

125 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 A. DEPOSITS AND INVESTMENTS (continued) Deposits and investments at June 30,2015 are as follows: Cash in Bank or on hand - Primary Government Cash Equivalents Money Market accounts: LOGIC TexPool Prime LoneS tar TexPool Fidelity Total Cash and Cash Equivalents Investments Total Deposits and Investments - Primary Government $ 12,601,934 59,095,099 82,224,261 17,119,657 12,330, ,685 $ 183,475, ,086,203 $ 392,562,012 The District utilizes imprest accounts where funds are automatically transferred from a cash management account whenever checks are presented. The cash account balance will occasionally reflect a negative balance as a result of the complexity and timing of various banking transactions. Deposits At June 30, 2015, the carrying amount ofthe District's deposits was $12,601,071. The District's cash deposits at June 30, 2015 were fully covered by FDIC insurance or by pledged collateral held by the District's agent bank or in the District's name. The District bid for a depository services contract for a term oftwo years beginning July 1, 2015 and ending June 30, Wells Fargo was awarded the contract, therefore funds were transferred to Wells Fargo accounts on June 25th and 30th, to test the new account and fund a July 2, 2015 payroll. At June 30, 2015, the bank balance at Bank of America was $10,736,007, and the balance at Wells Fargo was $5,000,

126 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 A. DEPOSITS AND INVESTMENTS (continued) In addition, the following is disclosed regarding coverage of combined balances on the date of the highest deposit: a. Depository: Bank of America, N.A.; San Antonio, Texas (funded the entire fiscal year; July 1, June 30,2015); Wells Fargo Bank, N.A.; Austin, Texas (funded June 25, 2015) b. The highest combined balances of cash, savings, and time deposit accounts at Bank of America amounted to $9,007,006 and occurred during April The highest balance at Wells Fargo occurred on June 30th at $5,000,196. c. The District's balances were collateralized for all amounts on deposit above the $250,000 FDIC insurance. Investments The District is required by the Public Funds Investment Act, Chapter 2256, Texas Government Code (PFIA), to adopt and implement an investment policy. That policy must address the following areas: safety of principal and liquidity, portfolio diversification, allowable investments, acceptable risk levels, expected rates of return, maximum allowable stated maturity of portfolio investments, maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, investment staff quality and capabilities, and bid solicitation preferences for certificates of deposit. Statutes authorize the District to invest in obligations of the U.S. Treasury, certain U.S. agencies and the State of Texas, certificates of deposit, certain municipal securities, and money market guaranteed investment contracts. The PFIA also requires the District to have independent auditors perform test procedures related to investment practices as provided by the PFIA. The District is in substantial compliance with the requirements of the PFIA and with local policies. The investment pools used by the District are organized under the authority of the Interlocal Cooperation Act, Chapter 791, Texas Government Code, and the Public Funds Investment Act, Chapter 2256, Texas Government Code. The investment pools are public funds investment pools created to provide a safe environment for the placement of local government funds in authorized short-term investments. The investment pools operate in a manner consistent with the Security and Exchange Commission's Rule 2a7 ofthe Investment Company Act of The District's investments in investment pools, which are exempt from regulation by the Securities and Exchange Commission, have as one of their objectives the maintenance of a stable net asset value of $1.00. The book value of the position in the pools is the same as the number of the shares in each pool; the market value of a share should approximately equal the book value of a share. 56

127 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 A. DEPOSITS AND INVESTMENTS (continued) Investments (continued) Credit Risk. In accordance with state law and the District's investment policy, investments in mutual funds and investment pools must be rated at least AAA or have an equivalent rating, commercial paper must be rated at least A-1 by Standard & Poors (S&P), P-1 by Moody's Investment Services, or have an equivalent rating, and obligations of states, agencies, counties, and cities must be rated at least A or its equivalent. As of June 30, 2015, the District's investments in investment pools met or exceeded the ratings criteria and were rated AAA by S&P. S&P has rated the long-term sovereign credit rating on the United States of America AA+. As a result, the long-term issuer credit ratings and related issue ratings on select government-related entities are also rated AA +. S&P affirmed the short-term issue ratings for these entities at A-1 +. These entities are still rated Aaa and AAA by Moody's and Fitch rating agencies. S&P had formerly issued a credit rating of AAA for the United States of America and on the related governmental entities. Although the credit ratings were lowered on government-related issues held by the District, they remain compliant with the District's investment policy. Concentration of Credit Risk. The District places no limit on the amount the District may invest in any one issuer, rather investments are governed by the objectives of preservation and safety of principal, liquidity, and yield. In addition, the investment portfolio is diversified in terms of investment instruments, maturity scheduling, and financial institutions to reduce risk of loss resulting from over-concentration of assets in a specific class of investments, specific maturity, or specific issuer. More than 5% of the District's investments are in agency securities issued by the Federal National Mortgage Association (5.50%). Interest Rate Risk. In accordance with State law and the District's investment policies, the District does not purchase any investments with maturities greater than five (5) years unless the investment's maturity is matched to cash flow needs of long-term liabilities. The investment maturities in the following table reflect the maturity date of the investments in each category. Some investments are callable (redeemable) by the issuer on specified dates prior to the stated maturity date. The District uses its investments in the investment pools to further mitigate interest rate risk. The District's investments at June 30,2015 are shown in the table on the following page: 57

128 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 A. DEPOSITS AND INVESTMENTS (continued) Investment Maturities in Years Investment Type Fair Value Less than 1 1 to 2 2 to 4 U.S. Agencies $ 61,532,490 $ 41,431,825 $ 18,098,145 $ 2,002,520 Municipal Bonds/Notes 70,869,644 53,269,800 15,810,596 Commercial Paper 74,999,069 74,999,069 Certificates of Deposit 1,685,000 1,685,000 Investment Pools 170,873,875 Total Fair Value $ 379,960,077 $ 171,385,694 $ 33,908,741 $ 2,002, $ 1,789,248 $ 1,789,248 B. PROPERTY TAXES Property taxes are levied by October 1 on the assessed value listed as of the prior January 1st for all real and business personal property located in the District in conformity with Subtitle E, Texas Property Tax Code. Taxes are due on receipt of the tax bill and are delinquent if not paid before February I st of the year following the year in which imposed. On January I st of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. The delinquency and lien provisions do not apply to certain taxpayers that elect and follow a split-payment option and to qualified taxpayers over 65 years old or disabled that elect and follow a 4-payment option. C. DELINQUENT TAXES RECEIVABLE Delinquent taxes are prorated between maintenance (General Fund) and debt service based on rates adopted for the year of the levy. Allowances for uncollectible taxes receivable within the General and Debt Service Funds are based on historical experience in collecting property taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the District is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature. 58

