$94,135,000 SPRING INDEPENDENT SCHOOL DISTRICT (Harris County, Texas) UNLIMITED TAX SCHOOLHOUSE BONDS, SERIES 2009

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1 OFFICIAL STATEMENT DATED JANUARY 6, 2009 In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See TAX MATTERS herein for a discussion of the opinion of Bond Counsel, including a description of certain alternative minimum tax consequences for corporations. NEW ISSUE - Book-Entry-Only $94,135,000 SPRING INDEPENDENT SCHOOL DISTRICT (Harris County, Texas) UNLIMITED TAX SCHOOLHOUSE BONDS, SERIES 2009 RATINGS: Moody s: Aaa Standard & Poor s: AAA (See MUNICIPAL BOND RATINGS and THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM herein) Dated: February 1, 2009 Due: August 15, as shown on the inside cover Interest Accrual Date: Date of Delivery The Spring Independent School District (the District ) intends to issue its $94,135,000 Unlimited Tax Schoolhouse Bonds, Series 2009 in part as current interest bonds (the Current Interest Bonds ) and in part as capital appreciation bonds (the Premium Capital Appreciation Bonds ). The Current Interest Bonds and the Capital Appreciation Bonds are collectively referred to herein as the Bonds. The Bonds will be issuable as fully registered Bonds only and, when issued, will be initially registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York ( DTC ), which initially will act as securities depository pursuant to a book-entry-only system described herein. Beneficial ownership of the Current Interest Bonds may be acquired in denominations of $5,000 or any integral multiple thereof and beneficial ownership of the Premium Capital Appreciation Bonds may be acquired in denominations of $5,000 of maturity amount (the Maturity Amount ), including principal, premium and accreted and compound interest or any multiple thereof. Beneficial owners of the Bonds will not receive physical delivery of the Bonds. For so long as Cede & Co., as a nominee of DTC, is the exclusive registered owner of the Bonds, principal of and interest on the Bonds will be payable by the paying agent/registrar, initially The Bank of New York Mellon Trust Company, N.A., (the Paying Agent/Registrar ) having its principal payment office in Dallas, Texas, to DTC on each applicable payment date. DTC will be responsible for distributing the amounts so paid to the beneficial owners of the Bonds. (See THE BONDS Book- Entry-Only System. ) The Bonds are direct obligations of the District, and are issued pursuant to the Constitution and general laws of the State of Texas, (the State ), including Chapter 45, Texas Education Code, Chapters 1371, Texas Government Code, as amended, and elections held within the District on May 12, 2007 (the Election ), and the order of the Board of Trustees authorizing the issuance of the Bonds (the Bond Order ). Principal of, interest and Maturity Amounts of the Bonds are payable from an annual ad valorem tax levied, without legal limitation as to maximum rate or amount, on all taxable property located within the District, as provided in the Bond Order. (See THE BONDS Authority ). The District has made application and received conditional approval for the payment of the principal of and interest on the Bonds to be guaranteed by the corpus of Permanent School Fund of the State of Texas. See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM. Interest on Current Interest Bonds will accrue from the date of delivery and will be payable on August 15, 2009, and on each August 15 and February 15 thereafter. Interest on Premium Capital Appreciation Bonds will accrete from the date of delivery thereof, will be compounded semiannually on each August 15 and February 15, commencing February 15, 2009, and will be payable only at maturity. See inside cover page for Maturities, Principal Amounts, Interest Rates, Yields, and CUSIP Numbers for the Bonds Proceeds from the sale of the Bonds will be used (i) for the construction, acquisition and equipment of new school facilities; (ii) for the renovation of existing school facilities; (iii) instructional technology; and (iv) to pay costs of issuance of the Bonds. The District reserves the right, at its option, to redeem the Bonds maturing on or after August 15, 2019, in whole or in part, in multiples of $5,000 on August 15, 2018 and on any date thereafter at a price of par plus accrued interest to the date fixed for redemption. If less than all of such Bonds are redeemed, the particular Bonds or portions thereof to be redeemed shall be selected by the District. (See THE BONDS Redemption Provisions. ) The Bonds are offered when, as and if issued, subject to the opinion of the Attorney General of Texas and Vinson & Elkins L.L.P., Houston, Texas, Bond Counsel. Certain other matters will be passed upon for the Underwriters by Bates & Coleman, P.C., Counsel to the Underwriters. The Bonds are expected to be available for delivery through the facilities of the DTC on or about February 5, MORGAN KEEGAN & CO., INC. FIRST SOUTHWEST COMPANY LOOP CAPITAL MARKETS MERRILL LYNCH MORGAN STANLEY SIEBERT BRANDFORD SHANK & CO., LLC SOUTHWEST SECURITIES, INC.

2 MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, INITIAL REOFFERING YIELDS AND CUSIPS $94,135,000 SPRING INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX SCHOOLHOUSE BONDS, SERIES 2009 $90,700,000 Current Interest Bonds Initial CUSIP Initial CUSIP Maturity Principal Interest Reoffering Nos. (c) Maturity Principal Interest Reoffering Nos. (c) (August 15) Amount Rate Yield (a) (August 15) Amount Rate Yield (a) $ 2,760, % % N (b) $ 3,915, % % Q ,835, P (b) 4,110, Q ,920, P (b) 4,315, Q ,015, P (b) 4,530, Q ,115, P (b) 4,760, Q (b) 3,220, P (b) 4,995, Q (b) 3,380, P (b) 5,245, Q (b) 3,550, P (b) 5,495, Q (b) 3,730, P95 $24,810, % Term Bond due August 15, 2034 (b) Yield 5.110% (a) CUSIP No R51 (c) (Interest to accrue from date of delivery) $3,435,000 Premium Capital Appreciation Bonds (d) Original Offering Price CUSIP Maturity Principal Yield to Maturity Per $5,000 Nos. (c) (August 15) Amount Maturity (a) Amount at Maturity $ 1,445, % $ 2,760,000 $ 4, N ,120, ,760,000 4, N , ,760,000 4, N89 (Interest to accrete from date of delivery) (a) The initial reoffering yields on the Bonds are established by, and are the sole responsibility of the Underwriters, and may subsequently be changed. (b) Current interest bonds maturing on August 15, 2019, and thereafter, shall be subject to redemption and payment at the option of the District, in whole or from time to time in part on August 15, 2018, or on any date thereafter, at the par value thereof plus accrued interest to the date fixed for redemption. See THE BONDS Redemption Provisions. (c) CUSIP numbers have been assigned to the Bonds by the CUSIP Service Bureau and are included solely for the convenience of the purchasers of the Bonds. Neither the District, the Financial Advisor nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. (d) Not subject to optional redemption prior to maturity.

3 SPRING INDEPENDENT SCHOOL DISTRICT (Harris County, Texas) Board of Trustees Occupation Service Mel Smith, President... Principal, Mel Smith & Associates, P.C. 7 years Justine Durant, Vice President... Provider Services Manager 3 years CIGNA Healthcare of Texas, Inc. Jana Anders, Secretary... Vice President, InvesTex Credit Union 3 years Jeffrey Mitchell, Assistant Secretary... Ruth M. Watson, Ed.D., Member... Freight Consultant, InXpress Freight Solutions President and Co-Founder Groves Educational Foundation, Inc. 2 years 2 years Ron Crier, Member... Consultant, HouData 6 years Calvin K. Tang, CPA, Member... Vice-President Planning, Business Intelligence & Financial Systems US Oncology, Inc. 2 years Administration Length of Service (a) Ralph H. Draper, Ed.D., Superintendent of Schools... Christine A. Porter, CPA, RTSBA, Associate Superintendent for Financial Services.... Dalane E. Bouillion, Ed.D., Associate Superintendent for Curriculum & Instruction... Renee Coleman, Associate Superintendent for Human Resources... Regina Curry, Associate Superintendent for Communications & Community Relations... Ruthie Foreman, Area Superintendent... Ann Sandoval, Area Superintendent... 4 years 9 years 3 years 18 years 13 years 3 years 2 years (a) Represents length of service in Spring ISD administration. CONSULTANTS AND ADVISORS Vinson & Elkins L.L.P., Houston, Texas... Bracewell & Giuliani, L.L.P., Houston, Texas... Bond Counsel Legal Counsel RBC Capital Markets Corporation, Houston, Texas... Financial Advisor Null-Lairson, Houston, Texas... Auditors

4 USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the District. This Official Statement, which includes the cover page and the Appendices hereto, does not constitute, and is not authorized by the District for use in connection with, an offer to sell or the solicitation of any offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. The Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions, or matters of opinion, or that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. However, the District has agreed herein to keep the Official Statement current by amendment or sticker to reflect changes in the affairs of the District and, to the extent that information actually comes to its attention, the other matters described in the Official Statement until delivery of the Bonds to the Underwriters and thereafter only as specified in OFFICIAL STATEMENT - Updating the Official Statement; Further Disclosure and CONTINUING DISCLOSURE OF INFORMATION. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

5 OFFICIAL STATEMENT SUMMARY...i THE FINANCING...i SELECTED FINANCIAL INFORMATION... ii Direct Debt (b)...ii 2008 Tax Rate...ii OFFICIAL STATEMENT...1 INTRODUCTION...1 PLAN OF FINANCING...1 Purpose... 1 SOURCES AND USES OF FUNDS...1 THE BONDS...2 General... 2 Yield on Premium Capital Appreciation Bonds... 2 Book-Entry-Only System... 2 Redemption Provisions... 4 Mandatory Redemption... 4 Additional Bonds... 5 Paying Agent/Registrar... 5 Transfer, Exchange and Registration... 5 Defeasance... 5 Record Date for Interest Payment... 5 Authority... 6 Registered Owners Remedies... 6 Security and Source of Payment... 6 SELECTED FINANCIAL INFORMATION...7 Ad Valorem Tax Bonds Authorized but Unissued... 7 Tax Rate Distribution... 7 Tax Collections... 7 Classification of Assessed Valuation... 8 Tax Adequacy... 8 Principal Taxpayers... 9 AD VALOREM TAXATION...9 General... 9 Authority for Taxation... 9 Property Subject to Taxation by the District... 9 District and Taxpayer Remedies Levy and Collection of Taxes Rollback Tax Rate District s Rights in the Event of Tax Delinquencies STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS...11 Recent Litigation Relating to the Texas Public School Finance System Funding Changes in Response to West Orange-Cove II12 Recent Litigation Relating to HB Possible Effects of Litigation and Changes in Law on District Obligations CURRENT PUBLIC SCHOOL FINANCE SYSTEM...14 General State Funding for Local School Districts Local Revenue Sources - Property Tax Authority Wealth Transfer Provisions Possible Effects of Wealth Transfer Provisions on the District's Financial Condition TAX RATE LIMITATIONS...18 COMPARISON OF REVENUES AND EXPENDITURES AND CHANGES IN FUND BALANCES...20 Debt Service Fund DESCRIPTION OF SPRING INDEPENDENT SCHOOL DISTRICT...21 General Administration TABLE OF CONTENTS Total Enrollment Data Enrollment Data Per School Student Transportation Economic Activity ESTIMATED OVERLAPPING DEBT STATEMENT...26 PENSION FUND LIABILITY...27 DEBT SERVICE SCHEDULE...28 TAX MATTERS...29 Tax Exemption Additional Federal Income Tax Considerations LEGAL INVESTMENTS...31 Investment Policies Additional Provisions Current Investments LEGAL MATTERS...33 Legal Opinions No Litigation Certificate No Material Adverse Change Legal Investment and Eligibility to Secure Public Funds in Texas MUNICIPAL BOND RATINGS...34 THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM...34 History and Purpose The Total Return Constitutional Amendment Management and Administration of the Fund The Guarantee Program Ratings of Bonds Guaranteed Under the Guarantee Program Valuation of the PSF and Guaranteed Bonds Discussion and Analysis Pertaining to Fiscal Year Ended August 31, Other Events and Disclosures PSF Continuing Disclosure Undertaking Annual Reports Material Event Notices Availability of Information from NRMSIRs and SID.. 46 Limitations and Amendments Compliance with Prior Undertakings SEC Exemptive Relief CONTINUING DISCLOSURE OF INFORMATION...48 Annual Reports Material Event Notices Availability of Information from NRMSIRs and SID.. 48 Limitations and Amendments Compliance with Prior Agreements SALE AND DISTRIBUTION OF THE BONDS 49 Underwriting Prices and Marketability FINANCIAL ADVISOR...50 OFFICIAL STATEMENT...50 Sources and Compilation of Information Litigation Updating of Official Statement; Further Disclosure Official Statement Deemed Final APPENDIX A - Annual Financial Report for the Year Ended June 30, 2008 APPENDIX B - Form of Bond Counsel Opinion APPENDIX C - Schedule of Accreted Values of Premium Capital Appreciation Bonds

6 OFFICIAL STATEMENT SUMMARY This Official Statement Summary is subject in all respects to the more complete information and to the definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary statement from this Official Statement or to otherwise use it without the entire Official Statement. THE FINANCING The Issuer... The Bonds... Redemption Provisions... Municipal Bond Ratings... Spring Independent School District (the District ), Harris County, Texas. $94,135,000 Spring Independent School District Unlimited Tax Schoolhouse Bonds, Series 2009 (the Bonds ) are dated February 1, 2009 and issued pursuant to an order adopted by the Board of Trustees of the District (the Bond Order. ) The Current Interest Bonds are serial bonds in the aggregate principal amount of $90,700,000 maturing annually in varying amounts on August 15 in the years 2014 through The Premium Capital Appreciation Bonds are being issued in the original principal amount of $3,435,000 and will mature, together with interest accrued from initial delivery, on February 5, The Current Interest Bonds are offered in fully registered form in integral multiples of $5,000 principal amount, and the Premium Capital Appreciation Bonds are offered in fully registered form in amounts due at maturity including principal, premium and accreted and compounded interest in integral multiples of $5,000 (See THE BONDS ). The Current Interest Bonds and the Capital Appreciation Bonds are collectively referred to herein as the Bonds. The Bonds maturing on or after August 15, 2019, are subject to optional redemption, in whole or in part, on August 15, 2018, and on any date thereafter at a price of par plus accrued interest to the date of redemption, at the option of the District. Applications for ratings on the Bonds were made to Moody s Investors Service ( Moody s ) and Standard & Poor s Rating Services ( S&P ) and ratings of Aaa and AAA have been assigned, respectively, as a result of the guarantee of the Permanent School Fund Guarantee Program on the Bonds. Outstanding bonds of the District that are not credit enhanced by either a municipal bond insurance policy or the Permanent School Fund Guarantee are presently assigned ratings of A1 by Moody s and A by S&P. (See MUNICIPAL BOND RATINGS, and THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM. ) Book-Entry-Only... Use of Proceeds... Payment Record... The Bonds are initially issuable in book-entry-only form and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, which will act as securities depository. Beneficial owners of the Bonds will not receive physical delivery of the Bonds. (See THE BONDS - Book-Entry-Only System. ) Proceeds from the sale of the Bonds will be used (i) for the construction, acquisition and equipment of new school facilities; (ii) for the renovation of existing school facilities; (iii) instructional technology; and (iv) to pay costs of issuance of the Bonds. The District has never defaulted in the timely payment of principal of or interest on its bonds. i

7 Authority for Issuance... Source of Payment... Guarantee Program For School District Bonds... Tax Exemption... The Bonds are being issued pursuant to the Constitution and laws of the State of Texas, including Chapter 45, Texas Education Code, Chapters 1371, Texas Government Code, an election held within the District on May 12, 2007 (the Election ) and the Bond Order. The Bonds constitutes the third installment of a total of $280,000,000 bonds authorized by the voters at the Election. After the issuance of the Bonds, no Unlimited Tax Bonds will remain authorized but unissued. The Bonds constitute direct obligations of the District, payable as to principal and interest from a continuing direct annual ad valorem tax levied, without legal limitation as to maximum rate or amount, against all taxable property in the District. In connection with the sale of the Bonds, the District has applied and received conditional approval for the Bonds to be guaranteed by the corpus of the Permanent School Fund of the State of Texas. See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM. In the opinion of Bond Counsel, the interest on the Bonds is excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See TAX MATTERS for a discussion of the Opinion of Bond Counsel including a discussion of alternative minimum tax consequences for corporations. SELECTED FINANCIAL INFORMATION 2008 Certified Assessed Valuation (100% of Estimated Market Value)... $8,381,755,685 (a) Direct Debt (b) Outstanding Bonds... $ 620,895,000 Plus: The Bonds... 94,135,000 Total Direct Debt... $ 715,030,000 Interest and Sinking Fund Balance (as of June 30, 2008)... $ 33,230,899 Ratio of Direct Debt to 2008 Assessed Valuation % 2008 Tax Rate Local Maintenance Tax Rate... $1.04 Debt Service Tax Rate TOTAL... $1.46/$100 A.V. Projected Annual Debt Service Requirements: Average ( )... $45,857,242 Maximum (2023)... $54,419,544 Average Percentage of Tax Collections (Tax Years ): Current Collections % Total Collections % (a) (b) Net of exemptions. A portion of the debt service payable on the District s outstanding bonds will be paid with funds received by the District from the State pursuant to the Existing Debt Allotment for outstanding debt service. For the fiscal year ending June 30, 2009, the District expects to receive approximately $10,532,495 in state funds for debt service. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. ii

8 OFFICIAL STATEMENT Relating to $94,135,000 SPRING INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX SCHOOLHOUSE BONDS, SERIES 2009 INTRODUCTION The Official Statement provides certain information in connection with the issuance of the Spring Independent School District $94,135,000 Unlimited Tax Schoolhouse Bonds, Series 2009 (the Bonds ). The Bonds are issued pursuant to the Constitution and laws of the State of Texas, including Chapter 45, Texas Education Code, Chapters 1371, Texas Government Code, an election held within the District on May 12, 2007 (the Election ), and an order authorizing the issuance of the Bonds (the Bond Order ) adopted by the Board of Trustees of the Spring Independent School District (the District ), a political subdivision of the State of Texas located within Harris County, Texas. The Official Statement includes descriptions of the Bonds, the Bond Order, and certain information about the District and its financial condition. 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 upon payment of duplication costs. PLAN OF FINANCING Purpose Proceeds from the sale of the Bonds will be used (i) for the construction, acquisition and equipment of new school facilities; (ii) for the renovation of existing school facilities; (iii) instructional technology; and (iv) to pay costs of issuance of the Bonds. SOURCES AND USES OF FUNDS The proceeds derived from the sale of the Bonds will be applied approximately as follows: Sources of Funds: Par Amount of Bonds... $94,135, Net Original Issue Premium/(Discount)... 5,165, Total Sources of Funds... $99,300, Uses of Funds: Deposit to Construction Fund... $94,139, Underwriter s Discount , Costs of Issuance , Deposit to Debt Service Fund... 4,259, Total Uses of Funds... $99,300,

