PRELIMINARY OFFICIAL STATEMENT DATED SEPTEMBER 21, 2016

Transcription

1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold, nor may offers to buy them be accepted, prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. NEW ISSUE FULL BOOK-ENTRY PRELIMINARY OFFICIAL STATEMENT DATED SEPTEMBER 21, 2016 RATINGS: S&P: AA (Insured) A- (Underlying) (See MISCELLANEOUS Ratings herein) In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, the interest (and original issue discount) with respect to the Series A Certificates is excluded from gross income for federal income tax purposes. In the further opinion of Special Counsel, interest (and original issue discount) due with respect to the Certificates is exempt from State of California personal income tax. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest with respect to, the Certificates. See TAX MATTERS herein. $22,740,000 * 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES A (TAX EXEMPT) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) Dated: Date of Delivery $6,015,000 * 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES B (FEDERALLY TAXABLE) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) Due: October 1, as shown on the inside cover hereof The Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) (the Series A Certificates ) and the Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Federally Taxable) (the Series B Certificates, and with the Series A Certificates, the Certificates ) are being executed and delivered pursuant to a Trust Agreement, dated as of September 1, 2016 (the Trust Agreement ), by and among U.S. Bank National Association, as trustee, the Hemet Unified School District School Facilities Corporation (the Corporation ) and the Hemet Unified School District (the District ) to (i) discharge certain obligations of the District, (ii) terminate a swap agreement, (iii) acquire a municipal bond insurance policy and a debt service reserve insurance policy for the Certificates, and (iv) pay certain costs related to the execution and delivery of the Certificates, all as further described in the sections THE REFUNDING PLAN and ESTIMATED SOURCES AND USES OF PROCEEDS herein. Pursuant to a Site Lease, dated as of September 1, 2016, the District will lease certain property owned by the District and more particularly described herein (the Property ), to the Corporation, and will lease the Property back from the Corporation pursuant to a Lease Agreement, dated as of September 1, 2016 (the Lease ), by and between the Corporation and the District. The Series A Certificates evidence fractional interests in the Series A Lease Payments and the Series B Certificates evidence fractional interests in the Series B Lease Payments to be made by the District, as lessee under the Lease. The District will covenant to budget and appropriate Lease Payments in each year in consideration of the use and occupancy of the Property from any source of legally available funds, and to take such action as may be necessary to include all Lease Payments in its annual budgets and to make the necessary annual appropriations therefor. See SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Lease Payments herein. The District s obligation to make Lease Payments is subject to abatement in the event of the taking of, damage to or loss of use and possession of the Property. See RISK FACTORS Abatement. Interest represented by the Certificates is payable semiannually on April 1 and October 1 of each year, commencing April 1, The Certificates will be delivered as fully registered certificates, without coupons, and when delivered will be registered in the name of The Depository Trust Company ( DTC ), New York, New York, or its nominee. DTC will act as securities depository for the Certificates. Ownership interests in the Certificates may be purchased in book-entry form only, in authorized denominations, as described in this Official Statement. See APPENDIX G BOOK-ENTRY ONLY SYSTEM. The Certificates are subject to prepayment prior to their stated maturity as described herein. See THE CERTIFICATES Prepayment. The scheduled payment of principal and interest evidenced by the Certificates when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the execution and delivery of the Certificates by Assured Guaranty Municipal Corp. (the Insurer ). See MUNICIPAL BOND INSURANCE herein. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS CONSTITUTES A DEBT OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS IS SUBJECT TO THE DISTRICT S BENEFICIAL USE AND POSSESSION OF THE PROPERTY. This cover page of the Official Statement contains information for quick reference only. It is not a complete summary of the Certificates or the Lease. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See RISK FACTORS herein. The Certificates will be offered when, as and if delivered and received by the Underwriter, subject to the approval as to legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel. Certain matters will be passed on for the District by its counsel, Bowie, Arneson, Wiles & Giannone, Newport Beach, California, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Disclosure Counsel. Certain matters will be passed upon for the Underwriter by its counsel, Nixon Peabody LLP, Los Angeles, California. It is anticipated that the Certificates in definitive form will be available for delivery through the facilities of DTC on or about September 30, Dated: September, 2016 * Preliminary, subject to change.

2 MATURITY SCHEDULE $ 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES A (TAX EXEMPT) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) (BASE CUSIP NO.: ) Maturity (October 1) Principal Amount Interest Rate Yield Price CUSIP No. $ 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES B (FEDERALLY TAXABLE) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) (BASE CUSIP NO.: ) Maturity (October 1) Principal Amount Interest Rate Yield Price CUSIP No. CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright 2016 CUSIP Global Services. All rights reserved. CUSIP data herein is provided by Standard & Poor s CUSIP Service Bureau. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Service Bureau. CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such numbers.

3 No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations other than those contained herein. If given or made, such other information or representations must not be relied upon as having been authorized by the District or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Certificates by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the Underwriter of the Certificates. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information and expression of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or any other parties described herein since the date hereof. This Official Statement is being submitted in connection with the sale of the Certificates referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the District. All summaries of documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. All information for investors regarding the District and the Certificates is contained in this Official Statement. While the District maintains an internet website for various purposes, none of the information on this website is intended to assist investors in making any investment decision or to provide any continuing information with respect to the Certificates or any other Certificates or obligations of the District. Certain statements included or incorporated by reference in this Official Statement constitute forwardlooking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as a plan, expect, estimate, project, budget or similar words. Such forward-looking statements include, but are not limited to certain statements contained in the information under the captions THE DISTRICT and DISTRICT FINANCIAL MATTERS herein. The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. While the District has agreed to provide certain on-going financial and operating data for a limited period of time, it does not plan to issue any updates or revisions to those forwardlooking statements if or when its expectations or events, conditions or circumstances on which statements are based change. See CONTINUING DISCLOSURE and Appendix E FORM OF CONTINUING DISCLOSURE CERTIFICATE herein. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM, supplied by AGM and presented under the heading MUNICIPAL BOND INSURANCE and Appendix F SPECIMEN MUNICIPAL BOND INSURANCE POLICY.

4 WITH RESPECT TO THIS OFFERING, THE UNDERWRITER MAY ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE CERTIFICATES DESCRIBED HEREIN TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED IN THIS OFFICIAL STATEMENT AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. THE CERTIFICATES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

5 HEMET UNIFIED SCHOOL DISTRICT (RIVERSIDE COUNTY, CALIFORNIA) Governing Board Jim Smith, President Vic Scavarda, Vice President Marilyn Frost, Member Megan Haley, Member Patrick Searl, Member Horacio Valenzuela, Member Joe Wojcik, Member District Administrators Christi Barrett, Superintendent Dr. LeFaye Platter, Deputy Superintendent, Human Resources Vincent J. Christakos, Assistant Superintendent, Business Services Dr. David Horton, Assistant Superintendent, Educational Services PROFESSIONAL SERVICES Special Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California Counsel to District and Corporation Bowie, Arneson, Wiles & Giannone Newport Beach, California Financial Advisor Dale Scott & Company, Inc. San Francisco, California Trustee U.S. Bank National Association Los Angeles, California

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7 TABLE OF CONTENTS INTRODUCTION...1 The District...1 Purpose of the Certificates...2 Security and Source of Payment of the Certificates...2 Description of the Certificates...3 Certificate Insurance...3 Continuing Disclosure...3 Professionals Involved in the Offering...4 Certificate Owners Risks...4 Other Information...4 DISCHARGE OF PRIOR CERTIFICATES...4 THE PROPERTY...5 THE CERTIFICATES...5 General...5 Prepayment...6 Prepayment Procedures...7 Book-Entry Only System...8 CERTIFICATE PAYMENT SCHEDULE...8 ANNUAL CERTIFICATE PAYMENT SCHEDULE...8 SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES...9 General...9 Lease Payments...10 Reserve Fund...10 Additional Payments...11 Insurance...11 Remedies on Default...11 Additional Certificates...12 MUNICIPAL BOND INSURANCE...12 Insurance Policy...12 Assured Guaranty Municipal Corp ESTIMATED SOURCES AND USES OF PROCEEDS...14 RISK FACTORS...14 General Considerations Security for the Certificates...15 Constitutional and Statutory Limitations on Appropriations...15 Abatement...15 No Cash Reserve...16 Absence of Earthquake Insurance and Flood Insurance...16 Other Limitations on Liability...16 No Acceleration Upon Default...17 Limited Recourse on Default; Insurer Right to Control Remedies...17 Substitution of Property...18 Additional Certificates...18 Economic Conditions in California...18 Loss of Tax Exemption...19 Certificate Insurance...19 CONTINUING DISCLOSURE...20 THE CORPORATION...20 THE DISTRICT...20 Introduction...20 Governing Board...21 Superintendent and Administrative Personnel...21 Employee Relations...22 Retirement System...23 Other Postemployment Benefits...28 Insurance...29 Assessed Valuation...29 i

8 DISTRICT FINANCIAL MATTERS...31 Accounting Practices...31 District Budget...31 State Funding of Education...33 Historical General Fund Financial Information...37 Current Financial Condition...39 Revenue Sources...41 State Apportionment Funding...41 Federal Revenues...41 Other State Sources...41 Other Local Sources...41 SCHOOL DISTRICT DEBT STRUCTURE...42 Long Term Debt...42 Short Term Debt...42 Direct and Overlapping Debt...42 STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES...43 Article XIIIA...44 Article XIIIB...44 Articles XIIIC and XIIID...45 Unitary Property...46 Proposition Proposition Propositions 98 and Proposition 1A and Proposition Proposition Proposition Jarvis v. Connell...51 Future Initiatives...51 STATE OF CALIFORNIA FISCAL ISSUES...51 General Overview State Budget...52 Future Actions...53 State Dissolution of Redevelopment Agencies...53 Litigation Challenging Method of School Financing...55 TAX MATTERS...55 CERTAIN LEGAL MATTERS...58 ABSENCE OF MATERIAL LITIGATION...58 RATINGS...58 UNDERWRITING...59 MISCELLANEOUS...59 Audited Financial Statements...59 Financial Interests...59 ADDITIONAL INFORMATION...59 APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... A-1 APPENDIX B CITY OF HEMET AND RIVERSIDE COUNTY GENERAL ECONOMIC DATA... B-1 APPENDIX C PROPOSED FORM OF OPINION OF SPECIAL COUNSEL... C-1 APPENDIX D DISTRICT S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE... E-1 APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY... F-1 APPENDIX G BOOK-ENTRY ONLY SYSTEM... G-1 APPENDIX H COUNTY INVESTMENT POLICY... H-1 APPENDIX I COUNTY OF RIVERSIDE POOLED INVESTMENT FUND MONTHLY REPORT... I-1 ii

9 $22,740,000 * 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES A (TAX EXEMPT) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) $6,015,000 * 2016 REFUNDING CERTIFICATES OF PARTICIPATION SERIES B (FEDERALLY TAXABLE) Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the HEMET UNIFIED SCHOOL DISTRICT (Riverside County, California) INTRODUCTION This Official Statement, which includes the cover page, inside cover and Appendices hereto, provides certain information concerning the sale and delivery of the Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) (the Series A Certificates ) in the aggregate principal amount of $22,740,000 * and the Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Federally Taxable) (the Series B Certificates, and with the Series A Certificates, the Certificates ) in the aggregate principal amount of $6,015,000 *. The Series A Certificates will evidence fractional interests of the registered owners thereof (the Owners ) in the Series A Lease Payments (as hereinafter defined) and the Series B Certificates will evidence fractional interests of the Owners thereof in the Series B Lease Payments (hereinafter defined and, together with the Series A Lease Payments, the Lease Payments ). The Lease Payments are to be made by the Hemet Unified School District (the District ) pursuant to a Lease Agreement, dated as of September 1, 2016 (the Lease ), by and between the Hemet Unified School District School Facilities Corporation, as lessor (the Corporation ), and the District, as lessee, for the use and possession of the West Valley High School, which is owned by the District (the Property ). The Lease is an amendment and restatement of the lease entered into by the District and the Corporation with respect to the Prior Certificates (hereinafter defined). This introduction is not a summary of the Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement. Capitalized terms not defined herein shall have the meanings set forth in Appendix A hereto. The District The District was established on July 1, 1966, as a result of the unification of the Alamos and Cottonwood Districts, the Hemet Valley Union School District, and the Hemet Union High School District. The District covers approximately 647 square miles in the western part of Riverside County. The City of Hemet and unincorporated communities of Idyllwild, Anza, Aguanga, and Winchester are situated within the District s boundaries. Hemet is located in the State of California (the State ), approximately forty-five miles west of Palm Springs, seventy-five miles north of San Diego, sixty-five miles east of Los Angeles, and thirtyfile miles southeast of Riverside. The District s total population is approximately 135,000. The District currently has an enrollment of approximately 21,527 students. The District currently operates 11 elementary schools, 3 kindergarten through grade eight schools, 4 middle schools, 4 high schools, 1 continuation high school, 2 alternative schools, 2 charter schools and 1 adult education program. The charter schools are operated by the District, and their financial activities are presented in the District s audited financial statements in the Charter School Special Revenue Fund. The District is governed by a seven member Governing Board. The Governing Board members are elected to staggered four-year terms. For more information regarding the District see the information under the caption THE DISTRICT and DISTRICT FINANCIAL MATTERS herein. * Preliminary, subject to change. 1

10 Purpose of the Certificates The proceeds received from the sale of the Certificates will be used to (i) discharge the District s 2006 Certificates of Participation (2006 School Facilities Project) (the Prior Certificates ), (ii) terminate a Replacement Swap Undertaking (the Swap Agreement ) with Morgan Stanley Capital Services, Inc. entered into with respect to the Prior Certificates, (iii) acquire a municipal bond insurance policy and a debt service reserve insurance policy for the Certificates, and (iv) pay certain costs related to the execution and delivery of the Certificates. See THE PREPAYMENT PLAN and ESTIMATED SOURCES AND USES OF PROCEEDS herein. Security and Source of Payment of the Certificates The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of September 1, 2016 (the Trust Agreement ), by and among the District, the Corporation and U.S. Bank National Association, as trustee (the Trustee ). The District is required under the Lease to pay Lease Payments for the use and possession of the Property, which is further described under the caption THE PROPERTY herein. The District is also required to pay any taxes and assessments and the cost of maintenance and repair of the Property. Pursuant to an Assignment Agreement, dated as of September 1, 2016 (the Assignment Agreement ), by and between the Corporation and the Trustee, the Corporation will assign to the Trustee, for the benefit of the Owners of the Certificates, substantially all of its rights under the Lease and a Site Lease, dated as of September 1, 2016 (the Site Lease ), by and between the District and the Corporation, pursuant to which the District will lease the Property to the Corporation, including its rights to receive and collect Lease Payments, Reserve Replenishment Rent and Prepayments from the District under the Lease and rights as may be necessary to enforce payment of Lease Payments, Reserve Replenishment Rent and Prepayments and to exercise all rights and remedies under the Lease following a default. The Site Lease is an amendment and restatement of the site lease entered into by the District and the Corporation with respect to the Prior Certificates. All rights assigned by the Corporation pursuant to the Assignment Agreement shall be administered by the Trustee in accordance with the provisions of the Trust Agreement for the equal and proportionate benefit of all Owners. The Series A Certificates evidence fractional and undivided interests in the right to receive Series A Lease Payments and Prepayments thereof and the Series B Certificates evidence fractional and undivided interests in the right to receive Series B Lease Payments and Prepayments thereof, each to be made by the District to the Corporation under the Lease. The Series A Lease Payments are designed to pay, when due, the principal and interest with respect to the Series A Certificates and the Series B Lease Payments are designed to pay, when due, the principal and interest with respect to the Series B Certificates. The District will covenant in the Lease that it will take such action as may be necessary to include the Lease Payments and other payments due under the Lease in its annual budgets and to make the necessary annual appropriations therefor. The District s obligation to make Lease Payments is subject to abatement in the event of the loss of use and possession of all or a portion of the Property due to its damage, destruction, title defect or taking by eminent domain. See RISK FACTORS Abatement herein. The obligation of the District to make Lease Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation. Neither the Certificates nor the obligation of the District to make Lease Payments constitutes a debt of the District, the State or any of its political subdivisions within the meaning of any constitutional or statutory debt limitation or restriction. 2

11 Description of the Certificates For a more complete description of the Certificates and the basic documentation pursuant to which they are being sold and delivered, see THE CERTIFICATES and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS herein. The summaries and descriptions in this Official Statement of the Trust Agreement, the Lease, the Site Lease, the Assignment Agreement and other agreements relating to the Certificates are qualified in their entirety by the form thereof and the information with respect thereto included in such documents. Prepayment. The Certificates are subject to optional and extraordinary prepayment prior to maturity. See THE CERTIFICATES Prepayment herein. Registration, Transfers and Exchanges. The Certificates will be executed and delivered as fully registered Certificates, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ( DTC ), and will be available to actual purchasers of the Certificates (the Beneficial Owners ) in the denominations set forth below, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described herein. Beneficial Owners will not be entitled to receive physical delivery of the Certificates. See THE CERTIFICATES Book-Entry Only System herein. In the event that the book-entry only system is no longer used with respect to the Certificates, the Certificates will be registered and transferred in accordance with the provisions of the Trust Agreement. The Certificates may be held and transferred only in the minimum denominations of $5,000 and any integral multiple thereof. Payments. Principal and interest due with respect to the Certificates are payable by the Trustee to DTC. Disbursement of such payments to DTC Participants is the responsibility of DTC and disbursement of such payments to the Beneficial Owners is the responsibility of DTC Participants. In the event that the bookentry only system is no longer used with respect to the Certificates, the Beneficial Owners will become the registered owners of the Certificates and will be paid principal and interest by the Trustee, all as described in the Trust Agreement. See THE CERTIFICATES General herein. Certificate Insurance The scheduled payment of principal and interest evidenced by the Certificates when due will be guaranteed under an insurance policy (the Policy ) to be issued concurrently with the execution and delivery of the Certificates by Assured Guaranty Municipal Corp. (the Insurer or AGM ). See MUNICIPAL BOND INSURANCE and APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY. The Reserve Requirement for the Certificates will initially be satisfied by a debt service reserve insurance policy to be provided by the Insurer. See SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Reserve Fund and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Reserve Fund. Continuing Disclosure The District will agree in the Continuing Disclosure Certificate for the benefit of Certificate Owners and Beneficial Owners to make available certain financial information and operating data relating to the District on an annual basis and to provide notices of the occurrence of certain enumerated events in compliance with Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission. The specific nature of the information to be made available and of the event notices to be provided is summarized below under the caption CONTINUING DISCLOSURE and APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE herein. For information concerning the District s compliance with its continuing disclosure undertakings over the past five years, see CONTINUING DISCLOSURE herein. 3

12 Professionals Involved in the Offering U.S. Bank National Association, will act as Trustee with respect to the Certificates. The Certificates will be delivered subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel. Stradling Yocca Carlson & Rauth, a Professional Corporation will also act as the District s Disclosure Counsel with respect to the Certificates. Bowie, Arneson, Wiles & Giannone, Newport Beach, California, will act as counsel to the District and the Corporation with respect to certain matters. Dale Scott & Company, Inc. will act as Financial Advisor to the District. The District s financial statements for the fiscal year ended June 30, 2015 are included as Appendix D hereto. The financial report for the fiscal year ended June 30, 2015 has been audited by Vavrinek, Trine, Day & Co., LLP. Certificate Owners Risks Certain events could affect the ability of the District to make the Lease Payments when due. See RISK FACTORS for a discussion of certain factors that should be considered, in addition to other matters set forth herein, in evaluating an investment in the Certificates. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. The sale and delivery of the Certificates to potential investors is made only by means of the Official Statement. Copies of the Lease, the Site Lease, the Trust Agreement, the Assignment Agreement and the Continuing Disclosure Certificate are available, upon request, and upon payment to the District of a charge for copying, mailing and handling, from the District at 1791 W. Acacia Avenue, Hemet, California This Official Statement contains brief descriptions of, among other things, the District, the Corporation, the Certificates, the Trust Agreement, the Lease, the Assignment Agreement, the Site Lease and certain other matters relating to the security for the Certificates. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to documents and agreements are qualified in their entirety by reference to such documents, and agreements and references herein to the Certificates are qualified in their entirety by reference to the form thereof included in the Trust Agreement. Copies of such documents will be available for inspection at the principal office of the Trustee after delivery of the Certificates. Capitalized terms used but not otherwise defined herein shall have the meanings assigned thereto in the Trust Agreement. DISCHARGE OF PRIOR CERTIFICATES A portion of the proceeds from the sale of the Certificates will be transferred to U.S. Bank National Association, as trustee for the Prior Certificates for the purpose of providing funds to effect the mandatory tender of the Prior Certificates on October 3, Pursuant to a Second Supplement to Amended and Restated Trust Agreement, dated as of September 1, 2016, by and between the District, the Corporation and U.S. Bank National Association as trustee, upon the payment of the tender price on October 3, 2016, the Prior Certificates shall be cancelled and discharged. In connection with the Prior Certificates, the District entered into an Interest Rate Swap Agreement (the Prior Swap Agreement ) with Piper Jaffrey Financial Products Inc. In 2008, the District replaced the Prior Swap Agreement with the Swap Agreement. In connection with the discharge of the Prior Certificates, a 4