129 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 D. INTERFUND RECEIVABLES, PAY ABLES, AND TRANSFERS The composition ofinterfund balances as of June 30, 2015 is as follows: Receivable Fund General Fund General Fund General Fund General Fund General Fund General Fund Debt Service Fund Capital Projects Funds Nonmajor Governmental Funds Nonmajor Governmental Funds Nonmajor Governmental Funds Internal Service Funds Internal Service Funds Internal Service Funds Internal Service Funds Internal Service Funds Internal Service Funds Enterprise Funds Enterprise Funds Fiduciary Fund Fiduciary Fund Total Payable Fund Nonmajor Governmental Funds Capital Projects Funds Enterprise Funds Internal Service Funds Debt Service Fund Fiduciary Funds General Fund General Fund General Fund Nonmajor Governmental Funds Enterprise Funds General Fund Capital Projects Funds Nonmajor Governmental Funds Enterprise Funds Internal Service Funds Fiduciary Fund General Fund Nonmajor Governmental Funds General Fund Nonmajor Governmental Funds $ $ Amount 6,207,752 13,912, ,313 2,503, ,575 6,435, ,718 1,734,080 52,374 3,369 7,041,736 56,691 2,732,802 17,229 31, ,852 5,288 47, ,410 42,295,658 The outstanding balances between funds result mainly from the time lag between the dates that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made. These amounts will all be collected within the subsequent year. 59

130 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 D" INTERFUND RECEIVABLES, PAY ABLES, AND TRANSFERS (continued) Interfund transfers are defined as "flow of assets without equivalent flows of assets in return and without requirement of repayment." Interfund transfers for the year ending June 30, 2015 were as follows: Transfers Out General Nonmajor Debt Transfers In Fund Governmental Enteq~rise Service Total General Fund $ - $ 95,126 $ 65,059 $ - $ 160,185 Capital Projects 279, ,000 1,415,535 14,664 1,809,392 Nonmajor Governmental Internal Service 993, ,000 1,473,000 Debt Service 1,700,000 1,700,000 Total Transfers $ 2,972,793 $ 195,126 $ 1,960,594 $ 14,664 $ 5,143,177 Transfers are used to (1) move revenues/expenditures from the fund that statute or budget requires them to collect the revenues/expenditures to the fund that statute or budget requires to expend them; (2) move funds to the debt service fund as a voluntary accumulation of resources for principal payments that are not payable from tax revenues for the 2010 Qualified School Construction Bonds, and (3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. 60

131 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 E. CAPITAL ASSET ACTIVITY Capital asset activity for the District's governmental activities, including internal service funds, for the year ended June 30, 2015, was as follows: Completed Beginning Capital Ending Balance Additions Projects Diseosals Balance Nondepreciable Capital Assets Land $ 92,288,I43 $ 2,052,I09 $ 364,I30 $ - $ 94,704,382 Construction in Progress II2,396, I36 124,276,990 ( 68,823,928) 167,849,I98 Subtotal Nondepreciable Assets 204,684,279 I26,329,099 (68,459,798) 262,553,580 Depreciable/Amortizable Capital Assets Buildings and Improvements I,58I,094,3II 4,204,908 68,459,798 I,653,759,0I7 Furniture and Equipment 67,782,974 5,568,293 (I,480,274) 7I,870,993 Subtotal Depreciable/ Amortizable Assets I,648,877,285 9,773,20I 68,459,798 (I,480,274) 1,725,630,0IO Totals at Historical Cost I,853,56I,564 I36, I 02,300 (I,480,274) I,988,I83,590 Less Accumulated Depreciation/Amortization for: Buildings and Improvements (5I8, I24,637) (53,211,273) (57I,335,9IO) Furniture and Equipment ( 4I,305, 728) (6,05I,335) I,452,071 (45,904,992) Total Accumulated Depreciation/ Amortization (559,430,365) (59,262,608) I,452,07I (6I7,240,902) Governmental Activities Capital Assets, Net $ I,294,I3l,I99 $ 76,839,692 $ - $ (28,203) $ I,3 70,942,688 61

132 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 E. CAPITAL ASSET ACTIVITY (continued) Capital asset activity for the District's business-type activities for the year ended June 30, 2015, was as follows: Completed Beginning Capital Ending Balance Additions Projects Dis~osals Balance Nondepreciable Capital Assets Land $ 2,547,600 $ - $ - $ - $ 2,547,600 Construction in Progress Subtotal Nondepreciable Assets 2,547,600 2,547,600 Depreciable Capital Assets Buildings and Improvements 9,928, ,579 I 0,325,760 Furniture and Equipment 464,345 61, ,893 Subtotal Depreciable Assets 10,392, ,127 10,851,653 Totals at Historical Cost 12,940, ,127 13,399,253 Less Accumulated Depreciation for: Buildings and Improvements (3,354,013) (397,344) (3,751,357) Furniture and Equipment (212, 135) (80,470) (292,605) Total Accumulated Depreciation (3,566,148) (477,814) (4,043,962) Business- Type Activities Capital Assets, Net $ 9,373,978 $ (18,687) $ - $ - $ 9,355,291 62

133 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 E. CAPITAL ASSET ACTIVITY (continued) Depreciation and amortization expense, excluding internal service funds, was charged to governmental functions as follows: Instruction Instructional Resources and Media Services Curriculum Development and Instructional Staff Development Instructional Leadership School Leadership Guidance, Counseling and Evaluation Services Health Services Student (Pupil) Transportation Food Services Cocurricular/Extracurricular Activities General Administration Plant Maintenance and Operations Security and Monitoring Service Data Processing Services Community Services Total Governmental Funds Depreciation/Ammiization on capital assets held by the District's Internal Service Funds is charged to the various functions based on their usage of the assets Total Depreciation/Amortization Expense- Governmental Activities $ 33,186,002 2,985,006 7,781 6,799 1,603, , ,183 2,567,056 3,026,751 6,077,810 21,510 6,250,372 81, ,704 59,261 57,377,623 1,884,985 $ 59,262,608 Total Depreciation/Amortization Expense- Business- Type Activities $ 477,814 63

134 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Fo BONDS AND NOTES PAY ABLE Bonded indebtedness of the District is reflected in the Statement of Net Position. Current requirements for principal and interest expenditures are accounted for in the Debt Service Fund. A summary of changes in bonds and notes ("bonds") payable for the year ended June 30, 2015 is as follows: Original Description Balance Unlimited Tax School Building Bonds - Series 2004 Unlimited Tax Refunding Bonds - Series 2004 Unlimited Tax Refunding Bonds- Series 2004* Unlimited Tax School Building Bonds - Series 2005 Unlimited Tax Refunding Bonds - Series 2005 Unlimited Tax Refunding Bonds - Series 2007 Unlimited Tax School Building Bonds -Series 2007 A* Unlimited Tax School Building Bonds- Series 2007A Limited Tax Maintenance Notes - Series 2010 Unlimited Tax School Building and Refunding Bonds - Series 2012 Variable Rate Unlimited Tax School Building Bonds Series 2013A Variable Rate Unlimited Tax School Building Bonds Series 2013B Unlimited Tax School Building Bonds- Series 2013 Unlimited Tax Refunding Bonds- Series 2014 Unlimited Tax Refunding Bonds- Series 2014A Variable Rate Unlimited Tax School Building Bonds Series 2014 Variable Rate Unlimited Tax School Building Bonds- Series 2013A (20 14 Remarketing) Unlimited Tax Refunding Bonds- Series 2014B Unlimited Tax Refunding Bonds- Series 2015 Unlimited Tax Refunding Bonds - Series 20 15A * Capital appreciation bonds ** Additions to capital appreciation bonds include interest accretion for the year ended June 30, The capital appreciation bonds are included in bonds payable at their accreted value, for principal amounts due as of June 30, $ $ 300,000, ,435, , ,000, ,580, ,795,000 71,590, ,000,000 37,545, ,610,000 75,000,000 73,795,000 58,905,000 33,215, ,735,000 70,825,000 67,325,000 69,925, ,185,000 51,495,000 2,684,269,349