9 THE BONDS General The following is a description of some of the terms and conditions of the Bonds, which description is qualified in its entirety by the provisions contained in the Bond Order. The Bond Order authorizes the issuance and sale of the Bonds and prescribes the terms, conditions and provisions for the payment of the principal of and interest on the Bonds by the District. A copy of the Bond Order may be obtained upon request to Bond Counsel and payment of the cost of duplication. The Bonds are dated February 1, 2009 with interest accruing from the date of delivery. Interest payable on the Bonds will be calculated on the basis of a 360-day year of twelve 30 day months. The Bonds are issued in part as Current Interest Bonds and in part as Premium Capital Appreciation Bonds (collectively referred to herein as the Bonds ). The Current Interest Bonds will mature on the dates, in the principal amounts and accrue interest at the per annum rates set forth on the inside cover page of this Official Statement. Interest on the Current Interest Bonds is payable on August 15, 2009 and each February 15 and August 15 thereafter until maturity or prior redemption. The Premium Capital Appreciation Bonds accrete in value from the date of delivery to the Underwriters and the total accreted value thereon is payable only at maturity. The Premium Capital Appreciation Bonds will mature on the dates and in the maturity values set forth on the inside cover page of this Official Statement. Interest on the Premium Capital Appreciation Bonds will compound on February 15 and August 15, beginning February 15, 2009, and the sum of the principal of, premium, if any, and accrued/compounded interest on the Premium Capital Appreciation Bonds (the Maturity Value ) is payable only at maturity. A table of accreted values for the Premium Capital Appreciation Bonds per $5,000 maturity amount as of each February 15 and August 15 is set forth in Appendix C hereto (the Accreted Value Table ), computed on the basis of initial offering prices to the public as adjusted by semiannual compounding at the initial offering yields set forth on the cover page of this Official Statement. Such Accreted Value Table is provided for informational purposes only and may not reflect prices for the Premium Capital Appreciation Bonds in the secondary market. For any date other than a February 15 or August 15, the accreted value shall be determined by straight line interpretation between the values for the applicable semiannual dates, based upon 30-day months. Initially the definitive Bonds will be registered and delivered only to Cede & Co., the nominee of the Depository Trust Company ( DTC ) pursuant to the Book-Only-Entry System described below. 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 distribute the amounts paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. (See THE BONDS - Book-Entry- Only System below for a more complete description of such system.) Yield on Premium Capital Appreciation Bonds The approximate yield of the Premium Capital Appreciation Bonds as set forth on the inside cover of this Official Statement is based upon the initial applicable offering price therefor set forth on the inside cover of this Official Statement. Such offering price includes the principal amount of such Premium Capital Appreciation Bonds plus premium, if any, equal to the amount by which such offering price exceeds the principal amount of such Premium Capital Appreciation Bonds. The yield on the Premium Capital Appreciation Bonds to a particular purchaser may differ depending upon the price paid by the purchaser. For various reasons, securities that do not pay interest periodically, such as the Premium Capital Appreciation Bonds, have traditionally experienced greater price fluctuations in the secondary market than securities that pay interest on a periodic basis. Book-Entry-Only System This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company ( DTC ), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District, the Financial Advisor and the Initial Purchaser believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered Bonds registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for the Bonds, in the aggregate principal amount of each maturity, and will be deposited with DTC. 2

10 DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and 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 the Bonds ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to Cede & Co. If less than all of the Bonds within a maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the Record Date (hereinafter defined). The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). 3

11 Redemption proceeds, principal, Maturity Amounts, and interest payments, on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal, Maturity Amounts, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the District. Under such circumstances, in the event that a successor depository is not obtained, the Bonds are required to be printed and delivered. The District may decide to discontinue use of the system of bookentry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the District, the Financial Advisor and the Initial Purchaser believe to be reliable, but the District, the Financial Advisor and the Initial Purchaser take no responsibility for the accuracy thereof. So long as Cede & Co. is the registered owner of the Bonds, the District will have no obligation or responsibility to the DTC. Participants or Indirect Participants, or the persons for which they act as nominees, with respect to payment to or providing of notice to such Participants, or the persons for which they act as nominees. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in Book-Entry-Only form, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, payment or notices that are to be given to registered owners under the Order will be given only to DTC. Redemption Provisions The Bonds maturing on and after August 15, 2019 are subject to redemption at the option of the District, in whole or in part, on August 15, 2018 and on any date thereafter at a price of par plus accrued interest to the date of redemption. If less than all of such Bonds are to be redeemed, the District may select the Bonds to be redeemed. If such Bond (or any portion of the principal sum thereof) has been called for redemption and notice of such redemption has been given, such Bond (or the principal sum thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. Mandatory Redemption In addition to being subject to optional redemption, the bonds issued as a term bond maturing August 15, 2034 (the Term Bonds ) are subject to mandatory redemption prior to maturity in the following amounts (subject to reduction as hereinafter provided), on the following dates ( Mandatory Redemption Date ), at a price equal to the principal amount redeemed plus accrued interest to each Mandatory Redemption Date, subject to the conditions set forth below: $24,810,000 TERM BOND DUE AUGUST 15, 2034 Mandatory Redemption Principal Amount August 15, 2031 $5,755,000 August 15, ,045,000 August 15, ,345,000 August 15, 2034 (maturity) 6,665,000 4

12 Not less than thirty (30) days prior to a redemption date for such Bonds, the District shall cause a notice of redemption to be sent by United States mail, first class postage prepaid, to the registered owners of such Bonds to be redeemed, in whole or in part, at the address of the registered owner appearing in the registration and transfer books of the Paying Agent/Registrar. ANY NOTICE OF REDEMPTION SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVED SUCH NOTICE. Additional Bonds After the issuance of the Bonds, the District will not have any authorized but unissued bonds. Paying Agent/Registrar The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas. Provision is made in the Bond Order for removal of the Paying Agent/Registrar, provided that no such removal shall be effective until a successor paying agent/registrar shall be selected by the District. Any successor paying agent/registrar will be a commercial bank or trust company organized under the laws of the United States or of any state and duly qualified and legally authorized to act as Paying Agent/Registrar for the Bonds. 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 proposed amendment to the Bond 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 any action premised on any such notice. See THE BONDS Book-Entry-Only System. 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 thereof to the Paying Agent/Registrar at its principal payment office and such transfer or exchange shall be without expenses 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. A Bond may be assigned by the execution of an assignment form on the Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred or exchanged, at the principal payment office of the Paying Agent/Registrar, or sent by the 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 Bond or 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. Defeasance The District reserves the right to defease the Bonds in any manner now or hereafter provided by law. Record Date for Interest Payment Interest on the Bonds will be paid to the registered owner appearing on the registration and transfer books of the Paying Agent/Registrar at the close of business on the Record Date (the last business day of the month next preceding each interest payment date) and shall be paid by the Paying Agent/Registrar (i) by check sent United States mail, first class postage prepaid, to the address of the Holder recorded in the registration and transfer books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, a legal holiday, or a day when banking institutions in the city where the principal payment office of the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day when banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. 5

13 In the event of non-payment of interest on a scheduled payment date and for thirty (30) days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar when funds for the payment of such interest have been received. Notice of the Special Record Date and of the scheduled payment date of the past due interest ( Special Payment Date which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each registered owner of a Bond appearing in the registration and transfer books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing such notice. Authority The Bonds are issued pursuant to the Constitution and laws of the State, including Chapter 45, Texas Education Code, Chapters 1371, Texas Government Code, the Election, the Bond Order and an officers pricing certificate authorized therein. The Bonds constitute the third and final installment of a total of $280,000,000 bonds authorized by the voters at the Election. Registered Owners Remedies The Bond Order does not establish specific events of default with respect to the Bonds. Under Texas law, there is no right to the acceleration of maturity of the Bonds upon the failure of the District to observe any covenant under the Bond Order. Such registered owner s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the District to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes due. The enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W.3rd 325 (Tex. 2006) ( Tooke ) that a waiver of sovereign immunity must be provided for by statute in clear and unambiguous language. In so ruling, the Court declared that statutory language such as sue and be sued, in and of itself, did not constitute a clear and unambiguous waiver of sovereign immunity. In Tooke, the Court noted the enactment in 2005 of sections , Texas Local Government Code (the Local Government Immunity Waiver Act ), which, according to the Court, waives immunity from suit for contract claims against most local governmental entities in certain circumstances. The Local Government Immunity Waiver Act covers school districts and relates to contracts entered into by school districts for providing goods or services to school districts. The District is not aware of any Texas court construing the Local Government Immunity Waiver Act in the context of whether contractual undertakings of local governments that relate to their borrowing powers are contracts covered by the Local Government Immunity Waiver Act. Neither the remedy of mandamus nor any other type of injunctive relief was at issue in Tooke, and it is unclear whether Tooke will be construed to have any effect with respect to the exercise of mandamus, as such remedy has been interpreted by Texas courts. In general, Texas courts have held that a writ of mandamus may be issued to require public officials to perform ministerial acts that clearly pertain to their duties. Texas courts have held that a ministerial act is defined as a legal duty that is prescribed and defined with a precision and certainty that leaves nothing to the exercise of discretion or judgment, though mandamus is not available to enforce purely contractual duties. However, mandamus may be used to require a public officer to perform legallyimposed ministerial duties necessary for the performance of a valid contract to which the State or a political subdivision of the State is a party (including the payment of monies due under a contract). The Bond Order do 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 Bond Order, or upon any other condition. The opinion of Bond Counsel will note that the rights of bondholders subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM herein for a description of the procedures to be followed for payment of the Bonds in the event the District fails to make a payment on the Bonds when due. Security and Source of Payment The Bonds constitute direct obligations of the District, payable as to principal and interest from a continuing direct annual ad valorem tax levied, without legal limitation as to maximum rate or amount, against all taxable property in the District. 6

14 SELECTED FINANCIAL INFORMATION (As of February 1, 2009) 2008 Certified Net Taxable Valuation (100% of Estimated Market Value) $ 8,381,755,685 (a) Outstanding Bonds 620,895,000 (b) Plus: The Bonds 94,135,000 Total Direct Debt $ 715,030,000 Ratio of Direct Debt to 2008 Assessed Valuation 8.53% Population: 2008 Estimate - 189,640 Per Capita Direct Debt - $3,770 Per Capita 2008 Assessed Valuation - $44,198 Enrollment: ,038 Per Student Direct Debt - $21,007 Per Student 2008 Assessed Valuation - $246,247 (a) Net of exemptions. (b) A portion of the debt service payable on the District s outstanding bonds will be paid with funds received by the District from the State of Texas pursuant to the Existing Debt Allotment for outstanding debt service. For the fiscal year ending June 30, 2009, the District expects to receive $10,532,495 in state funds for debt service. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. Ad Valorem Tax Bonds Authorized but Unissued Date Amount Issued Authorized Authorized Authorized to Date The Bonds But Unissued 5/12/2007 $ 280,000,000 $ 185,860,000 $ 94,140,000 $ - Tax Rate Distribution Local Maintenance $ $ $ $ $ Debt Service Total $ $ $ $ $ Tax Collections Assessed Current Collections Total Collections Fiscal Year Year Valuation (a) Tax Rate Tax Levy Amount % Amount % Ending 2003 $ 5,720,152,380 $ 1.76 $ 99,430,680 $ 96,150, % $ 100,748, % 6/30/ ,181,064, ,880, ,222, % 113,204, % 6/30/ ,615,825, ,463, ,289, % 127,254, % 6/30/ ,265,663, ,166, ,688, % 123,828, % 6/30/ ,754,492, ,664, ,080, % 112,113, % 6/30/ ,381,755, ,373,633 (In the Collection Process) 6/30/2009 (a) Taxable values as shown in the District s audited financial statement. 7

15 Classification of Assessed Valuation 2008 (a) 2007 (b) 2006 (b) Amount % Amount % Amount Residential $ 4,768,742, % $ 4,589,945, % $ 4,166,858,231 Commercial, Industrial, & Business 4,556,498, % 4,056,697, % 3,872,957,478 Acreage 120,681, % 116,458, % 120,123,832 Vacant Lots & Tracts 235,211, % 214,114, % 202,609,896 Utilities 132,354, % 124,320, % 125,521,238 Mineral Reserves 36,171, % 33,233, % 29,160,282 Total Appraised Value $ 9,849,658, % $ 9,134,769, % $ 8,517,230,957 Less: Exemptions (1,467,903,076) (1,380,277,344) (1,251,567,002) Total Net Taxable Value $ 8,381,755,685 $ 7,754,492,450 $ 7,265,663,955 (a) As certified by the Harris County Appraisal District. Include uncertified values. (b) Taxable values as shown in the District s audited financial statement. Tax Adequacy Average Annual Debt Service Requirements ( ) $ 45,857,242 Estimated State Funding for Debt Service 10,532,495 (b) Net Average Annual Debt Service Requirements. $ 35,324,747 $ tax rate on 2008 assessed valuation at 98% collection rate produces..... $ 35,328,933 Maximum Annual Debt Service Requirements (2023) $ 54,419,544 Estimated State Funding for Debt Service 10,532,495 (b) Net Maximum Annual Debt Service Requirements. $ 43,887,049 $ tax rate on 2008 assessed valuation at 98% collection rate produces..... $ 43,888,046 (a) Includes the Bonds. (b) A portion of the debt service payable on the District s outstanding bonds will be paid with funds received by the District from the State pursuant to the Existing Debt Allotment for outstanding debt service. For the fiscal year ending June 30, 2009, the District expects to receive $10,532,495 in state funds for debt service. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. (a) (a) 8

16 Principal Taxpayers The following list of principal taxpayers was provided by the District s Tax Assessor Collector based on the approved tax roll for 2008 and Principal Taxpayer Type of Property Houston Pipeline Co. Oil, Gas & Real Property $ 285,064,874 $ 219,814,250 HNMC Inc. Real & Personal Property 116,462, ,646,434 Center Point Energy Utility 74,435,883 63,936,988 Equistar Chemicals Oil, Gas & Real Property 64,378,050 33,242,592 Cardinal Health Real & Personal Property 46,684,479 41,872,520 Wal-Mart Stores, Inc. Real & Personal Property 44,593,504 44,350,943 Lakeview Apartments Real Property 31,786,700 32,134,400 Enterprise Leasing Real & Personal Property 30,417,014 23,376,197 Cypresswoods Land Development Real Property 26,719,676 22,726,000 Southwestern Bell Utility 23,880,655 27,325,977 TOTAL $ 744,422,856 $ 611,426,301 AD VALOREM TAXATION General The Bonds are payable from and secured by the proceeds of a continuing, direct annual ad valorem tax levied, without legal limitation as to maximum rate or amount, against all taxable property within the District as set forth in the Bond Order authorizing the issuance of the Bonds. A description of current ad valorem tax procedures is as follows. Authority for Taxation The Texas Property Tax Code (the Property Tax Code ) establishes for each county in the State a single appraisal district, with responsibility for recording and appraising property for all taxing units within the county, and a single appraisal review board, with responsibility for reviewing and equalizing the values established by the appraisal district. The Property Tax Code requires the appraisal district, by May 15 of each year, to prepare appraisal records of property to be appraised as of January 1 of each year, and the Property Tax Code generally requires appraisals to be made at market value. Appraisals are subject to review by the appraisal review board, and under certain circumstances, taxpayers and taxing units (such as the District) may appeal the orders of the appraisal review board by filing a petition for review in district court. In such event, the value of the property in question will be determined by the court, or by a jury, if requested by any party. Absent any such appeal, the appraisal roll prepared by the appraisal district and approved by the appraisal review board must be used by each taxing jurisdiction in establishing its tax rolls and tax rate. Property Subject to Taxation by the District Except for certain exemptions provided by Texas law, all property in the District is subject to taxation by the District. Categories of exemptions applicable to the District include property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; farm products owned by the producers; certain property affiliated with charitable organizations, youth development associations, religious organizations, and qualified schools; designated historic sites; solar and wind-powered energy devices; and most individually owned automobiles. In addition, owners of agricultural, timber and open space land may, under certain circumstances, request valuation of such land on the basis of productive capacity rather than market value. Certain specific exemptions apply to residential homesteads. An adult who files an application is entitled to an exemption from taxation by the District of $15,000 of the appraised value of his residential homestead for that year and subsequent years until the property is sold or is no longer his homestead. If the taxpayer is 65 or older, or is disabled, an additional $10,000 of the appraised value is exempt from District taxation. Disabled veterans are entitled to an exemption, the amount of which varies up to $12,000, dependent on age and disability, and certain survivors of deceased disabled veterans may claim the same amount of exemption. In addition to state mandated exemptions, the District offers a $13,300 local exemption to taxpayers 65 years of age or older. 9

17 Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of goods-in-transit. Goods-in-transit is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. District and Taxpayer Remedies Under certain circumstances, taxpayers and taxing units, including the District, may appeal orders of the Appraisal Review Board by filing a petition for review in district court within forty-five (45) days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury if requested by any party. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Tax Code. The Tax Code sets forth notice and hearing procedures for certain tax rate increases by the District and provides for taxpayer referenda which could result in the repeal of certain tax increases. Levy and Collection of Taxes The District is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. By September 1 of each year, or as soon thereafter as practicable, the rate of taxation is set by the District based upon the valuation of property within the District as of the preceding January 1. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs an initial penalty of from six percent (6%) to twelve percent (12%) of the amount of the tax, depending upon the time of payment, and accrues interest at the rate of one percent (1%) per month. If the tax is not paid by the following July 1 an additional penalty of up to twenty percent (20%) may, under certain circumstances, be imposed by the District. The Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances. Rollback Tax Rate In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district s rollback tax rate without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt served. For the fiscal year, the rollback tax rate for a school district is the sum of (1) 88.67% of the maintenance and operations tax rate adopted by the district for the fiscal year, (2) the rate of $0.04, and (3) the district s current debt rate. For the fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district s state compression percentage for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district s current debt rate, or (B) the sum of (1) the district s effective maintenance and operations tax rate, (2) the product of the district s state compression percentage for that year multiplied by $0.06, and (3) the district s current debt rate (see CURRENT PUBLIC SCHOOL FINANCE SYSTEM General for a description of the state compression percentage ). For tax years 2003 through 2008, the rollback tax rate also includes the tax rate that, applied to current tax values, would impose taxes in an amount sufficient for the district to fund its minimum local effort requirement for employee health care coverage (see CURRENT PUBLIC SCHOOL FINANCE SYSTEM ). The effective maintenance and operations tax rate for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. By September 1 or as soon thereafter as practicable, the Board of Trustees adopts a tax rate per $100 taxable value for the current 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 10

18 collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Furthermore, 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. District s Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property. The District has no lien for unpaid taxes on personal property but does have a lien for unpaid taxes upon real property, which lien is discharged upon payment. On January 1 of each year, such tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The District s tax lien is on a parity with the tax liens of other such taxing units. A tax lien on real property takes priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights, or by bankruptcy proceedings which restrict the collection of taxpayer debts. STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Recent Litigation Relating to the Texas Public School Finance System On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the "District Court") against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the "Commissioner") and the Texas Comptroller of Public Accounts in a case styled West Orange- Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate had become in effect a state property tax, in violation of article VIII, section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the "Finance System") was inefficient, inadequate, and unsuitable, in violation of article VII, section 1 of the Texas Constitution, because the State of Texas (the "State") did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the "Supreme Court"), which rendered decisions in the case on May 29, 2003 ("West Orange-Cove I") and November 22, 2005 ("West Orange-Cove II"). After the remand by the Supreme Court back to the District Court in West Orange-Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their article VII, section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of article VII, section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by article VII, section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. 11