13 portion of the proceeds from the sale of the Certificates will be used to pay the costs of terminating the Swap Agreement. THE PROPERTY Pursuant to the Site Lease, the District is leasing the Property to the Corporation and leasing the Property back from the Corporation pursuant to the Lease. The Property consists of the West Valley High School (the School ), located within the District at 3401 Mustang Way, Hemet, California, and the real property on which the School is located. The School, originally constructed in 1996, serves approximately 1,800 students in grades 9 through 12. The Property is located in a 100-year flood plain and a dam inundation zone. The District was aware of these conditions when the School was constructed so the site was graded to increase the building area 20 to 30 feet above the original ground level and the School was built on a structurally enhanced concrete pad. As a result, the District believes that the School would not suffer significant damage in the event of a dam break or flood, though damage to surrounding area could render the Property inaccessible for a period of time. See RISK FACTORS Abatement and Absence of Earthquake and Flood Insurance. General THE CERTIFICATES The Series A Certificates will be executed in the aggregate principal amount of $22,740,000 * and the Series B Certificates will be executed in the aggregate principal amount of $6,015,000 *. The Certificates will be dated their date of delivery, and will be delivered as registered Certificates without coupons in denominations of $5,000 each, and any integral multiple thereof. Interest with respect to the Certificates will accrue from their dated date and will be payable on each April 1 and October 1, commencing April 1, 2017 (each a Certificate Payment Date ), at the rates per annum set forth on the page following the cover page of this Official Statement. The Certificates will mature on October 1 in the designated years and in the principal amounts as set forth on the page following the cover page of this Official Statement. If a Certificate is executed: (i) as of a Certificate Payment Date, interest will be payable from such Certificate Payment Date; and (ii) after the close of business on the fifteenth day of the month preceding each Certificate Payment Date (whether or not a business day) (each, a Record Date ) and before the following Certificate Payment Date, interest will be payable from such following Certificate Payment Date. Interest with respect to the Certificates will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Series A Certificates evidence and represent fractional and undivided interests of the Owners thereof in the Series A Lease Payments and Prepayments thereof and the Series B Certificates evidence and represent fractional and undivided interests of the Owners thereof in the Series B Lease Payments, each to be made by the District pursuant to the Lease. To the extent Lease Payments are abated or not made under the Lease and insurance proceeds or amounts in the Reserve Fund are not available to make such Lease Payments, all Certificate Owners will receive a proportionate reduction in their payments. See RISK FACTORS Abatement. So long as the Certificates are held in book-entry form, principal and interest will be paid to DTC for disbursement to Beneficial Owners of interests in the Certificates in accordance with DTC s procedures. See Book-Entry Only System below. In the event that the Certificates are no longer held in book-entry form, the following provisions will apply. Principal with respect to the Certificates will be payable upon surrender by the Owners thereof at the principal office of the Trustee. Interest with respect to the Certificates will be payable by check mailed by first class mail to the Owners of record at the address shown on the Certificate registration books maintained by the Trustee for such purpose. Owners of Certificates in an aggregate principal amount of $1,000,000 or more may, by providing written instruction to the Trustee, receive interest with respect to the Certificates by wire transfer. 5

14 Prepayment * Optional Prepayment. The Series A Certificates maturing on or after October 1,, are subject to optional prepayment prior to their stated maturities on any date on or after October 1,, in whole or in part, at the option of the District, from any lawfully available source in the event the District exercises its option under the Lease to prepay the Principal Component of the Series A Lease Payments (in integral multiples of $5,000), at a prepayment price equal to the Principal Component of the Series A Lease Payments to be prepaid, plus accrued interest to the date fixed for prepayment, without premium. The Series B Certificates are subject to optional prepayment prior to their stated maturities on any date, in whole or in part, at the option of the District, from any lawfully available source in the event the District exercises its option under the Lease to prepay the Principal Component of the Series B Lease Payments (in integral multiples of $5,000), at a prepayment price equal to the Make-Whole Prepayment Price. The Make-Whole Prepayment Price means the amount equal to the greater of the following: (1) the initial offering price of the Series B Certificates to be prepaid (but not less than 100% of the principal amount of the Series B Certificates to be prepaid); or (2) the sum of the present value of the remaining scheduled payments of principal and interest with respect to the Series B Certificates to be prepaid to the maturity date of such Series B Certificates, not including any portion of those payments of interest accrued and unpaid as of the date on which the Series B Certificates are to be prepaid, discounted to the date on which the Series B Certificates are to be prepaid on a semiannual basis, assuming a 360-day year containing twelve 30 day months, at the Treasury Rate, plus basis points, plus in each case accrued interest on the Series B Certificates to be prepaid to the prepayment date. For the purpose of determining the Make-Whole Prepayment Price, Treasury Rate means, with respect to any prepayment date for a particular Series B Certificate, the yield to maturity as of such prepayment date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) (the Statistical Release ) that has become publicly available at least two Business Days prior to the prepayment date (excluding inflation-indexed securities) (or, if the Statistical Release is no longer published, any publicly available source of similar market data) most nearly equal to the period from the prepayment date to the maturity date of such Series B Certificate to be prepaid; provided, however that if the period from the prepayment date to the maturity date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. The District may provide a conditional notice to optionally prepay Certificates. In the event the District gives a conditional notice to the Trustee of its intention to exercise such option, but does not deposit with the Trustee on or prior to the prepayment date an amount equal to the prepayment price, the prepayment of the Certificates shall not occur and the District shall not be required to prepay the Certificates and the District will continue to pay the Lease Payments as if no such notice had been given. Within a reasonable time thereafter, the Trustee shall give notice to the Owners that the conditions to prepayment were not met and the prepayment was cancelled. Extraordinary Prepayment. The Certificates are subject to prepayment prior to their respective maturity dates on any date, in whole or in part, from Net Proceeds which the Trustee shall transfer to the Prepayment Fund as provided in the Lease at least 45 days prior to the date set for prepayment, at a prepayment price equal to the Principal Component of the Lease Payments to be prepaid, together with accrued interest to the date fixed for prepayment, without premium. Selection of Certificates for Prepayment. Whenever provision is made in the Trust Agreement for the optional prepayment of Series A Certificates and less than all Outstanding Series A Certificates are called for optional prepayment, the Trustee shall select Certificates for optional prepayment from among maturities * Preliminary, subject to change. 6

15 selected by the District and by lot within any maturity. Optional prepayments of the Series B Certificates being prepaid in part will be made among the maturities being prepaid on a pro rata basis to each Owner in whose name such Series B Certificates are registered at the close of business on the Record Date immediately preceding the prepayment date. For purposes of the receding sentence, pro rata means, in connection with any optional prepayment in part, with respect to the allocation of amounts to be prepaid, the application to such amounts of a fraction, the numerator of which is equal to the amount of the specific maturity of Series B Certificates held by an Owner of such Series B Certificates, and the denominator of which is equal to the total amount of such maturity of Series B Certificates, then Outstanding. So long as there is a securities depository for the Series B Certificates, there will be only one registered Owner and neither the District nor the Trustee will have responsibility for prorating partial prepayments among Beneficial Owners of the Series B Certificates. For extraordinary prepayment of the Certificates, the Trustee shall select Certificates for prepayment pro rata among each series and maturities of all Certificates Outstanding, based on the Outstanding principal amount of each series, and by lot within any maturity. Prepayment Procedures So long as DTC is the registered Owner of the Certificates, all such notices will be provided only to DTC as the registered Owner, and will not be mailed by the Trustee to the Beneficial Owners of the Certificates. See Book-Entry Only System herein. Notice of prepayment shall be mailed by first-class mail, postage prepaid, not less than 30 nor more than 60 days before the prepayment date, to the respective Certificates Owners designated for prepayment at their addresses appearing on the Certificate registration books, or, so long as the Certificates are held by DTC, or its nominee, in such manner as is approved by DTC; provided that neither failure to receive such notice nor any defect in any notice so delivered shall affect the sufficiency of the proceedings for prepayment. In addition, a copy of such notice of prepayment shall be sent to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access System ( EMMA ). Neither failure to send such notice to EMMA nor any defect in any notice so sent shall affect the sufficiency of the proceedings for the prepayment of the Certificates. Such notice shall specify: (a) the prepayment date, (b) the prepayment price, (c) if less than all of the Outstanding Certificates are to be prepaid, the Certificate numbers (and in the case of partial prepayment, the respective principal amounts), (d) the CUSIP numbers of the Certificates to be prepaid, (e) the place or places where the prepayment will be made, (f) the original date of execution and delivery of the Certificates, (g) the rate of interest payable with respect to each Certificate being prepaid, (h) any other descriptive information regarding the Certificates needed to identify accurately the Certificates being prepaid, and (i) if the notice is conditional, a statement to that effect. Such notice shall further state that on the specified date there shall become due and payable upon each Certificate to be prepaid, the portion of the principal amount of such Certificate to be prepaid, together with interest accrued to said date and that from and after such date, provided that moneys therefor have been deposited with the Trustee, interest with respect thereto shall cease to accrue and be payable. Effect of Prepayment. Notice having been given to the Owners of the Certificates in accordance with the Trust Agreement, and the moneys for the prepayment (including the interest to the applicable date of prepayment), having been set aside in the Prepayment Fund, the Certificates shall become due and payable on the date of prepayment, and upon presentation and surrender thereof at the Principal Office, said Certificates shall be paid at the prepayment price with respect thereto, plus interest accrued and unpaid to said date of prepayment. If, on the date of prepayment, moneys for the prepayment of all the Certificates to be prepaid, together with interest to the date of prepayment, shall be held by the Trustee so as to be available therefor on such date of prepayment, and, if notice of prepayment thereof shall have been given as provided in the Trust Agreement, then, from and after the date of prepayment, interest with respect to the Certificates to be prepaid shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the prepayment of Certificates 7

16 shall be held in trust for the account of the Owners of the Certificates so to be prepaid, without liability for interest thereon. Book-Entry Only System The Certificates will be executed and delivered as one fully registered certificate without coupons for each maturity of each series and, when issued, will be registered in the name of Cede & Co., as nominee DTC. DTC will act as securities depository of the Certificates. Individual purchases may be made in book-entry form only, in the principal amount of $5,000 and integral multiples thereof for each maturity. Beneficial Owners will not receive certificates representing their interest in the Certificates purchased. Principal and interest will be paid to DTC, which will, in turn, remit such principal and interest to its participants for subsequent dispersal to the Beneficial Owners of the Certificates in accordance with DTC s procedures. See APPENDIX G BOOK-ENTRY ONLY SYSTEM herein. CERTIFICATE PAYMENT SCHEDULE Lease Payments are required to be made by the District under the Lease on or before March 15 and September 15 of each year for the use and possession of the Property for the period commencing as of the Closing Date and terminating as provided in the Lease. The aggregate annual amounts of Lease Payments, comprising interest and principal payable to the Owners, are set forth below. The following table summarizes the annual Certificate payments to be made from the Lease Payments of the District assuming no extraordinary prepayments. Certificate Year (October 1) Series A Principal Component ANNUAL CERTIFICATE PAYMENT SCHEDULE Series A Interest Component Series B Principal Component Series B Interest Component 2017 $ $ $ $ $ Total $ $ $ $ $ Total Annual Certificate Payments 8

17 SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Neither the Certificates nor the obligation of the District to make Lease Payments constitutes an obligation of the District for which the District is obligated to levy or pledge, or for which the District has levied or pledged, any form of taxation. Neither the Certificates nor the obligation of the District to make Lease Payments constitutes a debt of the District, the State or any of its political subdivisions within the meaning of any constitutional limitation or violates any statutory debt limitation. General Each Series A Certificate represents a fractional interest in the Series A Lease Payments and Series A Prepayments and each Series B Certificate represents a fractional interest in the Series B Lease Payments and Series B Prepayments to be made by the District to the Trustee pursuant to the Lease. The District is obligated to pay Lease Payments from any source of legally available funds, and will covenant in the Lease, subject to the abatement provisions therein, to include all Lease Payments coming due in its annual budgets and to make the necessary annual appropriations therefor. The Corporation, pursuant to the Assignment Agreement, will assign all of its rights under the Lease (excepting certain rights as specified therein), including the right to receive Lease Payments, Reserve Replenishment Rent and Prepayments, to the Trustee for the benefit of the Certificate Owners. By the fifteenth day of each March and September (if such day is not a Business Day, the next succeeding Business Day), the District must pay to the Trustee a Lease Payment (to the extent required under the Lease) which is equal to the amount necessary to pay the principal, if any, and interest due with respect to the Certificates on the next succeeding Certificate Payment Date. Under the Lease, the District will agree to pay certain taxes, assessments, utility charges, and insurance premiums due with respect to the Property and the Certificates and fees and expenses of the Trustee. The District is responsible for repair and maintenance of the Property during the term of the Lease. The District may at its own expense in good faith contest such taxes, assessments and utility and other charges if certain requirements set forth in the Lease are satisfied, including obtaining an opinion of counsel that the Property will not be subjected to loss or forfeiture. In accordance with the Lease, the District will certify to the Trustee on or before September 1 of each year that the District has included all Lease Payments, Reserve Replenishment Rent and Additional Payments (known as of the date of budget adoption) due under the Lease in the Fiscal Year covered by its annual budget and the amount so included. If the District fails to certify that it has included all such Lease Payments, Reserve Replenishment Rent and Additional Payments in its annual budget, the Trustee will promptly provide the District written notice specifying that the District has failed to observe and perform its covenant and agreement in the Lease and requesting that such failure be remedied within 30 days, or such failure shall constitute an Event of Default under the Lease. The District s obligation to make Lease Payments will be abated in the event of, and to the extent of, substantial interference with use and possession of the Property arising from damage, destruction, title defect, or taking by eminent domain or condemnation of the Property. Abatement does not constitute a default under the Lease and the Trustee will not be entitled in such event to pursue remedies against the District. See RISK FACTORS Abatement herein. Should the District default under the Lease, the Trustee, as assignee of the Corporation, may terminate the Lease and re-let the Property or may continue the Lease in effect and hold the District liable for all Lease Payments thereunder on an annual basis. So long as it is not in default under its Policy, the Insurer shall have the right to control the exercise all remedies following an Event of Default by the District. Under no circumstances will the Trustee or the Insurer have the right to accelerate Lease Payments. See RISK FACTORS No Acceleration Upon Default and Limited Recourse on Default; Insurer Right to Control Remedies herein. 9

18 Lease Payments Subject to the provisions of the Lease regarding abatement in the event of loss of use and possession of any portion of the Property (see RISK FACTORS Abatement herein) and prepayment of Lease Payments (see the provisions relating to prepayment under the caption THE CERTIFICATES above), the District agrees to pay to the Corporation, its successors and assigns, as annual rental for the use and possession of the Property, the Lease Payments to be due and payable on April 1 and October 1 of each year. Under the Lease, the District is required to deposit the Lease Payments with the Trustee on March 15 and September 15 of each year, or, if such day is not a Business Day, the next succeeding Business Day (each, a Lease Payment Deposit Date ). Any amounts held in the Lease Payment Fund on any Lease Payment Deposit Date (other than amounts received by the Trustee under the Policy, amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to the Lease and amounts required for payment of past due principal or interest with respect to any Certificates not presented for payment) shall be credited to the payment of Lease Payments due and payable on such Lease Payment Deposit Date. The Trust Agreement requires that Series A Lease Payments be deposited in the Series A Account of the Lease Payment Fund and Series B Lease Payments be deposited in the Series B Account of the Lease Payment Fund, each maintained by the Trustee. Pursuant to the Trust Agreement, on each Certificate Payment Date, the Trustee will apply such amounts in the Series A Account of the Lease Payment Fund to make interest and principal payments due with respect to the Series A Certificates and amounts in the Series B Account of the Lease Payment Fund to make interest and principal payments due with respect to the Series B Certificates, as the same shall become due and payable. Reserve Fund A Reserve Fund will be established by the Trust Agreement for the Certificates and any Additional Certificates in an amount equal to the least of (i) maximum aggregate annual Lease Payments then payable under the Lease in any Certificate Year with respect to the Certificates and any Additional Certificates, (ii) 125% of the average annual aggregate Lease Payments then payable under the Lease (calculated based on Certificate Years) with respect to the Certificates and any Additional Certificates, or (iii) 10% of the original face amount of the Certificates and any Additional Certificates (less original issue discount of in excess of two percent (2%) of the stated Principal Components at maturity) (collectively, the Reserve Requirement ); provided, however, that the Reserve Requirement for the Certificates may not exceed $, which is the initial Reserve Requirement for the Certificates. The full amount available in the Reserve Fund may be used by the Trustee in the event that amounts in the Lease Payment Fund are not sufficient to pay the principal or interest due with respect to the Certificates due to abatement or failure by the District to make Lease Payments. The District will initially satisfy the Reserve Requirement with a Municipal Bond Debt Service Reserve Insurance Policy in the stated amount of $ (the Reserve Policy ) issued by the Insurer. Under the Trust Agreement the Trustee is obligated to draw on the Reserve Policy in the event the amounts held under the Trust Agreement are insufficient to pay the interest and principal represented by the Certificates when due. The amounts available to be drawn under the Reserve Policy will be automatically reduced by the amount of any payment on the Reserve Policy and will be reinstated only to the extent that Reserve Replenishment Rent is paid to the Insurer to reimburse it for previous draws together with interest thereon and expenses. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Reserve Fund herein. Subject to the requirements and restrictions contained in the Trust Agreement, the District may substitute a line of credit, letter of credit, an insurance policy, surety bond or any other comparable credit 10

19 facility (each, a Reserve Facility ) or combination thereof in lieu of all or a portion of the Reserve Policy, which, in the aggregate, makes funds available in the Reserve Fund in an amount equal to the Reserve Requirement; provided, however, other than the Reserve Policy, the long-term unsecured debt or claim-paying ability, as the case may be, of the provider of any such Reserve Facility, must be rated in one of the two highest rating categories by S&P and/or Moody s (without regard to qualifiers), but only at the time of purchase of the Reserve Facility. Additional Payments The Lease provides that the District shall pay such amounts ( Additional Payments ) as shall be required for the payment of all administrative costs of the Corporation relating to the Property or the Certificates, including, without limitation, all expenses, assessments, compensation and indemnification of the Trustee payable by the District under the Trust Agreement, taxes of any sort whatsoever payable by the Corporation as a result of its leasehold interest in the Property or undertaking of the transactions contemplated in the Lease or in the Trust Agreement, fees of auditors, accountants, attorneys or engineers, any and all amounts due to the Insurer under the Trust Agreement (other than amounts paid by the Insurer to Certificate Owners under the Policy and the Reserve Policy), and all other necessary administrative costs of the Corporation or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Certificates or of the Trust Agreement, including premiums on insurance required to be maintained by the Lease or to indemnify the Corporation and its officers and directors and any fees, expenses and other amounts due to the Insurer as described in the Lease. Insurance Pursuant to the Lease, the District will obtain an ALTA leasehold title insurance policy (with certain exceptions) on the Property in an amount equal to the aggregate Principal Component of unpaid Lease Payments. The Lease also requires that the District maintain rental interruption insurance to insure against loss of Lease Payments from the Property in an amount not less than the maximum remaining scheduled Lease Payments in any future two-year period. The District is obligated to obtain a standard comprehensive general public liability and property damage insurance policy or policies and workers compensation insurance or to self-insure against such risks as permitted by the Lease. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE Insurance and THE DISTRICT Insurance herein. The proceeds of any rental interruption or use and occupancy insurance will be deposited to (i) the Reserve Fund to make up any deficiency therein, and (ii) in the Lease Payment Fund to be credited towards the payment of the Lease Payments in the order in which such Lease Payments become due and payable. The Lease requires the District to apply the Net Proceeds of any insurance or condemnation award either to replace or repair the Property or to prepay Certificates if certain certifications with respect to the adequacy of the Net Proceeds to make repairs, and the timing thereof, cannot be made. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Lease Application of Net Proceeds. The amount of Lease Payments will be abated and Lease Payments due under the Lease reduced during any period in which a title defect, condemnation, material damage or destruction to all or part of the Property substantially interferes with the District s use and possession thereof. See RISK FACTORS Abatement herein. Remedies on Default If the District defaults in performance of its obligations under the Lease, the Trustee, as assignee of the Corporation, may, among other things, elect either (i) to terminate the Lease and re-enter and relet the Property, or (ii) without terminating the Lease enforce the Lease and hold the District liable for all Lease Payments on an annual basis whether or not it has re-entered and relet the Property. In the event of a default, available monies under the Trust Agreement after the payment of the Trustee s expenses will be applied on a proportionate basis to pay amounts due with respect to the Certificates. So long as the Insurer is not in default under the Policy, it will have the right to control all remedies under the Lease and the Trust Agreement. See 11