135 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Beginning Balance $ 7,600,000 20,315, ,982 79,585,000 57,905, ,795,000 21,135, ,000,000 37,545,000 Refunded/ Additions** Pal:ments Remarketed $ $ 7,600,000 $ 20,315,000 8, ,000 3,550,000 76,035,000 57,905, ,058 10,830, ,160,000 $ Ending Balance 246,795,000 10,791,000 59,840,000 37,545, ,455,000 75,000,000 73,795,000 58,905,000 33,215, ,735,000 70,825,000 1,000,000 6,360,000 68,640, , ,455,000 73,795,000 57,925,000 33,215, ,735,000 70,825,000 $ 1,500,482,924 67,325,000 69,925,000 1,265, ,185,000 51,495,000 $ 534,423,076 $ 52,580,000 $ 559,740,000 67,325,000 68,660, ,185,000 51,495,000 $ 1,422,586,000 65

136 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 F. BONDS AND NOTES PAYABLE (continued) The general obligation bonds mature and the capital appreciation bonds accrete in value through 2045 as follows: Year Ending June 30, Principal Interest Total 2016 $ 52,055,000 $ 57,080,272 $ 109,135,272 20I7 54,000,000 6I,411,413 1I5,4I1, ,430,000 59,022,563 I 03,452,563 20I9 51,240,000 58,489,538 I09,729, ,785,000 59,342,688 II5,127, I ,055, ,044, ,099, ,845, ,258, ,103, ,830, ,540, ,370, ,590,000 42,172, ,762, ,795,000 9,777,550 85,572,550 1,422,625,000 $ 896,140,335 $ 2,318, 765,335 Less interest accretion in future years 39,000 Total principal due at June 30, 20 I 5 $ 1,422,586,000 There are a number of limitations and restrictions contained in the general obligation bond indenture. The District is in compliance with all significant limitations and restrictions as of June 30, 20I5. Summary information for the capital appreciation bonds is as follows: Original Accreted Amount Value Series Outstanding June 30, 2015 Unlimited Tax School Building Bonds- Series 2007 A $ 7,743,775 $ I 0,79 I,000 66

137 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 F. BONDS AND NOTES PAYABLE (continued) The District issued three series of refunding bonds during the year ended June 30, The bonds were issued to reduce its total debt service payments to obtain an economic gain (difference between the present value of the old and new debt service payments). Amounts received from the issuance of refunding debt (and any required District contribution) were deposited into an irrevocable trust with an escrow agent to provide for all future debt service payments of the refunded debt. As a result, the refunded bonds are considered to be defeased and the liability for those bonds has been removed from the government-wide statement of net position. The District issued $69,925,000 in Unlimited Tax Refunding Bonds (series 2014B) of outstanding bonds in a current refunding of $76,035,000 of outstanding debt. The proceeds of $78,423,784 (net of $643,843 in underwriting fees and issuance costs plus $8,254,209 of premium and $244,575 of District cash contribution) were used to purchase state and local government securities. The District completed the refunding to reduce its total debt service payments over the next 20 years by $12,492,421 and to obtain an economic gain (difference between the present value of the old and new debt service payments) of $10,060,009. The refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of$1,495,949. The difference, reported in the accompanying financial statements as a deferred outflow, is being charged to operations through the year The District issued $345,185,000 in Unlimited Tax Refunding Bonds (Series 2015) to advance refund $357,160,000 of outstanding bonds. The refunding proceeds of $396,981,463 (net of $2,142,819 in underwriting fees and issuance costs plus $42,867,463 of premium and $8,929,000 of District cash contribution) were used to purchase open market federal securities. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of$28,746,189. The difference, reported in the accompanying financial statements as a deferred outflow, is being charged to operations through the year Total debt service payments decreased over the next 22 years by $69,589,453 and results in an economic gain (difference between the present value ofthe old and new debt service payments) of$49,850,319. The District issued $51,495,000 in Unlimited Tax Refunding Bonds (series 2015A) of outstanding bonds in a current refunding of $57,905,000 of outstanding debt. The proceeds of $59,914,585 (net of $523,871 in underwriting fees and issuance costs plus $7,349,078 of premium and $1,070,507 of District cash contribution) were used to purchase open market federal securities. The District completed the refunding to reduce its total debt service payments over the next 15 years by $12,010,917 and to obtain an economic gain (difference between the present value of the old and new debt service payments) of $9,600,564. The refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $413,965. The difference, reported in the accompanying financial statements as a deferred outflow, is being charged to operations through the year

138 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 F. BONDS AND NOTES PAYABLE (continued) In addition, the District converted the Variable Rate Unlimited Tax School Building Bonds, Series 20 13A from the existing one-year note paying interest at one percent to a four-year note paying interest at two percent through July 31, The District contributed $5,300,000 to the Payment Fund at the time of closing. The conversion of the bonds resulted in a reduction in the amount of outstanding bonds from $75,000,000 at June 30, 2015 to $67,325,000. The refunded or remarketed debt was from four series as follows: Series Amounts Refunded/ Remarketed Unlimited Tax School Building Bonds - Series 2005 Unlimited Tax School Refunding Bonds - Series 2005 Unlimited Tax Refunding Bonds - Series 2007 A Unlimited Tax Refunding Bonds - Series 20 13A 2014B A 2014 $ $ 76,035,000 57,905, ,160,000 68,640, ,740,000 In prior years, the District defeased certain general obligation and other bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the District's financial statements. As of June 30, 2015, $480,840,000 of refunded bonds outstanding are considered to be defeased. The District has no authorized but unissued debt at June 30,

139 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 G. ACCUMULATED STATE PERSONAL AND SICK LEAVE BENEFITS Upon separation from the District, employees with ten consecutive years of service in the District and eligible to receive benefits under the Teacher Retirement System of Texas shall be entitled to a lump sum cash payment for any unused accrued State leave or local leave earned in the District. The District implemented this as an incentive to retain employees. Employees receive reimbursement equivalent to one-half the daily rate of pay at the time of their separation from the District up to a maximum of $40 per day for up to 80 days, and one-fourth the daily rate of pay to a maximum of $20 per day for days in excess of 80 for days earned through June 30, For days earned after June 30, 2005, employees will receive reimbursement equivalent to one half the daily rate of pay at the time of their separation from the District up to a maximum of $75 per day up to 80 days and one fourth the daily rate of pay up to a maximum of $65 per day for days in excess of 80. A summary of changes in the accumulated State personal and sick leave liability follows: Balance July 1, 2014 Additions - New Entrants and Salary Increments Deductions - Payments to Participants Balance June 30, 2015 Current Portion $ 3,665, ,209 (586,222) $ 3,947,329 $ 565,968 No liability for accumulated sick leave is recorded in the governmental funds unless the employee has met the requirements and the amounts are due. No such liability existed as of June 30,