19 On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated article VIII, section 1-e of the Texas Constitution because the statutory limit of $1.50 per $ of taxable assessed valuation on property taxes levied by school districts for operation and maintenance purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in article VII, section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by article VII, section 1, of the Texas Constitution. In West Orange-Cove II, the Supreme Court's holding was twofold: (1) that the local O&M Tax had become a state property tax in violation of article VIII, section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of article VII, section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the O&M Tax. In reaching its second holding, the Court, using a test of arbitrariness determined that: the public education system was "adequate," since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not "inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of "suitability," since the system was suitable for adequately and efficiently providing a public education. In reversing the District Court's holding that the Finance System was unconstitutional under article VII, section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of article VII, section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts' contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ("Edgewood IV") that such funding variances may not be unreasonable. The Supreme Court further stated that "[t]he standards of article VII, section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that "[e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system," and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a "general diffusion of knowledge" without additional facilities. Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature (the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the Texas state treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce O&M Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to as the "Reform Legislation"). The Reform Legislation generally became effective at the beginning of the fiscal year of each district. 12

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

21 CURRENT PUBLIC SCHOOL FINANCE SYSTEM General The following description of the Finance System includes the provisions of the Reform Legislation. For a more complete description of school finance and fiscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded were intended to reduce local O&M Tax rates by one third over two years, with O&M Tax levies declining by approximately 11% in fiscal year and approximately another 22% in fiscal year Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The LBB projected that the Reform Legislation will be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years through , although State surpluses were budgeted to offset the revenue shortfall in fiscal year and for the State biennium, and the shortfall could be addressed in future years if the Reform Legislation, particularly the ad valorem tax compression measures of HB 1, should prove to be an economic stimulus for the State or if there is sustained growth in the economy of the State that generates greater State revenues than were originally forecast by the LBB. Under the Finance System, school districts are guaranteed to receive State funding necessary to provide the district the greater of (A) the amount of State and local revenue per student for the district in the fiscal year, (B) the amount of State and local revenue per student the district would have been entitled to for the fiscal year based on the funding elements in place prior to the Reform Legislation using the O&M Tax rate the district adopted for the fiscal year, or (C) the amount of State and local revenue per student the district would have been entitled to for the fiscal year based on the funding elements in place prior to the Reform Legislation using an O&M Tax rate that would allow the district to maintain total revenue per student under the funding elements in place prior to the Reform Legislation. In addition to the greater of (A), (B) or (C), school districts beginning with the fiscal year, HB 1 provided a $2,000 across-the-board salary increase for teachers and certain other employees funded by the State, a $500 stipend for school district employee health insurance and a high school student allotment of $275 per student in average daily attendance for dropout prevention and college readiness programs. During the 2007 Regular Legislative Session, which convened on January 9, 2007 and adjourned on May 28, 2007, a new funding allotment was created and funded by the Legislature to provide an average $425 salary increase for educators at each school district. State funds appropriated to provide districts the guaranteed amount may only be used for operating and maintenance purposes and not to fund facilities, debt service or other purposes. If a district adopts an O&M Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the O&M Tax rate adopted by the district for the fiscal year, the district's guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to "compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the fiscal year. A basic component of the funding formulas is the "state compression percentage". The state compression percentage was 88.67% for fiscal year and 66.67% for fiscal year The State compression rate for fiscal year is 66.67%. For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its O&M Tax rate for that year, as compared to the district's adopted O&M Tax rate for the fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. 14

22 State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the "equalized wealth level" to reduce their wealth to such amount or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for "enrichment" of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ("Tier One") and (2) State guaranteed revenues per student for each cent of local tax effort to provide operational funding for an "enriched" educational program ("Tier Two"). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ("EDA"), the Instructional Facilities Allotment ("IFA"), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem O&M Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts at a tax rate of $0.86 per $100 of property value to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. The cost of the basic program is based on an allotment per student known as the "Tier One Basic Allotment." The Tier One Basic Allotment is adjusted for all districts by a cost-ofliving factor known as the "cost of education index." In addition, a district-size adjustment further adjusts the Tier One Basic Allotment for districts that have less than 5,000 students in average daily attendance. For the fiscal year the Tier One Basic Allotment was funded at $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort. For fiscal year , the Tier One Basic Allotment is $3,218 based upon a guaranteed yield of $37.42 for each cent of tax effort. Tier Two consists of State equalization funding for local M&O Tax levies that exceed $0.86. For fiscal year , State funding to equalize local M&O Tax levies above $0.86, up to a district s compressed rate, was funded at a guaranteed yield of $36.45 per student in weighted average daily attendance ("WADA") for each cent of tax effort; any amount above a district s compressed rate up to $0.04 was funded at a guaranteed yield of $46.94 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a roll back election was funded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district s compressed rate plus $0.04. For fiscal year , these three levels of Tier Two are funded at $37.42, $50.98 and $31.95, respectively. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion of the state compression percentage. 15

23 The IFA guarantees each school district a specified amount per student (the "IFA Guaranteed Yield") in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. If the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State's fiscal biennium, however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the "EDA Yield"), which for the State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district's bonds are eligible for the allotment if, during the fiscal year, the district (i) made payments on such bonds or (ii) levied and collected debt taxes for the payment of principal and interest on such bonds. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for EDA allotments and provided additional EDA funding for the State's fiscal biennium for new bonds that qualify for the allotment. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives overlapping IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district's Tier Two State funding. 16

24 Local Revenue Sources - Property Tax Authority The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. The former provision of the Education Code, Section , that in general limited the O&M Tax rate to $1.50 per $100 of taxable assessed value, was replaced with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the and fiscal years, districts were able to generate additional local funds by raising their O&M Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts would generate equalized funding dollars from the State under the Tier Two program. In fiscal year and beyond, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their O&M Tax under prior law and may be subject to other limitations on the O&M Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in rate. See "TAX INFORMATION - Tax Rate Limitations" herein. The governing body of a school district cannot adopt an annual tax rate which exceeds the district's "rollback tax rate" without submitting such proposed tax rate to the voters at a referendum election. See "TAX INFORMATION - Public Hearing and Rollback Tax Rate" herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ("wealth per student") for each school year to no greater than the "equalized wealth level", determined in accordance with a formula set forth in the Reform Legislation. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The wealth level that required wealth reduction measures for fiscal year was $319,500 per student in average daily attendance. For that wealth level was increased to $364,500 per student in average daily attendance with respect to that portion of a district s M&O tax effort that does not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district s local tax effort that was beyond its compressed rate plus $.04. For that wealth level has been increased to $374,200 per student in average daily attendance with respect to that portion of a district s M&O tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district s local tax effort that is beyond its compressed rate plus $.04. Property wealthy districts may also be able to levy up to an additional four cents (six cents beginning with fiscal year ) per $100 of assessed valuation of O&M Taxes to provide revenue above the equalized wealth level that is not subject to recapture. Additional funding was provided by the Legislature in HB 1 for low wealth districts that exercise all or part of the local option enrichment tax. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) A district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either O&M Taxes or both O&M Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property-poor district. (4) A district may educate students from other districts who transfer to the district without charging tuition to such students. A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase "attendance credits" by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving elections by the transferring district's qualified voters. Third, a wealthy district may reduce its wealth by paying tuition to a nonwealthy district for the education of students that reside in the wealthy district. A district may not adopt a tax rate until its effective wealth per student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner. 17

25 If a district fails to exercise a permitted option, the Commissioner must reduce the district's property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district's existing debt. Possible Effects of Wealth Transfer Provisions on the District's Financial Condition The District's wealth per student for the school year is less than the equalized wealth value. Accordingly, the District has not been required to exercise one of the permitted wealth equalization options. As a district with wealth per student less than the equalized wealth value, the District may benefit in the future by agreeing to accept taxable property or funding assistance from or agreeing to consolidate with a property-rich district to enable such district to reduce its wealth per student to the permitted level. 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 performance of the annexing district. TAX RATE LIMITATIONS A school district is authorized to levy maintenance and operation taxes ( O&M Tax ) subject to approval of a proposition submitted to district voters. The maximum O&M Tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. The maximum voted O&M Tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on March 21, 1970 pursuant to Article 2784e-1, Texas Revised Civil Statues Annotated, as amended ( Article 2784e-1 ). Article 2784e-1 limits the District s annual O&M Tax rate based upon a comparison between the District's outstanding bonded indebtedness and the District s taxable assessed value per $100 of assessed valuation. Article 2784e-1 provides for a reduction of $0.10 for each one percent (1%) or major fraction thereof increase in bonded indebtedness beyond seven percent (7%) of assessed valuation of property in the District. This limitation is capped when the District's bonded indebtedness is ten percent (10%) (or greater) of the District's assessed valuation which would result in an annual O&M Tax rate not to exceed $1.20. Lastly, the Texas Attorney General in reviewing the District's transcript of proceedings will allow the District to reduce the amount of its outstanding bonded indebtedness by the amount of funds (on a percentage basis) that the District receives in State assistance for the repayment of this bonded indebtedness (For example, if the District anticipates that it will pay 75% of its bonded indebtedness from State assistance, for the purposes of Article 2784e-1, the Texas Attorney General will assume that only 25% of the District s bonded indebtedness is outstanding and payable from local ad valorem taxes). The bonded indebtedness of the District after the issuance of the Bonds will be approximately 8.53% of the District s current taxable assessed valuation of property. See SELECTED FINANCIAL INFORMATION herein. For any fiscal year beginning with the fiscal year, the maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50, or such lower rate as described in the preceding paragraph, and (B) the sum of (1) the rate of $0.17, and (2) the product of the state compression percentage multiplied by $1.50. The state compression percentage was 88.67% for fiscal year and 66.67% for fiscal year The state compression percentage for fiscal year is 66.67%. For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year which is based on the amount of State funds appropriated for distribution to the District for the current fiscal year (for a more detailed description of the state compression percentage, see CURRENT PUBLIC SCHOOL FINANCE SYSTEM General ). Furthermore, a school district cannot annually increase its tax rate in excess of the district's "rollback tax rate" without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. See AD VALOREM TAXATION - Rollback Tax Rate. A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of a proposition submitted to the voters under Section (b)(1), Texas Education Code, as amended, which provides 18

26 a tax unlimited as to rate or amount for the support school district bonded indebtedness (see THE BONDS Security and Source of Payment ). Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding "new debt" of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduces the district's local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt service on bonds approved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. In addition, taxes levied to pay refunding bonds issued pursuant to Chapter 1207, Texas Government Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds are included in the calculation of the $0.50 tax rate test as applied to subsequent issues of "new debt." The Bonds are "new debt" and are subject to the $0.50 threshold tax rate test. Under current law, a district may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier of the tax year five years after the current tax year or the tax year in which the final payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax at a rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used projected property values to satisfy this threshold test. 19

27 COMPARISON OF REVENUES AND EXPENDITURES AND CHANGES IN FUND BALANCES District revenues and expenditures and changes in the General Fund balances for the fiscal years ended June 30, 2004 through 2008, are compared in the summary below. Such summary has been prepared based upon information obtained from the District s records and audited financial statements. Fiscal Year Ended June 30, REVENUES Local Revenues Property Taxes $ 82,070,890 $ 95,693,611 $ 98,679,718 $ 91,126,542 $ 83,586,496 Tuition & Fees 526, , , , ,626 Earnings on Investments 1,746,416 2,002,572 1,177, , ,750 Other Local 668, , , , ,752 State Revenues 146,948, ,605,701 91,755,533 80,083,928 75,719,709 Federal Intergovernmental Revenues 1,018, ,546 1,233, , ,847 Total Revenues $ 232,979,211 $ 209,483,908 $ 194,190,322 $ 173,624,684 $ 161,505,180 EXPENDITURES Current: Instructional $ 142,261,457 $ 127,696,681 $ 106,623,195 $ 104,359,615 $ 102,299,110 Instructional Resources & Media Services 3,248,871 3,123,846 2,755,777 2,481,321 2,420,360 Curriculum/Staff Development 2,833,585 1,594,982 2,314,275 1,964,679 1,747,954 Instructional Leadership 3,982,105 3,130,611 3,034,500 2,609,063 2,517,635 School Leadership 16,207,497 14,540,346 13,628,728 11,855,841 10,611,055 Guidance & Counseling Services 7,374,236 6,520,997 5,208,274 5,294,893 6,156,623 Social Work Services 269, , , , ,595 Health Services 2,542,611 2,323,561 2,003,988 1,704,094 1,602,976 Student (Pupil) Transportation 11,138,989 9,405,275 8,364,135 7,060,722 6,525,318 Co-Curricular Activities 4,061,217 3,570,531 3,257,964 3,667,318 3,656,408 General Administration 6,483,125 6,568,186 6,105,275 5,688,348 5,988,082 Plant Maintenance & Operation 25,819,668 22,799,741 21,029,288 17,673,324 16,953,330 Security & Monitoring Services 2,948,900 2,780,126 2,351,870 2,163,554 1,743,270 Data Processing Services 4,009,963 3,426,577 2,815,624 2,506,183 2,401,556 Community Services 277, , , , ,695 Intergovernmental Charges: Fiscal Agent/Shared Services Arrangement 165, , , , ,858 Alternative Education 16,848 21,175 24,844 16,104 56,059 Other Intergovernmental Charges 888,360 Debt Service: Principal Retirement of Bonds , , ,000 Principal Retirement of Capital Leases ,000 74,681 73,792 Interest & Fiscal Charges ,601 43, ,528 Facilities Acquisition & Construction 2,927, , , ,002 27,132 Total Expenditures $ 237,456,620 $ 208,270,210 $ 181,329,882 $ 170,353,716 $ 166,033,336 NET REVENUES (Deficit) $ (4,477,409) (a) $ 1,213,698 $ 12,860,440 $ 3,270,968 $ (4,528,156) Beginning Fund Balance $ 43,382,399 $ 45,478,844 $ 32,594,780 $ 29,128,637 $ 33,511,231 Other Resources 98,586 53,166 23, , ,562 Other Uses (400,000) (b) (3,363,309) (b) Ending Fund Balance $ 38,603,576 $ 43,382,399 $ 45,478,844 $ 32,594,780 $ 29,128,637 (a) One time budgeted draw down. (b) Other Uses for Fiscal 2007 and 2008 represent transfers to ensure stability in Health Insurance Fund due to increases in claims paid. 20

28 Debt Service Fund Fiscal Year Ended June 30, REVENUES Local Taxes for Debt Service $ 31,451,524 $ 29,285,221 $ 29,628,170 $ 23,225,977 $ 16,654,443 State Aid 10,738,580 10,927,314 12,268,951 9,269,812 9,469,950 Interest & Misc. Earnings 1,029,719 1,136, , , ,282 Total Revenues $ 43,219,823 $ 41,349,382 $ 42,701,747 $ 32,874,821 $ 26,277,675 EXPENDITURES Principal $ 11,419,748 $ 10,090,752 $ 10,725,645 $ 10,278,396 $ 6,927,525 Interest & Fiscal Fees 31,811,880 27,910,156 28,064,067 19,580,106 17,243,509 Total Expenditures $ 43,231,628 $ 38,000,908 $ 38,789,712 $ 29,858,502 $ 24,171,034 NET REVENUES (Deficit) $ (11,805) $ 3,348,474 $ 3,912,035 $ 3,016,319 $ 2,106,641 Beginning Fund Balance $ 29,440,111 $ 26,091,637 $ 22,179,602 $ 17,108,283 $ 14,734,250 Other Sources (Uses) 3,802, ,055, ,392 Ending Fund Balance $ 33,230,899 $ 29,440,111 $ 26,091,637 $ 22,179,602 $ 17,108,283 General DESCRIPTION OF SPRING INDEPENDENT SCHOOL DISTRICT Spring Independent School District, containing 57.6 square miles of land, is located in the northern portion of Harris County, Texas, some 20 miles north of downtown Houston. IH 45 traverses the District north to south and FM 1960 bisects the District east to west at its approximate midpoint. The unincorporated community of Spring is located in the District. The District s system presently includes 21 elementary schools, 1 intermediate school, 6 middle schools, 3 high schools, and a high school academy. All District schools are fully accredited by the Texas Education Agency and the Southern Association of Colleges and Schools. Administration District Professional and Support Staff Currently, the District employs 4,859 persons, of which 2,857 are in the professional field. Salaries for new teachers with bachelor s degrees start at $43,205 annually and range to $57,321 annually for teachers with postgraduate degrees and classroom experience. Principal management staff for the District includes: Ralph H. Draper Ed.D, Superintendent of Schools. Dr. Draper assumed his position with the District in August, 2005, having spent three years as the Superintendent of Marshall Independent School District in East Texas. Prior to that time, Dr. Draper served as Marshall s Assistant Superintendent of Personnel for five years and as an elementary school principal for two years. He began his education career in Texas in Longview Independent School District in 1988, teaching elementary and middle school. He also served as a middle school principal in Longview Independent School District. Dr. Draper earned his Bachelor s Degree from Davis Lipscomb University in Tennessee, and his Master s Degree from Stephen F. Austin State University. He earned his Doctoral Degree in Education from Stephen F. Austin in December,

29 Christine A. Porter, Associate Superintendent for Financial Services. Ms. Porter joined the District in November, 2000, serving as Controller prior to her being appointed to her current position in November Ms. Porter has, also, been employed as Business Manager at Tomball Independent School District and Budget Manager at Spring Branch Independent School District. She has 17 years of experience in school district financial management. Ms. Porter is a certified public accountant and holds a BBA from Texas A&M University. Dalane E. Bouillion, Ed.D, Associate Superintendent for Curriculum & Instruction Services. Dr. Bouillion joined Spring Independent School District in her current capacity in July, Prior to that time, she served Galena Park Independent School District as a principal for seven years, assistant principal for three years, and classroom teacher for four years. Dr. Bouillion earned her Bachelor of Science in Interdisciplinary Studies, Master of Education and Doctor of Education degrees from Stephen F. Austin State University. Renee Coleman, Associate Superintendent for Human Resources. Ms. Coleman earned her Bachelor s degree and Master s degree from Sam Houston State University. She was a classroom teacher for 10 years, an assistant principal for 5.5 years, a Director for Character Development for 1 year, and a principal for 6 years. Ms. Coleman has served in her current position since February, Regina Curry, Associate Superintendent for Communications and Community Relations. Ms. Curry earned her Bachelor of Arts Degree in Communications from the University of California, Los Angeles (UCLA) and her Masters Degree in Educational Administration from the University of St. Thomas. She started her career in education as a teacher and instructional coordinator in the Los Angeles Unified School District. During that time, she also worked with the Los Angeles Times as an educational consultant, writer and workshop facilitator. She has been in Spring ISD since 1991, serving the District as a teacher, assistant principal, and principal. Ms. Curry has been in her current position since January, Ruthie Foreman, Area Superintendent. Ms. Foreman joined the District in July, She earned her Bachelors of Science degree in English and Spanish from East Texas State University (now Texas A & M Commerce). She earned her Masters Degree in Educational Administration from University of Texas-Tyler. Prior to joining the District, Ms. Foreman has twenty-seven years of experience as classroom teacher, language arts coordinator, high school assistant principal, and elementary school principal for Marshall Independent School District. Ann Sandoval, Area Superintendent. Ms, Sandoval joined Spring Independent School District in July 2007 serving as the Executive Director of Elementary Education prior to being appointed to her current position in July of Ms. Sandoval earned her Bachelor of Science degree in Education from the University of Southwest Texas in San Marcos, Texas. Her Masters degree in Education Administration is from the University of North Texas in Denton, Texas. Ms. Sandoval has over thirty years of experience in education including: five years as an elementary and middle school teacher, two years as an Assistant Principal, with the rest of the years serving as a Principal, Director of Leadership and Campus Accountability, Director of Curriculum, Executive Director of Elementary Education and an Area Superintendent. 22