20 RISK FACTORS Limited Recourse on Default; Insurer Right to Control Remedies and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Events of Default and Remedies. Additional Certificates Pursuant to the Trust Agreement, the District may cause Additional Certificates to be executed and delivered without the consent of the Owners of the Certificates if certain conditions precedent are satisfied. See RISK FACTORS Additional Certificates and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Additional Certificates. MUNICIPAL BOND INSURANCE The information under this caption has been prepared by the Insurer for inclusion in this Official Statement. The District has not reviewed this information and the District does not make any representation with respect to the accuracy or completeness thereof. The following information is not complete and reference is made to Appendix F for a specimen of the Policy. Insurance Policy Concurrently with the delivery of the Certificates, AGM will issue its Municipal Bond Insurance Policy (the Policy ) for the Certificates. The Policy guarantees the scheduled payment of principal of and interest evidenced by the Certificates when due as set forth in the form of the Policy included as Appendix F to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Assured Guaranty Municipal Corp. AGM is a New York domiciled financial guaranty insurance company and an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. Neither AGL nor any of its shareholders or affiliates, other than AGM, is obligated to pay any debts of AGM or any claims under any insurance policy issued by AGM. AGM s financial strength is rated AA (stable outlook) by S&P Global Services, a business unit of Standard & Poor s Financial Services LLC ( S&P ), AA+ (stable outlook) by Kroll Bond Rating Agency, Inc. ( KBRA ) and A2 (stable outlook) by Moody s Investors Service, Inc. ( Moody s ). Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. 12

21 Current Financial Strength Ratings. On July 27, 2016, S&P issued a credit rating report in which it affirmed AGM s financial strength rating of AA (stable outlook). AGM can give no assurance as to any further ratings action that S&P may take. On August 8, 2016, Moody s published a credit opinion affirming its existing insurance financial strength rating of A2 (stable outlook). AGM can give no assurance as to any further ratings action that Moody s may take. On December 10, 2015, KBRA issued a financial guaranty surveillance report in which it affirmed AGM s insurance financial strength rating of AA+ (stable outlook). AGM can give no assurance as to any further ratings action that KBRA may take. For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, Capitalization of AGM. At June 30, 2016, AGM s policyholders surplus and contingency reserve were approximately $3,841 million and its net unearned premium reserve was approximately $1,459 million. Such amounts represent the combined surplus, contingency reserve and net unearned premium reserve of AGM, AGM s wholly owned subsidiary Assured Guaranty (Europe) Ltd. and 60.7% of AGM s indirect subsidiary Municipal Assurance Corp.; each amount of surplus, contingency reserve and net unearned premium reserve for each company was determined in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference. Portions of the following documents filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) (ii) (iii) the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (filed by AGL with the SEC on February 26, 2016); the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 (filed by AGL with the SEC on May 6, 2016); and the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 (filed by AGL with the SEC on August 4, 2016). All consolidated financial statements of AGM and all other information relating to AGM included in, or as exhibits to, documents filed by AGL with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, excluding Current Reports or portions thereof furnished under Item 2.02 or Item 7.01 of Form 8-K, after the filing of the last document referred to above and before the termination of the offering of the Certificates shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 1633 Broadway, New York, New York 10019, Attention: Communications Department (telephone (212) ). Except for the information referred to above, no information available on or through AGL s website shall be deemed to be part of or incorporated in this Official Statement. 13

22 Any information regarding AGM included herein under the caption MUNICIPAL BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters. AGM makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading MUNICIPAL BOND INSURANCE. ESTIMATED SOURCES AND USES OF PROCEEDS The estimated sources and uses of proceeds to be received from the sale of the Certificates are as follows: Sources Series A Certificates Series B Certificates Certificate Par Amount $ $ $ [Plus/Less] Original Issue [Premium/Discount] Funds on Hand Total $ $ $ Total Uses Prior Certificates Tender Price (1) $ $ $ Fee to Terminate the Swap Agreement Costs of Delivery (2) Total $ $ $ (1) (2) Reflects amounts required to effect the mandatory tender of the Prior Certificates on October 3, See DISCHARGE OF PRIOR CERTIFICATES. Includes Underwriter s discount, legal fees, financial advisor fees, Trustee fees, title insurance premiums, printing, municipal bond insurance premium, municipal bond debt service reserve insurance policy premium and rating agency fees and expenses, and other miscellaneous delivery costs. RISK FACTORS The following factors, together with all other information provided in this Official Statement, should be considered by potential investors in evaluating the purchase of the Certificates. The discussion below does not purport to be, nor should it be construed to be, complete nor a summary of all factors which may affect the financial condition of the District, the District s ability to make Lease Payments in the future, the effectiveness of any remedies that the Trustee may have or the circumstances under which Lease Payments may be abated. No representation is made as to the future financial condition of the District. Payment of the Lease Payments is an obligation of the District payable from legally available funds and the ability of the District to make Lease Payments may be adversely affected by its financial condition as of any particular time. See STATE OF CALIFORNIA FISCAL ISSUES, THE DISTRICT and DISTRICT FINANCIAL MATTERS. 14

23 General Considerations Security for the Certificates The obligation of the District to make the Lease Payments does not constitute a debt of the District or of the State or of any political subdivision thereof within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the District or the State is obligated to levy or pledge any form of taxation or for which the District or the State has levied or pledged any form of taxation. Although the Lease does not create a pledge, lien or encumbrance upon the funds of the District, the District is obligated under the Lease to pay the Lease Payments, Reserve Replenishment Rent and Additional Payments from any source of legally available funds and the District will covenant in the Lease that it will take such action as may be necessary to include all Lease Payments, Reserve Replenishment Rent and Additional Payments due under the Lease in its annual budgets and to make necessary annual appropriations for all such rental payments. The District is currently liable and may become liable on other obligations payable from general revenues, some of which may have a priority over the Lease Payments. To the extent that additional obligations are incurred by the District, the funds available to make Lease Payments may be decreased. In the event the District s revenue sources are less than its total obligations, the District could choose to fund other activities before making Lease Payments and other payments due under the Lease. Constitutional and Statutory Limitations on Appropriations There are limitations on the ability of the District to increase revenues. The ability of the District to increase the ad valorem property tax is limited pursuant to Article XIIIA of the State Constitution, which was enacted in In 1986, California voters approved an initiative statute to limit the imposition of new or higher taxes by local agencies, including the District. On November 5, 1996, voters approved Proposition 218 the Right to Vote on Taxes Act, which further affects the ability of local agencies to levy and collect existing and future taxes, assessments, fees and charges. On November 3, 2010, California voters approved Proposition 26, which generally expands the definition of taxes that are subject to voter approval requirements imposed by Proposition 218. Additionally, Article XIIIB of the State Constitution places certain limits on the appropriations the District is permitted to make. See STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES herein. Abatement The obligation of the District under the Lease to pay Lease Payments is in consideration for the use and possession of the Property. The obligation of the District to make Lease Payments (other than to the extent that funds to make Lease Payments are available in the Lease Payment Fund and the Reserve Fund) may be abated in whole or in part if the District does not have full use and possession of the Property. An abatement of Lease Payments is not an event of default and no remedy is available under the Lease or the Trust Agreement to the Owners of the Certificates under such circumstances. The amount of Lease Payments due under the Lease will be adjusted or abated during any period in which by reason of damage, destruction, title defect or taking by eminent domain or condemnation, there is substantial interference with the use and possession of any portion of the Property. The amount of such abatement shall be determined by the District such that the resulting Lease Payments and Additional Payments represent fair consideration for the District s right to use and possession of the portion of the Property not damaged, destroyed or interfered with as a result of title defect or taking. The Reserve Fund will be funded on the date of execution and delivery of the Certificates with the Reserve Policy, in an amount equal to the Reserve Requirement, and amounts available in the Reserve Fund shall be used by the Trustee to make payments in the event Lease Payments received by the Trustee are insufficient to pay principal and interest with respect to the Certificates as such amounts become due. If damage or destruction, title defect or taking of the Property results in abatement or adjustment of Lease Payments and the resulting Lease Payments, together with moneys in the Reserve Fund, are insufficient 15

24 to make all payments of principal and interest with respect to the Certificates during the period that the Property is being replaced, repaired or reconstructed, then such payments of principal and interest may not be made and the only source of funds available to the Trustee or Owners will be any proceeds of rental interruption insurance. Such insurance is required to provide coverage of Lease Payments for up to two years following damage or destruction of the Property with respect to an insured loss. Rental interruption insurance does not cover a loss of use due to uninsured events such as earthquake and flood. Notwithstanding the provisions of the Lease and the Trust Agreement specifying the extent of abatement in the event of the District s failure to have use and possession of the Property, such provisions may be superseded by operation of law and, in such event, the resulting Lease Payments of the District may not be sufficient to pay all of the remaining principal and interest with respect to the Certificates Outstanding. No Cash Reserve Initially, the Reserve Requirement will be satisfied by the Reserve Policy. In the event that the Insurer was to experience financial difficulties, there would be no cash available for transfer from the Reserve Fund. The obligations of the Insurer under the Reserve Policy are unsecured contractual obligations and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or state law related to insolvency of insurance companies. See RISK FACTORS Certificate Insurance. Absence of Earthquake Insurance and Flood Insurance Much of California is seismically active, with numerous faults that could be earthquake sources. The District has no earthquake insurance on the Property and is not obligated under the Lease to procure and maintain, or cause to be procured and maintained, earthquake insurance on the Property. Seismic activity could cause significant damage to the Property and the value of the Property could be adversely affected and an abatement of Lease Payments could occur due to a seismic event. The District is not able to predict whether or to what extent these results might occur. The Property is in a 100-year flood plain and a dam inundation zone but has been constructed in a manner designed to prevent significant damage to the School in the event of a flood or failure of the dam. See THE PROPERTY. The District has no flood insurance on the Property. Other Limitations on Liability Although the District will covenant to budget and appropriate annually to provide for Lease Payments, the District has not pledged its full faith and credit to such payment. In the event that the District s revenue sources are less than its total obligations in any year, the District could choose to pay other District expenditures before paying any or all of the annual Lease Payments. Except as expressly provided in the Trust Agreement, the Corporation shall not have any obligation or liability to the Owners with respect to the payment when due of the Lease Payments by the District, or with respect to the performance by the District of other agreements and covenants required to be performed by it contained in the Lease or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. No Acceleration Upon Default In the event of a default by the District under the Lease, the remedy of acceleration of the remaining Lease Payments is not available. The District will only be liable for Lease Payments on an annual basis, and, in the event of default, the Trustee would be required to seek a separate judgment each year for that year s defaulted Lease Payments. Any such suit for money damages would be subject to limitations on legal 16

25 remedies against school districts in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Limited Recourse on Default; Insurer Right to Control Remedies The Lease provides that the Trustee, without terminating the Lease, may take possession of the Property and re-let it if there is a default by the District and that, in the event such re-leasing occurs, the District would be liable for any resulting deficiency in the Lease Payments. The Lease provides that the Trustee may have such rights of access to the Property as may be necessary to exercise any remedies. If the Property is determined to be of an essential nature to the District by a court, it is not certain whether such court would permit the exercise of the remedies of repossession and re-leasing of the Property. The Trustee is not empowered to sell the Property for the benefit of the Owners. Alternatively, the Lease provides that, following an event of default, the Trustee may terminate the Lease with respect to the Property and proceed against the District to recover damages pursuant to the Lease. Any suit for money damages would be subject to limitations on legal remedies against school districts in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. The enforceability of the rights and remedies of the Owners of the Certificates, and the obligations incurred by the District, may become subject to the following: the Federal Bankruptcy Code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors rights generally, now or hereafter in effect; usual equity principles which may limit the specific enforcement under state law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, would subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently entail risks of delay, limitation, or modification of their rights with respect to the Certificates. In a bankruptcy case, a plan of adjustment for the District could be confirmed that would allow for enforcement of the Lease, but the priority, interest rate, payment terms, collateral, maturity dates, payment sources, covenants and other terms or provisions of the Lease and the Certificates may be altered by the bankruptcy court. Such a plan could be confirmed even over the objections of the Trustee and the Owners, and without their consent. In addition, if the Lease is determined to constitute a true lease by the bankruptcy court (rather than a financing lease providing for the extension of credit), the District could choose not to perform under the Lease and the claim of the Owners could be substantially limited. An allowable claim could be substantially less than the amount of the Certificates outstanding, resulting in the Owners not receiving the full amount of the principal and interest due with respect to the Certificates. So long as the Policy remains in effect and the Insurer is not in default of its obligations thereunder, the Insurer shall have the right to control all remedies for default under the Lease and the Trust Agreement and shall not be required to obtain the consent of the Owners with respect to the exercise of remedies. Remedies available to the Owners of the Certificates may be limited by a variety of factors and may be inadequate to assure the timely payment of principal and interest due with respect to the Certificates or to preserve the tax-exempt status of the interest component of the Series A Certificates. Special Counsel has limited its opinion as to the enforceability of the Certificates and of the Trust Agreement to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium, or others similar laws affecting generally the enforcement of creditors rights, by equitable principles and by the exercise of judicial discretion. Additionally, the 17

26 Certificates are not subject to acceleration in the event of the breach of any covenant or duty under the Trust Agreement. The lack of availability of certain remedies or the limitation of remedies may entail risks of delay, limitation or modification of the rights of the Certificate Owners. Substitution of Property The Lease provides that, upon the satisfaction of certain conditions specified therein, the District may substitute other public facilities or real property for all or any portion of the Property and may release a portion of the Property from the Lease. Although the Lease requires, among other things, that the Property, as constituted after such substitution or release, have an annual fair rental value at least equal to the maximum Lease Payments payable by the District in any fiscal year, it does not require that such Property have an annual fair rental value equal to the annual fair rental value of the Property at the time of substitution or release. Thus, a portion of the Property could be replaced with less valuable real property, or could be released altogether. Such a replacement or release could have an adverse impact on the security for the Certificates, particularly if an event requiring abatement of Lease Payments were to occur subsequent to such substitution or release. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE AGREEMENT Substitution or Release of the Property. Additional Certificates The Trust Agreement permits Additional Certificates secured on a parity with the Certificates to be executed and delivered without the consent of the Owners of the Certificates upon compliance with the provisions in the Trust Agreement. In connection with the execution and delivery of any Additional Certificates, the Lease Payments due under the Lease would be increased. The Certificates and the Additional Certificates will be secured on a parity under the Trust Agreement by Lease Payments and other amounts held in the funds established thereunder, other than the Project Fund. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE CERTIFICATES OF PARTICIPATION Additional Certificates. Economic Conditions in California As described further under STATE OF CALIFORNIA FISCAL ISSUES, the State recently experienced several years of significant financial pressure and, until fiscal year , the State funding of K-12 education for local school districts had been reduced substantially from prior years. Although State funding increased in fiscal years through and is expected to continue to increase in the current fiscal year, the District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address State budget issues, changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State s ability to fund schools. State budget shortfalls in future fiscal years could have an adverse financial impact on the State General Fund budget and on the District. See DISTRICT FINANCIAL MATTERS Current Financial Condition. Loss of Tax Exemption As discussed under the heading TAX MATTERS, certain acts or omissions of the District in violation of its covenants in the Trust Agreement and the Lease and future court decisions or legislation could result in the interest component of the Series A Certificates being includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Series A Certificates. Should such an event of taxability occur, the Series A Certificates would not be subject to mandatory prepayment and would remain Outstanding until maturity or until prepaid at the option of the District. 18

27 Certificate Insurance In the event of default of the payment of the scheduled principal or interest with respect to the Certificates when all or some becomes due, the Trustee on behalf of any Owner of the Certificates shall have a claim under the Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory prepayment or acceleration resulting from default or otherwise, if any, other than any advancement of maturity pursuant to a scheduled mandatory sinking fund payment, if applicable, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy does not insure prepayment premium, if any. The payment of principal and interest in connection with mandatory prepayment of the Certificates which is recovered from the Certificate owner as a voidable preference under applicable bankruptcy law is covered by the insurance policy, however, such payments will be made by the Insurer at such time and in such amounts as would have been due absent such prepayment unless the Insurer chooses to pay such amounts at an earlier date. Under most circumstances, default of payment of principal and interest does not obligate acceleration of the obligations of the Insurer without appropriate consent. The Insurer may direct and must consent to any remedies with respect to the Certificates and the Insurer s consent may be required in connection with amendments to any applicable documents relating to the Certificates. In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Certificates are payable solely from the Lease Payments and other sources specifically provided for in the Trust Agreement. In the event the Insurer becomes obligated to make payments with respect to the Certificates, no assurance is given that such event will not adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates. The long-term ratings on the Certificates are dependent in part on the financial strength of the Insurer and its claims paying ability. The Insurer s financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Insurer and the ratings on the Certificates will not be subject to downgrade and such event could adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates. See RATINGS herein. The obligations of the Insurer are unsecured contractual obligations and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or state law related to insolvency of insurance companies. Neither the District nor the Corporation has made an independent investigation into the claims paying ability of the Insurer and no assurance or representation regarding the financial strength or projected financial strength of the Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the District to pay the Lease Payments from which the Owners of the Certificates will be paid as provided in the Trust Agreement and the claims paying ability of the Insurer, particularly over the life of the investment. See MUNICIPAL BOND INSURANCE herein for further information regarding the Insurer and the Policy, which includes further instructions for obtaining current financial information concerning the Insurer. CONTINUING DISCLOSURE Pursuant to the Continuing Disclosure Certificate (the Continuing Disclosure Certificate ), the form of which is attached hereto as Appendix E, the District will agree, upon the occurrence of any of the following events, to report such event in a timely manner not more than ten (10) business days after the occurrence of such event to the Municipal Securities Rulemaking Board (the MSRB ) through its EMMA system: (1) principal and interest payment delinquencies; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; 19