140 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Ho DEFINED BENEFIT PENSION PLAN Plan Description The District participates in a cost-sharing multiple-employer defined benefit pension that has a special funding situation. The plan is administered by the Teacher Retirement System of Texas ('frs). TRS's defined benefit pension plan is established and administered in accordance with the Texas Constitution, Article XVI, Section 67 and Texas Government Code, Title 8, Subtitle C. The pension trust fund is a qualified pension trust under Section 401 (a) of the Internal Revenue Code. The Texas Legislature establishes benefits and contribution rates within the guidelines of the Texas Constitution. The pension's Board of Trustees does not have the authority to establish or amend benefit terms. All employees of public, state-supported educational institutions in Texas who are employed for one-half or more of the standard work load and who are not exempted from membership under Texas Government Code, Title 8, Section are covered by the system. Pension Plan Fiduciary Net Position Detailed information about the Teacher Retirement System's fiduciary net position is available in a separately-issued Comprehensive Annual Financial Report that includes financial statements and required supplementary information. That report may be obtained on the Internet at by writing to TRS at 1000 Red River Street, Austin, TX, ; or by calling (512) Benefits Provided TRS provides service and disability retirement, as well as death and survivor benefits, to eligible employees (and their beneficiaries) of public and higher education in Texas. The pension formula is calculated using 2.3 percent (multiplier) times the average of the five highest annual creditable salaries times years of credited service to arrive at the annual standard annuity except for members who are grandfathered, the three highest annual salaries are used. The normal service retirement is at age 65 with 5 years of credited service or when the sum of the member's age and years of credited service equals 80 or more years. Early retirement is at age 55 with 5 years of service credit or earlier than 55 with 30 years of service credit. There are additional provisions for early retirement ifthe sum ofthe member's age and years of service credit total at least 80, but the member is less than age 60 or 62 depending on date of employment, or if the member was grandfathered in under a previous rule. There are no automatic post-employment benefit changes; including automatic COLAs. Ad hoc post-employment benefit changes, including ad hoc COLAs can be granted by the Texas Legislature as noted in the Plan description above. 70

141 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 H. DEFINED BENEFIT PENSION PLAN (continued) Contributions Contribution requirements are established or amended pursuant to Article 16, section 67 of the Texas Constitution which requires the Texas legislature to establish a member contribution rate of not less than 6% ofthe member's annual compensation and a state contribution rate of not less than 6% and not more than 10% of the aggregate annual compensation paid to members of the system during the fiscal year. Texas Government Code section prohibits benefit improvements, if as a result of the particular action, the time required to amortize TRS' unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or, if the amortization period already exceeds 31 years, the period would be increased by such action. Employee contribution rates are set in state statute, Texas Government Code Senate Bill 1458 of the 83rct Texas Legislature amended Texas Government Code for member contributions and established employee contribution rates for fiscal years 2014 thru It also added a 1.5% contribution for employers not paying Old Age Survivor and Disability Insurance (OASDI) on certain employees effective for fiscal year 2015 as discussed in Note 1 of the TRS 2014 CAFR. The 83rct Texas Legislature, General Appropriations Act (GAA) established the employer contribution rates for TRS fiscal years 2014 and Plan Year Contribution Rates Members (Employees) Employers (Districts) Non-Employer Contributing Entity (State oftexas) 6.4% 6.8% 6.8% 6.7% 6.8% 6.8% District Employees District State oftexas Plan Year Contributions 2014 $ 25,065,608 $ 7,141,048 $ 19,693,145 Contributions shown above are for the plan year which runs from September 1 51 through August 31st and are shown for the year of the measurement date. 71

142 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Ho DEFINED BENEFIT PENSION PLAN (continued) Contributors to the plan include members, employers and the State of Texas as the only nonemployer contributing entity. The State is the employer for senior colleges, medical schools and state agencies including TRS. In each respective role, the State contributes to the plan in accordance with state statutes and the GAA. As the non-employer contributing entity for public education and junior colleges, the State of Texas contributes to the retirement system an amount equal to the current employer contribution rate times the aggregate annual compensation of all participating members of the pension trust fund during that fiscal year reduced by the amounts described below which are paid by the employers. Employers (public school, junior college, other entities or the State of Texas as the employer for senior universities and medical schools) are required to pay the employer contribution rate in the following instances: <~> On the portion of the member's salary that exceeds the statutory minimum for members entitled to the statutory minimum under Section of the Texas Education Code. <~> During a new member's first 90 days of employment. <~> When any part or all of an employee's salary is paid by federal funding sources, a privately sponsored source, from non-educational and general, or local funds. <~> In addition to the employer contributions listed above, when employing a retiree of the Teacher Retirement System the employer shall pay both the member contribution and the state contribution as an employment after retirement surcharge. 72

143 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 H. DEFINED BENEFIT PENSION PLAN (continued) Actuarial Assumptions The total pension liability in the August 31, 2014 actuarial valuation was determined using the following actuarial assumptions: Valuation Date Actuarial Cost Method Amortization Method Remaining Amortization Period Asset Valuation Method Discount Rate Long-term expected Investment Rate of Return* Salary Increases* Weighted-Average at Valuation Date Payroll Growth Rate * Includes inflation rate of 3% 31-Aug-14 Individual Entry Age Normal Level Percentage of Payroll, Open 30 years 5 year Market Value 8.00% 8.00% 4.25% to 7.25% 5.55% 3.50% The actuarial methods and assumptions are primarily based on a study of actual experience for the four year period ending August 31, 2010 and adopted on April 8, With the exception of the post-retirement mortality rates for healthy lives and a minor change to the expected retirement age for inactive vested members stemming from the actuarial audit performed in the Summer of 2014, the assumptions and methods are the same as used in the prior valuation. When the mortality assumptions were adopted in 2011 they contained a significant margin for possible future mortality improvement. As of the date of the valuation there has been a significant erosion of this margin to the point that the margin has been eliminated. Therefore, the post-retirement mortality rates for current and future retirees was decreased to add additional margin for future improvement in mortality in accordance with the Actuarial Standards of Practice No. 35. Discount Rate The discount rate used to measure the total pension liability was 8.0%. There was no change in the discount rate since the previous year. The projection of cash flows used to determine the discount rate assumed that contributions from plan members and those of the contributing employers and the non-employer contributing entity are made at the statutorily required rates. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all future benefit payments of current plan members. Therefore, the long-term 73

144 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Ho DEFINED BENEFIT PENSION PLAN (continued) expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The long-term rate of return on pension plan investments is 8%. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimates ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of geometric real rates of return for each major asset class included in the Systems target asset allocation as of August 31, 2014 are summarized below: Real Return Target Geometric Asset Class Allocation Basis Global Equity u.s. 18.0% 7.0 Non-U.S. Developed Emerging Markets Directional Hedge Funds Private Equity Stable Value U.S. Treasuries Absolute Return Stable Value Hedge Funds Cash Real Return Global Inflation Linked Bonds Real Assets Energy and Natural Resources Commodities Risk Parity Risk Parity Alpha Total 100.0% 82.6% *The })::peeled Contribution to Returns incorporates the volatility drag resultingfi'om the conversion between Arithmetic and Geometric mean returns. Long-Tet m Expected Portfolio Real Rate of Return* 1.4% % 74