30 ENROLLMENT INFORMATION Total Enrollment Data The tables shown below have been prepared from information provided by District officials to set forth the historical increase in student enrollment for the period , and the estimated future increases for the period Enrollment at % of Fifth Day of Increase School Year School Year (Decrease) 1986/ , / , / , / , / , / , / , / , / , / , / , / , / ,793 (a) / ,989 (a) / ,818 (a) / ,226 (a) / ,342 (a) / ,472 (a) / ,298 (a) / ,409 (b) * 2006/ ,424 (b) / ,317 (b) / ,989 (b) 2.01 PROJECTED % of Increase School Year Enrollment (b) (Decrease) 2009/ , / , / , (a) Enrollment on tenth day of school year. (b) Enrollment on first Monday in October. * Increase due to approximately 1,300 students transferring into the District from the effect of Hurricane Katrina. 23

31 Enrollment Data Per School Maximum Year Student Tenth Day School Construction Capacity(a) Enrollment Dekaney High ,500 1,927 Spring High ,840 3,119 Westfield High ,338 2,736 Westfield Ninth Grade Center ,200 0 (b) Wunsche High ,500 1,413 Bailey Middle ,200 1,255 Bammel Middle ,500 1,267 Claughton Middle ,303 1,446 Dueitt Middle ,037 Twin Creeks Middle , Wells Middle ,378 1,342 Anderson Elementary Bammel Elementary Beneke Elementary Booker Elementary Burchett Elementary Clark Primary (K-2) Clark Intermediate (3-5) Cooper Elementary ,033 Heritage Elementary Hirsch Elementary Jenkins Elementary Lewis Elementary Link Elementary McNabb Elementary Meyer Elementary ,108 1,096 Northgate Crossing Ponderosa Elementary Reynolds Elementary Salyers Elementary Smith Elementary Thompson Elementary , Winship Elementary TOTAL 36,755 33,620 (a) Excludes 150 portable buildings with an estimated maximum capacity of 7,500 students. (b) This campus is currently under renovations to be re-opened August 2009 as a middle school. Student Transportation District students who reside more than one-quarter mile from their school are provided free bus service by the District. As of June 30, 2008, the District transported approximately 27,674 students daily and operated 276 buses for this purpose. District school buses traveled a total of 3,840,940 miles in the school year, an average of 21,339 miles per school day. 24

32 Economic Activity The expansion of the Houston metropolitan area northward along IH 45, the main Houston/Dallas traffic artery, and along FM 1960 has had a substantial impact on the economy of the District. Although the District has remained primarily residential in character, including over 50 single-family residential subdivisions and numerous multifamily residential complexes, numerous shopping centers, automobile dealerships, hotels and combination business park/multi-family developments have been built along IH 45 and FM Thirty banks, a credit union and several savings and loans are located in the District and in various shopping centers along FM 1960 and I-45. These include branches of Bank of America, Chase Bank of Texas, Compass Bank, Frost National Bank, Guaranty Federal Bank, Houston Savings Bank, Klein Bank, Metro Bank, Primerica, Prosperity Bank, Republic National Bank, Southwest Bank, Sterling Bank, Washington Mutual Bank, Wells Fargo Bank and Wood Forest Bank. Due to branch banking, the total bank deposits are no longer applicable to the Spring Independent School District area only. BAM Leasing and AEP Energy Services operate a petrochemical gas processing plant located in the District which produces ethane, propane and butane gases. The companies also operate a pipeline system that transports natural gas for underground storage in the District. An American Telephone and Telegraph Company microwave installation is located in the District. The microwave station is capable of handling over 100,000 long distance circuits. The installation also acts as the central maintenance center for a 32,000 square mile area of southeast Texas. In recent years, commercial, service, and residential building has been very active within the District, particularly along IH 45, the main Houston/Dallas traffic artery, and along FM Numerous shopping centers, single and/or multi-family subdivisions, and combination business park/multi-family developments are located in the District. The Houston Northwest Medical Center, located just off FM 1960, is the second largest taxpayer in the District with a 2007 taxable assessed valuation of $102,646,434. The Medical Center, which currently operates a full service hospital, employs approximately 1,900 persons. About 620 active physicians are on the staff of the hospital and surrounding clinic facilities. North Belt/Greenspoint Trade Area. In addition to the FM 1960 area, the North Belt/Greenspoint area has developed into a major employment center for residents of the District. Numerous multi-use developments are located in the North Belt area, which is approximately two miles from the southeast corner of the District. These developments include retail shopping centers (both mall and specialty centers), low to mid-rise office buildings, hotels, restaurants and high-density residential complexes. George Bush Intercontinental Airport, the chief air terminal facility serving the Houston metropolitan area, is located east of the District and northeast of the IH 45/North Belt intersection. The airport currently has five operating terminals that accommodate 20 passenger airlines, domestic and international, and 7 cargo carriers. 25

33 ESTIMATED OVERLAPPING DEBT STATEMENT Other governmental entities whose boundaries overlap the District have outstanding bonds payable from ad valorem taxes. The following statement of direct and estimated overlapping ad valorem tax debt was developed 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 independently verified the accuracy or completeness of such information, and no person is entitled to rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes for payment of their debt, and some are presently levying and collecting such taxes. % Amount Ovlpg. Taxing Body Amount As of Ovlpg. Net Debt CNP UD $ 19,015,000 08/31/ % $ 19,015,000 Harris Co 2,572,023,643 08/31/ % 78,189,519 Harris Co Department of Education - 08/31/ % - Harris Co Flood Control Distist 111,929,698 08/31/ % 3,402,663 Harris Co MUD # 5 16,505,000 08/31/ % 10,592,909 Harris Co MUD # 16 8,545,000 08/31/ % 8,545,000 Harris Co MUD # 43 4,515,000 08/31/ % 4,515,000 Harris Co MUD # 44 2,825,000 08/31/ % 2,825,000 Harris Co MUD # 58 1,870,000 08/31/ % 1,870,000 Harris Co MUD # 82 29,660,000 08/31/ % 29,660,000 Harris Co MUD # 86 13,475,000 08/31/ % 13,475,000 Harris Co MUD # 96 28,205,000 08/31/ % 28,205,000 Harris Co MUD # ,225,000 08/31/ % 9,853,443 Harris Co MUD # ,630,000 08/31/ % 18,630,000 Harris Co MUD # 189 2,710,000 08/31/ % 2,710,000 Harris Co MUD # 200 9,675,000 08/31/ % 9,675,000 Harris Co MUD # 205 1,705,000 08/31/ % 1,705,000 Harris Co MUD # 211 2,930,000 08/31/ % 2,930,000 Harris Co MUD # 215 1,620,000 08/31/ % 1,620,000 Harris Co MUD # 217 8,190,000 08/31/ % 8,190,000 Harris Co MUD # 221 9,575,000 08/31/ % 8,396,318 Harris Co MUD # 233 6,830,000 08/31/ % 6,830,000 Harris Co MUD # ,545,000 08/31/ % 19,545,000 Harris Co MUD # ,855,000 08/31/ % 20,855,000 Harris Co MUD # 399 2,300,000 08/31/ % 2,300,000 Harris Co Toll Road Authority (a) - 08/31/ % - Harris Co WC&ID # 91 1,315,000 08/31/ % 1,315,000 Harris Co WC&ID # ,000 08/31/ % 310,000 Harris Co WC&ID # 109 5,075,000 08/31/ % 107,590 Harris Co WC&ID # ,805,000 08/31/ % 12,869,973 Houston, City of 2,184,426,155 08/31/ % 1,965,984 Inverness Forest Improvement Dist 3,195,000 08/31/ % 115,659 Lone Star College System 149,040,000 08/31/ % 14,471,784 North Park PUD 2,775,000 08/31/ % 2,544,675 Northgate Crossing MUD # 1 6,500,000 08/31/ % 6,500,000 Northgate Crossing MUD # 2 17,235,000 08/31/ % 17,235,000 Northgate Crossing RUD 6,199,997 08/31/ % 6,199,997 Northwest Harris Co MUD # 20 6,640,000 08/31/ % 6,640,000 Northwest Harris Co MUD # 21 1,395,000 08/31/ % 1,395,000 26

34 Northwest Harris Co MUD # 22 6,460,000 08/31/ % 6,460,000 Northwest Harris Co MUD # 23 3,620,000 08/31/ % 3,620,000 Port of Houston Auth 578,595,000 08/31/ % 17,589,288 Post Wood MUD 2,445,000 08/31/ % 2,445,000 Rankin Road West MUD 9,655,300 08/31/ % 9,655,300 Spring West MUD 7,310,579 08/31/ % 2,904,493 Tattor Road Municipal Dist 4,270,000 08/31/ % 4,270,000 Timber Lane UD 37,760,000 08/31/ % 33,247,680 Westador MUD 4,015,000 08/31/ % 4,015,000 Total Overlapping Debt $ 469,412,273 Spring Independent School District $ 715,030,000 (b) 12/01/ % $ 715,030,000 TOTAL DIRECT AND OVERLAPPING DEBT $ 1,184,442,273 Ratio of Total Direct and Overlapping Debt to 2008 Taxable Valuation 14.13% (a) Supported by Toll Road Revenue. To date a Toll Road Tax has not been assessed. (b) Includes the Bonds. Note: An individual resident of the District resides in only one utility district. Therefore, the overlapping debt applicable to the individual resident is significantly less than the Total Direct and Overlapping Debt shown above. PENSION FUND LIABILITY The Teachers Retirement System of Texas generally is charged with the responsibility of administering pension funds for all school district employees. The State and the individual employee participate in the retirement system on a joint basis, and each local district is responsible only for funding contributions for salary amounts in excess of the State foundation level and 0.55% of all TRS-eligible salaries. 27

35 DEBT SERVICE SCHEDULE The following schedule sets forth the current total debt service requirements of the District, plus the principal and interest requirements on the Bonds. The Bonds Year End Outstanding Principal Debt Total as of 12/31 Debt Service (a) (Due 8/15) Interest Service Debt Service 2009 $ 47,753,651 $ 2,237,125 $ 2,237,125 $ 49,990, ,001,894 4,238,763 4,238,763 51,240, ,261,288 $ 1,445,000 5,553,763 6,998,763 53,260, ,211,416 1,120,000 5,878,763 6,998,763 53,210, ,037, ,000 6,128,763 6,998,763 54,036, ,961,740 2,760,000 4,238,763 6,998,763 53,960, ,003,828 2,835,000 4,162,863 6,997,863 54,001, ,783,213 2,920,000 4,077,813 6,997,813 53,781, ,922,236 3,015,000 3,982,913 6,997,913 53,920, ,925,228 3,115,000 3,884,925 6,999,925 53,925, ,876,108 3,220,000 3,775,900 6,995,900 53,872, ,894,983 3,380,000 3,614,900 6,994,900 53,889, ,935,198 3,550,000 3,445,900 6,995,900 53,931, ,965,500 3,730,000 3,268,400 6,998,400 53,963, ,422,644 3,915,000 3,081,900 6,996,900 54,419, ,342,456 4,110,000 2,886,150 6,996,150 54,338, ,190,650 4,315,000 2,680,650 6,995,650 54,186, ,581,481 4,530,000 2,464,900 6,994,900 53,576, ,424,131 4,760,000 2,238,400 6,998,400 52,422, ,922,188 4,995,000 2,000,400 6,995,400 51,917, ,345,456 5,245,000 1,750,650 6,995,650 42,341, ,377,750 5,495,000 1,501,513 6,996,513 20,374, ,385,750 5,755,000 1,240,500 6,995,500 20,381, ,389,250 6,045, ,750 6,997,750 20,387, ,966,750 6,345, ,500 6,995,500 13,962, ,665, ,250 6,998,250 6,998,250 $ 1,017,882,177 $ 94,135,000 $ 80,271,112 $ 174,406,112 $ 1,192,288,289 (a) Interest rates on the Series 2005A Adjustable Rate Bonds estimated at 5.00 %. Note: Discrepancies in totals due to rounding. 28

36 TAX MATTERS Tax Exemption In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on Bonds is excludable from gross income for federal income tax purposes under existing law and (ii) the Bonds are not private activity bonds under the Internal Revenue Code of 1986, as amended (the Code ) and as such, interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. The Code imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds and the source of repayment of bonds, limitations on the investment of bond proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of bond proceeds be paid periodically to the United States and a requirement that the issuer file an information report with the Internal Revenue Service (the Service ). The District has covenanted in the Bond Order that it will comply with these requirements. Bond Counsel s opinion will assume continuing compliance with the covenants of the Bond Order pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Bonds for federal income tax purposes and, in addition, will rely on representations by the District, the District s Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the District, the District s Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the District should fail to comply with the covenants in the Bond Order or if the foregoing representations or report should be determined to be inaccurate or incomplete, interest on the Bonds could become includable in gross income from the date of delivery of the Bonds, regardless of the date on which the event causing such includability occurs. The Code also imposes a 20% alternative minimum tax on the alternative minimum taxable income of a corporation if the amount of such alternative minimum tax is greater than the amount of the corporation s regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by which its adjusted current earnings exceeds its other alternative minimum taxable income. Because interest on tax exempt obligations, such as the Bonds, is included in a corporation s adjusted current earnings, ownership of the Bonds could subject a corporation to alternative minimum tax consequences. Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Bonds. Bond Counsel s opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel s knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel s attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel s opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsel s legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given regarding whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the District as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds regardless of the ultimate outcome of the audit. 29

37 Additional Federal Income Tax Considerations Collateral Tax Consequences Prospective purchasers of the Bonds should be aware that the ownership of tax exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the branch profits tax on their effectively connected earnings and profits, including tax exempt interest such as interest on the Bonds. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Bonds should also be aware that, under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Bonds, received or accrued during the year. Tax Accounting Treatment of Original Issue Premium Bonds The issue price of all or a portion of the Bonds may exceed the stated redemption price payable at maturity of such Bonds. Such Bonds (the Premium Bonds ) are considered for federal income tax purposes to have bond premium equal to the amount of such excess. The basis of a Premium Bond in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Bond in determining gain or loss for federal income tax purposes. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Bond by the initial owner. No corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Bond that is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined using the yield to maturity on the Premium Bond based on the initial offering price of such Bond. The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Bonds should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Bond and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Bonds. Tax Accounting Treatment of Capital Appreciation Bonds and Original Issue Discount Bonds The issue price of all of the Capital Appreciation Bonds and the issue price of all or a portion of the Current Interest Bonds may be less than the stated redemption price payable at maturity of such Bonds (the Original Issue Discount Bonds ). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond constitutes original issue discount with respect to such Original Issue Discount Bond in the hands of any owner who has purchased such Original Issue Discount Bond in the initial public offering of the Bonds. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Bonds under the captions - Tax Exemption and -Additional Federal Income Tax Considerations Collateral Tax Consequences generally applies, and should be considered in connection with the discussion in this portion of the Official Statement. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. The foregoing discussion assumes that (i) the Underwriter has purchased the Bonds for contemporaneous sale to the public and (ii) all of the Original Issue Discount Bonds have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm's-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the cover page of this Official Statement. Neither the District nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Bonds will be offered and sold in accordance with such assumptions. 30

38 Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (i) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less in the case of Current Interest Bonds that are Original Issue Discount Bonds (ii) the amounts payable as current interest during such accrual period on such Current Interest Bond. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. LEGAL INVESTMENTS Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board. Both state law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) noload mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. 31

39 The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 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 includes 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 formally adopted Investment Strategy Statement that specifically addresses each funds investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio and (6) yield. Under Texas law, 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 probably safety of capital and the probably income to be derived. At least quarterly, the investment officers of the District shall submit an investment report detailing: (1) the investment position of the District, (2) that all investment officers of the District shall submit an investment report detailing: (1) 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 of Trustees. Additional Provisions Under Texas law the District is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers with personal business relationships or 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; (3) require the registered principal of firms seeking to sell securities to the District to: (a) receive and review the District s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform an annual audit of the management controls on investments and adherence to the District s investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict its investment in mutual funds in the aggregate to no more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, and to invest no portion of bond proceeds, reserves and funds held for debt service in mutual funds; and (8) require local government investment pools to conform to the disclosure, rating, net asset value, yield calculation and advisory board requirements. 32

40 Current Investments As of June 30, 2008, the District s investable funds were invested in the following categories. Description of Investments Book Value Percent Cash/Certificates of Deposit $ 103,390, % TexPool 51,957, % TexPool Prime 72,227, % Total $ 227,575, % LEGAL MATTERS Legal Opinions The District will furnish the Underwriters a transcript of certain certified proceedings held incident to the authorization and issuance of the Bonds, including a certified copy of the unqualified approving opinion of the Attorney General of Texas, as recorded in the Bond Register of the Comptroller of Public Accounts of the State of Texas, to the effect that the Bonds, which the Attorney General will have examined, are valid and binding obligations of the District under the Constitution and laws of the State. The District also will furnish the legal opinion of Vinson & Elkins L.L.P., Bond Counsel in substantially the form attached as APPENDIX B to this Official Statement. Bond Counsel has reviewed the statements and information contained in the Official Statement under the captions and sub-captions THE BONDS (except for the information under the sub-caption Book-Entry-Only System, as to which no opinion is expressed) and CONTINUING DISCLOSURE OF INFORMATION (except for the information under the sub-caption Compliance With Prior Agreements, as to which no opinion is expressed), and Bond Counsel is of the opinion that the statements and information contained therein fairly and accurately reflect the provisions of the Bond Order; further, Bond Counsel has reviewed the statements and information contained in the Official Statement under the captions and sub-captions STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM, (except for the information under Possible Effects of Wealth Transfer Provisions on the District s Financial Condition, as to which no opinion is expressed) TAX MATTERS, ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS, and LEGAL MATTERS, and Bond Counsel is of the opinion that the statements and information contained therein are correct as to matters of law. Such firm has not, however, independently verified any of the factual information contained in this Official Statement nor have they conducted an investigation of the affairs of the District for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon such firm s limited participation as an assumption of responsibility for, or an expression of opinion of any kind with regard to, the accuracy or completeness of any of the information contained herein. The fee of Vinson & Elkins L.L.P. for its services with respect to the Bonds is contingent upon the sale and delivery of the Bonds. No Litigation Certificate The District will furnish to the Underwriter a certificate, dated as of the date of delivery of the Bonds, executed by an authorized officer of the Board, to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Bonds; restraining or enjoining the issuance, execution or delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Bonds; or affecting the validity of the Bonds. No Material Adverse Change The obligations of the Underwriter to take up and pay for the Bonds, and the District to deliver the Bonds, are subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, there shall have been no material adverse change in the condition (financial or otherwise) of the District subsequent to the date of sale from that set forth or contemplated in the Preliminary Official Statement, as it may have been supplemented or amended through the date of sale. 33