28 (4) substitution of credit or liquidity providers, or their failure to perform; (5) adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determinations of taxability or of a Notice of Proposed Issue (IRS Form 5701-TEB); (6) tender offers; (7) defeasances; (8) ratings changes; and (9) bankruptcy, insolvency, receivership or similar proceedings. Notice of certain other events will be provided as described in the Continuing Disclosure Certificate, if material. See APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE. In addition, the District will agree in the Continuing Disclosure Certificate to provide certain annual financial and operating data to the MSRB not later than April 1 of each year commencing April 1, These covenants will be made in order to assist the Underwriter in complying with Rule 15c2-12 promulgated by the Securities and Exchange Commission. The Owners and Beneficial Owners of the Certificates are third party beneficiaries of the Continuing Disclosure Certificate. In the event the District fails to comply with any provision in the Continuing Disclosure Certificate, any Owner or Beneficial Owner may take all action necessary to cause the District to comply with the Continuing Disclosure Certificate. A default under the Continuing Disclosure Certificate shall not be an event of default under the Trust Agreement. In addition, no person or entity shall be entitled to recover any monetary damages under the Continuing Disclosure Certificate. The District has entered into certain continuing disclosure undertakings with respect to prior financings. Within the last five years, the District failed to comply with these prior undertakings in the following respects: the notice of certain ratings changes were not timely filed, the annual report for fiscal year was filed 23 days late with respect to two series of outstanding District obligations and was not linked on EMMA to certain of the District s obligations until May 8, 2015, and the annual report for fiscal year was filed 16 days late with respect to two series of outstanding District obligations. THE CORPORATION The Hemet Unified School District School Facilities Corporation, a nonprofit public benefit corporation was incorporated on August 8, 1990 pursuant to the Nonprofit Public Benefit Corporation Law of the State (Title 1, Division 2, Part 2 of the California Corporation Code). The Corporation was established in order to facilitate and assist the District in financing and refinancing its capital projects and equipment needs. Introduction THE DISTRICT The District was established on July 1, 1966, as a result of the unification of the Alamos and Cottonwood Districts, the Hemet Valley Union School District, and the Hemet Union High School District. The District covers approximately 647 square miles in the western part of Riverside County. The City of Hemet and unincorporated communities of Idyllwild, Anza, Aguanga, and Winchester are situated within the District s boundaries. Hemet is located approximately forty-five miles west of Palm Springs, seventy-five miles north of San Diego, sixty-five miles east of Los Angeles, and thirty-file miles southeast of Riverside. The District s total population is approximately 135,000. The District currently has an enrollment of 21,527 students. The District currently operates 11 elementary schools, 3 kindergarten through grade eight schools, 4 middle schools, 4 high schools, 1 continuation high school, 2 alternative schools, 2 charter schools and 1 adult education program. The charter schools are operated by the District, and their financial activities are presented in the District s audited financial statements in the Charter School Special Revenue Fund. The District is governed by a seven member Governing Board. The members are elected to four-year terms. 20

29 Unless otherwise indicated, the following financial, statistical and demographic data has been provided by the District. Additional information concerning the District and copies of the most recent and subsequent audited financial reports of the District may be obtained on the District s website or by contacting: Hemet Unified School District, 1791 West Acacia Avenue, Hemet, California, Attention: Assistant Superintendent, Business Services. Governing Board The District is governed by a seven-member Governing Board, each member of which is elected to a four-year term. Elections for positions to the Board are held every two years, alternating between three and four available positions. Current members of the Board, together with their office and the date their term expires, are listed in Table 1 below. Table 1 HEMET UNIFIED SCHOOL DISTRICT Governing Board Name Office Current Term Expires Jim Smith President December 2016 Vic Scavarda Vice President December 2018 Megan Haley Board Member December 2018 Joe Wojcik Board Member December 2018 Patrick Searl Board Member December 2016 Horacio Valenzuela Board Member December 2018 Marilyn Forst Board Member December 2016 Source: Hemet Unified School District. Superintendent and Administrative Personnel The Superintendent of the District, appointed by the Board, is responsible for management of the day to day operations and supervises the work of other District administrators. The names and backgrounds of the Superintendent and the Assistant Superintendent, Business Services are set forth below. Christi Barrett, Superintendent. Christi Barrett has been the Superintendent for the District since June Ms. Barrett earned her Bachelor of Arts degree in Liberal Arts from the University of California, Riverside in 2000 and a Master s degree in Special Education from the University of California, Riverside in 200,3 and is currently in the Doctorial program for Urban Education Leadership at Claremont Graduate University. Ms. Barrett has 15 years of educational experience and has served as Teacher, Assistant Principal, Principal and Assistant Superintendent at Victor Elementary School District and Val Verde Unified School District. Ms. Barrett has a strong background in instruction, human resources and district operations. Vincent J. Christakos, Assistant Superintendent, Business Services. Vincent J. Christakos has been the Assistant Superintendent, Business Services for the District since October Mr. Christakos received a Bachelor of Science degree in Accounting and Economics from the University of Tampa and a Master of Science in Systems Management from the University of Southern California. He has 40 years in leadership and management-level positions. Following fifteen years as a US Army Officer, Mr. Christakos spent five years in the private sector as the plant Controller and the General Manager for a fortune 250 paper manufacturing company in Los Angeles. Mr. Christakos entered the K-12 public school career field in 1993 as the budget supervisor for the Moreno Valley Unified School District. He has been a Director of Fiscal Services with the Hemet Unified School District and the Director of Internal Business Operations for the Riverside County Office of Education. He spent six years as the Chief Business Official for the Redlands Unified School District prior to coming to Hemet Unified School District. 21

30 Employee Relations In the fall of 1974, the State Legislature enacted a public school employee collective bargaining law known as the Rodda Act, which became effective in stages in The law provides that employees are to be divided into appropriate bargaining units which are to be represented by an exclusive bargaining agent. The teachers of the District (certificated personnel) are represented by the Hemet Unified Teachers Association (the HTA ). The District and the HTA are operating under a labor contract that expired on June 30, The parties will continue to operate under the terms of the expired contract until a new contract is agreed upon. As of June 30, 2016, the District employed 1,107 certificated employees with a total estimated payroll of $90,839,000. Table 2 below sets forth the number of certificated employees employed by the District for each of the last six fiscal years. Source: Hemet Unified School District. Table 2 HEMET UNIFIED SCHOOL DISTRICT Certificated Employees Fiscal Year Total Number of Employees , , ,107 The California School Employees Association (the CSEA ) has been selected as the exclusive bargaining agent for non-teaching (classified) personnel. The District and CSEA are currently operating under a contract that expired on June 30, The parties will continue to operate under the terms of the expired contract until a new contract is agreed upon. As of June 30, 2016, the District employed 1,420 classified employees with a total estimated payroll of $42,807,200. Table 3 below sets forth the number of classified employees for each of the last six fiscal years. Source: Hemet Unified School District. Table 3 HEMET UNIFIED SCHOOL DISTRICT Classified Employees Fiscal Year Total Number of Employees , , , , , ,420 22

31 Retirement System This section contains certain information relating to the Public Employees Retirement System ( PERS ) and the State Teachers Retirement System ( STRS ). The information is primarily derived from information produced by PERS and STRS, their independent accountants and their actuaries. The District has not independently verified the information provided by PERS and STRS and makes no representations nor expresses any opinion as to the accuracy of the information provided by PERS and STRS. The comprehensive annual financial reports of PERS and STRS are available on their websites at and respectively. The PERS and STRS websites also contain the most recent actuarial valuation reports, as well as other information concerning benefits and other matters. Such information is not incorporated by reference herein. The District cannot guarantee the accuracy of such information. Actuarial assessments are forward-looking information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. STRS. All full-time certificated employees, as well as certain classified employees, are members of STRS. STRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program (the STRS Defined Benefit Program ). The STRS Defined Benefit Program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers, and the State. Benefit provisions and contribution amounts are established by State statutes, as legislatively amended from time to time. Prior to fiscal year , unlike typical defined benefit programs, neither the employee, employer or State contribution rate to the STRS Defined Benefit Program varied annually to make up funding shortfalls or assess credits for actuarial surpluses. In recent years, the combined employer, employee and State contributions to the STRS Defined Benefit Program have not been sufficient to pay actuarially required amounts. As a result, and due to significant investment losses, the unfunded actuarial liability of the STRS Defined Benefit Program has increased significantly in recent fiscal years. In September 2013, STRS projected that the STRS Defined Benefit Program would be depleted in 31 years assuming existing contribution rates continued, and other significant actuarial assumptions were realized. In an effort to reduce the unfunded actuarial liability of the STRS Defined Benefit Program, in 2014, the State passed legislation described below to increase contribution rates. Prior to July 1, 2014, K-14 school districts were required by statute to contribute 8.25% of eligible salary expenditures, while participants contributed 8% of their respective salaries. On June 24, 2014, the Governor signed A.B ( A.B ) in to law as a part of the State Budget. A.B seeks to fully fund the unfunded actuarial obligation with respect to service credited to members of the STRS Defined Benefit Program before July 1, 2014 (the 2014 Liability ), within 32 years, by increasing member, K-14 school district and State contributions to STRS. Commencing on July 1, 2014, the employee contribution rates have increased over a three year phase in period in accordance with the schedule set forth in Table 4 below: 23

32 Source: A.B Effective Date Table 4 MEMBER CONTRIBUTION RATES STRS (Defined Benefit Program) STRS Members Hired Prior to January 1, 2013 STRS Members Hired After January 1, 2013 July 1, % 8.150% July 1, July 1, Pursuant to A.B. 1469, K-14 school districts contribution rate will increase over a seven year phase in period in accordance with the schedule set forth in Table 5 below: (1) Table 5 K-14 SCHOOL DISTRICT CONTRIBUTION RATES STRS (Defined Benefit Program) Effective Date K-14 school districts (1) July 1, % July 1, July 1, July 1, July 1, July 1, July 1, Percentage of eligible salary expenditures to be contributed. Source: A.B Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter the STRS Teachers Retirement Board (the STRS Board ), is required to increase or decrease the K-14 school districts contribution rate to reflect the contribution required to eliminate the remaining 2014 Liability by June 30, 2046; provided that the rate cannot change in any fiscal year by more than 1% of creditable compensation upon which members contributions to the STRS Defined Benefit Program are based; and provided further that such contribution rate cannot exceed a maximum of 20.25%. In addition to the increased contribution rates discussed above, A.B also requires the STRS Board to report to the State legislature every five years (commencing with a report due on or before July 1, 2019) on the fiscal health of the STRS Defined Benefit Program and the unfunded actuarial obligation with respect to service credited to members of that program before July 1, The reports are also required to identify adjustments required in contribution rates for K-14 school districts and the State in order to eliminate the 2014 Liability. The District s contribution to STRS was $6,419,936 in fiscal year , $6,767,727 for fiscal year and $8,384,699 for fiscal year The District estimates that it contributed $16,585,519 to STRS in fiscal year and has budgeted $21,678,297 as its contribution to STRS in fiscal year The increase in fiscal years and is related to a combination of staffing and rate increases and reporting on-behalf payments made to STRS by the State for District employees. The District started tracking the on-behalf entries at the end of fiscal year , though such entries aren t reflected herein until fiscal year If the on-behalf payments are excluded, the District estimates that it contributed $10,919,929 to STRS in fiscal year and has budgeted $13,822,760 as its contribution to STRS in fiscal year

33 The State also contributes to STRS. The State s contribution reflects a base contribution rate of 2.017%, and a supplemental contribution rate that will vary from year to year based on statutory criteria. Pursuant to A.B. 1469, the State contribution rate, including the supplemental contribution, is 4.891% in fiscal year and will increase in fiscal year to a total of 6.328%. Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter, the STRS Board is required, with certain limitations, to increase or decrease the State s contribution rates to reflect the contribution required to eliminate the unfunded actuarial accrued liability attributed to benefits in effect before July 1, In addition, the State is currently required to make an annual general fund contribution up to 2.5% of the fiscal year covered STRS member payroll to the Supplemental Benefit Protection Account (the SBPA ), which was established by statute to provide supplemental payments to beneficiaries whose purchasing power has fallen below 85% of the purchasing power of their initial allowance. PERS. Classified employees working four or more hours per day are members of PERS. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by the State statutes, as legislatively amended from time to time. PERS operates a number of retirement plans including the Public Employees Retirement Fund ( PERF ). PERF is a multiple-employer defined benefit retirement plan. In addition to the State, employer participants at June 30, 2013 included 1,580 public agencies and schools (representing more than 2,500 entities). PERS acts as the common investment and administrative agent for the member agencies. The State and school districts (for classified employees, which generally consist of school employees other than teachers) are required by law to participate in PERF. Employees participating in PERF generally become fully vested in their retirement benefits earned to date after five years of credited service. One of the plans operated by PERS is for school districts throughout the State (the Schools Pool ). Contributions by employers to the PERS Schools Pool are based upon an actuarial rate determined annually and contributions by plan members vary based upon their date of hire. The District is currently required to contribute to PERS at an actuarially determined rate, which is % of eligible salary expenditures for fiscal year Participants enrolled in PERS prior to January 1, 2013 contribute 7% of their respective salaries, while participants enrolled after January 1, 2013 contribute at an actuarially determined rate, which is 6% of their respective salaries for fiscal year See California Public Employees Pension Reform Act of 2013 herein. The District s contribution to PERS was $3,599,796 in fiscal year , $4,245,041 for fiscal year and $4,893,040 for fiscal year The District estimates that it contributed $6,092,570 to PERS in fiscal year and has budgeted $7,434,480 as its contribution to PERS in fiscal year State Pension Trusts. Each of STRS and PERS issues a separate comprehensive financial report that includes financial statements and required supplemental information. Copies of such financial reports may be obtained from each of STRS and PERS as follows: (i) STRS, P.O. Box 15275, Sacramento, California ; (ii) PERS, P.O. Box , Sacramento, California Moreover, each of STRS and PERS maintains a website, as follows: (i) STRS: (ii) PERS: However, the information presented in such financial reports or on such websites is not incorporated into this Official Statement by any reference. Both STRS and PERS have substantial statewide unfunded liabilities. The amount of these unfunded liabilities will vary depending on actuarial assumptions, returns on investments, salary scales and participant contributions. Table 6 below summarizes information regarding the actuarially-determined accrued liability for both STRS and PERS (Schools Pool). Actuarial assessments are forward-looking information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. 25

34 Table 6 FUNDED STATUS STRS (Defined Benefit Program) and PERS (Dollar Amounts in Millions) (1) Fiscal Years through STRS Fiscal Year Accrued Liability Value of Trust Assets (MVA) (2) Unfunded Liability (MVA) (2)(3) Value of Trust Assets (AVA) (4) Unfunded Liability (AVA) (4) $208,405 $147,140 $68,365 $143,930 $64, , ,118 80, ,232 70, , ,176 74, ,614 73, , ,749 61, ,495 72, , ,633 72, ,553 76,200 PERS Fiscal Year Accrued Liability Value of Trust Assets (MVA) (2) Unfunded Liability (MVA) (2) Value of Trust Assets (AVA) (4) Unfunded Liability (AVA) (4) $58,358 $45,901 $12,457 $51,547 $6, ,439 44,854 14,585 53,791 5, ,487 49,482 12,005 56,250 5, ,600 56,838 8, (5) -- (5) (6) 73,325 56,814 16, (5) -- (5) (1) Amounts may not add due to rounding. (2) Reflects market value of assets. (3) Excludes assets allocated to the SBPA reserve. (4) Reflects actuarial value of assets. (5) Effective for the June 30, 2014 actuarial valuation, PERS no longer uses an actuarial value of assets. (6) On April 19, 2016, the PERS Finance & Administration Committee approved the K-14 school district contribution rate for fiscal year and released certain actuarial information to be incorporated into the June 30, 2015 actuarial valuation to be released in summer Source: PERS Schools Pool Actuarial Valuation; STRS Defined Benefit Program Actuarial Valuation. The STRS Board has sole authority to determine the actuarial assumptions and methods used for the valuation of the STRS Defined Benefit Program. The following are certain of the actuarial assumptions adopted by the STRS Board with respect to the STRS Defined Benefit Program Actuarial Valuation for fiscal year : measurement of accruing costs by the Entry Age Normal Actuarial Cost Method, 7.50% investment rate of return (net of investment and administrative expenses), 4.50% interest on member accounts, 3.75% projected wage growth, and 3.00% projected inflation. According to the STRS Defined Benefit Program Actuarial Valuation, as of June 30, 2014, the future revenue from contributions and appropriations for the STRS Defined Benefit Program is projected to be sufficient to finance its obligations. This finding reflects the scheduled contribution increases specified in AB 1469 and is based on the valuation assumptions and the valuation policy adopted by the STRS Board. In recent years, the PERS Board of Administration (the PERS Board ) has taken several steps, as described below, intended to reduce the amount of the unfunded accrued actuarial liability of its plans, including the Schools Pool. On March 14, 2012, the PERS Board voted to lower the PERS rate of expected price inflation and its investment rate of return (net of administrative expenses) (the PERS Discount Rate ) from 7.75% to 7.5%. As one consequence of such decrease, the annual contribution amounts paid by PERS member public agencies, 26

35 including the District, have been increased by 1 to 2% for miscellaneous plans and by 2 to 3% for safety plans beginning in fiscal year On November 17, 2015, the PERS Board voted to reduce the PERS Discount Rate to 6.5% over a period of 20 years. This change could result in increased contributions over time from both employers and employees. On April 17, 2013, the PERS Board approved new actuarial policies aimed at returning PERS to fullyfunded status within 30 years. The policies include a rate smoothing method with a 30-year fixed amortization period for gains and losses, a five-year increase of public agency contribution rates, including the contribution rate at the onset of such amortization period, and a five year reduction of public agency contribution rates at the end of such amortization period. The new actuarial policies were first included in the June 30, 2014 actuarial valuation and were implemented with respect the State, K-14 school districts and all other public agencies in fiscal year Also, on February 20, 2014, the PERS Board approved new demographic assumptions reflecting (i) expected longer life spans of public agency employees and related increases in costs for the PERS system and (ii) trends of higher rates of retirement for certain public agency employee classes, including police officers and firefighters. The new actuarial assumptions were first reflected in the Schools Pool in the June 30, 2015 actuarial valuation. The increase in liability due to the new assumptions will be amortized over 20 years with increases phased in over five years, beginning with the contribution requirement for fiscal year The new demographic assumptions affect the State, K-14 school districts and all other public agencies. The District can make no representations regarding the future program liabilities of STRS, or whether the District will be required to make additional contributions to STRS in the future above those amounts required under A.B The District can also provide no assurances that the District s required contributions to PERS will not increase in the future. California Public Employees Pension Reform Act of On September 12, 2012, the Governor signed into law the California Public Employee s Pension Reform Act of 2013 (the Reform Act ), which makes changes to both STRS and PERS, most substantially affecting new employees hired after January 1, 2013 (the Implementation Date ). For STRS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor (the age factor is the percent of final compensation to which an employee is entitled to for each year of service) from age 60 to 62 and increasing the eligibility of the maximum age factor of 2.4% from age 63 to 65. Similarly, for non-safety PERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. Among the other changes to PERS and STRS, the Reform Act also: (i) requires all new participants enrolled in PERS and STRS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (ii) requires STRS and PERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date (previously 12 months for STRS members who retire with 25 years of service), and (iii) caps pensionable compensation for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers) and benefit base for members participating in Social Security or 120% for members not participating in social security (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers), while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. GASB Statement Nos. 67 and 68. On June 25, 2012, the Governmental Accounting Standards Board ( GASB ) approved two new standards ( Statements ) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. The new Statements, No. 67 and No. 68, will replace GASB Statement No. 27 and most of Statements No. 25 and No. 50. The changes will impact 27

36 the accounting treatment of pension plans in which state and local governments participate. Major changes include: 1) the inclusion of unfunded pension liabilities on the government s balance sheet (currently, such unfunded liabilities are typically included as notes to the government s financial statements); 2) more components of full pension costs being shown as expenses regardless of actual contribution levels; 3) lower actuarial discount rates being required to be used for underfunded plans in certain cases for purposes of the financial statements; 4) closed amortization periods for unfunded liabilities being required to be used for certain purposes of the financial statements; and 5) the difference between expected and actual investment returns being recognized over a closed five-year smoothing period. In addition, according to GASB, Statement No. 68 means that, for pensions within the scope of the Statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pensions and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. Because the accounting standards do not require changes in funding policies, the full extent of the effect of the new standards on the District is not known at this time. The reporting requirements under GASB No. 68 for pension plans took effect for the fiscal year beginning July 1, 2013 and the reporting requirements for government employers, including the District, took effect for the fiscal year beginning July 1, The District s net pension liability at June 30, 2015 calculated pursuant to GASB No. 68 was $179,524,068. See Notes 1 and 16 to the District s Audited Financial Statements for Fiscal Year attached as Appendix D hereto. Other Postemployment Benefits The District provides post-employment health care benefits under a Postemployment Benefit Plan (the Plan ). The Plan provides medical, dental and vision insurance benefits to eligible retirees and their spouses for a maximum of 10 years or until they reach age 65, whichever comes first. All employees who retire on or after attaining age 50 with 15 or more years of service with the District and all employees who retire on or after the age of 55 with 10 or more years of service with the District are eligible to receive $3,300 annually for health and welfare benefits. The retirees may enroll their spouses and dependent children in the program, but are required to contribute any premium in excess of the District s contribution. The District offered a one-time increase in post-employment health benefits from $3,300 to $10,000 to eligible certificated employees retiring in June As of June 30, 2015, there were 113 retirees and beneficiaries currently receiving benefits and 2,201 employees eligible for benefits upon their retirement from the District. Under Government Accounting Standards Board Regulation 45 ( GASB 45 ), which the District adopted in the Fiscal Year ended June 30, 2008, the District is required to calculate its accrued liability for the Plan and the amount of its annual required contribution (the ARC ). The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal costs of the Plan and to amortize any unfunded accrued actuarial liabilities over a period not to exceed 30 years. For the District, as of July 1, 2016, 9 years of the 30-year period had passed, with 21 years remaining. To comply with the requirements of GASB 45, the District engaged an actuarial consultant (the Actuarial Consultant ) to prepare a report regarding the Plan, which report presents results for the July 1, 2014 actuarial valuation of the Plan (the Actuarial Report ). The Actuarial Report contains a number of assumptions that affect the calculation of the unfunded liability for the Plan and the ARC. The Actuarial Report uses an entry age normal actuarial cost method. In this method, the actuarial present value of projected benefits is allocated on a level basis over the earnings period of individuals between their entry date into the Plan and their assumed retirement date. The valuation attributed the benefit assuming a 2.75% annual increase in payroll. The Actuarial Consultant estimated that the actuarial accrued liability of the Plan as of March 1, 2015 was $13,325,446 and that the unfunded actuarial accrued liability as of that date was $13,325,446. Although GASB 45 requires the District to calculate the ARC, it does not require the District to fund that amount annually. The District has been funding the Plan on a pay-as-you-go basis; however, in fiscal year the 28