145 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 H. DEFINED BENEFIT PENSION PLAN (continued) Discount Rate Sensitivity Analysis The following schedule shows the impact of the Net Pension Liability if the discount rate used was 1% less than and 1% greater than the discount rate that was used (8%) in measuring the District's 2014 Net Pension Liability. 1% Decrease in Discount Rate (7.0%) $134,444,370 Discount Rate (8.0%) $75,237,231 1% Increase in Discount Rate (9.0%) $30,961,318 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2015, the District reported a liability of $75,237,231 for its proportionate share of the TRS's net pension liability. This liability reflects a reduction for State pension support provided to the District. The amount recognized by the District as its proportionate share of the net pension liability, the related State support, and the total portion of the net pension liability that was associated with the District were as follows: District's proportionate share of the collective net pension liability State's proportionate share associated with the District Total $ 75,237, ,927,211 $ 283,164,442 The net pension liability was measured as of August 31, 2014 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The District's proportion of the net pension liability was based on the District's contributions to the pension plan relative to the contributions of all employers to the plan for the period September 1, 2013 through August 31, At August 31, 2014 the employer's proportion of the collective net pension liability was %. The change in proportion was regarded as immaterial by TRS and disregarded this year. There were no changes of assumptions or other inputs that affected measurement of the total pension liability during the measurement period. There were no changes of benefit terms that affected measurement of the total pension liability during the measurement period. 75

146 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 H. DEFINED BENEFIT PENSION PLAN (continued) There was a change in employer contribution requirements that occurred after the measurement date of the net pension liability and the employer's reporting date. A 1.5% contribution for employers not paying Old Age Survivor and Disability Insurance (OASDI) on certain employees went into law effective 09/01/2014. The amount of the expected resultant change in the employer's proportion cannot be determined at this time. For the year ended June 30, 2015, the District recognized pension expense of $19,122,484 and revenue of $19,122,484 for support provided by the State. At June 30, 2015 the District reported its proportionate share ofthe TRS's deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Difference between expected and actual economic experience $ Changes in actuarial assumptions Difference between projected and actual investment earnings Changes in proportion and difference between the employer's contributions and the proportionate share of contributions Contributions paid to TRS subsequent to the measurement date Total $ Deferred Outflows of Resources 1,163,568 $ 4,890,504 10,842,650 16,896,722 $ Deferred Inflows of Resources 22,995,570 19,722 23,015,292 The net amounts of the employer's balances of deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: Year Ended June 30, Therafter Pension Expense $ ( 4, 730,900) (4,730,900) (4,730,900) 1,017, ,387 76

147 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 I. SCHOOL DISTRICT RETIREE HEALTH PLAN Plan Description The District contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple employer defined benefit postemployment health care plan administered by TRS. TRS-Care provides health care coverage for certain persons (and their dependents) who retired under TRS. The statutory authority for the program is Texas Insurance Code, Chapter Section grants the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants. The TRS issues a publicly available financial report that includes financial statements and supplementary information for TRS-Care. That report may be obtained by visiting the TRS web site at by writing to the Communications Department of the Teacher Retirement System of Texas at 100 Red River Street, Austin, TX 78701, or by calling Funding Policy Contribution requirements are not actuarially determined but are established each biennium by the Texas Legislature. Texas Insurance Code Sections , 203, and 204 establish state, active employee, and public school contributions, respectively. Funding for free basic coverage is provided by the program based upon public school district payroll. Funding for optional coverage is provided by those participants selecting the optional coverage. The State of Texas contribution rate was 1.0% for fiscal year 2015, 1.0% for fiscal year 2014, and 0.5% for fiscal year Active public school employee rates and school district contribution rates were set at 0.65% and 0.55% of payroll for all three fiscal years. Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. The contributions to TRS-Care made by the State, active employees, and the District for fiscal years 2015, 2014, and 2013 equaled the required contributions and are as follows: Year Ended Year Ended Year Ended June 30, June 30, June 30, State TRS-Care On-Behalf Contributions $ 4,032,391 $ 3,814,429 $ 2,007,423 Active Member's Contributions 2,621,054 2,544,375 2,486,053 District Contributions to TRS-Care 2,232,162 2,152,932 2,103,584 $ 8,885,607 $ 8,511,736 $ 6,597,060 Revenue and expenditures equal to the amount paid by the State of Texas for on-behalf fringe benefits were recognized during the fiscal year. 77

148 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 I. SCHOOL DISTRICT RETIREE HEALTH PLAN (continued) Medicare Part D Federal legislation enacted in January 2006 established prescription drug coverage for Medicare beneficiaries known as Medicare Part D. One provision ofthe law allows TRS-Care to receive retiree drug subsidy payments from the federal government to offset certain prescription drug expenditures for eligible participants. These payments totaled $1,240,773, $602,391, and $1,542,113 for fiscal years 2015, 2014, and 2013, respectively. Revenue and expenditures equal to the amount paid by the federal government were recognized during the fiscal year. J. OTHER POST EMPLOYMENT BENEFITS (OPEB) The District also offers medical, dental, and life insurance coverage to certain retirees who have continued their coverage with the District's insurance plans since their retirement. The option to continue coverage is no longer offered; thereby, participation in the plan is limited to those employees who retired prior to August 31, Plan Description The plan is a single employer plan offering continued medical coverage under the District's medical insurance for retirees and their dependents with the retiree paying both the employee and District contributions. If Medicare coverage is available, the District's third party administrator, Blue Cross/Blue Shield of Texas, will coordinate coverage with Medicare acting as the primary insurer. The plan does not issue a separate set of financial statements. 78

149 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 J. OTHER POST EMPLOYMENT BENEFITS (OPEB) (continued) Annual OPEB Cost The District's annual OPEB cost and net OPEB obligation for the past three fiscal years are as follows: June 30, June30, June 30, Annual Required Contribution (ARC) $ Interest on PriorY ear Net OPEB (Benefit)/Obligation Adjustment to the ARC Annual OPEB Cost Retiree Claims Paid Increase/(Decrease) in Net OPEB Obligation $ 215,814 $ 7,369 (7,040) 216,143 (219,9532 (3,810) $ =~==: ::: 205,114 $ 314,448 8,422 5,579 (8,045) (7,652) 205, ,375 (231,811) (227,380) (26,320) $ 84,995 Net OPEB (Benefit)/Obligation at June 30 $ 180,414 $ 184,224 $ 210,544 Percentage of ARC Contributed 101.8% 112.8% 72.8% The funded status of the plan for the past three fiscal years is as follows: June 30, June 30, June 30, Schedule of Funding Progress Actuarial Accrued Liability $ 3,726,633 $ 3,737,374 $ 4,709,198 Actuarial Value of Plan Assets Funded Ratio (actuarial value of plan assets/aal) 0% 0% 0% Unfunded Actuarial Accrued Liability $ 3,726,633 $ 3,737,374 $ 4,709,198 Actuarial valuation of an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include mortality, the healthcare cost trend, and insurance benefits offered in the future. Amounts determined regarding the funded status of the plan and the annual required contribution of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, shown above, presents information that will show whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 79