41 Legal Investment and Eligibility to Secure Public Funds in Texas Pursuant to the Texas Public Securities Procedures Act, Chapter 1201, Texas Government Code, as amended, the Bonds, whether rated or unrated, are legal investments for insurance companies, fiduciaries, trustees, and municipalities and other political subdivisions or public agencies of the State. Most political subdivisions in the State of Texas are required to adopt investment guidelines under the Public Funds Investment Act, Chapter 2256, Texas Government Code, and such political subdivisions may impose a requirement consistent with such act that the Bonds have a rating of not less than A or its equivalent to be legal investments for such entity s funds. The Bonds are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, to secure deposits of public funds of the State or any political subdivision or public agency of the State and are lawful and sufficient security for those deposits to the extent of their market value. Again, political subdivisions in the State of Texas may impose a requirement that the Bonds have a rating of not less than A or its equivalent to be eligible to serve as collateral for their funds. The District makes no representation that the Bonds will be acceptable to public entities to secure their deposits, or acceptable to any such institutions or entities for investment purposes. The District has made no investigation of other laws, regulations or investment criteria which might apply to any such persons or entities or which might otherwise limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such persons or entities to purchase or invest in the Bonds for such purposes. MUNICIPAL BOND RATINGS In connection with the sale of the Bonds, the District made application to Moody s Investors Service ( Moody s ) and Standard & Poor s Rating Services ( S&P ) for a municipal rating, and ratings of Aaa and AAA have been assigned, respectively, as a result of the guarantee of the Permanent School Fund Guarantee of the Bonds. See PERMANENT SCHOOL FUND GUARANTEE PROGRAM herein. An explanation of the significance of such rating may be obtained from Moody s and S&P. These ratings reflect only the view of Moody s and S&P, and the District makes no representation as to the appropriateness of such ratings. Further, there is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdraw entirely, if in the sole judgment of Moody s and S&P, circumstances so warrant. Any such downward revisions or withdrawal of the ratings may have an adverse effect on the trading value and the market price of the Bonds. Outstanding bonds of the District that are not credit enhanced by either a municipal bond insurance policy or the Permanent School Fund Guarantee are presently assigned ratings of A1 by Moody s and A by S&P. THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM The District has made application to the Texas Education Agency (the "TEA") for a Permanent School Fund guarantee of the Bonds and has received conditional approval for the Bonds to be guaranteed under the Guarantee Program (as defined and described below). 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. 34

42 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 of litigation ( ), 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 of school district bonds by the PSF. 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 Guarantee Program." 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 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 of the State of the Total Return 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 2008, distributions to the ASF amounted to $ (unaudited) per student and the total amount distributed to the ASF was $ million (unaudited). 35

43 Audited financial information for the PSF is provided annually through the PSF Annual Report (the "Annual Report"), which is filed with each designated nationally recognized municipal securities information repository ("NRMSIR") and the Texas Municipal Advisory Council (the "Texas MAC") as a State Information Depository ("SID"). The Annual Report includes the Message of the Executive Administrator of the Fund (the "Message") and the Management's Discussion and Analysis ("MD&A"). Reference is made to the Annual Report for the complete Message and MD&A for the year ended August 31, 2007 and for a description of the financial results of the PSF for the year ended August 31, 2007, the most recent year for which audited financial information regarding the Fund is available. The 2007 Annual Report is incorporated herein and made a part hereof for all purposes, but the 2007 Annual Report speaks only as of its date and the TEA has not obligated itself to update the 2007 Annual Report or any other Annual Report. The TEA posts each Annual Report, which includes statistical data regarding Fund values, and Fund equity and fixed income holdings 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 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 Securities and Exchange Commission ("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 exchange-traded (e.g., NYSE, AMEX) or NASDAQ-quoted stocks, equity options and warrants, shares of closedend 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, 2008 is posted to the TEA web site. Such list excludes holdings in the Fund's securities lending program, and is unaudited and subject to amendment. Such list is incorporated herein and made a part hereof for all purposes. The Total Return Constitutional Amendment The Total Return 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-return-based formula instead of the current-income-based formula, which was used from 1964 to the end of the 2003 fiscal year. The Total Return 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 six percent of the average of the market value of the Fund, excluding real property, 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 tenyear period (the "Ten Year Total Return"). On November 4, 2008, the Chairman of the SBOE requested an opinion from the Attorney General with regard to certain matters pertaining to the determination of the Ten Year Total Return (see "Other Events and Disclosures"). 36

44 In determining 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." Intergenerational 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. In September 2006, the SBOE established the distribution rate from the Fund to the ASF for fiscal years 2008 and 2009 at 3.5% of the average of the PSF market value during the Distribution Measurement Period. The decision of the SBOE regarding the distribution rate for 2008 and 2009 took into account a commitment by the SLB to transfer at least $100 million per year for each year of the biennium commencing September 1, The SLB has advised the SBOE that it anticipates that it will make similar $100 million releases to the PSF in the 2010 and 2011 fiscal years. On November 21, 2008, the SBOE set the distribution rate for the Fund for fiscal years 2010 and 2011 at 2.5% of the average of the PSF market value during the Distribution Measurement Period that ends in November For a discussion of legislation enacted during the 80th Regular Session of the Legislature that concluded on May 28, 2007 (the "2007 Legislative Session"), which pertains to the distribution of money from the Fund to the ASF, among other aspects of management of the Fund, see "Other Events and Disclosures." 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, the investment of the Fund has historically included a significant amount of fixed income investments and dividendyielding equity investments, to produce income for transfer to the ASF. With respect to the management of the Fund's investment 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 by the SBOE in February 2004 and in July 2006, which have significantly altered the asset allocations of the Fund. In February 2004, the SBOE adopted a new asset allocation for the Fund, which 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. In the first quarter of fiscal year 2006, a new investment advisor for the Fund was engaged by the SBOE and tasked with recommending a new asset allocation mix for the Fund. In July 2006, the SBOE adopted a revised asset allocation (the "2006 Asset Allocation Policy"), and the Investment Policy was modified in accordance with the 2006 Asset Allocation Policy. The 2006 Asset Allocation Policy includes an equity allocation, including both domestic and foreign equity portfolios, of 53%; a fixed income allocation of 19%; and an alternative asset allocation, which includes real estate, real return, absolute return and private equity components, totaling 28% of the Fund's asset target. The Fund's investment policy provides for minimum and maximum ranges among the components of each of the three general asset classifications. The Fund's investment advisor has been further tasked with advising the SBOE with respect to the implementation of the 2006 Asset Allocation Policy, including the timing and manner of the selection of any external managers and other consultants. For a variety of reasons, including the requirement that the SBOE obtain additional appropriations from the Legislature to pay administrative costs associated with certain types of investments included in the 2006 Asset Allocation Policy, the 2006 Asset Allocation Policy is being implemented in phases. At August 31, 2008, based on unaudited records, the Fund was invested as follows: 64.25% in equity investments; 25.43% in fixed income investments; 10.05% in alternative assets; and.27% in cash. 37

45 In accordance with the Texas Constitution, the SBOE views the PSF as a perpetual institution. Consistent with its perpetual nature, the PSF is managed as an endowment fund with a long-term investment horizon. Under the totalreturn 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 of Texas, 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. It should be noted that the heavier weighting of equity securities relative to fixed income investments could result in greater volatility of the value of the Fund. Given the greater weighting in the overall portfolio of passively managed investments, it is more likely in the future that the Fund will reflect the general performance returns of the markets in which the Fund is invested. Moreover, while the SBOE may continue to change allocations within the various asset categories of the investment portfolios, and the 2006 Asset Allocation Policy includes an allotment for a portion of Fund assets to investment classes other than fixed income and equities, including hedge funds and real estate and other alternative asset classes, it is assumed that the new distribution formula will result in fewer large-scale reallocations of Fund assets than have occurred in recent years as the SBOE modified Fund asset allocations on a regular basis to produce income for distribution in light of changes in the financial markets. Notwithstanding the assumption that asset allocations for the Fund will be more consistent after the changes made to implement the Total Return Constitutional Amendment have occurred, the asset allocation of the Fund 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 performance 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; 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. 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 prudence, 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 sections 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-0293 (2005) ("GA-0293"), 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. The SBOE contracts with its securities custodial agent to measure the performance of the total return of the Fund. 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. 38

46 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 and outside fiduciary counsel provide legal advice to the Executive Administrator and to the SBOE. See "Other Events and Disclosures." Prior to June 1995, the PSF was invested exclusively by the internal staff of the TEA's Investments Office, under the direction of the Executive Administrator of the Fund. The portion of the Fund that is managed by external managers has declined from 39% at August 31, 2002 to 20.24% at August 31, 2007, in large part due to legislative appropriations riders that reduced the appropriation for the administrative costs of managing the Fund during that period, including, in particular, the payment of fees of external managers. However, while the 2007 Legislature did not fund all administrative costs requested by the TEA for the implementation of the 2006 Asset Allocation Policy, additional legislative appropriations were made for that purpose in 2007, and at August 31, 2008, the portion of the Fund that is administered by external managers increased to 25.32% (unaudited), in large part due to the partial implementation of the 2006 Asset Allocation Policy, including the funding of new asset classes. See "Other Events and Disclosures." The Guarantee Program The Guarantee Program for School District Bonds (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 (the "Act"). If the conditions for the Guarantee Program are satisfied, the guarantee becomes effective upon approval of the Bonds by the Attorney General and remains in effect until the Bonds are paid or defeased, by a refunding or otherwise. In the event of default, holders of the Bonds will receive all payments due from the corpus of the PSF. Following a determination that the District will be or is unable to pay maturing or matured principal or interest on any Bond, the Act requires the 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 of Public Accounts to withhold the amount paid, plus interest, from the first State money payable to the 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 District to the PSF with interest, the Comptroller will cancel the Bond or evidence of payment of the interest and forward it to the District. If the 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 Guarantee Program does not apply to the payment of principal and interest upon redemption of the Bonds, 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 the Bonds. In the event that two or more payments are made from the PSF on behalf of the District, the Commissioner may 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 the Bonds. 39

47 The capacity of the Fund to guarantee bonds under the Guarantee Program is limited in two ways: by State law (the "State Capacity Limit") and by an Internal Revenue Service ("IRS") private letter ruling received by the TEA (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 half times 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 receipt of the 2005 IRS Letter (defined below), the capacity of the program under the IRS Limit was limited to two and one-half times 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 and signed into law, providing for additional increases in the capacity of the Guarantee Program. SB 389 provides that the SBOE may by rule increase the capacity of the Guarantee Program from two and one-half times 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. In November 2004, the TEA and a Texas school district, as an issuer of proposed bonds, formally requested a ruling from the IRS that would have the effect of increasing the capacity of the Fund under the IRS Limit to approximately equal the State Capacity Limit. On March 31, 2005, the IRS released a private letter ruling addressed to the school district (the "2005 IRS Letter") that, among other matters, does not require an adjustment to the capacity of the Guarantee Program relating to certain deposits to the Fund made since May 14, The 2005 IRS Letter is posted to the TEA web site at As a result of the receipt of the 2005 IRS Letter, the TEA has concluded that the State Capacity Limit and the IRS Limit are approximately the same. At October 31, 2008, that amount was $57,577,443,766 (unaudited; including the 5% Capacity Reserve, defined below). Prior to any increase in the capacity of the Guarantee Program as provided by SB 389, the TEA will need to obtain regulatory changes from the IRS and the Treasury Department for any such increase. The TEA is seeking such approval from the IRS, but cannot predict when or if such regulatory changes will be obtained. Until there is a change in the federal regulations and the other conditions to the increase of Guarantee Program capacity that are included in SB 389 are met, if ever, TEA will continue to apply to apply a limitation of 250% of the lower of cost or fair market value of the PSF even though SB 389 immediately establishes a State law limitation of 250% of the cost value of the PSF. The 2005 IRS Letter conditions the tax-exemption of bonds guaranteed by the Guarantee Program on the amount of bonds guaranteed by the Fund not exceeding 250 percent of the lower of cost or fair market value of Fund on each date on which a deposit to the Fund is received, or such deposit being attributable to the sale or other disposition of Fund assets, at all times prior to the sale date of such bonds. At present, for purposes of the 2005 IRS Letter, the TEA assumes that deposits are made to the Fund from investment income and other sources on a daily basis. The 2005 IRS Letter does not provide direction on how or when the Fund values its assets. Because of the variety of assets held by the Fund, the TEA and the GLO value different assets, such as land holdings, minerals, externally managed investments and TEA managed fixed income and equity securities on various dates, based upon the latest information available. Due to extreme volatility that has characterized the financial markets since mid-september 2008, which volatility has impacted Fund asset values, on October 31, 2008, the TEA implemented changes to the Guarantee Program that require school districts that sell bonds to notify the TEA periodically before consummating the sale of their bonds. That change was made to provide contemporaneous information to the TEA of the amount of bonds guaranteed under the Guarantee Program. The TEA has also determined to seek additional guidance from the IRS with respect to certain matters that would facilitate easier administrative compliance, including the date or dates that amounts are deemed deposited to the Fund. The IRS generally does not provide guidance on valuing any taxpayer's holdings. The TEA believes that its valuation practices are consistent with customary commercial practices followed by similar institutional funds. The 2005 IRS Letter and applicable IRS regulations relating to the Guarantee Program may require strict compliance with the terms thereof. The tax-exempt status of bonds guaranteed by the Guarantee Program is subject to the approving opinion of the District's Bond Counsel (a form of which opinion is attached to the Official Statement for the Bonds) but the IRS is not bound by the determination of bond counsel. 40

48 Since July 1991, when the SBOE amended the regulations that govern the Guarantee Program to broaden the range of bonds that can be guaranteed 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 of bonds issued by school districts in the State. See the table "Permanent School Fund Guaranteed Bonds" below, which reflects the trend of growth of guaranteed bonds for the last five fiscal years. In November 2004 and again in November 2005, the SBOE modified its regulations to restrict access to the Guarantee Program. Generally, the new regulations limit Guarantee Program guarantees to certain types of bonds, including, with respect to refunding bonds a requirement that the bonds produce debt service savings for the school district and bonds issued for capital facilities must have been voted as unlimited tax debt of the issuing district. Also, Guarantee Program guarantees are limited to districts with less than $1,250 of annual debt service per student in average daily attendance. The new regulations also provide that guarantees will be awarded until the PSF reaches 95% of its capacity to guarantee bonds. The remaining 5% of capacity (the "5% Capacity Reserve") is to be held in reserve for districts that experience unforeseen catastrophes or emergencies that require the renovation or replacement of school facilities. In November 2008, the SBOE considered on first reading a proposed amendment to the Guarantee Program regulations. The amendment, if adopted by the SBOE at its January 2009 meeting, will confirm the changes implemented on an emergency basis for the Guarantee Program on October 31, 2008, which are referenced above. Among other changes included in the proposed amendment is an increase of the amount of debt service per student in average daily attendance, that serves as a limit for accessing the Guarantee Program, from $1,250 to $1,650, the use of certain accreditation criteria for districts that apply for a guarantee of their bonds and authorization for the Commissioner to increase the 5% Capacity Reserve to an amount deemed necessary by the Commissioner to prudently manage Fund capacity. 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. 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, among other factors, could adversely affect the ratio of Fund assets to guaranteed bonds and the growth of the Fund in general. The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program (the Annual Report). For the years ending on and after August 31, 1998, the State Auditor has separately audited the financial statements of the PSF. The TEA has filed the audited annual report of the PSF for the year ended August 31, 2007 with each NRMSIR and the Texas SID (as such terms are defined above), and such report and audit, which speak only as of the respective dates thereof, are incorporated herein by reference. Ratings of Bonds Guaranteed Under the Guarantee Program Moody's Investors Service, Standard & Poor's Ratings Group, and Fitch Ratings rate bonds guaranteed by the PSF "Aaa," "AAA" and "AAA," respectively. Not all issuers apply for multiple ratings on their bonds, however. See "Ratings" herein. 41

49 Valuation of the PSF and Guaranteed Bonds Permanent School Fund Valuations Fiscal Year Ended 8/31 Book Value (1) Market Value (1) 2004 $17,596,760,145 $19,261,799, ,497,507,739 25,994,480, ,359,570,146 26,537,687, ,234,323,093 29,014,431, (2) 22,938,758,427 27,415,384,588 (1) For 2004, the above table excludes assets managed by the SLB, that consist of land and mineral assets, escrowed cash held by the SLB for real estate transactions, and investments in externally managed real estate funds (the "SLB managed assets"). For State law purposes, the SLB managed assets are included in the PSF. However, prior to the receipt of the 2005 IRS Letter such assets were excluded by the TEA in calculating Fund values for purposes of determining the capacity of the Guarantee Program under the IRS Limit. The 2005 IRS Letter clarified that the SLB managed assets may be included in Fund values for the purpose of calculating the capacity of the Guarantee Program. For all fiscal years beginning with 2005, the TEA has included SLB managed assets in its reporting of the market value and book value of the Fund. In determining the market value of the PSF from time to time during a fiscal year, the TEA uses current, unaudited values for TEA managed investment portfolios and cash held by the SLB. Market values of land and mineral interests, and investments in externally managed real estate funds managed by the SLB are based upon information reported to the PSF by the SLB at the close of the last fiscal year, which are not updated during the year. The valuation of such assets following the year end close 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 year to year. At August 31, 2008, land, external real estate investments and mineral assets managed by the SLB had unaudited book values of approximately $471million, $703.4 million, and $13.4 million, respectively, and unaudited market values of approximately $830 million, $725.9 million, and $3.880 billion, respectively. (2) 2008 data for TEA managed assets is unaudited data derived from SLB sources is preliminary data, which is also unaudited. At October 31, 2008, the PSF had a book value of $23,030,977,506, and a market value of $24,738,218,601 (in each case, based on unaudited and preliminary data). Permanent School Fund Guaranteed Bonds At 8/31 Principal Amount (1) 2004 $32,097,749, ,230,425, ,793,429, ,856,621, (2) 49,860,572,025 (1) 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) 2008 data is unaudited. At October 31, 2008, there were $51,351,595,889 of bonds guaranteed under the Guarantee Program and the capacity of the Guarantee Program was $57,577,443,766 (in each case based on unaudited data). Discussion and Analysis Pertaining to Fiscal Year Ended August 31, 2007 The following discussion is derived from the Annual Report for the year ended August 31, 2007, 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 for the complete Message and MD&A. The discussion in this section describes the portfolios managed by the SBOE and excludes land, external real estate investments, and mineral assets managed by the SLB. The discussion below will be revised to reflect PSF results for the year ended August 31, 2008 when audited financial statements become available during the first quarter of calendar year The Permanent School Fund continues to grow and has increased 12% or $2.9 billion for the year ending August 31, The Fund's annual total return of 14.32% exceeded the target policy benchmark adopted by the SBOE for the Fund of 14.03%. The fiscal year ending August 31, 2007 was the fifth consecutive year that the Fund has experienced positive returns over all asset classes included in the Fund's strategic asset allocation mix. The three year, five year and ten year annualized total returns for the Fund are 12.97%, 11.96% and 8.32%, 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). The market value of the investments grew by $2.5 billion for the fiscal year ended August 31,