37 District did establish a special reserve fund to begin accumulating funds to be applied towards the unfunded liability and has set aside $3,519,845 to date. The ARC for fiscal year was $1,396,104 and the District made a contribution of $2,000,000. The District s net OPEB obligation as of July 1, 2015 was $19,521,179. The Actuarial Report contains a five-year projection under the assumption that the District contributes an amount equal to the Plan benefit on a pay-as-you-go basis and the District implied subsidy. Using a 4.50% discount rate, and assuming the normal cost component of the ARC increases by 2.75% per year, the Actuarial Consultant projects that the net OPEB obligation was $19,521,179 as of June 30, See Note 11 to the District s Annual Financial Report attached as Appendix D regarding contributions for (the last fiscal year for which an audit is available). GASB 45 explicitly incorporates Actuarial Standards of Practice ( ASOPs ). There was a recent change to ASOPs No. 6 ( ASOP 6 ) requiring reflection of implicit subsidies in OPEB costs and projections. Implicit subsidies refers to an indirect cost sharing feature of OPEB plans. Using unadjusted flat-rate premiums as a cost basis for accounting was previously acceptable under GASB 45 when the health plans are considered community-rated. Community-rated plans have premium levels determined without adjustment for the demographics of an individual employer buying coverage. Although these subsidies were previously allowed to be excluded, the changes to ASOP 6 eliminated the community-rated exemption. As a result, the District is required to reflect these implicit subsidies in its OPEB liability accounting beginning with fiscal year As of June 30, 2016, the District also owed $649,692 in early retirement incentives to 52 participating employees which is scheduled to be paid in annual installments through June 30, At June 30, 2016, the District also had a liability of $1,052,939 for accumulated unpaid employee vacation. Insurance The District's risk management activities are recorded in the General and Self-Insurance Funds. Employee life, health, vision, dental, disability and workers' compensation programs are administered by the District. The District is exposed to various risks of loss related to torts; theft, damage and destruction of assets; errors and omissions; injuries to employees; life and health of employees; and natural disasters. The District is a member of Southern California Regional Liability Excess Fund Joint Powers Authority for property and liability with coverage up to a maximum of $250 million, subject to Member Retained Limits of $5,000 per occurrence. The District also maintains coverage as a member of Southern California Regional Liability Excess Fund Joint Powers Authority for general liability claims with coverage up to $25 million per occurrence and $52 million aggregate, all subject to a $5,000 Member Retained Limit per occurrence. The District self-insures workers' compensation coverage up to $1,000,000 per occurrence with excess coverage up to $10,000,000. The District records an estimated liability for indemnity torts and other claims against the District. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred, but not reported based on historical experience. Assessed Valuation The assessed valuation of property within the District for fiscal year is $9,660,507,854. Table 7 below describes the District s land use by type in fiscal year , which reflects that 77.39% of the total assessed valuation is for residential property and 22.61% for nonresidential property. 29

38 Table 7 HEMET UNIFIED SCHOOL DISTRICT ASSESSED VALUATION AND PARCELS BY LAND USE Assessed Valuation (1) % of Total No. of Parcels % of Total Non-Residential: Agricultural $ 364,780, % 1, % Commercial/Industrial 1,474,379, , Vacant Commercial/Industrial 209,162, Vacant Unclassified 128,740, , Miscellaneous 6,876, Subtotal Non-Residential $ 2,183,938, % 10, % Residential: Single Family Residence $ 5,897,341, % 32, % Condominium/Townhouse 56,135, Mobile Homes/Lots 820,152, , Residential Units 192,611, Residential Units/Apartments 293,969, Vacant Residential 216,358, , Subtotal Residential $ 7,476,569, % 54, % Total $ 9,660,507, % 65, % (1) Local Secured and Utility Assessed Valuations; excluding tax-exempt property. Source: California Municipal Statistics, Inc. Table 8 below shows the number of parcels of single-family homes with various assessed value ranges in fiscal year located in the District. There are 32,683 single family parcels within the District with an average assessed valuation in fiscal year of $180,441 and a median assessed value of $166,

39 TABLE 8 HEMET UNIFIED SCHOOL DISTRICT ASSESSED VALUATION PER PARCEL OF SINGLE-FAMILY HOMES No. of Parcels Assessed Valuation Average Assessed Valuation Median Assessed Valuation Single Family Residential 32,683 $5,897,341,575 $180,441 $166, Assessed Valuation No. of Parcels (1) % of Total Cumulative % of Total Total Valuation % of Total Cumulative % of Total $0 - $24, % 0.153% $ 1,032, % 0.018% $25,000 - $49, ,975, $50,000 - $74,999 2, ,210, $75,000 - $99,999 3, ,863, $100,000 - $124,999 3, ,139, $125,000 - $149,999 4, ,272, $150,000 - $174,999 3, ,329, $175,000 - $199,999 3, ,886, $200,000 - $224,999 3, ,276, $225,000 - $249,999 2, ,869, $250,000 - $274,999 2, ,581, $275,000 - $299,999 1, ,065, $300,000 - $324, ,519, $325,000 - $349, ,267, $350,000 - $374, ,671, $375,000 - $399, ,199, $400,000 - $424, ,309, $425,000 - $449, ,227, $450,000 - $474, ,432, $475,000 - $499, ,434, $500,000 and greater ,776, Total 32, % $ 5,897,341, % (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc. Accounting Practices DISTRICT FINANCIAL MATTERS The accounting policies of the District conform to generally accepted accounting principles and are in accordance with the policies and procedures of the California School Accounting Manual. This manual, according to Section of the California Education Code, is to be followed by all State school districts. District Budget The District is required by provisions of the California Education Code to maintain each year a balanced budget in which the sum of expenditures plus the ending fund balance cannot exceed the revenues plus the carry over fund balance from the previous year. The California State Department of Education imposes a uniform budgeting format for each school district in the State. School districts must adopt a budget no later than June 30 of each year. The budget must be submitted to the County Superintendent of Schools (the County Superintendent ) within five days of adoption or by July 1, whichever occurs first. The budget is only readopted if it is disapproved by the County Superintendent, or as needed. 31

40 For budgets submitted by July 1, the County Superintendent will (a) examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance, (b) determine if the budget allows the district to meet its current obligations, and (c) determine if the budget is consistent with a financial plan that will enable the district to meet its multi-year financial commitments. On or before August 15, the County Superintendent will approve or disapprove the adopted budget for each school district. Budgets will be disapproved if they fail the above standards. The district board must be notified by August 15 of the County Superintendent s recommendations for revision and reasons for the recommendations. The County Superintendent may assign a fiscal advisor or appoint a committee to examine and comment on the recommendations. The committee must report its findings no later than August 20. Any recommendations made by the County Superintendent must be made available by the district for public inspection. The law does not provide for conditional approvals; budgets must be either approved or disapproved. No later than August 20, the County Superintendent must notify the State Superintendent of Public Instruction (the State Superintendent ) of all school districts whose budget has been disapproved. Each district whose budget has been disapproved must revise and readopt its budget by September 8, reflecting changes in projected income and expenses since July 1, including responding to the County Superintendent s recommendations. The County Superintendent must determine if the budget conforms to the standards and criteria applicable to final district budgets, and, not later than October 8, must approve or disapprove the revised budgets. If the budget is disapproved, the County Superintendent will call for the formation of a budget review committee pursuant to Education Code Section Until a district s budget is approved, the district will operate on the lesser of its proposed budget for the current fiscal year or the last budget adopted and reviewed for the prior fiscal year. After approving the districts budgets, the County Superintendent will monitor, throughout the fiscal year, each school district under his or her jurisdiction pursuant to its adopted budget to determine on a continuing basis if the district can meet its current or subsequent year financial obligations. If a County Superintendent determines that a district cannot meet its current or subsequent year obligations, the County Superintendent may do either or both of the following: (a) assign a fiscal advisor to enable the district to meet those obligations, or (b) if a study and recommendations are made and a district fails to take appropriate action to meet its financial obligations, the County Superintendent must so notify the State Superintendent, and then may do any or all of the following for the remainder of the fiscal year: (i) request additional information regarding the district s budget and operations; (ii) develop and impose, also after consulting with the district s board, revisions to the budget that will enable the district to meet its financial obligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the County Superintendent may not abrogate any provision of any collective bargaining agreement that was entered into prior to the date upon which the County Superintendent assumed authority. At minimum, school districts file with their County Superintendent and the State Department of Education a First Interim Financial Report by December 15 covering financial operations from July 1 through October 31 and a Second Interim Financial Report by March 15 covering financial operations from November 1 through January 31. Section of the Education Code requires that each interim report be certified by the school board as either (a) positive, certifying that the district, based upon current projections, will meet its financial obligations for the current fiscal year and subsequent two fiscal years, (b) qualified, certifying that the district, based upon current projections, may not meet its financial obligations for the current fiscal year or two subsequent fiscal years, or (c) negative, certifying that the district, based upon current projections, will be unable to meet its financial obligations for the remainder of the fiscal year or the subsequent fiscal year. A certification by a school board may be revised by the County Superintendent. If either the First or Second Interim Report is not positive, the County Superintendent may require the district to provide a Third Interim Financial Report covering financial operations from February 1 through April 30 by June 1. If not required, a Third Interim Financial Report is not prepared. Each interim report shows fiscal year to date financial operations and the current budget, with any budget amendments made 32

41 in light of operations and conditions to that point. After the close of the fiscal year on June 30, an unaudited financial report for the fiscal year is prepared and filed without certification with the County Superintendent and the State Department of Education. The District s Second Interim Report for fiscal year was certified by the District as qualified. Other than as stated in the previous sentence, the District has not received a qualified or negative certification on its interim reports within the past five years. Pursuant to State law, the District adopted its fiscal year budget on June 7, 2016 (the Adopted Budget ), which set forth revenues and expenditures such that appropriations during fiscal year were not projected to exceed the sum of revenues plus the July 1, 2016 beginning fund balance. See DISTRICT FINANCIAL MATTERS Current Financial Condition below. State Funding of Education School district revenues consist primarily of guaranteed State moneys, local property taxes and funds received from the State in the form of categorical aid under ongoing programs of local assistance. All State aid is subject to the appropriation of funds in the State s annual budget. Revenue Limit Funding. Previously, school districts operated under general purpose revenue limits established by the State Department of Education. In general, revenue limits were calculated for each school district by multiplying the ADA for such district by a base revenue limit per unit of ADA. Revenue limit calculations were subject to adjustment in accordance with a number of factors designed to provide cost of living adjustments ( COLAs ) and to equalize revenues among school districts of the same type. Funding of a school district s revenue limit was provided by a mix of local property taxes and State apportionments of basic and equalization aid. Beginning in fiscal year , school districts began being funded based on uniform funding grants assigned to certain grade spans. See Local Control Funding Formula. (1) Table 9 below reflects the District s historical ADA fiscal years through Table 9 AVERAGE DAILY ATTENDANCE Fiscal Years through Hemet Unified School District Year Average Daily Attendance (1)(2) 33 Annual Change in ADA , , % ,656 (0.8) , , For fiscal years through , reflects ADA as of the second principal reporting period (P-2 ADA), ending on or before the last attendance month prior to April 15 of each school year, excluding charter schools. (2) ADA for fiscal year reflects attendance projections at the time of adoption of the Adopted Budget. Source: Hemet Unified School District. Local Control Funding Formula. State Assembly Bill 97 (Stats. 2013, Chapter 47) ( AB 97 ), enacted as part of the State budget, establishes a new system for funding school districts, charter schools and county offices of education. Certain provisions of AB 97 were amended and clarified by Senate Bill 91 (Stats. 2013, Chapter 49). The primary component of AB 97 is the implementation of the Local Control Funding Formula ( LCFF ), which replaces the revenue limit funding system for determining State apportionments, as well as the majority of categorical program funding. State allocations will be provided on the basis of target base

42 funding grants per unit of ADA (a Base Grant ) assigned to each of four grade spans. Each Base Grant is subject to certain adjustments and add-ons, as discussed below. Full implementation of the LCFF is expected to occur over a period of several fiscal years. Beginning in fiscal year , an annual transition adjustment will be calculated for each school district, equal to such district s proportionate share of appropriations included in the State budget to close the gap between the prior-year funding level and the target allocation following full implementation of the LCFF. In each year, school districts will have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of a district s funding gap. The Base Grants per unit of ADA for each grade span at full implementation are as follows: (i) $7,083 for grades K-3; (ii) $7,189 for grades 4-6; (iii) $7,403 for grades 7-8; and (iv) $8,578 for grades Beginning in fiscal year , the Base Grants are to be adjusted for COLAs by applying the implicit price deflator for government goods and services. Following full implementation of the LCFF, the provision of COLAs will be subject to appropriation for such adjustment in the annual State budget. The differences among Base Grants are linked to differentials in statewide average revenue limit rates by district type, and are intended to recognize the generally higher costs of education at higher grade levels. The Base Grants for grades K-3 and 9-12 are subject to adjustments of 10.4% and 2.6%, respectively, to cover the costs of the grade span adjustment in early grades and the provision of career technical education in high schools. Following full implementation of the LCFF, and unless otherwise collectively bargained for, school districts serving students in grades K-3 must maintain an average class enrollment of 24 or fewer students in grades K-3 at each school site in order to continue receiving the adjustment to the K-3 Base Grant. Such school districts must also make progress towards this grade span adjustment goal in proportion to the growth in their funding over the implementation period. AB 97 also provides additional add-ons to school districts that received categorical block grant funding pursuant to the Targeted Instructional Improvement and Home-to-School Transportation programs during fiscal year School districts that serve students of limited English proficiency ( EL students), students from low income families that are eligible for free or reduced priced meals ( LI students) and foster youth are eligible to receive additional funding grants (collectively, EL/LI/FY students ). Enrollment counts are unduplicated, such that students may not be counted as both EL and LI (foster youth automatically meet the eligibility requirements for free or reduced priced meals, and are therefore not discussed herein separately). AB 97 authorizes a supplemental grant add-on (each, a Supplemental Grant ) for school districts that serve EL/LI/FY students, equal to 20% of the applicable Base Grant multiplied by such districts percentage of unduplicated EL/LI/FY student enrollment. School districts whose EL/LI/FY populations exceed 55% of their total enrollment are eligible for a concentration grant add-on (each, a Concentration Grant ) equal to 50% of the applicable Base Grant multiplied the percentage of such district s unduplicated EL/LI/FY student enrollment in excess of the 55% threshold. 34

43 Table 10 below shows a breakdown of the District s ADA by grade span, total enrollment, and the percentage of EL/LI student enrollment, for fiscal years through , exclusive of charter schools. (1) Table 10 ADA, ENROLLMENT AND EL/LI/FY ENROLLMENT PERCENTAGE Fiscal Years THROUGH Hemet Unified School District (Exclusive of Charter Schools) Average Daily Attendance (1) Enrollment (2) Fiscal Year K Total ADA Total Enrollment % of EL/LI/FY Enrollment ,102 4,495 2,828 6,399 19,824 20, % ,078 4,503 2,817 6,258 19,656 20, ,951 4,597 2,800 6,387 19,735 20, ,989 4,630 2,823 6,418 19,860 21, Because P-2 ADA for fiscal year will not be released until April 2017, Average Daily Attendance for fiscal year is based on District s current estimate. (2) As of October report submitted to the California Basic Educational Data System (CBEDS). For purposes of calculating Supplemental and Concentration Grants, a school district s fiscal year percentage of unduplicated EL/LI/FY students will be expressed solely as a percentage of its total fiscal year total enrollment. For fiscal year , the percentage of unduplicated EL/LI/FY enrollment will be based on the two-year average of EL/LI/FY enrollment in fiscal years and Beginning in fiscal year , a school district s percentage of unduplicated EL/LI/FY students will be based on a rolling average of such district s EL/LI/FY enrollment for the then-current fiscal year and the two immediately preceding fiscal years. Source: Hemet Unified School District. For certain school districts that would have received greater funding levels under the prior revenue limit system, the LCFF provides for a permanent economic recovery target ( ERT ) add-on, equal to the difference between the revenue limit allocations such districts would have received under the prior system in fiscal year , and the target LCFF allocations owed to such districts in the same year. To derive the projected funding levels, the LCFF assumes the discontinuance of deficit revenue limit funding, implementation of a 1.94% COLA in fiscal years through , and restoration of categorical funding to pre-recession levels. The ERT add-on will be paid incrementally over the implementing period of the LCFF. The District does not qualify for the ERT add-on. The sum of a school district s adjusted Base, Supplemental and Concentration Grants will be multiplied by such district s P-2 ADA for the current or prior year, whichever is greater (with certain adjustments applicable to small school districts). This funding amount, together with any applicable ERT or categorical block grant add-ons, will yield a district s total LCFF allocation. Generally, the amount of annual State apportionments received by a school district will amount to the difference between such total LCFF allocation and such district s share of applicable local property taxes. Most school districts receive a significant portion of their funding from such State apportionments. As a result, decreases in State revenues may significantly affect appropriations made by the Legislature to school districts. Certain schools districts, known as basic aid districts, have allocable local property tax collections that equal or exceed such districts total LCFF allocation, and result in the receipt of no State apportionment aid. Basic aid school districts receive only special categorical funding, which is deemed to satisfy the basic aid requirement of $120 per student per year guaranteed by Article IX, Section 6 of the State Constitution. The implication for basic aid districts is that the legislatively determined allocations to school districts, and other politically determined factors, are less significant in determining their primary funding sources. Rather, property tax growth and the local economy are the primary determinants. The District does not currently qualify as a basic aid district. 35