150 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 Jo OTHER POST EMPLOYMENT BENEFITS (OPEB) (continued) Projections of benefits for financial reporting purposes are based on the substantive plan (as understood by the District and its plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the District and plan members at that time. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculationso In the June 30, 2015 actuarial valuation, the projected unit credit cost method was used. The actuarial assumptions used include a 4.00% rate compounded annually for an unfunded plan, claims costs for future years equal the costs for the current year adjusted for assumed healthcare cost trends beginning at a rate of 10.0% for fiscal year 2015, an inflation rate of 4.0% annually, and a 3.0% increase in claims per year per member. A closed amortization period of 30 years was used to compute the District's Annual Required Contribution. Since the plan is closed to new members, there is no annual covered payroll costs associated with the plan. Contributions to fund the net OPEB obligation are made by the Health Insurance Fund. K RISK MANAGEMENT The District is exposed to various risks or torts; theft of, damage to, and destruction of assets; injuries to employees; and natural disasters. During fiscal year 2015, the District purchased insurance coverage for prope1iy, general liability, fleet liability, errors and omissions, crime, various cyber liability and network insurance coverage, extortion, equipment breakdown coverage, storage tank liability, and police professional liability. Internal Service Funds purchased self-funded unemployment compensation insurance, employee health stop-loss coverage, and workers' compensation excess coverage. There has been no significant reduction in insurance coverage from the prior year by major category of risk. There were three instances in fiscal year that the District had insurance settlements that reached the amount of its stop-loss coverage limit. There were two insurance settlements that reached the stop-loss coverage limit in the prior two years combined. Detailed information on the major categories of risk is as follows: 80

151 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 K. RISK MANAGEMENT Employee Health Coverage (continued) The District's major medical program offers two plan options, which are self-funded through an Internal Service Fund. Under two plan options, the District carries $520,000 specific stop-loss (SSL) coverage, aggregate stop-loss coverage of 125%, and the plans have an unlimited maximum lifetime SSL benefit. Accrued expenses in the Health Insurance Fund are based on actuarial estimates of the amounts necessary to pay prior and current period claims and to establish a reserve for catastrophic losses. A liability claim is established if information indicates it is probable that a liability has been incurred at the date of the financial statements, and the amount of the loss is reasonably estimable. A reconciliation of changes in the aggregate liabilities for major medical claims for the prior and current fiscal period is presented below: Beginning of Claims and End of Fiscal Year Changes in Claim Fiscal Year Liability Estimates Payments Liability $ 4,323,788 $ 55,258,771 $ (55,602,559) $ 3,980, $ 3,980,000 $ 53,527,700 $ (53,495,535) $ 4,012,165 81

152 North East Independent School District Notes to the Financial Statements Year Ended June 30, 2015 K RISK MANAGEMENT (continued) Employee Dental Program The District's dental program is self-funded through an Internal Service Fund. It is a voluntary program funded solely by employee contributions. Cost containment features include a graded benefit schedule to deter adverse selection into the plan, maximum annual benefit of $1,750 and deductibles/coinsurance. The District and third-party administrator determine projected claim costs and administrative fees. A liability for a claim is established if information indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss is reasonably estimable. A reconciliation of changes in the aggregate liabilities for the dental program for the prior and current fiscal period is below: Beginning of Claims and End of Fiscal Year Changes in Claim Fiscal Year Liability Estimates Payments Liability $ 260,144 $ 3,472,145 $ (3,432,289) $ 300, $ 300,000 $ 3,348,115 $ (3,367,491) $ 280,624 Workers' Compensation The District's workers' compensation program is self-funded through an Internal Service Fund. The District carries excess coverage of $400,000 specific stop-loss and aggregate stop-loss of $5,000,000. Amounts payable to the Workers' Compensation Fund are based on actuarial estimates of the amounts necessary to pay prior and current period claims and to establish a reserve for catastrophic losses. A liability for a claim is established if information indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount ofthe loss is reasonably estimable. A reconciliation of changes in the aggregate liabilities for workers' compensation claims for the prior and current fiscal period is presented below: Beginning of Claims and Fiscal Year Changes in Claim Liability Estimates Payments End of Fiscal Year Liability $ I,983,153 $ 743,578 $ $ 1,179,816 $ 749,838 $ (I,546,915) (873,543) $ 1,179,816 $ 1,056,111 The current portion ofworkers' compensation claims is $300,

153 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 L. CHANGES IN LONG-TERM LIABILITIES Activity for long-term liabilities for the year ended June 30, 2015, was as follows: Beginning Ending Governmental Activities: Balance Additions Reductions Balance Bonds and Notes Payables: General Obligation Bonds $ I,478,675,000 $ 533,930,000 $ 600,810,000 $ 1,411,795,000 $ Capital Appreciation Bonds 21,807, ,076 11,510,000 10,791,000 Issuance Premiums Ammiization 115,836,307 60,168,687 33,522, ,482,111 Total Bonds and Notes Payable 1,616,319, ,591, ,842,883 1,565,068,111 Other Liabilities: Workers' Compensation Accrued Claims Liability 1,179, , ,543 1,056,111 Compensated Absences 3,665, , ,222 3,947,329 TRS Net Pension Liability 92,385,148 17,147,917 75,237,231 Net OPEB Obligation/(Benefit) 184, , , ,414 Total Other Liabilities 97,414,530 1,834,190 18,827,635 80,421,085 Total Governmental Activities Long-term Liabilities $ 1,713,733,761 $ 596,425,953 $ 664,670,518 $ 1,645,489,196 $ Due Within One Year 41,264,000 10,791,000 52,055, , , ,968 52,920,968 Additions to capital appreciation bonds consist of interest accretion for the year ended June 30, The compensated absence liability is liquidated using the fund where the employee's salary is charged. The majority of the District's salaries are accounted for in the General Fund. 83

154 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 M. UNEARNED REVENUE Unearned revenue in the District's governmental funds at June 30, 2015 consisted of the following: Nonmajor General Governmental Fund Funds Total National Breakfast and Lunch Program $ - $ 882,345 $ 882,345 Other Federal Grants 4,917 4,917 Advanced Placement Initiatives 43,005 43,005 State Textbook 721, ,163 Mise State Grants 4,729 4,729 Coalition of Essential Schools 1,070 1,070 Asia Society 22,436 22,436 Mise Local 3,069 3,069 Other 35,055 35,055 Total $ 35,055 $ 1,682,734 $ 1,717,789 The District's proprietary funds reported unearned revenue as of June 30, 2015 as follows: Enterprise :Fund Community Education PPCD NEAT Total $ $ 50,155 22,820 8,110 81,085 84

155 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 N. DUE FROM OTHER GOVERNMENTS The District participates in a variety of federal and state programs from which it receives grants to partially or fully finance certain activities. In addition, the District receives entitlements from the State through the School Foundation and Per Capita Programs. Amounts due from federal and state governments as ofjune 30, 2015 are presented below. All federal grants shown below are passed through the TEA and are reported as Due From Other Governments. Nonmajor Internal General Governmental Service Total State Entitlements $ 30,004,982 $ $ $ 30,004,982 State Pass Through Grants 7,101,489 7,101,489 Federal Grants 46, , ,512 Other 4,467, ,467,988 Total $ 34,519,122 $ 7,323,511 $ 338 $ 41,842, RECEIVABLES Receivables as of June 30, 2015 for the District's individual major governmental funds and other nonmajor governmental funds in the aggregate, including the applicable allowances for uncollectible accounts, are as follows: Nonmajor Debt Capital Governmental General Service Projects Funds Total Taxes $ 15,637,604 $ 5,567,444 $ - $ - $ 21,205,048 Due From Other Governments 34,519,122 7,323,511 41,842,633 Interest 278,324 97, ,160 18, ,670 Other Receivables 526,312 30,520 13,723 17, ,869 Gross Receivables 50,961,362 5,695, ,883 7,358,857 64,136,220 Less: Allowance for Uncollectible (I,295, I 00) (431, 197) (I, 726,297) Net Total Receivables $ 49,666,262 $ 5,263,921 $ 120,883 $ 7,358,857 $ 62,409,923 85