50 The market value of the Fund's assets is directly impacted by the performance of the various financial markets in which the assets are invested. The most important factor affecting investment performance is the asset allocation decision made by the SBOE. The current long term asset allocation policy allows for diversification of the portfolio into alternative asset classes whose returns are not as correlated to 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. New asset classes such as absolute return, real return, private equity, emerging markets and real estate will be strategically added commensurate with the economic environment and the goals and objectives of the SBOE. Effective November 16, 2007, the SBOE approved the selection of five absolute return fund-of-fund managers for the partial implementation of the absolute return mandate. The Fund's investment in domestic and international equity securities experienced a positive return of 17.0% during the fiscal year. The domestic large capitalization equity market, as represented by the Standard & Poor's 500 Stock Index ("S&P 500 Index"), increased 15.13% and the Fund's internally managed S&P 500 index portfolio returned 15.12% for the year. Small and mid capitalization stocks, represented by the Standard & Poor's 1000 Stock Index, increased 15.72% and the Fund's internally managed S&P 1000 index portfolio returned the 15.82%. Returns in the international developed markets were also positive. The Morgan Stanley Capital International All Country World Index Ex-U.S., Net Dividend ("MSCI ACWI Ex-US Index") increased 21.76% and the Fund's externally managed international index portfolio returned 21.93% for the year. The Fund's fixed income portfolio produced a total return of 5.59% compared to the Lehman Brothers Aggregate Bond Index return of 5.26%. At August 31, 2007, approximately 21% of the Fund's $6.1 billion fixed income portfolio was invested in U.S. Treasury notes and bonds, 17% in government agencies, 44% in mortgage and asset backed securities and 18% in corporate bonds. For fiscal year 2007, total revenues, net of security lending rebates and fees reported by the Fund were $3.9 billion, a 36.9% increase over the prior year, primarily attributable to the fact that domestic equity and fixed income returns were higher in 2007 than the previous year. In fiscal year 2007, 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 increase 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. Operating expenditures, net of security lending rebates and fees, moderately decreased by 1.7% for the year ended August 31, The Fund supports the public school system in the State by distributing a predetermined percentage of its asset value to the ASF. In February 2006, the SBOE requested an opinion from the Attorney General regarding the appropriate calculation of the market value of the Fund in determining the total return distribution. On February 13, 2007, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-516, which addressed the SBOE's opinion request. The legal advice included in the opinion was taken into account by the SBOE in making its distribution calculation, which increased the calculation to include accrued investment revenues at each quarter. For fiscal years 2006 and 2007, this distribution to the ASF totaled $841.9 million and $843.1 million, respectively. At the end of the 2007 fiscal year, PSF assets guaranteed $44.9 billion in bonds issued by 767 local school districts. Since its inception in 1983, the Fund has guaranteed 3,731 school district bond issues totaling $75.56 billion in principal amount. During the 2007 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program increased by 253, or 11.2%. The dollar amount of guaranteed school bond issues outstanding increased by $7.06 billion or 18.7%. The guarantee capacity of the Fund increased by $4.58 billion, or 9.5%, during fiscal year The adoption of the 2006 Asset Allocation Policy by the SBOE is intended to strengthen the assets of the PSF that it manages by increasing total returns and reducing risk and volatility within the portfolio. Whether the Fund will realize those goals will be determined over a period of years and will be dependent upon a variety of factors, as the financial marketplace continues to undergo many changes. 43

51 Other Events and Disclosures Since U.S. and other developed equity markets peaked in October 2007, there has been extraordinary volatility in global equity and fixed income markets. From October 10, 2007 to November 20, 2008, the S&P 500 Index lost approximately 51% of its value and the MSCI ACWI Ex-US Index gave up approximately 56% of its value. During that period, a credit crunch and lack of liquidity led to the demise, sale and government capitalization of major financial companies. The Fund's asset allocation positions the Fund to participate in the diversified returns that reflect the indexed allocations of the Fund, and the Fund has been broadly impacted by current market events. However, the Fund has not had a concentration that exceeded equity holdings dictated by an indexed portfolio in any of the financial companies that have been most severely impacted by the global financial crisis. Reference is made to the unaudited and preliminary list of the Fund's equity and fixed income holdings as of August 31, 2008 and to the monthly updates with respect to the Guarantee Program, each of which are posted to the PSF web site, for additional information regarding the impact of the global financial crisis on the Fund. On November 4, 2008, the Chairman of the SBOE submitted a request to the Attorney General for a legal opinion regarding five questions relating to the Ten Year Total Return. In the request, the Chairman noted that the questions involve the application of the Ten Year Total Return in light of the recent dramatic declines in the financial markets, and in particular because of the market decline it is possible that a distribution from the PSF to the ASF could exceed the total return on all investments of the PSF over the relevant 10-year period. The questions are as follows: (1) clarification was requested regarding the current methodology used by the TEA in calculating the Fund's total return, particularly with respect to proceeds received by the Fund from the GLO; (2) whether the total return of the Fund should be reduced by either the investment management fees paid by the Fund or the administration expenses incurred in the management of the Fund; (3) when the Ten Year Total Return should be applied to a transfer from the PSF to the ASF; (4) what actions would be necessary should it be determined that a transfer of funds from the PSF to the ASF exceeded the limit provided by the Ten Year Total Return; and (5) whether the Ten Year Total Return limits the ability of the SBOE to determine the distribution rate from the PSF to the ASF on a biennial basis. While the questions presented by the opinion request may affect the amount and frequency of distributions from the PSF to the ASF, the timing of valuations of Fund assets and the determination of the distribution rate made by the SBOE, the TEA does not anticipate that any Attorney General opinion will adversely affect the Guarantee Program or the value of the Fund. The opinion request has been assigned request number RQ-0758-GA, and will be available for review at the web site of the Attorney General at 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 modified its code of ethics in November 2003 and again in September 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 In December 2007, the SBOE engaged outside counsel to advise it as to its fiduciary duties over the Fund, including the applicable fiduciary standards of Article VII, Section 5 of the Texas Constitution to specific actions regarding the investment of the PSF to ensure compliance with the fiduciary standards. That provision of the Texas Constitution directs the SBOE to manage the assets of the PSF in the manner that persons of ordinary prudence, discretion, and intelligence would manage their own accounts. The SBOE relies on such outside counsel for transactional and fiduciary advice in connection with the investment of Fund assets in non-traditional investments made in connection with the implementation of the 2006 Asset Allocation Policy. During the 2007 Legislative Session, the SBOE requested the Legislature to provide an additional appropriation of approximately $18 million for the State's fiscal biennium ending August 31, 2009, to be used for the implementation of the 2006 Asset Allocation Policy. Such amount was requested in addition to a general operating appropriation of $14 million. During the 2007 Legislative Session, for the biennium the Legislature appropriated $9 million of the requested additional appropriation for external management services in addition to a $14 million operating appropriation. Fund management anticipates that TEA will make an exceptional item request to the 2009 Legislature totally approximately $12.5 million for the biennium to fund costs of implementing the 2006 Asset Allocation Policy. The TEA cannot predict whether or to what extent that request will be funded. 44

52 In addition, to the appropriation and the enactment of SB 389 (see "The Guarantee Program"), the House Bill 3699 was enacted during the 2007 Legislative Session ("HB 3699"), which established the real estate special fund account of the PSF (the "Real Estate Account") consisting of the 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. While as discussed below certain provisions of HB 3699 have presented questions relating to the constitutionality of HB 3699, HB 3699 provides that 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. In addition to modifying and expanding the powers of the SLB with respect to the management and investment of the assets of the Real Estate Account, HB 3699 provides that the SLB may release funds from the Real Estate Account to the credit of the ASF or to the SBOE for investment in the PSF. In addition, HB 3699 provides that the SBOE may transfer funds from the portion of the PSF managed by the SBOE to the Real Estate Account, provided that the SBOE determines any such proposed transfer to be in the best interest of the PSF. HB 3699 does not remove from the PSF any assets that have historically comprised or currently comprise the PSF, and therefore the bill has not directly impacted the cost value of the PSF, which has generally been used to determine the capacity of the Guarantee Program to guarantee bonds under the Guarantee Program. In accordance with HB 3699, the SLB approved a resolution on August 7, 2007 to begin depositing revenues previously deposited with the PSF into the Real Estate Account, commencing September 1, Also on August 7, 2007 and July 23, 2008, the SLB adopted resolutions to make four quarterly payments of $25,000,000 during fiscal years 2008 and 2009, respectively, from the Real Estate Account to the SBOE for investment, which action was taken to honor a SLB commitment to the Fund that was made prior to the enactment of HB HB 3699 includes language that would authorize the SLB and the Land Commissioner to determine whether to transfer funds to the SBOE (in which event such funds may then be invested by the SBOE or paid over to the ASF in accordance with the Total Return Constitutional Amendment) or to directly transfer funds to the ASF (see "The Total Return Constitutional Amendment"). In October 2007, the Chair of the SBOE requested an opinion from the Attorney General with respect to the constitutionality of certain provisions of HB 3699 that permit the SLB to transfer funds directly to the ASF, instead of to the SBOE for the exercise by the SBOE of its discretion under the limits of the Total Return Constitutional Amendment. The opinion request also sought confirmation that all assets that have historically been accounted for as the PSF are, in fact, a single fund under the Texas Constitution, which assets form the corpus available for the Bond Guarantee Program. On April 9, 2008, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-0617 (2008) ("GA-0617"), advising the Chair of the SBOE that (1) the various constitutional references made to a perpetual educational endowment of the State are all properly read to refer to a single fund known as the PSF, (2) the SLB is authorized to sell PSF land and to acquire other land for the PSF, although any proceeds from the sale of real estate that are not reinvested by the SLB in other real estate assets shall be invested under the direction of the SBOE, (3) both the SLB and the SBOE, in making their respective reinvestment of proceeds from the sale of PSF land or other assets, should consider the potential impact of such investment on the probable income and safety of the PSF, and (4) the provisions of H.B that purport to authorize the SLB to directly transfer investment proceeds to the ASF (in lieu of transfer to the PSF for a determination by the SBOE of an appropriate ASF distribution rate), would likely be determined by a court to be in violation of the State constitution. As of August 31, 2008, 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. Reference is made to the Annual Report for a description of such lawsuits that are pending, which may represent contingent liabilities of the Fund. 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 H of the TEA Investment Procedure Manual, which relates to the Guarantee Program. Through the adoption of the TEA Rule and its commitment to guarantee the Bonds, the SBOE has made the following agreement for the benefit of the District and holders and beneficial owners of the 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 SEC Rule 15c2-12 ("Rule 15c2-12"), with respect to the Bonds. Under the agreement, the TEA will be obligated to provide annually certain updated financial information and operating data, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. 45

53 Annual Reports The TEA will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the Guarantee Program and the PSF of the general type included in this Official Statement under the heading "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM." The information 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 will provide the updated information to each NRMSIR and to the SID. The Texas MAC has received SEC approval to operate, and has begun to operate, a "central post office" for information filings (the "CPO") made by issuers of municipal securities in accordance with Rule 15c2-12. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at ("DisclosureUSA"). The TEA may utilize DisclosureUSA for the filing of information relating to the Guarantee Program, unless the SEC issues a statement that its approval has been withdrawn. The TEA may provide updated information in full text or may incorporate by reference certain other publiclyavailable documents, as permitted 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 conform 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 February in each year, unless the State changes its fiscal year. If the State changes its fiscal year, the TEA will notify each NRMSIR and any SID of the change. Material Event Notices The TEA will also provide timely notices of certain events to certain information vendors. The TEA will provide notice of any of the following events with respect to the Guarantee Program, if such event is material within the meaning of the federal securities laws: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Guarantee Program; (7) modifications to rights of holders of Bonds guaranteed by the Guarantee Program; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of Bonds guaranteed by the Guarantee Program; and (11) rating changes. (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, or early redemption.) 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." The TEA will provide each notice described in this paragraph to any SID and to each NRMSIR. Availability of Information from NRMSIRs and SID The TEA has agreed to provide the foregoing information only to NRMSIRs and any SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. 46

54 The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID, and the SEC staff has issued a no-action letter confirming that designation. The address of the Municipal Advisory Council of Texas is 600 West 8th Street, P.O. Box 2177, Austin, Texas , and its telephone number is 512/ and its Internet address is 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 District has made 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 the District and notices of material events relating to the Bonds. A description of the District's undertaking is included elsewhere in this 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 (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with 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 this 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 of this 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 The TEA has not previously 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) of Rule 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. The TEA has filed the SEC letter with each NRMSIR and the Texas SID, and reference should be made to the letter for the complete terms and conditions thereof. 47

55 CONTINUING DISCLOSURE OF INFORMATION In the Bond 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 while it remains obligated to advance funds to pay the Bonds. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The District will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement under the headings SELECTED FINANCIAL INFORMATION, COMPARISON OF REVENUES AND EXPENDITURES AND CHANGES IN FUND BALANCES, and in APPENDIX A. The District will update and provide this information within six months after the end of each fiscal year. The District will provide the updated information to each nationally recognized municipal securities information repository ( NRMSIR ) and to the Municipal Advisory Council of Texas, the state information depository ( SID ) designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the SEC ). The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. The updated information will include the full audited financial statements of the District, if the District s audit is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements within the required time, and audited financial statements when the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in APPENDIX A or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation. The District s current fiscal year end is June 30. Accordingly, it must provide updated information by December 31 in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify each NRMSIR and the SID of the change. Material Event Notices The District will also provide timely notices of certain events to certain information vendors. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. Neither the Bonds nor the Bond Order makes any provision for debt service reserves or liquidity enhancement. In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under Annual Reports. The District will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board ( MSRB ). Availability of Information from NRMSIRs and SID The District has agreed to provide the foregoing information only to NRMSIRs and any SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. 48

56 The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council is 600 West 8th Street, P.O. Box 2177, Austin, Texas , and its telephone number is 512/ The MAC has also received SEC approval to operate, and has begun to operate, a central post office for information filings made by municipal issuers, such as the District. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at ( DisclosureUSA ). The District may utilize DisclosureUSA for the filing of information relating to the Bonds. Limitations and Amendments The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the District to comply with its agreement. Nothing in this paragraph is intended or shall act to disclaim, waive, or otherwise limit the duties of the District under federal and state securities laws. The District may amend its continuing disclosure agreement 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, but only if (i) the agreement, as so amended, would have permitted an underwriter to purchase or sell the Bonds in the original primary offering in compliance with SEC Rule 15c2-12, taking into account any amendments or interpretations of SEC Rule 15c2-12 to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate amount of the outstanding Bonds consent to such amendment or (b) a person unaffiliated with the District (such as nationally recognized bond counsel) determines 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 applied to provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling the Bonds in the primary offering of the Bonds. If the District amends the agreement, it has agreed to include with any financial information or operating data next 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. Compliance with Prior Agreements The District has complied in all material respects with its previous continuing disclosure agreements made pursuant to SEC Rule 15c2-12. SALE AND DISTRIBUTION OF THE BONDS Underwriting The Underwriters listed on the cover page of this Official Statement have agreed, subject to certain conditions, to purchase the Bonds from the District for $98,666, (an amount equal to the principal amount of the Bonds, plus a net reoffering premium of $5,165,037.95, less an Underwriter s discount of $633,234.84). Prices and Marketability The delivery of the Bonds is conditioned upon the receipt by the District of a certificate executed and delivered by the Underwriter two weeks prior to the date of delivery of the Bonds stating the prices at which a substantial amount of the Bonds of each maturity has been sold to the public. For this purpose, the term public shall not include any person who is a bond house, broker or similar person acting in the capacity of underwriter or wholesaler. Otherwise, the District has no understanding with the Underwriter regarding the reoffering yields or prices of the Bonds. Information concerning reoffering yields or prices is the sole responsibility of the Underwriter. 49

57 THE PRICES AND OTHER TERMS RESPECTING THE OFFERING AND SALE OF THE BONDS MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER AFTER THE BONDS ARE RELEASED FOR SALE, AND THE BONDS MAY BE OFFERED AND SOLD AT PRICES OTHER THAN THE INITIAL OFFERING PRICES, INCLUDING SALES TO DEALERS WHO MAY SELL THE BONDS INTO INVESTMENT ACCOUNTS. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE REVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FINANCIAL ADVISOR RBC Capital Markets Corporation (the Financial Advisor ) was employed in 2003 as Financial Advisor to the District. The fees paid the Financial Advisor for services rendered in connection with the issuance and sale of the Bonds are based on the amount of Bonds actually issued, sold and delivered, and therefore such fees are contingent on the sale and delivery of the Bonds. OFFICIAL STATEMENT Sources and Compilation of Information The information contained in this Official Statement has been obtained primarily from the District and from other sources believed to be reliable. No representation is made as to the accuracy or completeness of the information derived from sources other than the District. The summaries of the statues, order, and other related documents are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. 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 condition of the District. Updating of Official Statement; Further Disclosure The District will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the District and, to the extent that information comes to its attention, in the other matters described in the Official Statement, until the delivery of the Bonds. All changes in the affairs of the District and other matters described in the Official Statement subsequent to the delivery of the Bonds and all information with respect to the resale of the Bonds shall be the responsibility of the Underwriter. This Official Statement was duly authorized and approved by the Board of Trustees of Spring Independent School District, as of the date specified on the first page hereof. ATTEST: /s/ Mel Smith President, Board of Trustees Spring Independent School District /s/ Jana Anders Secretary, Board of Trustees Spring Independent School District 50

58 APPENDIX A SPRING INDEPENDENT SCHOOL DISTRICT Annual Financial Report for the Year Ended June 30, 2008 The information contained in this appendix has been excerpted from the annual financial report of the Spring Independent School District for the fiscal year ended June 30, Certain information not considered to be relevant to this financing has been omitted; however, complete financial reports are available upon request.