44 Accountability. Regulations adopted by the State Board of Education require that school districts increase or improve services for EL/LI students in proportion to the increase in funds apportioned to such districts on the basis of the number and concentration of such EL/LI students, and detail the conditions under which school districts can use supplemental or concentration funding on a school-wide or district-wide basis. School districts are also required to adopt local control and accountability plans ( LCAPs ) disclosing annual goals for all students, as well as certain numerically significant student subgroups, to be achieved in eight areas of State priority identified by the LCFF. LCAPs may also specify additional local priorities. LCAPs must specify the actions to be taken to achieve each goal, including actions to correct identified deficiencies with regard to areas of State priority. LCAPs are required to be adopted every three years, beginning in fiscal year , and updated annually thereafter. The State Board of Education has adopted a template LCAP for use by school districts. Support and Intervention. AB 97, as amended by SB 91, establishes a new system of support and intervention to assist school districts meet the performance expectations outlined in their respective LCAPs. School districts must adopt their LCAPs (or annual updates thereto) in tandem with their annual operating budgets, and not later than five days thereafter submit such LCAPs or updates to their respective county superintendents of schools. On or before August 15 of each year, a county superintendent may seek clarification regarding the contents of a district s LCAP (or annual update thereto), and the district is required to respond to such a request within 15 days. Within 15 days of receiving such a response, the county superintendent can submit non-binding recommendations for amending the LCAP or annual update, and such recommendations must be considered by the respective school district at a public hearing within 15 days. A district s LCAP or annual update must be approved by the county superintendent by October 8 of each year if the superintendent determines that (i) the LCAP or annual update adheres to the State template, and (ii) the district s budgeted expenditures are sufficient to implement the actions and strategies outlined in the LCAP. A school district is required to receive additional support if its respective LCAP or annual update thereto is not approved, if the district requests technical assistance from its respective county superintendent, or if the district does not improve student achievement across more than one State priority for one or more student subgroups. Such support can include a review of a district s strengths and weaknesses in the eight State priority areas, or the assignment of an academic expert to assist the district identify and implement programs designed to improve outcomes. Assistance may be provided by the California Collaborative for Educational Excellence, a state agency created by the LCFF and charged with assisting school districts achieve the goals set forth in their LCAPs. On or before October 1, 2015, the State Board of Education is required to develop rubrics to assess school district performance and the need for support and intervention. The State Superintendent of Public Instruction (the State Superintendent ) is further authorized, with the approval of the State Board of Education, to intervene in the management of persistently underperforming school districts. The State Superintendent may intervene directly or assign an academic trustee to act on his or her behalf. In so doing, the State Superintendent is authorized (i) to modify a district s LCAP, (ii) impose budget revisions designed to improve student outcomes, and (iii) stay or rescind actions of the local governing board that would prevent such district from improving student outcomes; provided, however, that the State Superintendent is not authorized to rescind an action required by a local collective bargaining agreement. Other State Sources. In addition to State allocations determined pursuant to the LCFF, the District receives other State revenues consisting primarily of restricted revenues designed to implement State mandated programs. Beginning in fiscal year , categorical spending restrictions associated with a majority of State mandated programs were eliminated, and funding for these programs was folded into the LCFF. Categorical funding for certain programs was excluded from the LCFF, and school districts will continue to receive restricted State revenues to fund these programs. Other Sources. The federal government provides funding for several school district programs, including specialized programs such as No Child Left Behind, special education programs, and programs 36

45 under the Educational Consolidation and Improvement Act. In addition, a small part of a school district s budget is from local sources other than property taxes, including but not limited to interest income, leases and rentals, educational foundations, donations and sales of property. Historical General Fund Financial Information Table 11 on the following page summarizes the District s Statement of General Fund Revenues, Expenditures and Changes in Fund Balance for fiscal years through The figures in Table 11 below are taken from the District s audited financial statements. See APPENDIX D DISTRICT S AUDITED FINANCIAL STATEMENTS for further detail on the District s financial condition as of June 30, Table 11 HEMET UNIFIED SCHOOL DISTRICT Summary of General Fund Revenues, Expenditures and Changes in Fund Balance (1) Audited Audited Audited Audited Audited REVENUES: State Apportionment Funding $ 110,995,110 $ 110,214,785 $ 109,128,902 $ 132,074,030 $ 151,592,331 Federal Sources 18,409,942 20,583,365 16,329,529 15,442,873 15,334,017 Other State Revenues 26,538,505 26,017,337 27,228,421 16,794,923 13,954,257 Other Local Revenues 22,652,788 25,463,422 26,239,305 15,011,847 16,963,433 TOTAL REVENUES $ 178,596,345 $ 182,278,909 $ 178,926,157 $ 179,323,673 $ 197,844,038 EXPENDITURES: Current Instruction $ 102,504,318 $ 107,043,211 $ 104,251,379 $ 109,856,226 $ 125,961,212 Instruction-Related Activities: Supervision of Instruction 6,041,172 6,325,717 6,474,551 7,185,369 8,444,836 Instructional Library, Media and Technology 1,182,752 1,063,312 1,071,088 1,336,809 1,497,915 School Site Administration 12,009,339 11,768,447 12,248,900 13,328,799 14,892,269 Pupil Services: Home-To-School Transportation 9,023,933 11,484,932 11,025,861 4,070,143 4,934,462 Food Services 41,463 39,109 49,671 35,873 32,109 All Other Pupil Services 9,239,632 9,158,193 9,777,916 11,121,454 13,395,881 General Administration: Data Processing 2,239,184 2,472,089 2,292,477 2,363,649 3,331,629 All Other General Administration 8,068,985 8,058,675 7,867,547 8,600,283 9,707,091 Plant Services 15,128,157 15,222,525 15,353,180 16,682,228 17,919,582 Facility Acquisition and Construction 67, , , ,966 1,486,283 Ancillary Services 1,806,954 1,861,061 2,044,844 1,185,736 1,907,325 Community Service 72,843 68,166 55,424 98, ,390 Other Outgo/Enterprise services 5,210 6, , ,010 Debt Service Principal 1,105, ,854 1,096, , ,634 Interest and Other 633, , , , ,902 TOTAL EXPENDITURES $ 169,170,026 $ 176,565,435 $ 174,148,467 $ 178,187,094 $ 205,206,530 Excess (Deficiency) of Revenues Over Expenditures 9,426,319 5,713,474 4,777,690 1,136,579 (7,362,492) OTHER FINANCING SOURCES (USES): Transfers In $ 896,055 $ 328,989 $ 1,144,496 $ 1,502,778 $ 585,172 Other Sources 685, , , ,268 Transfers Out (5,252,239) (3,662,670) (4,480,162) (4,574,537) (4,588,879) Net Financing Sources (Uses) $ (3,671,184) $ (2,388,172) $ (2,772,859) $ (3,071,759) $ (3,583,439) NET CHANGE IN FUND BALANCE $ 5,755,135 $ 3,325,302 $ 2,004,831 $ (1,935,180) $ (10,945,931) FUND BALANCE-BEGINNING 26,381,267 32,136,402 35,461,704 37,466,535 35,531,355 FUND BALANCE-END $ 32,136,402 $ 35,461,704 $ 37,466,535 $ 35,531,355 $ 24,585,424 (1) Includes activity in the Special Reserve Fund for Other Than Capital Outlay Projects and the Special Reserve Fund for Postemployment Benefits in accordance with GASB Statement No. 54. Source: Hemet Unified School District Audited Financial Statements for fiscal years through

46 Table 12 below compares the District s General Fund Adopted Budget to its General Fund actual revenues and expenditures for fiscal year and its General Fund Adopted Budget to its General Fund actual revenues and expenditures for fiscal year Table 12 HEMET UNIFIED SCHOOL DISTRICT Comparison of General Fund Budgeted (GAAP Basis) to General Fund Revenues and Expenditures for Fiscal Years and (1) Budget Audited Budget Audited SOURCES Revenue Limit Sources $ 112,026,416 $ 132,074,030 $ 152,350,511 $ 151,592,331 Federal Revenues 15,599,441 15,442,873 14,213,652 15,334,017 Other State Revenues 22,696,184 16,794,923 7,912,931 13,954,257 Other Local Revenue 25,049,726 15,011,847 14,104,578 16,963,433 Total Revenues $ 175,371,767 $ 179,323,673 $ 188,581,672 $ 197,844,038 EXPENDITURES Current Certified salaries $ 80,674,333 $ 81,622,055 $ 93,634,726 $ 95,295,350 Classified salaries 33,984,584 30,646,286 33,931,333 33,951,271 Employee benefits 36,731,017 36,966,646 37,837,807 39,944,851 Books and supplies 9,608,414 9,107,703 11,472,499 11,919,463 Services and operating expenditures 17,299,414 17,819,525 22,686,276 20,644,974 Capital outlay 145,713 1,267, ,189 2,735,025 Other outgo (622,988) (484,631) (691,554) (373,940) Debt service Principal 2,146, ,533 2,412, ,634 Interest 2,502, ,366 1,600, ,902 Total Expenditures $ 182,469,065 $ 178,187,094 $ 203,433,508 $ 205,206,530 Excess of Revenues over (Under) Expenditures $ (7,097,298) $ 1,136,579 $ (14,851,836) $ (7,362,492) OTHER FINANCING SOURCES Operating Transfers In $ 377,236 $ 1,502,778 $ 347,552 $ 585,172 Other sources ,268 Operating Transfers Out 68,531 (4,574,537) (2,198,227) (4,588,879) Total Other sources (uses) $ 445,767 $ (3,071,759) $ (1,850,675) $ (3,583,439) Net Increase (Decrease) in Fund Balance $ (6,651,531) $ (1,935,180) $ (16,702,511) $ (10,945,931) Fund Balance (Deficit), July 1 $ 37,466,535 $ 37,466,535 $ 35,531,355 $ 35,531,355 Fund Balance (Deficit), June 30 $ 30,815,004 $ 35,531,355 $ 18,828,844 $ 24,585,424 (1) Includes activity in the Special Reserve Fund for Other Than Capital Outlay Projects and the Special Reserve Fund for Postemployment Benefits in accordance with GASB Statement No. 54. Source: Hemet Unified School District adopted budgets and Audited Financial Statements for fiscal years and

47 Table 13 below sets forth the District s General Fund balance sheet for the last five fiscal years. The District s moneys, including moneys in the General Fund, are held by the County in the County Treasurer s Pooled Investment Fund. See Appendices H and I attached hereto for more information on the Pooled Investment Fund. Table 13 HEMET UNIFIED SCHOOL DISTRICT Summary of Combined General Fund Balance Sheet (1) Audited Audited Audited Audited Audited ASSETS Deposits and Investments $ 12,773,122 $ 366,657 $ 31,398,227 $ 11,991,669 $ 20,941,650 Accounts receivable -- 49,683,084 31,517,945 42,306,800 8,930,432 Due from other funds 39,773, ,508 2,217,436 4,133, ,073 Stores Inventories 1,375,331 1, , ,937 Prepaid Expenditures 254, , , Total Assets $ 54,177,059 $ 50,848,383 $ 65,409,968 $ 58,703,973 $ 30,906,091 LIABILITIES AND FUND EQUITY LIABILITIES Accounts Payable $ 3,151,330 $ 4,106,061 $ 6,472,593 $ 22,426,456 $ 5,067,715 Due to other funds 120,194 4,117,965 2,757, , ,466 Current loans 14,935,000 6,965,000 18,640, Deferred revenue 3,834, ,653 72,890 12, ,486 Total Liabilities $ 22,040,657 $ 15,386,679 $ 27,943,433 $ 23,172,618 $ 6,320,667 FUND EQUITY Fund balances Nonspendable $ 279,609 $ 282,134 $ 301,360 $ 296,906 $ 245,937 Restricted 4,451,267 4,333,372 4,991,642 4,534,590 1,164,301 Committed ,503,919 1,509,391 Assigned 18,855,372 22,046,198 23,373,533 20,085,940 11,176,020 Unassigned 8,550,154 8,800,000 8,800,000 9,110,000 10,489,775 Total Fund Equity $ 32,136,402 $ 35,461,704 $ 37,466,535 $ 35,531,355 $ 24,585,424 Total Liabilities and Fund Equity $ 54,177,059 $ 50,848,383 $ 65,409,968 $ 58,703,973 $ 30,906,091 (1) Includes activity in the Special Reserve Fund for Other Than Capital Outlay Projects and the Special Reserve Fund for Postemployment Benefits in accordance with GASB Statement No. 54. Source: Hemet Unified School District Audited Financial Statements for fiscal years through Current Financial Condition Table 14 below contains the District s Adopted General Fund Budget for fiscal year , the estimated revenues and expenditures for fiscal year and the difference between the adopted General Fund budget for fiscal year and the estimated revenues and expenses for fiscal year Table 14 also includes the Adopted General Fund Budget. 39

48 Table 14 HEMET UNIFIED SCHOOL DISTRICT Comparison of Adopted General Fund Budget to Estimated Actual Results for Fiscal Year General Fund Budget and Adopted Budget for Fiscal Year (1) Adopted Budget Unaudited Actuals Adopted Budget Difference SOURCES State Apportionment Sources $ 178,984,901 $ 179,062,317 (0.0)% $ 192,983,005 Federal Revenues 17,460,343 15,996,490 (8.4) 15,788,863 Other State Revenues 19,509,365 28,977, ,783,513 Other Local Revenue 15,040,547 17,620, ,571,360 Total Revenues $ 230,995,156 $ 241,657, % $ 248,126,741 EXPENDITURES Certificated Salaries $ 104,375,690 $ 104,053,685 (0.3)% $ 111,001,338 Classified Salaries 39,141,814 37,530,922 (4.1) 41,963,932 Employee Benefits 41,701,948 45,753, ,069,643 Books and Supplies 13,212,781 13,063,976 (1.1) 14,482,330 Contracted Services & Operating Expenditures 23,626,744 22,097,421 (6.5) 23,418,795 Capital Outlay 909,018 2,912, ,250,760 Other Outgo (excluding Transfers of Indirect Costs) 4,473,182 4,490, ,263,162 Other Outgo Transfers of Indirect Costs (694,735) (747,659) 7.6 (790,039) Total Expenditures $ 226,746,442 $ 229,154, % $ 251,659,921 Excess of Revenues over (Under) Expenditures $ 4,248,714 $ 12,502,973 $ (3,533,180) OTHER FINANCING SOURCES Transfers In $ 1,078,175 $ 1,292,995 $ 2,041,023 Transfers Out 2,495,600 2,557, ,747 Other , Total Other sources (uses) $ (1,417,425) $ (458,395) $ 1,397,276 Net Increase (Decrease) in Fund Balance $ 2,831,289 $ 12,044,578 $ (2,135,904) Fund Balance (Deficit), July 1 $ 21,386,713 $ 23,076,033 $ 29,656,768 Fund Balance (Deficit), June 30 $ 24,218,002 $ 35,120,611 $ 27,520,864 (1) Excludes activity in the Special Reserve Fund for Other Than Capital Outlay Projects and the Special Reserve Fund for Postemployment Benefits. Source: Hemet Unified School District Annual Budget Report for fiscal years and ; unaudited actuals for fiscal year In the Adopted Budget, the District projects that General Fund expenditures will exceed revenues by approximately $15.3 million through fiscal year , leaving a projected ending General Fund balance of $14,380,240 at June 30, The Adopted Budget assumes that there will be limited growth in ADA in the immediate future. If required the District has a variety of cost-cutting measures that it can implement in order to reduce General Fund expenses in future fiscal years. The primary cause of the projected deficit spending is the addition of staff and programs necessary to implement the District s LCAP. The staff and programs provide increased and improved services to students who generate the District s supplemental and concentration grants and include students identified as low income, English learners, and foster youth. If necessary, the District is able to implement the following procedures in order to reduce expenditures in future fiscal years: utilize ending balance reserves and reduce one-time expenditures related to LCAP initiatives and capital equipment and projects. State law requires the District to maintain a reserve for economic uncertainty equal to at least 3% of General Fund expenditures and other financing uses. The District is also required to demonstrate that available reserves for each of the next two fiscal years will equal or exceed the required amount. In the Adopted Budget, the District projects reserve levels of at least 5% as a percentage of General Fund expenditures in each of fiscal years , and Under SB 858 enacted as part of the 40

49 State s Budget, the District s future reserves may be capped at 6% of annual expenditures in certain fiscal years. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Proposition 2 and STATE OF CALIFORNIA FISCAL ISSUES State Budget School Reserves. As the reserve cap provisions of SB 858 are dependent upon State budget actions, the District cannot predict the fiscal years in which the cap may apply. For several fiscal years prior to fiscal year , the State deferred the payment of certain revenues due to school districts to the following fiscal year. In accordance with State accounting standards, the District applies an accrual method of accounting and, accordingly, Tables 11 through 14 do not reflect any deferral of revenues to future fiscal years. The District has borrowed funds on a short-term basis in recent years in order to have adequate cash on hand to meet expenditures. The District may also borrow from internal funds or from the County Treasurer and Tax Collector on a short-term basis, if needed. See DISTRICT DEBT STRUCTURE Short-Term Debt herein. Revenue Sources The District categorizes its General Fund revenues into four sources: (1) state apportionment funding (this was funded from revenue limit sources through fiscal year and thereafter pursuant to the LCFF); (2) federal sources; (3) other State sources; and (4) other local sources. Each of these revenue sources is described below. State Apportionment Funding The primary source of District funding prior to fiscal year came from the State in the form of base revenue limit funding per unit of ADA. In fiscal year , State apportionment funding changed as a result of the LCFF. See DISTRICT FINANCIAL MATTERS State Funding of Education. For fiscal year the District received $151,592,331 under the LCFF, representing 76.6% of General Fund revenues. The District estimates that it received $179,062,317 under the LCFF in fiscal year , representing 74.1% of projected General Fund revenues, and has budgeted receipt of $192,983,005, representing 77.8% of General Fund revenues, in fiscal year Federal Revenues The federal government provides funding for several District programs, including special education programs, programs under the Educational Consolidation and Improvement Act, and specialized programs such as Drug Free Schools. The federal revenues, all of which are restricted, comprised approximately 7.8% of General Fund revenues in fiscal year Federal revenues were estimated at 6.6% of General Fund revenues in fiscal year and are budgeted to be 6.4% of General Fund revenues in fiscal year Other State Sources In addition to State apportionment funding discussed above, the District receives other State revenues ( Other State Revenue ). In fiscal year , Other State Revenue equaled approximately 7.1% of total General Fund revenues, in fiscal year , Other State Revenue was estimated at 12.0% of total General Fund revenues and such revenues are projected to be 9.6% of General Fund revenues in fiscal year Other Local Sources In addition to property taxes, the District receives additional local sources ( Other Local Revenues ) from items such as the leasing of property owned by the District and interest earnings. These Other Local Revenues (including tuition and transfers) equaled approximately 8.6% of the total General Fund revenues in fiscal year and were estimated to be 7.3% of General Fund revenues in fiscal year Other local sources are budgeted to be 6.3% of General Fund revenues in fiscal year

50 SCHOOL DISTRICT DEBT STRUCTURE Long Term Debt As of June 30, 2016, the District estimates that it had $399,590, of long term debt outstanding. A schedule of changes in long term debt for the fiscal year ended June 30, 2016 is set forth below. The District has not issued any long-term debt since June 30, See Note 8 to the District s Audited Financial Statements for Fiscal Year attached as Appendix D hereto for additional discussion on the District s long-term debt. Table 15 HEMET UNIFIED SCHOOL DISTRICT Long Term Debt Starting Balance July 1, 2015 Increases Decreases Ending Balance June 30, 2016 Amounts Due Within One Year Governmental Activities: General Obligation Bonds Payable $ 181,095, $ 6,425, $ 174,670, $ 4,950, State School Building Loans Payable Certificates of Participation Payable 50,504, $ 16,690, ,420, ,774, ,625, Capital Leases Payable 1,312, , , ,455, , Discount on issuance 3,360, ,360, Other General Long-Term Debt 5,709, , , ,382, , Net Pension Liability 146,735, ,735, Net OPEB Obligation 19,521, ,521, Compensated Absences Payable 1,004, , ,052, Total $ 409,241, $ 17,747, $ 27,398, $ 399,590, $ 7,776, Source: The District. Short Term Debt On July 16, 2015, the California School Cash Reserve Program Authority issued tax revenue anticipation notes on behalf of the District in the aggregate principal amount of $6,720,000. These notes matured on June 30, 2016 and the District paid them in full at maturity. On July 14, 2016, the California School Cash Reserve Program Authority issued tax revenue anticipation notes on behalf of the District in the aggregate principal amount of $10,690,000. These notes mature on June 30, 2017 and the District expects to be able to set aside sufficient amount to make the payments thereon through maturity. Direct and Overlapping Debt Numerous overlapping local agencies provide public services within the District. These local agencies have outstanding debt issued in the form of general obligation, lease revenue and special tax and assessment bonds. An estimate of direct and overlapping debt of the District is shown in Table 16 below based on information available as of September 1, Tax and revenue anticipation notes, revenue, mortgage revenue and tax allocation bonds, and non-bonded capital lease obligations are excluded from the debt statement. The information provided in Table 16 has been provided by California Municipal Statistics, Inc. The District has not independently verified the information in Table 16 and does not guarantee its accuracy. 42