156 North East Independent School District Notes to the Financial Statements Year Ended June 30, RECEIVABLES (continued) Receivables as of June 30, 2015 for the District's proprietary-type funds in the aggregate are as follows: Internal Enterprise Service Funds Funds Total Interest $ $ 37,860 $ 37,860 Due From Other Governments Other Receivables 113, , ,759 Gross Receivables $ 113,068 $ 377,889 $ 490,957 P. REVENUE FROM LOCAL AND INTERMEDIATE SOURCES During the current fiscal year, revenues fi om local and intermediate sources in the Governmental Fund Types consisted of the following: Debt Capital Non major General Service Projects Governmental Fund Fund Fund Funds Total Property Taxes $ 316,545,636 $ 121,999,925 $ $ $ 438,545,561 Penalties, Interest and Other Tax Related Income 1,882, ,238 2,487,181 Investment Income 548, , ,080 19,794 1,102,680 Food Sales 12,858,113 12,858,113 Tuition and Fees 893, ,534 Co-curricular Student Activities 1.477,235 1,477,235 Other 2,212,087 20,036 7,337,091 9,569,214 Total $ 323,560,117 $ 122,723,287 $ 435,116 $ 20,214,998 $ 466,933,518 86

157 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 P. REVENUE FROM LOCAL AND INTERMEDIATE SOURCES (continued) During the current fiscal year, revenues from local and intermediate sources in the Proprietary Fund Types consisted of the following: Internal Service Enterprise Funds Funds Total User Charges $ 78,629,231 $ $ 78,629,231 Tuition and Fees 8,567,368 8,567,368 Rent 3, , ,067 Athletics 797, ,833 Enterprising Activities 136,591 72, ,209 Other Revenue from Local Sources 372, , ,188 Total $ 79,140,851 $ 10,206,045 $ 89,346,896 Q. LITIGATION The District is a defendant in several cases relating to accidents and other matters. While the result of any litigation contains an element of uncertainty, the District's management believes the amount of any liability and costs which might result would not have a material adverse effect on the financial statements. R. CONSTRUCTION AND OTHER SIGNIFICANT COMMITMENTS AND CONTINGENCIES The District participates in numerous state and federal grant programs which are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies; therefore, to the extent that the District has not complied with the rules and regulations governing the grants, refunds of any money received may be required and the collectibility of any related receivable may be impaired. In the opinion of the District, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying basic financial statements for such contingencies. At June 30, 2015, the District was committed under the terms of various construction contracts for new school facilities and the remodeling of existing facilities for $81,766,

158 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 R. CONSTRUCTION AND OTHER SIGNIFICANT COMMITMENTS AND CONTINGENCIES (continued) As discussed in footnote III.A, encumbrance accounting is used to ensure budgetary control and accountability. At June 30, 2015, the amount of encumbrances expected to be honored upon performance of the service of delivery of merchandise by vendors in the subsequent year are as follows: General Fund Debt Service Fund Nonmajor Governmental Funds Enterprise Funds Internal Service Funds $ $ 2,868,896 3,500 3,784, ,908 1,675,537 8,521,030 S. SHARED SERVICE ARRANGEMENTS The District participates in the North East Independent School District Regional Day School Program for the Deaf (NEISD RDSPD), a shared service arrangement, with two member Districts: Coma! ISO and Judson ISO. The District is acting as the fiscal agent for the parties involved. The NEISD RDSPD provides services to students from birth through 21 years of age who are auditorily impaired. Funding for the NEISD RDSPD is provided by the TEA and by the member districts at a per pupil cost of $12,500. Revenue from the respective member districts, including the District's contribution, is as follows: North East ISD Judson ISO Coma! ISO $ 406, ,000 25,000 $ 531,752 As fiscal agent, NEISD RDSPD is responsible for reporting all financial activities of the shared service arrangement. The District accounts for the activity in Special Revenue Fund

159 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 T. ARBITRAGE The Federal Tax Reform Act of 1986 enacted section 148(f) of the Internal Revenue Code, relating to arbitrage rebate requirements, which generally provides that in order for interest on any issue of obligation to be excluded from gross income the issuer must rebate to the United States the sum of (1) the excess of the amount earned on all "non-purpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the earnings on such excess earnings. The Act requires issuers oftax-exempt debt to make payments to the United States Treasury for investment income received at yields that exceed the issuer's tax exempt borrowing rates. The Treasury requires payment for each issue every five years. The estimated liability is updated annually for all tax-exempt issuances or changes in yields until such time payment of the calculated liability is due. As of June 30, 2015, the District had no arbitrage liability for applicable bond issues calculated to be due to the IRS. This amount is determined based on current investment yields and is subject to change prior to the due date of the rebate. The due date of the rebate is five years from the bond's date of issuance. The District considers arbitrage a revenue-generated liability and has adjusted interest earnings for the annual change in the liability. u. FUND BALANCE The fund balance as ofjune 30, 2015 consists ofthe following amounts: Debt Capital Nonmajor General Service Projects Government Fund Fund Fund Funds Total Nonspendable: Inventory $ 2,455,320 $ $ $ 5 I,430 $ 2,506,750 Scholarships 200, ,000 Restricted: Debt Service 90,277,490 90,277,490 Capital Acquisition 98,294,312 98,294,312 Child Nutrition 9,185,303 9,185,303 Medicaid 601, ,659 Scholarships 25,248 25,248 Committed: Campus Funds 3,284,254 3,284,254 Assigned: Debt Service 7,004,770 7,004,770 Unassigned: 112,644, ,644,911 Total $ 115,100,231 $ 97,282,260 $ 98,294,312 $ 13,347,894 $ 324,024,697 89

160 North East Independent School District Notes to the Financial Statements Year Ended June 30,2015 U. FUND BALANCE (continued) Committed fund balance within the Nonmajor Governmental funds represents fund balance in the Campus Activity fund which are funds raised by the campus for the campuses sole use. Assigned fund balance reported within the debt service fund represent amounts that are not collected from the interest and sinking fund tax levy and represent amounts set aside for debt maturing in future years. V. PRIOR PERIOD ADJUSTMENT During fiscal year 2015, the District adopted GASB Statement No. 68, Accounting and Reporting for Pensions. With the adoption of this standard, the District must assume their proportionate share of the Net Pension Liability of TRS. Adoption of GASB No. 68 required a prior period adjustment to report the effect of GASB 68 retroactively. The amount of the prior period adjustment is ($86,424,053). The restated net position for the Governmental Activities is $89,292,365 and for the Primary Government is $104,500,085. W. SUBSEQUENT EVENTS Subsequent to year end, the District converted the Variable Rate Unlimited Tax School Building Bonds, Series 20 13B from the existing two-year note paying interest at two percent to a one-year note paying interest at two percent through July 31, The District contributed $6,360,000 to the Payment Fund at the time of closing. The conversion of the bonds resulted in a reduction in the amount of outstanding bonds from $72,610,000 at June 30, 2015 to $65,560,000. On November 3, 2015, voters approved a bond issuance of $499.9 million. The bonds will be used to increase security at schools, update technology, eliminate portable classrooms, and renovate existing facilities. 90