59 Spring Independent School District Ella Blvd. Houston, Texas Tel Fax November 11, 2008 The Honorable Board of Trustees Spring Independent School District Ella Blvd. Houston, Texas Dear Board Members: The Comprehensive Annual Financial Report of the Spring Independent School District (the District, Spring ISD or SISD ), Houston, Texas, for the fiscal year ended June 30, 2008, is submitted herewith. The Comprehensive Annual Financial Report is management s report of financial operations to the Board of Trustees (the Board ), taxpayers, grantor agencies, employees, the Texas Education Agency ( TEA ), and other interested parties. The government-wide financial statements in this report provide an overview of the District s governmental activities, while detailed fund financial statements describe specific activities of each fund group used in accounting for the District s financial transactions. This report was prepared by the District s Financial Services Division in accordance with generally accepted accounting principles ( GAAP ) and reporting standards as promulgated by the Governmental Accounting Standards Board ( GASB ). Responsibility for the accuracy of the data and completeness and fairness of the presentation, including all disclosures, rests with the District. We believe that the data, as presented, is accurate in all material respects; that information is presented in a manner designed to set forth fairly the financial position and results of operations of the District as measured by the financial activity of its various funds; and that all disclosures necessary to enable the reader to gain the maximum understanding of the District s financial activities have been included. In order to provide a reasonable basis for making these representations of responsibility, management of the District has established a comprehensive internal control framework that is designed to protect the District s assets from loss, theft or misuse. Additionally, the internal control framework is designed to compile sufficient reliable information for the preparation of the District s financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the District s comprehensive framework of internal controls has been designed to provide reasonable assurance rather than absolute assurance that the financial statements will be free from material misstatement. To the best of our knowledge and belief, this financial report is complete and reliable in all material respects. 1

60 The financial statements of the District have been audited by Null-Lairson, a firm of licensed certified public accountants. The goal of the independent audit is to provide reasonable assurance that the financial statements of the District for the fiscal year ended June 30, 2008, are free of material misstatement. The independent audit involves examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditors concluded based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the District s financial statements for the fiscal year ended June 30, 2008, are fairly presented in conformity with GAAP. The independent auditors report is presented as the first component of the financial section of this report. The independent audit of the financial statements is part of a broader, federally mandated Single Audit designed to meet the special need of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the audited government s internal controls and compliance with legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the District s separately issued Single Audit Report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management s Discussion and Analysis ( MD&A ). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The District s MD&A can be found immediately following the report of the independent auditors. REPORTING ENTITY An act of the Thirty-Eighth Legislature of the State of Texas in 1923 provided the statutory authority for the creation of independent school districts in the State of Texas. The District was established and incorporated in 1933 by the combination of two separate schools districts, the Spring School District and the Harrell School District. As an independent school district, a seven-member board of trustees elected from residents of the District constitutes the governing body. Based on legislative authority codified in the Texas Education Code, the trustees (1) have exclusive power to manage and govern the District; (2) can acquire and hold real and personal property; (3) shall have power to levy and collect taxes and to issue bonds; (4) can contract for appointed officers, teachers, and other personnel as well as for goods and services; and (5) have the right of eminent domain to acquire real property. As required by GAAP, the financial statements of the reporting entity include those of the District (the primary government), an independent reporting entity clearly within the criteria established by GASB. The District encompasses approximately 57 square miles and is located in northern Harris County, Texas, approximately 20 miles north of downtown Houston. Interstate Highway 45 ( I-45 ) traverses the District north to south, and Farm-to-Market Road 1960 ( FM 1960 ) bisects the District east to west approximately at its midpoint. The unincorporated community of Spring is located in the District. The District s system presently includes twenty-two elementary schools, six middle schools, three traditional high schools, and a school-of-choice high school. Construction is currently underway on five new elementaries with two scheduled to open August 2008 and three scheduled to open August

61 The District is one of twenty public school districts located in Harris County. It provides a program of public education from pre-kindergarten through grade twelve. The purpose and responsibility of the District is to provide a thorough and efficient educational system for the children enrolled in public schools within its boundaries whereby each child has access to programs and services that are appropriate to his or her educational needs. In addition to the regular educational program, the District offers programs in areas such as vocational education, special education, gifted and talented, bilingual and compensatory education. All District schools are fully accredited by the TEA and the Southern Association of Colleges and Schools. The District continues to experience rapid growth in the number of students enrolled. Peak enrollment was 33,352 in 2008 and 32,443 in 2007, an increase of 909 and 868 students respectively. Average daily attendance increased by 669 students in and by 245 students in ORGANIZATIONAL PURPOSE During , the Board adopted the District s vision statement. This statement reads, By 2015, Spring Independent School District will be recognized nationally as a leader among learning organizations and known for exemplary student achievement. The mission of the Spring Independent School District is to develop students who excel academically, reason and solve problems rationally, and act responsibly by displaying good character and citizenship. Spring ISD is both a growing and changing school district. We take pride in the fact that more families are choosing SISD as the place for the education of their children, and we recognize and value the beliefs and cultures represented by all our families. We are committed to working together as parents, educators, and community members. Expectations of the District, its Board of Trustees, its staff, students and community are reflected in its core philosophy. Spring ISD: Believes in providing a basic educational program of instruction, which permits each student to attain his or her academic potential. Believes that the education of our students is a responsibility shared equally by students, their families and staff members, with the expectation that all will actively support and participate in the development of our children. Encourages all students to participate in school programs and activities for the purpose of discovering personal strengths and abilities and developing well-rounded interests. Believes that patriotism, responsible citizenship, self-discipline, respect for authority and respect for others, including an understanding of our heritage, should be emphasized in all aspects of the District s operation. Expects that parents will participate, support and cooperate in the education and discipline of their children. Believes in selecting staff members of the highest quality and rewarding them on the basis of achievement and performance. Expects that each staff member will be a model of commitment to professionalism and a model and example of good citizenship to the students, to the community, and to one another. 3

62 Believes that it is the responsibility of the Board to establish policy and direction for the District and to delegate the management and operation of the District to the Superintendent and the staff. Recognizes and respects the financial trust placed in the Board of Trustees by the taxpayers of the District, and expects that the District will be operated in a fiscally responsible manner. LONG-TERM FINANCIAL PLANNING Enrollment is projected to increase 2.5% during the school year and by 40 % by the school year. Currently there are 594 students per square mile in the District. In the fiscal year, the District passed a $280 million dollar bond authorization as part of a plan to accomplish the goals and objectives described in the District s Five-Year Strategic Plan. Approximately 58 percent of this bond addresses student enrollment growth. The District s approach to responding to the combination of fast student growth in a restricted funding environment with increasing academic standards has been to ensure that the budget process is instructionally driven and guided by the Strategic Plan. The major budget priorities are to ensure quality staff are hired to accommodate student growth and increased accountability; to ensure quality staff are retained and hiring practices are competitive with salary increases and benefit packages; to provide necessary professional development; and to provide additional funding for utilities, custodial services and maintenance supplies associated with opening new schools. DISTRICT STRATEGIES AND INITIATIVES During fiscal year the District operated under the first year of its sixth Five-Year Strategic Plan. The District and community members developed the sixth Five-Year Strategic Plan, effective November A Five-Year Plan Steering Committee was appointed to identify District needs over the next five years in the major study areas of Staff, Curriculum & Instruction, Safe & Secure Schools, Technology, Facilities, Budget & Finance, and Communication and Community/Parent Involvement. The Steering Committee consisted of eighty teachers, parents, administrators, paraprofessionals, auxiliary staff, and business/community representatives. The Five-Year Strategic Plan is a living document, providing the framework and guidance for the District to outline its priorities and goals of the District for the five-year period from the to the school years. The Five-Year Plan sets out the District s objectives and specific action steps necessary to achieve its established priorities. The eight priority areas of focus and its related priority statement are: Student Achievement: Increase student achievement and academic success by strengthening education programs and opportunities for all students. Learning Environment: Provide a safe, secure, and respectful learning environment for students and staff. Personnel: Recruit and retain quality staff. 4

63 Teaching Environment: Provide a supportive, professional teaching environment that encourages teaching excellence. Technology: Strengthen the technology competencies of students and staff and provide infrastructure, equipment and support to deliver instructional and administrative applications. Communications and Involvement: Enhance communications and involvement with students, parents, community and staff. Facilities and Transportation: Provide instructional and support facilities and transportation services to meet the needs of the existing and growing student population. Budget and Finance: Continue to exercise fiscal responsibility to maintain financial strength and provide the financial resources for the educational program and support needs. MAJOR INITIATIVES AND ACCOMPLISHMENTS District Achievements Spring ISD received a rating of Superior Achievement from the Financial Accountability Rating System of Texas ( SchoolsFirst ). Wunsche High School received the Caudill Award from the Texas Association of School Administrators /Texas Association of School Boards 2007 Architectural Awards of Excellence. Lewis Elementary School received the Value and Process of Planning Design Award, from the Texas Association of School Administrators /Texas Association of School Boards 2007 Architectural Awards of Excellence. Bailey Middle School received Criteria Award for Design Texas Association of School Administrators /Texas Association of School Boards 2007 Architectural Awards of Excellence. McNabb Elementary School received the Value and Process of Planning design Award, from the Texas Association of School Administrators /Texas Association of School Boards 2007 Architectural Awards of Excellence. Spring ISD Police Department received the Agency Recognition Award from the National School Safety Advocacy Council. Westfield High School received the Texas Gold Performance Acknowledgement for high percentage of graduates that completed the course of requirements for the Texas State Board of Education Recommended High School Program. Bammel and Cooper Elementary Schools and Claughton Middle School received the Governor s Educator s Excellence Award. Wunsche and Dekaney High Schools received the National Educator Program School of Promise Award. Ten of the District s schools received Recognized ratings from the Texas Education Agency. The District s community newsletter, Spring Schools, received a crystal award in the Bond Election and best of category in Spanish translation external newsletters submitted by schools with enrollments of over 30,000 students in the Texas School Public Relations Association awards competition. 5

64 Staff Achievements A Spring High School teacher received the Texas Choral Director s Association Distinguished Young Director Award. A Spring ISD lead driver for transportation received the Texas State Pupil Transportation Operations Specialist of the Year Award. Five Spring ISD teachers received Outstanding Teacher awards from the Houston Area Alliance of Black School Educators. A Spring ISD police officer received Department Officer of the Year Award recognized for professional demeanor both on and off duty. A Spring ISD elementary school teacher was chosen as the Rodeo Institute for Teacher Excellence Primary Teacher of the Year. A Spring ISD transportation mechanic received the Texas Association of School Bus Technician Award. Three elementary ESL teachers of the year named Bilingual Teachers of the Year by Suburban Houston Association of Bilingual Education. A middle school teacher was named the Gulf Coast Administrators of Special Education Special Educator of the Year Award. A Wells Middle School teacher was named Texas History Teacher of the Year by the Daughters of the Republic of Texas. A Bammel Middle School teacher received the 2007 Texas Alliance for Geographic Education Distinguished Service Award. The Spring ISD Athletic Director received the Distinguished Service Award from the Greater Houston Football Coaches Association. A Spring ISD head football coach received the Ronnie Bell Hall of Honor Award from the Greater Houston Football Coaches Association. The Spring ISD director of elementary mathematics was awarded the Eads Excellence Award by the Texas Association of Supervisors of Mathematics. A middle school teacher received the Math Hero National Award A Spring High School coach was named Coach of the Year in softball. Two Westfield High School coaches were named Coach of the Year in football and girls basketball. Student Academic Achievements Five high school students were named commended in the National Merit Scholarship competition. Six high school students were named recipients to the National Achievement Program. Five high school students were named scholars in the National Hispanic Recognition Program. A Spring High School student advanced to finalist in the 2008 National Merit Scholarship competition. Two Westfield High School students were named National Achievement Award Scholars. 6

65 Student Artistic Achievements Two Spring High School students earned positions in the Texas Music Educators Association All- State Choir. Five high school students and two alternates were named to the Texas All-State Band and Orchestra. The Westfield High School Symphonic Band was named winners in the National Wind Band Honors Project. Three high school students and one elementary school student s art work was selected for display in the Texas State Capital during Youth Art Month. Three high school art students and four high school language arts students received gold keys in the National Scholastic Art and Writing Awards competition. Spring High School Band invited to perform at the Midwest international Band and Orchestra Clinic. Spring High School art student wins Grand Champion at Houston Livestock Shown and Rodeo Art Contest. Five Spring High School debate students were selected as national qualifiers in National Forensic League competition. Spring High School art student wins Pearl Fincher Museum art contest. Dekaney High School music facilities chosen to be a part of the Wenger Corporation catalogue which will be distributed internationally. Bailey Middle School Band selected third in state in Class CC in the Texas Music Educators Association State Honor Band Competition. Scholastic Regional Art Awards four gold keys and five silver keys advanced to national competition. Westfield High School Band received award for Overall Outstanding Large School Concert Band in the choice Music Events 2007 National Mark of Excellence Competition. Westfield high School Band named 5A Open Texas State Champion at the USSBA Texas State Championships. Eighteen Sweepstakes Awards at band and choir University Interscholastic League competition. Student Athletic Achievements A Spring High School student was named National Champion in diving. Westfield High School: Regional Semi-Finalist in Football and Girls Basketball, State Qualifier in Girls Track and Regional Qualifier in Boys Tennis. Spring High School: State Qualifier in Cross Country and Swimming, Regional Qualifier in Girls Track and Boys Track, Regional Quarter Finalist in Softball and Bi-District Finalist in Volleyball. 7

66 Education Foundation The District receives support from the Spring Education Foundation (the Foundation ), a non-profit organization. The Foundation seeks funds to support initiatives related to the District s Five-Year Strategic Plan. The goal of the Foundation is to raise funds for teacher initiative projects and for campus initiative projects that attempt to improve student achievement and success. Grant awards are up to $1,000 for teacher or classroom projects and up to $5,000 for campus or District projects. During grants were awarded totaling $100,040 to improve services to students. The foundation does not meet the criteria for inclusion in the District s financial statements under the provisions of GASB Statement No. 39. ECONOMIC CONDITION AND OUTLOOK The Houston metropolitan area ranks as the fourth-largest metropolitan area in the country. Demographically and economically, the region has rapidly diversified into a cosmopolitan, international center of business and industry. Growth in real estate can be seen throughout the city, as new construction continues at a rapid pace. The District must be prepared to meet the challenges of educating an increasingly heterogeneous student population. Furthermore, in light of the recent growth of servicesector jobs in the Houston area, these children must be prepared for careers requiring high-level skills in mathematics, science, and technology in addition to solid reading and writing skills. The District s economy has historically been based upon mineral production and residential development. The expansion of the Houston metropolitan area northward along I-45, the main Houston/Dallas traffic artery, and along FM 1960 has had a substantial impact on the economy of the District. Although the District has remained primarily residential in character, numerous shopping centers, automobile dealerships, hotels and combination business park/multi-family developments have been built along I-45 and FM The following is a summary of the tax base by category for fiscal years 2008 and 2007: Type of Property Amount % Amount % Residential $4,589,945, % $4,166,858, % Commercial, Industrial and Multi-Family 4,056,697, % 3,872,957, % Acreage 116,458, % 120,123, % Vacant Lots and Tracts 214,114, % 202,609, % Utilities 124,320, % 125,521, % Mineral Reserves 33,233, % 29,160, % Total Assessed Value 9,134,769, % 8,517,230, % Less: Exemptions (1,380,277,344) (1,251,567,002) Net Taxable Value $7,754,492,450 $7,265,663,955 8

67 The percentage mix of property values by category in the District has been consistent over the past ten years. Residential Properties For the 2008 fiscal year, the Harris County Appraisal District listed 37,756 single-family residences. This compares to 35,756 dwellings in this category for last year. The District continues to develop new subdivisions throughout all geographic areas. The 2,000 new residences occurred throughout the District. The average value of the residential property in the 2008 fiscal year was $125,950, which compares to $125,897 in the 2007 fiscal year. This represents a.4% increase in the average home value from the prior year. The development of new residential subdivisions within the District boundaries continues to be influenced by these market forces. During the 2008 fiscal year, the assessed value for residential properties increased $423,087,747 or 10.15% over the previous year. Commercial, Industrial and Multi-Family Properties The commercial and industrial growth of the District is occurring along the interstate frontage. Additional apartment complexes, shopping centers, medical office complexes, restaurants, and other retail businesses have all been completed this year along the I-45 and FM 1960 corridor. We anticipate that the commercial growth will continue to increase at or above the level of residential growth. During the 2008 fiscal year, the assessed value for commercial properties increased $183,739,842 or 4.74% over the previous year. Acreage The vacant acreage tracts continue to decrease as we experience residential and commercial growth. From the 2007 to the 2008 fiscal year we experienced a shift in this category of property by approximately 211 acres. Vacant Lots and Tracts The total number of vacant lots continuously changes due to subdivision sections. Utilities The assessed value for the various utility properties decreased by $1,201,172 or 0.9% less than the previous year. 9

68 RELEVANT FINANCIAL POLICIES Accounting System The diverse nature of the District s operations and the necessity of legal compliance preclude recording the financial transactions of the District in a single fund. The District s accounting system is organized and operated on a fund basis. Each fund is a distinct, self-balancing accounting entity. The various funds are fully described in Note 1 of the Notes to the Financial Statements. In developing, evaluating, and improving the District s accounting system, consideration is given to the adequacy of the internal control structure. Internal controls are designed to provide loss from unauthorized use or disposition and that transactions are executed in accordance with management s authorization and recorded properly to permit the preparation of financial statements in accordance with GAAP. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived, and the evaluation of costs and benefits requires estimates and judgments by management. All internal control evaluations occur within the above-mentioned framework. We believe the District s internal control structure adequately safeguards assets and provides reasonable assurance of the proper recording of financial transactions. Single Audit As a recipient of federal and state awards, the District is also responsible for ensuring that an adequate internal control structure is in place to ensure compliance with applicable laws and regulations related to these programs. This internal control structure is subject to periodic evaluation by management and the internal audit staff of the District. As a part of the District's single audit, tests are made on the internal control structure, including that portion related to federal awards programs, as well as to determine that the District has complied with applicable laws and regulations. The results of the District's single audit for the fiscal year ended June 30, 2008 indicated no instances of material weaknesses in the internal control structure and no instances of material noncompliance with applicable laws and regulations. Budgetary Controls The District maintains budgetary controls to ensure compliance with legal provisions embodied in the annual appropriated budget approved by the District's Board of Trustees. Budgetary control is maintained at the organizational level. Principals and department heads have primary responsibility for controlling and amending their budgets as necessary and ensuring that no expenditure is made unless funds have been properly authorized. Funds are properly authorized when approved by the Board of Trustees. Activities of the General Fund, Special Revenue Funds, Debt Service Fund, and Capital Projects Fund are included in the annual appropriated budget. The level at which expenditures cannot legally exceed the appropriated amount is established by function within an individual fund. The District also maintains an encumbrance accounting system as one technique of accomplishing budgetary control. Encumbered amounts lapse at year-end but are reappropriated as part of the following year's budget. 10

69 CASH MANAGEMENT During fiscal year 2008 cash was invested in the Texas Local Government Investment Pool ( TexPool ) and certificates of deposit. TexPool is a public funds investment pool established by the Texas Treasury Safekeeping Trust Co. to provide a safe environment for the placement of local government funds in authorized short-term, fully-collateralized investments. The total amount of interest earned in the governmental funds and proprietary funds for the fiscal year ended June 30, 2008 was $7,705,422, an increase of $1,668,021 from the fiscal year ended June 30, This increase was due primarily to higher interest rates earned on higher balances invested in the Capital Projects fund during the course of the year. The District's investment policy is to minimize credit and market risks while maintaining a competitive yield on its portfolio. Accordingly, deposits were either insured by federal depository insurance or collateralized by securities pledged to the District. All collateral on deposits was held either by the Federal Reserve Bank or a third party bank in the District s name. RISK MANAGEMENT The objectives of the risk management program are to safeguard the assets of the District, minimize the financial effect of potential losses, and provide a reasonable level of employee benefits consistent with affordable funding. The District purchases commercial insurance for real and personal property with an insured value of $660,783,224. In no event shall liability under this policy arising out of one occurrence exceed $500,000,000. Casualty risks are insured with limits of $1,000,000 for commercial general liability and $1,000,000 combined single limit for automobile liability. Professional liability risks are insured with limits of $3,000,000 each professional incident and $3,000,000 professional incident aggregate. Within these policy limits, the District s exposure is limited to the deductibles specific to each type of risk coverage. The District is exposed to various risks related to torts: theft of, damage to and destruction of assets; errors and omissions; and natural disasters. The District s risk management program encompasses various means of protecting the District against losses through commercial insurance carriers. The District s workers compensation self-insurance program provides medical and indemnity payments as required by law for on-the-job-related injuries and is accounted for in the Workers Compensation Fund, an Internal Service Fund. A third-party administrator manages and oversees claims loss control. The District obtained excess loss insurance, which limited annual claims paid from the Workers Compensation Fund for the fiscal year ended June 30, 2008 to $300,000 for any individual participant and an aggregate limit of $1,000,000. The liability for outstanding losses includes an amount for claims that are incurred but not reported. 11

70 In addition, the District s Safety and Risk Management Department implements various risk control techniques, including annual hazard surveys. The District practices aggressive administration to maintain and improve efficiency in the management of workers compensation claims. The claims and related expenses are charged to an internal service fund that receives revenue from the General Fund from a budget established for that purpose. Various types of insurance coverages are made available to the employees. Portions of the coverage available, such as medical insurance, is provided through a self-insured program with contributions made both by the District and the employees. Other available benefits offered to employees on a voluntary basis include dental, vision, cancer, life, and long-term disability insurance, as well as dependent and supplemental-life policies. INDEPENDENT AUDIT The Texas Education Code Section requires an annual audit of the accounts, financial records, and transactions of the District by independent certified public accountants selected by the Board. This requirement has been complied with, and the independent auditors report has been included in this report. GFOA Certificate of Achievement FINANCIAL REPORTING AWARDS The Government Finance Officers Association of the United States and Canada ( GFOA ) awarded a Certificate of Achievement for Excellence in Financial Reporting to the District for its Comprehensive Annual Financial Report for the fiscal year ended June 30, In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized Comprehensive Annual Financial Report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. ASBO Certificate of Excellence The District received the Association of School Business Officials ( ASBO ) Certificate of Excellence in Financial Reporting for the fiscal year ended June 30, This award certifies that the Comprehensive Annual Financial Report for the fiscal year ended June 30, 2007, substantially conforms to the principles and standards of financial reporting as recommended and adopted by the ASBO. 12