51 Assessed Valuation: $9,851,681,418 Table 16 HEMET UNIFIED SCHOOL DISTRICT Estimated Direct and Overlapping Bonded Debt as of September 1, 2016 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 9/1/16 Metropolitan Water District 0.301% $ 279,872 Mount San Jacinto Community College District ,823,643 Hemet Unified School District ,720,000 (1) Eastern Municipal Water District Improvement Districts ,352,226 Riverside County Flood Control District Zone No ,695,033 City of Hemet Community Facilities District No ,880,000 Hemet Unified School District Community Facilities Districts ,005,000 Eastern Municipal Water District, Community Facilities Districts ,341,135 Riverside County Community Facilities District No ,413,460 Riverside County Assessment District No ,465,000 Lake Hemet Municipal Water District 1915 Act Bonds ,335,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $ 253,310,369 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Riverside County General Fund Obligations 3.933% $ 34,994,463 Riverside County Pension Obligation Bonds ,976,772 Riverside County Board of Education Certificates of Participation ,774 Hemet Unified School District Certificates of Participation ,450,000 City of San Jacinto Pension Fund Obligation Bonds ,897 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $ 99,582,906 Less: Riverside County supported obligations 245,299 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $ 99,337,607 OVERLAPPING TAX INCREMENT DEBT: $ 23,381,364 GROSS COMBINED TOTAL DEBT $ 376,274,639 (2) NET COMBINED TOTAL DEBT $ 376,029,340 (1) Excludes the Certificates. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal due at maturity. Ratios to Assessed Valuation: Direct Debt ($169,720,000) % Total Direct and Overlapping Tax and Assessment Debt % Combined Direct Debt ($222,170,000) % Gross Combined Total Debt % Net Combined Total Debt % Ratios to Redevelopment Incremental Valuation ($1,520,700,200): Total Overlapping Tax Increment Debt % Source: California Municipal Statistics, Inc. STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES Articles XIIIA, XIIIB, XIIIC and XIIID of the Constitution, Propositions 22, 39, 46, 49, 98, 111, and 1A, and certain other provisions of law discussed below, are discussed in this section to describe the potential 43

52 effect of these Constitutional and statutory measures on the ability of the District to levy taxes and spend tax proceeds for operating and other purposes. Article XIIIA On June 6, 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean the county assessor s valuation of real property as shown on the 1975/76 tax bill under full cash value, or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to 1% of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition. Legislation enacted by the California Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for voter approved bonded indebtedness and pension liability are also applied to 100% of assessed value. Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) will be allocated on the basis of situs among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and school districts will share the growth of base revenue from the tax rate area. Each year s growth allocation becomes part of each agency s allocation the following year. The District is unable to predict the nature or magnitude of future revenue sources that may be provided by the State to replace lost property tax revenues. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above. Article XIIIB On November 6, 1979, California voters approved Proposition 4, the so-called Gann Initiative, which added Article XIIIB to the California Constitution. In June 1990, Article XIIIB was amended by the voters through their approval of Proposition 111. Article XIIIB of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the state to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services rendered by the governmental entity. The base year for establishing such appropriation limit is the fiscal year. Increases in appropriations by a governmental entity are also permitted (a) if financial responsibility for providing services is transferred to the governmental entity, or (b) for emergencies so long as the appropriations limits for the three years following the emergency are reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity. Appropriations subject to Article XIIIB include generally any authorization to expend during the fiscal year the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979 on bonded indebtedness thereafter approved 44

53 according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the Federal government, appropriations for qualified outlay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to any entity of government from (a) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (b) the investment of tax revenues and (c) certain State subventions received by local governments. Article XIIIB includes a requirement that if an entity s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two fiscal years. As amended in June 1990, the appropriations limit for local governments in each year is based on the limit for the prior year, adjusted annually for changes in the costs of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the local government s option, either (i) the percentage change in California per capita personal income, or (ii) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college ( K-14 ) districts. As amended by Proposition 111, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate proceeds of taxes received by the District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. Any proceeds of taxes received by the District in excess of the appropriations limit are absorbed into the State s allowable limit. The District does not currently have and does not anticipate having proceeds of taxes in excess of its appropriations limit. Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved change can only be effective for a maximum of four years. Pursuant to statute, if a school district receives any proceeds of taxes in excess of its appropriations limit, it may, by resolution of the governing board, increase its appropriations limit to equal the amount received, provided that the State has sufficient excess appropriations limit in that fiscal year. Articles XIIIC and XIIID On November 5, 1996, California voters approved Proposition 218 Voters Approval for Local Government Taxes Limitation on Fees, Assessments, and Charges Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and propertyrelated fees and charges. Among other things, Proposition 218 states that all taxes imposed by local governments shall be deemed to be either general taxes (imposed for general governmental purposes) or special taxes (imposed for specific purposes); prohibits special purpose government agencies, including school districts, from levying general taxes; and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote. Proposition 218 also provides that no tax maybe assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIIC also provides that the initiative power shall not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. A portion of the District s revenues are received annually from property taxes. The State Constitution and the laws of the State impose a mandatory, statutory duty on the County Treasurer and Tax Collector to levy a property tax sufficient to pay debt service on the District s general obligation bonds coming due in each year. There is no court case which directly addresses whether the 45

54 initiative power may be used to reduce or repeal the ad valorem taxes pledged to repay general obligation bonds. See DISTRICT FINANCIAL MATTERS State Funding of Education. In the case of Bighorn- Desert View Water Agency v. Virjil (Kelley) (the Bighorn Decision ), the California Supreme Court held that water service charges may be reduced or repealed through a local voter initiative subject to Article XIIIC. The Supreme Court did state that it was not holding that the initiative power is free of all limitations. Such initiative power could be subject to the limitations imposed on the impairment of contracts under the contract clause of the United States Constitution. Legislation adopted in 1997 provides that Article XIIIC shall not be construed to mean that any owner or beneficial owner of a municipal security assumes the risk of or consents to any initiative measure that would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution. On November 2, 2010, voters in the State approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of tax to include any levy, charge, or exaction of any kind imposed by a local government except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor s burdens on, or benefits received from, the governmental activity. Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by the District. No developer fees imposed by the District are pledged or expected to be used to make payments with respect to the Certificates. The provisions of Article XIIIC and XIIID may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District thereby causing such local governments to reduce service levels and possibly adversely affecting the value of property within the District. The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination. Unitary Property Some amount of property tax revenue of the District is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions ( unitary property ). Under the State Constitution, such property is assessed by the State Board of Equalization ( SBE ) as part of a going concern rather than as individual pieces of real or personal property. State-assessed unitary and 46

55 certain other property is allocated to the counties by SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year. Proposition 46 On June 3, 1986, California voters approved Proposition 46, which provided an additional exemption to the 1% tax limitation imposed by Article XIIIA. Under this amendment to Article XIIIA, local governments and school districts may increase the property tax rate above 1% for the period necessary to retire new general obligation bonds, if two-thirds of those voting in a local election approve the issuance of such bonds and the money raised through the sale of the bonds is used exclusively to purchase or improve real property. Proposition 39 On November 7, 2000, California voters approved Proposition 39, called the Smaller Classes, Safer Schools and Financial Accountability Act (the Smaller Classes Act ) which amends Section 1 of Article XIIIA, Section 18 of Article XVI of the California Constitution and Section of the California Education Code and allows an alternative means of seeking voter approval for bonded indebtedness by 55 percent of the vote, rather than the two-thirds majority required under Section 18 of Article XVI of the Constitution. The 55 percent voter requirement applies only if the bond measure submitted to the voters includes, among other items: (1) a restriction that the proceeds of the bonds may be used for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities, (2) a list of projects to be funded and a certification that the school district board has evaluated safety, class size reduction, and information technology needs in developing that list and (3) that annual, independent performance and financial audits will be conducted regarding the expenditure and use of the bond proceeds. Section 1(b)(3) of Article XIIIA has been added to exempt from the one percent ad valorem tax limitation under Section 1(a) of Article XIIIA of the Constitution levies to pay bonds approved by the 55 percent of the voters, subject to the restrictions explained above. The Legislature enacted AB 1908, Chapter 44, which became effective upon passage of Proposition 39 and amends various sections of the Education Code. Under amendments to Section and of the Education Code, the following limits on ad valorem taxes apply in any single election: (1) for a school district, indebtedness shall not exceed $30 per $100,000 of taxable property, (2) for a unified school district, indebtedness shall not exceed $60 per $100,000 of taxable property, and (3) for a community college district, indebtedness shall not exceed $25 per $100,000 of taxable property. Finally, AB 1908 requires that a citizens oversight committee must be appointed to review the use of the bond funds and inform the public about their proper usage. Propositions 98 and 111 On November 8, 1988, California voters approved Proposition 98, a combined initiative, constitutional amendment and statute called the Classroom Instructional Improvement and Accountability Act ( Proposition 98 ). Proposition 98 changed State funding of public education below the university level and the operation of the State s appropriations limit, primarily by guaranteeing K-14 schools a minimum share of State General Fund revenues. Under Proposition 98 (as modified by Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) 40.9% of State General Fund revenues (the first test ), or (b) the amount appropriated to K-14 schools in the prior year, adjusted for changes in the cost-ofliving (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the second test ), or (c) a third test which would replace the second test in any year when the percentage growth in per capita State General Fund revenues from the prior year plus 1/2 of 1% is less than the percentage growth in California per capita personal income. Under the third test, schools would receive the amount appropriated in 47

56 the prior year adjusted for changes in enrollment and per capita State General Fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test would become a credit to schools which would be paid in future years when State General Fund revenue growth exceeds personal income growth. Proposition 98 permits the Legislature by two-thirds vote of both houses, with the Governor s concurrence, to suspend the K-14 schools minimum funding formula for a one-year period, and any corresponding reduction in funding for that year will not be paid in subsequent years. However, in determining the funding level for the succeeding year, the formula base for the prior year will be reinstated as if such suspension had not taken place. In certain fiscal years, the State Legislature and the Governor have utilized this provision to avoid having the full Proposition 98 funding paid to support K 14 schools. Proposition 98 also changes how tax revenues in excess of the State Appropriations Limit are distributed. Excess tax revenues are determined based on a two-year cycle, so that the State could avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year were under its limit. After any two-year period, if there are excess State tax revenues, 50% of the excess would be transferred to K-14 schools with the balance returned to taxpayers. Further, any excess State tax revenues transferred to K-14 schools are not built into the school districts base expenditures for calculating their entitlement for State aid in the next year, and the State s appropriations limit will not be increased by this amount. Since Proposition 98 is unclear in some details, there can be no assurance that the Legislature or a court might not interpret Proposition 98 to require a different percentage of State General Fund revenues to be allocated to K-14 districts, or to apply the relevant percentage to the State s budgets in a different way than is proposed in the Governor s Budget. In any event, some fiscal observers expect Proposition 98 to place increasing pressure on the State s budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State ability to fund such other programs by raising taxes. The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. One major reason is that Proposition 98 minimums under the first test and the second test described above are dependent on State General Fund revenues. In several recent fiscal years, the State made actual allocations to K-14 districts based on an assumption of State General Fund revenues at a level above that which was ultimately realized. In such years, the State has considered the amounts appropriated above the minimum as a loan to K-14 districts, and has deducted the value of these loans from future years estimated Proposition 98 minimums. Proposition 1A and Proposition 22 On November 2, 2004, California voters approved Proposition 1A, which amends the State Constitution to significantly reduce the State s authority over major local government revenue sources. Under Proposition 1A, the State cannot (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-third approval of both houses of the State Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Beginning in , the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (i) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (ii) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also amends the State Constitution to require the State to suspend certain State laws creating mandates in any year that the State does not fully 48

57 reimburse local governments for their costs to comply with the mandates. This provision does not apply to mandates relating to schools or community colleges or to those mandates relating to employee rights. Many of the provisions of Proposition 1A have been superseded by Proposition 22 enacted in November Proposition 22, The Local Taxpayer, Public Safety, and Transportation Protection Act, approved by the voters of the State on November 2, 2010, prohibits the State from enacting new laws that require redevelopment agencies to shift funds to schools or other agencies and eliminates the State s authority to shift property taxes temporarily during a severe financial hardship of the State. In addition, Proposition 22 restricts the State s authority to use State fuel tax revenues to pay debt service on state transportation bonds, to borrow or change the distribution of state fuel tax revenues, and to use vehicle license fee revenues to reimburse local governments for state mandated costs. Proposition 22 impacts resources in the State s general fund and transportation funds, the State s main funding source for schools and community colleges, as well as universities, prisons and health and social services programs. According to an analysis of Proposition 22 submitted by the Legislative Analyst s Office (the LAO ) on July 15, 2010, the longer-term effect of Proposition 22, according to the LAO analysis, will be an increase in the State s general fund costs by approximately $1 billion annually for several decades. On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos, which resulted in all redevelopment agencies in California being dissolved on February 1, 2012, and the property tax revenue which previously flowed to the redevelopment agencies is now instead going to other local governments, including school districts. It is likely that the dissolution of redevelopment agencies has mooted the effects of Proposition 22. Proposition 30 On November 6, 2012, voters approved the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment (also known as Proposition 30 ), which temporarily increases the State Sales and Use Tax and personal income tax rates on higher incomes. Proposition 30 temporarily imposes an additional tax on all retailers, at the rate of 0.25% of gross receipts from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, Proposition 30 also imposes an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013 and before January 1, 2017, for storage, use, or other consumption in the State. This excise tax will be levied at a rate of 0.25% of the sales price of the property so purchased. For personal income taxes imposed beginning in the taxable year commencing January 1, 2012 and ending January 1, 2019, Proposition 30 increases the marginal personal income tax rate by: (i) 1% for taxable income over $250,000 but less than $300,000 for single filers (over $340,000 but less than $408,000 for joint filers), (ii) 2% for taxable income over $300,000 but less than $500,000 for single filers (over $408,000 but less than $680,000 for joint filers), and (iii) 3% for taxable income over $500,000 for single filers (over $608,000 for joint filers). The revenues generated from the temporary tax increases will be included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. See Propositions 98 and 111. From an accounting perspective, the revenues generated from the temporary tax increases will be deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the EPA ). Pursuant to Proposition 30, funds in the EPA will be allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. The funds will be distributed to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make 49

58 these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs. Proposition 2 On November 4, 2014, voters approved the Rainy Day Budget Stabilization Fund Act (also known as Proposition 2 ). Proposition 2 is a legislatively-referred constitutional amendment which makes certain changes to State budgeting practices, including substantially revising the conditions under which transfers are made to and from the State s Budget Stabilization Account (the BSA ) established by the California Balanced Budget Act of 2004 (also known as Proposition 58). Under Proposition 2, and beginning in fiscal year and each fiscal year thereafter, the State will generally be required to annually transfer to the BSA an amount equal to 1.5% of estimated State general fund revenues (the Annual BSA Transfer ). Supplemental transfers to the BSA (a Supplemental BSA Transfer ) are also required in any fiscal year in which the estimated State general fund revenues that are allocable to capital gains taxes exceed 8% of total estimated general fund tax revenues. Such excess capital gains taxes net of any portion thereof owed to K-14 school districts pursuant to Proposition 98 will be transferred to the BSA. Proposition 2 also increases the maximum size of the BSA to an amount equal to 10% of estimated State general fund revenues for any given fiscal year. In any fiscal year in which a required transfer to the BSA would result in an amount in excess of the 10% threshold, Proposition 2 requires such excess to be expended on State infrastructure, including deferred maintenance. For the first 15 year period ending with fiscal year , Proposition 2 provides that half of any required transfer to the BSA, either annual or supplemental, must be appropriated to reduce certain State liabilities, including making certain payments owed to K-14 school districts, repaying State interfund borrowing, reimbursing local governments for State mandated services, and reducing or prefunding accrued liabilities associated with State-level pension and retirement benefits. Following the initial 15-year period, the Governor and the Legislature are given discretion to apply up to half of any required transfer to the BSA to the reduction of such State liabilities. Any amount not applied towards such reduction must be transferred to the BSA or applied to infrastructure, as described above. Proposition 2 changes the conditions under which the Governor and the Legislature may draw upon or reduce transfers to the BSA. The Governor does not retain unilateral discretion to suspend transfers the BSA, nor does the Legislature retain discretion to transfer funds from the BSA for any reason, as previously provided by law. Rather, the Governor must declare a budget emergency, defined as a an emergency within the meaning of Article XIIIB of the Constitution or a determination that estimated resources are inadequate to fund State general fund expenditures, for the current or ensuing fiscal year, at a level equal to the highest level of State spending within the three immediately preceding fiscal years. Any such declaration must be followed by a legislative bill providing for a reduction or transfer. Draws on the BSA are limited to the amount necessary to address the budget emergency, and no draw in any fiscal year may exceed 50% of funds on deposit in the BSA unless a budget emergency was declared in the preceding fiscal year. Proposition 2 also requires the creation of the Public School System Stabilization Account (the PSSSA ) into which transfers will be made in any fiscal year in which a Supplemental BSA Transfer is required (as described above). Such transfer will be equal to the portion of capital gains taxes above the 8% threshold that would be otherwise paid to K-14 school districts as part of the minimum funding guarantee. A transfer to the PSSSA will only be made if certain additional conditions are met, as follows: (i) the minimum funding guarantee was not suspended in the immediately preceding fiscal year, (ii) the operative Proposition 98 formula for the fiscal year in which a PSSSA transfer might be made is Test 1, (iii) no maintenance factor obligation is being created in the budgetary legislation for the fiscal year in which a PSSSA transfer might be made, (iv) all prior maintenance factor obligations have been fully repaid, and (v) the minimum funding guarantee for the fiscal year in which a PSSSA transfer might be made is higher than the immediately 50

59 preceding fiscal year, as adjusted for ADA growth and cost of living. Proposition 2 caps the size of the PSSSA at 10% of the estimated minimum guarantee in any fiscal year, and any excess funds must be paid to K-14 school districts. Reductions to any required transfer to the PSSSA, or draws on the PSSSA, are subject to the same budget emergency requirements described above. However, Proposition 2 also mandates draws on the PSSSA in any fiscal year in which the estimated minimum funding guarantee is less than the prior year s funding level, as adjusted for ADA growth and cost of living. Jarvis v. Connell On May 29, 2002, the California Court of Appeal for the Second District decided the case of Howard Jarvis Taxpayers Association, et al. v. Kathleen Connell (as Controller of the State of California). The Court of Appeal held that either a final budget bill, an emergency appropriation, a self-executing authorization pursuant to state statutes (such as continuing appropriations) or the California Constitution or a federal mandate is necessary for the State Controller to disburse funds. The foregoing requirement could apply to amounts budgeted by the District as being received from the State. To the extent the holding in such case would apply to State payments reflected in the District s budget, the requirement that there be either a final budget bill or an emergency appropriation may result in the delay of such payments to the District if such required legislative action is delayed, unless the payments are self-executing authorizations or are subject to a federal mandate. On May 1, 2003, the California Supreme Court upheld the holding of the Court of Appeal, stating that the Controller is not authorized under State law to disburse funds prior to the enactment of a budget or other proper appropriation, but under federal law, the Controller is required, notwithstanding a budget impasse and the limitations imposed by State law, to timely pay those State employees who are subject to the minimum wage and overtime compensation provisions of the federal Fair Labor Standards Act. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, and Propositions 22, 26, 30, 39, 46, 98, 111 and 1A were each adopted as measures that qualified for the ballot pursuant to California s initiative process. From time to time other initiative measures could be adopted, further affecting school districts revenues or such districts ability to expend revenues. There can be no assurance that the California electorate will not at some future time adopt other initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State of California resulting in a reduction of amounts legally available to the District. STATE OF CALIFORNIA FISCAL ISSUES The following information concerning the State s budgets has been obtained from publicly available information which the District believes to be reliable; however, the District does not guarantee the accuracy or completeness of this information and has not independently verified such information. General Overview Recent Financial Stress on State Budget. In 2008, the State began experiencing the most significant economic downturn and financial pressure since the Great Depression of the 1930s. Despite the recent significant budgetary improvements, there remain a number of major risks and pressures that threaten the State s financial condition, including large unfunded liabilities now totaling in excess of $200 billion for PERS, STRS, the University of California ( UC ) Retirement System and the State s and UC s retiree healthcare benefits plans. In addition, the State s revenues (particularly the personal income tax) can be volatile and correlate to overall economic conditions. There can be no assurances that the State will not face fiscal stress and cash pressures again, or that other changes in the State or national economies will not materially adversely affect the financial condition of the State. 51