161 Required Supplementary Information

162 (This page intentionally left blank.) 92

163 NORTH EAST INDEPENDENT SCHOOL DISTRICT SCHEDULE OF THE DISTRICT'S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY TEACHER RETIREMENT SYSTEM OF TEXAS FOR THE YEAR ENDED JUNE 30, 2015 EXHIBIT G District's Proportion of the Net Pension Liability (Asset) % District's Proportionate Share of Net Pension Liability (Asset) State's Proportionate Share of the Net Pension Liability (Asset) associated with the District Total $ $ 75,237, ,927, ,165,142 District's Covered-Employee Payroll District's Proportionate Share of the Net Pension Liability (Asset) as a percentage of its covered-employee Payroll Plan Fiduciary Net Position as a Percentage of the Total Pension Liability $ 390,530, % 83.25% Note: GASB 68, Paragraph 81 requires that the information on this schedule be data from the period corresponding with the period covered as of the measurement date of August 31, the period from September I, August 31,2014. Note: Only one year of data is presented in accordance with GASB 68, Paragraph 138. "The information for all periods for the I 0-year schedules that are required to be presented as required supplementary information may not be available initially. In these cases, during the transition period, that information should be presented for as many years as are available. The schedules should not include information that is not measured in accordance with the requirements of this Statement." 93

164 NORTH EAST INDEPENDENT SCHOOL DISTRICT SCHEDULE OF DISTRICT CONTRIBUTIONS TEACHER RETIREMENT SYSTEM OF TEXAS FOR FISCAL YEAR 2015 EXHIBIT G Contractually Required Contribution Contribution in Relation to the Contractually Required Contribution Contribution Deficiency (Excess) $ $ 12,022,603 (12,022,603) -0- District's Covered-Employee Payroll Contributions as a Percentage of Covered-Employee Payroll $ 404,080, % Note: GASB 68, Paragraph 81 requires that the data in this schedule be presented as of the District's current fiscal year as opposed to the time period covered by the measurement date of September I, August 31, Note: Only one year of data is presented in accordance with GASB 68, Paragraph 138. "The information for all periods for the I 0-year schedules that are required to be presented as required supplementary infonnation may not be available initially. In these cases, during the transition period, that information should be presented for as many years as are available. The schedules should not include inforrnation that is not measured in accordance with the requirements of this Statement." 94

165 APPENDIXC FORM OF BOND COUNSEL'S ORIGINAL OPINION

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167 A NORTON ROSE FULBRIGHT Fulbright & Jaworski LLP 300 Convent Street, Suite 2100 San Antonio, Texas United States Tel Fax nortonrosefulbright.com FINAL IN REGARD to the authorization and issuance of the "North East Independent School District Variable Rate Unlimited Tax School Building Bonds, Series 2013B" (the Bonds), dated June 15, 2013, in the aggregate original principal amount of $73,795,000, we have reviewed the legality and validity of the issuance thereof by the North East Independent School District (the Issuer). The Bonds are issuable in fully registered form only and have a Stated Maturity of August 1, 2043, unless optionally or mandatorily redeemed prior to Stated Maturity in accordance with the applicable redemption provisions. The Bonds bear interest on the unpaid principal amount from the date of their delivery to the initial purchaser through the end of the Initial Rate Period (as defined in the order authorizing the issuance of the Bonds (the Order)), at the rate per annum stated in the Order, and such interest is payable on the dates described in the Order to the registered owners shown on the registration books of the Paying Agent/Registrar on the Record Date (stated on the face of the Bonds). WE HAVE SERVED AS BOND COUNSEL for the Issuer solely to pass upon the legality and validity of the issuance of the Bonds under the laws of the State of Texas and with respect to the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes and for no other purpose. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Bonds. We express no opinion and make no comment with respect to the sufficiency of the security for or the marketability of the Bonds. Our role in connection with the Issuer's Offering Memorandum prepared for use in connection with the sale of the Bonds has been limited as described therein. WE HAVE EXAMINED the applicable and pertinent laws of the State of Texas and the United States of America. In rendering the opinions herein we rely upon (1) original or certified copies of the proceedings of the Issuer in connection with the issuance of the Bonds, including the Order; (2) customary certifications and opinions of officials of the Issuer; (3) certificates executed by officers of the Issuer relating to the expected use and investment of proceeds of the Bonds and certain other funds of the Issuer, and to certain other facts solely within the knowledge and control of the Issuer; and (4) such other documentation, including an examination of the Bonds executed and delivered initially by the Issuer, and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements and information contained in such certificates. We express no opinion concerning any effect on the following opinions which may result from changes in law effected after the date hereof. Fulbright & Jaworski LLP is a limited liability partnership registered under the laws oftexas Fulbright & Jaworski LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz, Inc.), each of which is a separate legal entity, are members of Norton Rose Fulbright Verein, a Swiss Verein. Details of each entity, with certain regulatory information, are at nortonrosefulbright.com. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

168 A NORTON ROSE FULBRIGHT legal Opinion of Fulbright & Jaworski llp of San Antonio, Texas, a member of Norton Rose Fulbright, in connection with the authorization and issuance of "NORTH EAST INDEPENDENT SCHOOL DISTRICT VARIABLE RATE UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2013B" BASED ON OUR EXAMINATION, IT IS OUR OPINION that the Bonds have been duly authorized and issued in conformity with the laws of the State of Texas now in force and that the Bonds are valid and legally binding obligations of the Issuer enforceable in accordance with the terms and conditions described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors' rights or the exercise of judicial discretion in accordance with general principles of equity. The Bonds are payable from the proceeds of an ad valorem tax levied, without legal limit as to rate or amount, upon all taxable property in the Issuer. IT IS FURTHER OUR OPINION THAT, assuming continuing compliance after the date hereof by the Issuer with the provisions of the Order and in reliance upon the representations and certifications of the Issuer made in a certificate of even date herewith pertaining to the use, expenditure, and investment of the proceeds of the Bonds, under existing statutes, regulations, published rulings, and court decisions ( 1) interest on the Bonds will be excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof (the Code), of the owners thereof for federal income tax purposes, pursuant to section 103 of the Code, and (2) interest on the Bonds will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. WE CALL YOUR ATTENTION TO THE FACT THAT, with respect to our opinion in clause (2) above, interest on all tax-exempt obligations, such as the Bonds, owned by a corporation will be included in such corporation's adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a mutual fund, a financial asset securitization investment trust, a real estate mortgage investment conduit, or a real estate investment trust. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed. WE EXPRESS NO OPINION herein on the excludability from gross income for federal income tax purposes of any action taken under the Order which requires that the Issuer shall have received an opinion of counsel nationally recognized in the field of municipal finance to the effect that such action will not adversely affect the excludability of the interest on the Bonds from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes. The Order provides that prior to taking certain actions, including converting the interest rate on the Bonds from one rate mode to another rate mode, the Issuer must have received such an opinion. WE EXPRESS NO OTHER OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of an interest in a financial asset securitization