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79 To the Board of Trustees Spring Independent School District Houston, Texas Independent Auditors Report We have audited the accompanying financial statements of the governmental activities, each major fund and the aggregate remaining fund information of Spring Independent School District (the District ) as of and for the year ended June 30, 2008, which collectively comprise the District s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District s management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the District as of June 30, 2008, and the respective changes in financial position and cash flows, where applicable, thereof, for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 3, 2008 on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management s Discussion and Analysis and budgetary comparison information on pages 23 to 34 and pages 73 through 74, respectively, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. 11 Greenway Plaza Suite 1515 Houston, TX (P) (F)

80 Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The combining and individual fund statements, the compliance schedules required by the Texas Education Agency and other supplementary information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The combining and individual fund financial statements have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly presented in all material respects in relation to the basic financial statements taken as a whole. We have applied certain limited procedures to the compliance schedules required by the Texas Education Agency, which consisted principally of inquires of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and express no opinion on it. The Introductory Section and Statistical Section listed in the table of contents have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. Houston, Texas November 3,

81 SPRING INDEPENDENT SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Fiscal Year Ended June 30, 2008 (Unaudited) Our discussion and analysis of Spring Independent School District s (the District ) financial performance provides an overview of the District s financial activities for the fiscal year ended June 30, It should be read in conjunction with the District s financial statements. FINANCIAL HIGHLIGHTS On the government-wide financial statements, the assets of the District exceeded liabilities at June 30, 2008 by $109,629,916. Of this amount, $29,474,569 is unrestricted. At June 30, 2008 the District s governmental funds financial statements reported combined ending fund balance of $212,342,061. Of this amount, $3,541,338 is reserved in the general fund for restricted purposes and $31,770,087 is unreserved in the general fund and is available for spending at the District s discretion. At the end of the current fiscal year, total fund balance for the general fund was $38,603,586, or 16.3% of total general fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the District s basic financial statements. The District s basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains required supplementary information and other supplementary information in addition to the basic financial statements themselves. Government-Wide Financial Statements All the District s services are reported in the government-wide financial statements, including instruction, student transportation, general administration, school leadership, and child nutrition services. Property taxes, state and federal aid, and interest and investment earnings finance most of the activities. Additionally, all capital and debt financing activities are reported here. The government-wide financial statements are designed to provide readers a broad overview of the District s finances, in a manner similar to a private-sector business. The statement of net assets presents information on all of the District s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the District s financial position is improving or deteriorating. 23

82 The statement of activities presents information showing how the District s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Fund Financial Statements The District uses fund accounting to record and report specific sources of funding and spending for particular purposes. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the District can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. The fund financial statements provide more detailed information about the District s most significant funds not the District as a whole. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. Most of the District s activities are included in governmental funds, which focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out, and (2) the balances left at year-end that are available. However, unlike the government-wide financial statements, governmental fund financial statements provide a detailed short-term view that helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District s programs. Because this information does not encompass the additional long-term focus of the government-wide statements, we provide additional information in Figure A-1 that explains the relationship (or differences) between them. The District s governmental funds are the General Fund, Debt Service Fund, Capital Projects Fund and Special Revenue Funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund schedules of revenues, expenditures, and changes in fund balance for the General Fund, Debt Service Fund and Capital Projects Fund, each of which is considered to be a major fund. Individual fund data for each of the nonmajor governmental funds is provided in the form of combining and individual statements elsewhere in this report. 24

83 Proprietary funds are used to account for operations that are financed similar to those found in the private sector. These funds provide both long and short-term financial information. The District maintains one type of proprietary fund (internal service fund) to report activities of the District s self-insured health insurance and workers compensation programs. Because these services benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. The proprietary fund financial statements provide separate information for the District s selfinsured health insurance fund and workers compensation fund. Both Internal Service Funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report. Fiduciary funds are used to account for assets held by the District in a trustee capacity or as an agent for individuals, private organizations and/or other funds. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of the District s fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. The District s fiduciary funds are considered to be agency funds which accounts for the District s Student Activity Funds. We exclude these activities from the District s government-wide financial statements because the District cannot use these assets. Notes to the Basic Financial Statements The financial statements also include notes that provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements. The remainder of this overview section of management s discussion and analysis explains the structure and contents of each of the statements. Figure A-1 summarizes the major features of the District s financial statements, including the portion of the District government they cover and the types of information they contain. Other Information In addition to the basic financial statements and accompanying notes to the basic financial statements, this report also presents certain required supplementary information concerning a comparison of the District s General Fund budgeted and actual revenues and expenditures. The combining and individual fund statements and schedules referred to earlier in connection with non-major governmental funds and internal service funds are presented immediately following the required supplementary information. 25

84 Figure A-1. Major Features of the District s Government-wide and Fund Financial Statements Fund Statements Type of Statements Government-wide Governmental Funds Proprietary Funds Fiduciary Funds Entire District's The activities of the Activities the District Instances in which the government (except District that are not operates similar to District is the trustee or Scope fiduciary funds) proprietary or fiduciary private business: agent for someone self-insurance else s resources Statement of net assets Balance sheet Statement of net assets Statement of fiduciary net assets Required financial Statement of activities Statement of revenues, Statement of revenues, Statement of changes statements expenditures and expenses and changes in fiduciary net assets changes in fund in fund net assets balances Statement of cash flows Accounting basis Accrual accounting and Modified accrual Accrual accounting Accrual accounting and measurement economic resources accounting and and economic resources and economic resources focus focus current financial focus focus resources focus All assets and Only assets expected All assets and liabilities, All assets and liabilities, Type of asset/liability liabilities, both financial to be used up and both financial and both short-term and information and capital, short-term liabilities that come capital, and short-term long-term and long-term due during the year and long-term or soon thereafter; no capital assets included All revenues and Revenues for which All revenues and All revenues and expenses during year, cash is received during expenses during year, expenses during Type of inflow/outflow regardless of when cash or soon after the end regardless of when year, regardless of information is received or paid of the year; expendi- cash is received or when cash is tures when goods or paid received or paid services have been received and payment is due during the year or soon thereafter 26

85 GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted earlier, net assets may serve over time as a useful indicator of the District s financial position. The District s assets exceeded liabilities by $109.6 million at June 30, 2008 and by $114.1 million at June 30, The District s Net Assets Governmental Activities Current and other assets $274,013,944 $143,632,004 Capital assets 541,740, ,014,499 Total Assets 815,754, ,646,503 Current liabilities 73,181,314 60,158,370 Noncurrent liabilities 632,943, ,349,825 Total Liabilities 706,124, ,508,195 Net Assets: Invested in capital assets, net of related debt 21,280,376 33,629,642 Restricted 58,874,971 41,816,206 Unrestricted 29,474,569 38,692,460 Total Net Assets $109,629,916 $114,138,308 For fiscal year 2008, the largest portion of the District s net assets, $58,874,971 or 53.7%, represents resources that are subject to external restrictions on how they may be used. The portion of net assets that reflect the District s investment in capital assets (e.g. land, building and improvements, and furniture and equipment), less any related debt used to acquire those assets that is still outstanding is $21,280,376 or 19.4%. An additional portion of the District s net assets, (26.9%), represents resources that are unrestricted and may be used to fund the programs of the District for the next year. The District s net assets decreased by $4,508,392 during the current fiscal year. The change is due to the net effect of two items. The first item is the increase in capital assets which is attributable to the District s increased activity in capital improvements including construction projects and the purchase of equipment and land. The second item as an increase in temporary investments. More detailed information about the District s capital assets and debt administration is presented in Notes 5 and 7, respectively. An offsetting decrease is due to an increase in non-current liabilities as a result of the sale of general obligation and refunding bonds payable. 27

86 Changes in net assets The District s total revenues for the fiscal year ended June 30, 2008 as shown on the Statement of Activities were $313,238,202. A significant portion (35.7%) of the District s revenue comes from taxes. State aid and other grant revenues represent 43.1%, while only 1.0% relate to charges for services. (See Figure A-2) The total cost of all programs and services was $317,746,594, of which 49.6% is for instructional-related services. (See Figure A-3) Figure A-2 Sources of Revenue for the fiscal year ended June 30, % 1.0% Charges for Services 17.7% Operating Grants 43.1% Property Taxes 35.7% State Aid and Other Grants Investment Earnings and Miscellaneous Revenue Figure A-3 Expenses by Major Function for the fiscal year ended June 30, % 50.0% 40.0% 49.6% Instructional & Instructional Related Instructional & School Leadership Support Services - Student 30.0% Administrative Support Services 20.0% 10.0% 0.0% 6.3% 17.1% 13.4% 5.0% Functional Expenses 0.3% 8.3% Support Services - Non- Student Ancillary Services and Intergovenmental Charges Debt Service 28

87 Governmental Activities Governmental activities decreased the District s net assets by $4,508,392 for the fiscal year ended June 30, The following table presents the changes in the District s net assets for the fiscal year ended June 30, 2008 and 2007: Changes in the District s Net Assets Governmental Activities Revenues Program Revenues Charges for services $6,114,723 $11,864,834 Operating grants and contributions 52,219,876 51,127,335 General Revenues Property taxes 111,990, ,460,098 State aid and other grants 135,022,443 98,736,526 Investment earnings 7,705,422 6,037,401 Miscellaneous 185, ,149 Total revenues 313,238, ,360,343 Expenses Instructional 157,522, ,937,255 Instructional resources and media services 3,520,250 3,388,879 Curriculum/staff development 4,411,843 2,589,444 Instructional leadership 3,958,670 3,505,689 School leadership 15,914,563 14,353,900 Guidance and counseling services 9,670,230 8,078,480 Social work services 269, ,265 Health services 2,539,519 2,302,274 Student (pupil) transportation 11,902,205 9,703,647 Child nutrition services 16,619,082 15,040,438 Co-curricular activities 5,124,601 4,549,724 General administration 16,094,055 23,484,456 Plant maintenance and operations 33,314,551 31,185,713 Security and monitoring services 2,890,072 2,627,963 Data processing services 5,891,652 4,944,171 Community services 504, ,215 Fiscal agent/shared services arrangement 165, ,920 Alternative education 16,848 21,175 Interest and fiscal charges 26,528,266 21,122,420 Other intergovernmental charges 888,360 Total expenses 317,746, ,671,028 Change in net assets (4,508,392) 1,689,315 Beginning net assets 114,138, ,448,993 Ending net assets $109,629,916 $114,138,308 29

88 The following table presents the cost of each of the District s largest functions as well as each function s net cost for the fiscal year ended June 30, 2008 (total cost less charges for services generated by the activities and operating grants and contributions). The net cost reflects what was funded by state revenues as well as local tax dollars. The cost of all governmental activities this year was $317,746,594. The amount of the cost that was paid by those who directly benefited from the program was $6,114,723 and The amount paid by grants and contributions was $52,219,876 The amount that our taxpayers paid for these activities through property taxes was only $111,990,515. Net Cost of Selected District Functions (in millions of dollars) Total Cost Net Cost Total Cost Net Cost of Services of Services of Services of Services Instructional $157.5 $137.8 $144.9 $123.3 Plant maintenance & operations General administration Interest and fiscal charges FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS The District s accounting records for general governmental operations are maintained on a modified accrual basis as prescribed by the Financial Accountability System Resource Guide, Texas Education Agency, with the revenues being recorded when available and measurable to finance expenditures of the fiscal period. Expenditures are recorded when services or goods are received and the fund liabilities are incurred, except for unmatured long-term debt. The general governmental operations include the following funds: General, Special Revenue, Debt Service, and Capital Projects. Revenues for general governmental functions totaled $314,519,971 for the fiscal year ended June 30, 2008 an increase of 9.5% from the prior fiscal year. State revenues increase 29.5% primarily due to the additional funding received to offset the state-mandated decrease in tax rate. Tax revenue decreased by 9.2% due to a lower tax rate offset by increased property values. Federal revenues increased 0.4% from

89 Expenditures for general governmental operations totaled $396,350,406 during the fiscal year ended June 30, 2008 an increase of 22.6% from the fiscal year ended June 30, Major increases in expenditures occurred in the functional areas of instruction, school leadership, student transportation, plant maintenance and operations and facilities acquisitions and construction. The general fund is the chief operating fund of the District. At the end of the current fiscal year, unreserved fund balance of the general fund was $31,770,087, while total fund balance was $38,603,586. Unreserved fund balance represented 13.3% of total general fund expenditures, while total fund balance represented 16.3%. Reservations and designations of the fund balance in the general fund include reservations for encumbrances and inventory and a designation for tax refunds. The general fund balance decreased by $4,778,813 during the fiscal year ended June 30, This decrease is primarily due to the cost of Westfield High School renovations as well as a budgeted use of fund balance. The debt service fund had a total fund balance of $33,230,899, all of which is reserved for the payment of debt service or designated for tax refunds. The increase in fund balance was $3,790,788. The increase is primarily due to a deposit to the debt service fund of $2,475,019 for capitalized interest bond proceeds associated with the 2008A Bond Sale. The receipt of additional taxes due to increased property values offset by a decreased tax rate also contributed to the increase in fund balance. The capital projects fund had a total fund balance of $129,677,951 at the close of fiscal year ended June 30, The fund balance is entirely designated for authorized construction. The increase to fund balance of $108,885,515 was caused by the net effect of bond proceeds and completion of construction and renovation projects. General Fund Budgetary Highlights Over the course of the year, the District revised its budget three times. These adjustments resulted in an increase in the final expenditure budget of $12,021,755 over the original budget. This increase is made of three major components. There was an increase for carryover encumbrances and for additional positions to accommodate growth across various functions. The increase is also due to the renovation of Westfield High School. Final budgeted revenues were decreased during the year by $2,473,429 over the original revenue budget due primarily to decreased state revenue caused by lower than expected special population enrollment. This decrease was offset somewhat by an increase in delinquent taxes. 31

90 Difference between the original budget and the final amended budget of the general fund can be briefly summarized below: Appropriations $5,500,000 Increase to renovate Westfield High School 1,622,151 Increase in miscellaneous appropriations resulting from rollover encumbrances 1,315,000 Increase in TRS on-behalf expenditures 1,136,044 Increase in payroll and benefit expenditures to account for additional staff 883,950 Increase in health insurance contributions 644,155 Increase in fuel costs and bus repairs 457,157 Miscellaneous increases to other appropriations 265,000 To purchase acres on Kuykendahl 198,298 To purchase 911 Emergency Response system $12,021,755 Total Appropriations Increase Revenues $ (8,170,366) Decease in state revenues due to lower actual student attendance and adjusted student populations 3,500,000 Increase to tax related revenues associated primarily with delinquent taxes 1,315,000 Increase in TRS on-behalf revenue 350,000 Increase in local revenues resulting from higher interest earnings 308,500 Increase in federal revenue for JROTC and SHARS revenue 223,437 Miscellaneous increases in other estimated revenue $(2,473,429) Total Revenues Decrease CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets The District had invested a net $542 million in a broad range of capital assets, including land, buildings and improvements, equipment and furniture and automotive equipment. This amount represents a net increase (including additions and deductions net of accumulated depreciation) of $61 million over last year. Major capital assets events during the current fiscal year included the following: Land was purchased in the amount of $13,666,893 to prepare for future construction to accommodate District growth. Construction in progress increased by $13,147,030 as construction continued on new campuses scheduled to open in Buildings increased by $42,945,254 as construction and renovations were completed on new and existing buildings. The remainder of increases in capital assets was improvements and additions to existing facilities, furniture and equipment and vehicles. 32

91 District s Capital Assets Land $65,333,769 $51,666,876 Construction-in-progress 13,989,147 1,737,309 Buildings and improvements 548,196, ,251,394 Equipment and furniture 43,811,752 37,691,155 Automotive equipment 21,438,586 15,613,952 Total 692,769, ,960,686 Accumulated depreciation (151,029,502) (130,946,187) Net capital assets $541,740,400 $481,014,499 More detailed information about the District s capital assets is presented in Note 5 to the basic financial statements. Debt Administration Debt-management policies seek to provide the most favorable climate for District debt projects while upholding the highest rating possible for debt instruments. Management policies include the following points. All debt service obligations will be met when due. Long-term financing will be restricted to capital projects and purchases of equipment. Long-term bonds will not be issued to finance current operations. The District will cooperate and communicate with bond-rating agencies and work towards obtaining the most favorable municipal bond rating possible. Outstanding obligations will be reviewed frequently to ensure the most favorable funding structure for the District. All necessary information and material regarding the District s financial status will be provided to the appropriate parties. The ratio of net general bonded debt to assessed valuation is a useful indicator of the District s debt position. This data is presented in the schedule Ratios of Net General Obligation Bonded Debt Outstanding (Table X) in the statistical section and reflects a ratio of net bonded debt to assessed value of 7.7%, as compared to 6.0% last year. During the fiscal year, the District sold bonds totaling $226,290,000 which included refunding bonds. At June 30, 2008 the District had $94,140,000 authorized but unissued bonds. The District continues to enjoy good underlying bond ratings. In December 2007 Moody s Investor Services, Inc., affirmed a rating of A1 and Standard and Poor s Corporation affirmed a rating of A to the District s debt obligations. All of the outstanding ad valorem tax bonds of the District are rated Aaa and AAA by Moody s and Standard and Poor s, respectively, as a result of credit enhancement. More detailed information about the District s debt administration is presented in Note 7 to the basic financial statements. 33

92 ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES General operating fund spending per student is budgeted to increase in the budget from $6,837 to $7,202, a 5.3% increase based upon the assumption that student enrollment will be 33,886. Total revenues in the general fund budget are $241.3 million, an increase of 5.4% over the final 2008 revenues of $229 million. Property taxes are budgeted to increase due to the effect of a 6.0% increase in certified property value. State revenue is budgeted to increase due to student population growth. The District will use these increases in revenues to finance programs we currently offer. Expenditures are budgeted for the fiscal year to decrease nearly 0.4% to $244.2 million over fiscal year The adopted budget primarily supports the priority of the Five-Year Education Plan to recruit and retain quality teachers and support staff. The budget primarily provides for: An increase in the beginning bachelor teacher salary from $41,581 to $43,205; an increase in the masters degree teacher from $42,611 to $44,250; and an increase in the doctorate degree teacher from $43,642 to $45,297. Teachers, librarians, and nurses will receive an across-the-board raise of $1,000 plus any appropriate step increases. Staff on performance-based pay will be eligible to receive an additional salary increase from a pool of 3.0% of this year s respective payroll, with steps being adjusted 1.5%. All staff on performance-based pay will be eligible to receive a salary increase from a pool of 3% of this year s respective payroll. Each pay grade in each job family will be adjusted by a 1.5% increase. In addition, the budget includes costs associated with additional staff needed for a projected student enrollment increase of over 534 students; additional staff and operational activities needed for the opening of new campuses; and increases for utilities and other operating expenditures. REQUESTS FOR INFORMATION This financial report is designed to provide our citizens, taxpayers, business community, and investors and creditors with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Division of Financial Services, Attn: Executive Director of Finance at Ella Blvd., Houston, Texas or call (281)

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