60 Cash Management by State and Impact on Schools. To conserve cash in light of declining revenues resulting from the last recession, the State enacted several statutes deferring the payment of amounts owed to public schools, until a later date in the current, or in a subsequent, fiscal year. This technique was used in all of the State s budget bills from fiscal year through fiscal year Some of these statutory deferrals were made permanent, and others were implemented only for one fiscal year. These deferrals reduced amounts paid to K-12 districts and resulted in deferred payments that at one point totaled more than $10 billion. These deferrals also created cash flow shortages for certain K-12 districts which required an increased level of cash flow borrowings. In fiscal years and , the State repaid the majority of these deferrals and the Budget repaid the remaining $992 million. School Reserves Senate Bill 858 (Stats. 2014, Chapter 32) ( SB 858 ), trailer legislation to the Budget, creates new disclosure requirements effective beginning fiscal year for school districts that have general fund reserves in excess of the State minimum. Existing minimum reserve levels vary between one to five percent of general fund expenditures, depending on the size of the district, and generally require higher reserves for smaller school districts. SB 858 would require school districts to identify amounts in excess of their required reserves and explain the need for higher levels. This information must be disclosed at a public meeting and in each budget submitted to a county office of education. The LAO indicates that available data shows that virtually all school districts maintain excess reserves. As a result of the passage of Proposition 2 (discussed above), certain additional provisions of SB 858 have gone into effect that will cap school district reserve levels. Reserves will be capped in any fiscal year following a State deposit into the PSSSA created by Proposition 2. See also CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Proposition 2. Caps for most school districts will range between three to ten percent of annual general fund expenditures. SB 858 permits a county office of education to grant an exemption from the reserve cap for up to two years if a school district demonstrates that it would face extraordinary fiscal circumstances justifying a higher reserve State Budget On June 27, 2016, the Governor signed into the law the State budget for fiscal year (the Budget ). The following information is drawn from the Department of Finance s summary of the Budget. The Budget projects, for fiscal year , total general fund revenues and transfers of $117 billion and total expenditures of $115.6 billion. The State is projected to end the fiscal year with total available reserves of $7.3 billion, including $3.9 billion in the traditional general fund reserve and $3.4 billion in the BSA. For fiscal year , the Budget projects a growth in State general fund revenues driven primarily by total general fund revenues of $120.3 billion and authorizes expenditures of $122.5 billion. The State is projected to end the fiscal year with total available reserves of $8.5 billion, including $1.8 billion in the traditional general fund reserve and $6.7 billion in the BSA. As required by Proposition 2, the Budget applies $1.3 billion towards the repayment of existing State liabilities, including loans from special funds, State and University of California pension and retiree health benefits and settle-up payments to K-14 school districts resulting from an underfunding of the Proposition 98 minimum funding guarantee in a prior fiscal year. Other significant features including measures designed to counteract the effects of poverty, fund various infrastructure improvements, and increase funding for low income housing and homelessness programs. For fiscal year , the Budget sets the minimum funding guarantee for K-14 districts at $71.9 billion, an increase of $3.5 billion over the revised level from the prior fiscal year. Significant features with respect to K-12 education funding include the following: 52

61 Local Control Funding Formula $2.9 billion of Proposition 98 funding to continue the implementation of the LCFF. As a result, the Budget projects total LCFF implementation to be at 96% during fiscal year College Readiness $200 million in one-time Proposition 98 funding to fund a block grant for school districts and charter schools serving high school students. Funds are intended to provide additional services that support access and successful transition to higher education. Allocation of the funding will be based on the number of students in grades 9 through 12 that are Englishlearners, low-income or foster youth, with no district or charter school receiving less than $75,000. The Budget also provides $15 million in one-time Proposition 98 grant funding to support coordinated student outreach by local educational agencies and community college districts aimed at increasing college preparation, access, and success. Teacher Workforce $35 million in one-time funding, including $25 million of Proposition 98 funding, to provide grants aimed at recruiting additional teachers and streamlining teacher credentialing programs. Charter Schools An increase of $20 million in one-time Proposition 98 funding to support startup costs for new charter schools in 2016 and The funds are intended to offset the loss of previously available federal funding. Support Systems $20 million in one-time Proposition 98 funding to assist local educational agencies provide academic, behavioral, social and emotional student support services. Truancy and Dropout Prevention Proposition 47, approved by voters in November 2014, reduces penalties for certain non-serious and non-violent property and drug offenses, and requires that State expenditures savings resulting from these reduced penalties by invested into K-12 truancy and dropout prevention. The Budget allocates $18 million of such funding to K- 12 local education agencies. Drinking Water $9.5 million in one-time Proposition 98 funding to assist school districts that serve isolated or economically disadvantaged areas improve access to safe drinking water. Mandates $1.3 billion in one-time Proposition 98 funding to reduce the existing backlog of unpaid reimbursement claims to K-12 local educational agencies for the cost of State-mandated programs. The funding would be provided to local educational agencies on a per-student basis, and would be available to be used at local discretion. For additional information regarding the Budget, see the State Department of Finance website at However, the information presented on such websites is not incorporated herein by reference. Future Actions The District cannot predict what actions will be taken in the future by the State legislature and the Governor to address changing State revenues and expenditures. The District also cannot predict the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions or results could produce a significant shortfall of revenue and cash, and could consequently impair the State s ability to fund schools. State budget shortfalls or changes in funding formulas in future fiscal years may also have an adverse financial impact on the financial condition of the District. State Dissolution of Redevelopment Agencies On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos ( Matosantos ), finding ABx1 26, a trailer bill to the State 53

62 budget, to be constitutional. As a result, all Redevelopment Agencies in California ceased to exist as a matter of law on February 1, The Court in Matosantos also found that ABx1 27, a companion bill to ABx1 26, violated the California Constitution, as amended by Proposition 22. See STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES Proposition 1A and Proposition 22. ABx1 27 would have permitted redevelopment agencies to continue operations provided their establishing cities or counties agreed to make specified payments to school districts and county offices of education, totaling $1.7 billion statewide. ABx1 26 was modified by Assembly Bill No (Chapter 26, Statutes of ) ( AB 1484 ), which, together with ABx1 26, is referred to herein as the Dissolution Act. The Dissolution Act provides that all rights, powers, duties and obligations of a redevelopment agency under the California Community Redevelopment Law that have not been repealed, restricted or revised pursuant to ABx1 26 will be vested in a successor agency, generally the county or city that authorized the creation of the redevelopment agency (each, a Successor Agency ). All property tax revenues that would have been allocated to a redevelopment agency, less the corresponding county auditor-controller s cost to administer the allocation of property tax revenues, are now allocated to a corresponding Redevelopment Property Tax Trust Fund ( Trust Fund ), to be used for the payment of pass-through payments to local taxing entities, and thereafter to bonds of the former redevelopment agency and any enforceable obligations of the Successor Agency, as well as to pay certain administrative costs. The Dissolution Act defines enforceable obligations to include bonds, loans, legally required payments, judgments or settlements, legal binding and enforceable obligations, and certain other obligations. Among the various types of enforceable obligations, the first priority for payment is tax allocation bonds issued by the former redevelopment agency; second is revenue bonds, which may have been issued by the host city, but only where the tax increment revenues were pledged for repayment and only where other pledged revenues are insufficient to make scheduled debt service payments; third is administrative costs of the Successor Agency, not to exceed $250,000 in any year, to the extent such costs have been approved in an administrative budget; then, fourth tax revenues in the Trust Fund in excess of such amounts, if any, will be allocated as residual distributions to local taxing entities in the same proportions as other tax revenues. Moreover, all unencumbered cash and other assets of former redevelopment agencies will also be allocated to local taxing entities in the same proportions as tax revenues. Notwithstanding the foregoing portion of this paragraph, the order of payment is subject to modification in the event a Successor Agency timely reports to the Controller and the Department of Finance that application of the foregoing will leave the Successor Agency with amounts insufficient to make scheduled payments on enforceable obligations. If the county auditor-controller verifies that the Successor Agency will have insufficient amounts to make scheduled payments on enforceable obligations, it shall report its findings to the Controller. If the Controller agrees there are insufficient funds to pay scheduled payments on enforceable obligations, the amount of such deficiency shall be deducted from the amount remaining to be distributed to taxing agencies, as described as the fourth distribution above, then from amounts available to the Successor Agency to defray administrative costs. In addition, if a taxing agency entered into an agreement pursuant to Health and Safety Code Section for payments from a redevelopment agency under which the payments were to be subordinated to certain obligations of the redevelopment agency, such subordination provisions shall continue to be given effect. As noted above, the Dissolution Act expressly provides for continuation of pass-through payments to local taxing entities. Per statute, 100% of contractual and statutory two percent pass-throughs, and 56.7% of statutory pass-throughs authorized under the Community Redevelopment Law Act of 1993 (AB 1290, Chapter 942, Statutes of 1993) ( AB 1290 ), are restricted to educational facilities without offset against revenue limit apportionments by the State. Only 43.3% of AB 1290 pass-throughs are offset against State aid so long as the District uses the moneys received for land acquisition, facility construction, reconstruction, or remodeling, or deferred maintenance as provided under Education Code Section 42238(h). ABX1 26 states that in the future, pass-throughs shall be made in the amount which would have been received had the redevelopment agency existed at that time, and that the County Auditor-Controller shall 54

63 determine the amount of property taxes that would have been allocated to each redevelopment agency had the redevelopment agency not been dissolved pursuant to the operation of [ABX1 26] using current assessed values and pursuant to statutory [pass-through] formulas and contractual agreements with other taxing agencies. Successor Agencies continue to operate until all enforceable obligations have been satisfied and all remaining assets of the Successor Agency have been disposed of. AB 1484 provides that once the debt of the Successor Agency is paid off and remaining assets have been disposed of, the Successor Agency shall terminate its existence and all pass-through payment obligations shall cease. The District can make no representations as to the extent to which State apportionments may be offset by the future receipt of residual distributions or from unencumbered cash and assets of former redevelopment agencies any other surplus property tax revenues pursuant to the Dissolution Act. Litigation Challenging Method of School Financing In Robles-Wong, et al. v. State of California (Alameda County Superior Court, Case No. RG ), plaintiffs challenge the State s education finance system as unconstitutional. Plaintiffs, consisting of 62 minor school children, various school districts, the California Association of School Administrators and the California School Boards Association, allege the State has not adequately fulfilled its constitutional obligation to support its public schools, and seek an order enjoining the State from continuing to operate and rely on the current financing system and to develop a new education system that meets constitutional standards as declared by the court. In a related matter, Campaign for Quality Education et al. ( CQE ) v. State of California (Alameda County Superior Court, Case No. RG ), plaintiffs also challenge the constitutionality of the State s education finance system. The court issued a ruling that there was no constitutional right to a particular level of school funding. Plaintiffs in each matter appealed. The appellate court affirmed the trial court s ruling and plaintiffs petition for review was denied by the California Supreme Court. Plaintiffs allege they have suffered $17 billion in education funding costs. The District cannot predict the outcome of this litigation or its possible impact on the District s financial condition or upon the State general fund. Series A Certificates TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, interest with respect to the Series A Certificates is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, interest with respect to the Series A Certificates is exempt from State of California personal income tax. Special Counsel notes that, with respect to corporations, interest with respect to the Series A Certificates may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. The difference between the issue price of a Series A Certificate (the first price at which a substantial amount of the Series A Certificates of the same series and maturity is to be sold to the public) and the stated payment price at maturity with respect to the Series A Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to an owner of a Series A Certificate (the Series A Certificate Owner ) before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Series A Certificate Owner will increase the Series A Certificate Owner s basis in the applicable Series A Certificate. In the opinion of Special 55

64 Counsel, original issue discount that accrues to a Series A Certificate Owner is excluded from gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Special Counsel s opinion as to the exclusion from gross income of interest (and original issue discount) with respect to the Series A Certificates is based upon certain representations of fact and certifications made by the District and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the execution and delivery of the Series A Certificates to assure that the interest (and original issue discount) with respect to the Series A Certificates will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) with respect to the Series A Certificates to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Series A Certificates. The District will covenant to comply with all such requirements. The amount by which a Series A Certificate Owner s original basis for determining loss on sale or exchange in the applicable Series A Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Series A Certificate premium, which must be amortized under Section 171 of the Code; such amortizable Series A Certificate premium reduces the Series A Certificate Owner s basis in the applicable Series A Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Series A Certificate premium may result in a Series A Certificate Owner realizing a taxable gain when a Series A Certificate is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Series A Certificate to the Owner. Purchasers of the Series A Certificates should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Series A Certificate premium. The Internal Revenue Service (the IRS ) has initiated an expanded program for the auditing of taxexempt bond issues, including both random and targeted audits. It is possible that the Series A Certificates will be selected for audit by the IRS. It is also possible that the market value of the Series A Certificates might be affected as a result of such an audit of the Series A Certificates (or by an audit of similar certificates). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the execution delivery of the Series A Certificates to the extent that it adversely affects the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Series A Certificates or their market value. SUBSEQUENT TO THE EXECUTION AND DELIVERY OF THE SERIES A CERTIFICATES, THERE MIGHT BE FEDERAL, STATE OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY INTERPRETATIONS OF FEDERAL, STATE OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE OR LOCAL TAX TREATMENT OF THE INTEREST DUE WITH RESPECT TO THE SERIES A CERTIFICATES OR THE MARKET VALUE OF THE SERIES A CERTIFICATES. LEGISLATIVE CHANGES HAVE BEEN PROPOSED IN CONGRESS, WHICH, IF ENACTED, WOULD RESULT IN ADDITIONAL FEDERAL INCOME TAX BEING IMPOSED ON CERTAIN OWNERS OF TAX-EXEMPT STATE OR LOCAL OBLIGATIONS, SUCH AS THE SERIES A CERTIFICATES. THE INTRODUCTION OR ENACTMENT OF ANY OF SUCH CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE SERIES A CERTIFICATES. NO ASSURANCE CAN BE GIVEN THAT, SUBSEQUENT TO THE EXECUTION AND DELIVERY OF THE SERIES A SERIES A CERTIFICATES, SUCH CHANGES (OR OTHER CHANGES) WILL NOT BE INTRODUCED OR ENACTED OR INTERPRETATIONS WILL NOT OCCUR. BEFORE PURCHASING ANY OF THE SERIES A CERTIFICATES, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY 56

65 CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE SERIES A CERTIFICATES. Special Counsel s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Special Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Trust Agreement and the Tax Certificate relating to the Series A Certificates permit certain actions to be taken or to be omitted if a favorable opinion of Special Counsel is provided with respect thereto. Special Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Series A Certificates if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Although Special Counsel will render an opinion that interest (and original issue discount) with respect to the Series A Certificates is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the ownership of the Series A Certificates and the accrual or receipt of interest (and original issue discount) with respect to the Series A Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Series A Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Series A Certificates. Should interest (and original issue discount) with respect to the Series A Certificates become includable in gross income for federal income tax purposes, the Series A Certificates are not subject to early prepayment and will remain outstanding until maturity or until prepaid in accordance with the Trust Agreement. Series B Certificates In the opinion of Special Counsel, under existing statutes, regulations, rulings and judicial decisions, interest with respect to the Series B Certificates is exempt from State of California personal income tax. Interest on the Series B Certificates is not excluded from gross income for federal income tax purposes. The difference between the issue price of a Series B Certificate (the first price at which a substantial amount of the Series B Certificates of the same series and maturity is to be sold to the public) and the stated prepayment price at maturity (to the extent that such issue price is lower than the stated prepayment price at maturity) with respect to such Series B Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method. The amount of original issue discount deemed received by an owner of a Series B Certificate ( Series B Certificate Owner ) will increase the Series B Certificate Owner s basis in the Series B Certificate. The amount by which a Series B Certificate Owner s original basis for determining gain or loss on sale or exchange of the applicable Series B Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Series B Certificate premium, which a 2016B Bond holder may elect to amortize under Section 171 of the Code; such amortizable Series B Certificate premium reduces the Series B Certificate Owner s basis in the applicable Series B Certificate (and the amount of taxable interest received), and is deductible for federal income tax purposes. The basis reduction as a result of the amortization of Series B Certificate premium may result in a Series B Certificate Owner realizing a taxable gain when a Series B Certificate is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Series B Certificate to the Owner. Purchasers of Series B Certificates should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Series B Certificate premium. 57

66 The federal tax and State of California personal income tax discussion set forth above is included for general information only and may not be applicable depending upon an owner s particular situation. The ownership and disposal of the Series B Certificates and the accrual or receipt of interest (and original issue discount) with respect to the Series B Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Series B Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Series B Certificates. A copy of the proposed form of opinion of Special Counsel is attached hereto as Appendix C. CERTAIN LEGAL MATTERS Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, will render an opinion with respect to the Certificates substantially in the form attached hereto as Appendix C. Copies of such approving opinion will be available at the time of delivery of the Certificates. Certain matters will also be passed on for the District by Stradling Yocca Carlson & Rauth, a Professional Corporation, as Disclosure Counsel. Stradling Yocca Carlson & Rauth, a Professional Corporation expresses no opinion to the Owners of the Certificates as to the accuracy, completeness or fairness of this Official Statement. ABSENCE OF MATERIAL LITIGATION At the time of delivery of and payment for the Certificates, the District and the Corporation will each certify that there is no action, suit, litigation, inquiry or investigation before or by any court, governmental agency, public board or body served, or to the best knowledge of the District or the Corporation threatened, against the District or the Corporation in any material respect affecting the existence of the District or the Corporation or the titles of their officers to their respective offices or seeking to prohibit, restrain or enjoin the sale, execution or delivery of the Certificates or the payment of Lease Payments or challenging, directly or indirectly, the validity or enforceability of the proceedings to have the District lease the Property to the Corporation and lease it back from the Corporation, or the validity or enforceability of the Trust Agreement, the Lease, the Assignment Agreement or the Site Lease. The District does have claims pending against it. The aggregate amount of the uninsured liabilities of the District which may result from all claims will not, in the opinion of the District, materially affect the District s finances or impair its ability to make Lease Payments under the Lease. RATINGS S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC ( S&P ), is expected to assign its municipal bond rating of AA to the Certificates based on the issuance of the Policy by the Insurer at the time of delivery of the Certificates. See MUNICIPAL BOND INSURANCE herein. In addition, S&P has assigned its long term underlying rating of A- to the Certificates independent of the delivery of the Policy. Such ratings reflect only the views of the rating agency and any explanation of the significance of such ratings must be obtained from the rating agency. There is no assurance that such ratings will continue for any given period of time, or that they will not be revised downward or withdrawn entirely by the rating agency if in the judgment of the rating agency circumstances so warrant. An explanation of the significance of such ratings may be obtained from S&P at 55 Water Street, 45th Floor, New York, New York Any such downward revision or withdrawal of the ratings may have an adverse effect on the market price of the Certificates. The District will covenant in a Continuing Disclosure Certificate to file on EMMA, notices of any ratings changes on the Certificates. See the caption CONTINUING DISCLOSURE above and APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE. Notwithstanding such 58

67 covenant, information relating to ratings changes on the Certificates may be publicly available from S&P prior to such information being provided to the District and prior to the date the District is obligated to file a notice of rating change on EMMA. Purchasers of the Certificates are directed to S&P and its website and official media outlets for the most current ratings changes with respect to the Certificates after the initial delivery of the Certificates. UNDERWRITING The Certificates are being purchased by Morgan Stanley & Co. LLC (the Underwriter ). The Underwriter has agreed to purchase the Series A Certificates pursuant to a Certificate Purchase Agreement with the District (the Certificate Purchase Agreement ) at the initial purchase price of $ (being equal to the aggregate principal amount of the Series A Certificates, less an Underwriter s discount of $, [plus/less] a net original issue [premium/discount] of $ ). Pursuant to the Certificate Purchase Agreement, the Underwriter has also agreed to purchase the Series B Certificates at the initial purchase price of $ (being equal to the aggregate principal amount of the Series B Certificates, less an Underwriter s discount of $, [plus/less] a net original issue [premium/discount] of $ ). The Certificate Purchase Agreement provides that the Underwriter will purchase all of the Certificates if any are purchased and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Certificate Purchase Agreement. The Underwriter may offer and sell the Certificates to certain dealers and others at prices lower than the offering prices stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter. Morgan Stanley, parent company of Morgan Stanley & Co. LLC, the Underwriter of the Certificates, has entered into a retail distribution arrangement with its affiliate Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Certificates. Audited Financial Statements MISCELLANEOUS The District s audited financial statements for Fiscal Year , included in this Official Statement have been audited by Vavrinek, Trine, Day & Co., LLP, CPAs and Advisors (the Auditor ), as stated in their report in Appendix D. Attention is called to the scope limitation described in the auditor s report accompanying the financial statements. The Auditor has not been requested to consent to the inclusion of its report herein and has not undertaken to update the audited financial statements for Fiscal Year or its report, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated December 11, See Note 1 to the District s Audited Financial Statements for Fiscal Year attached as Appendix D hereto for a description of certain changes in accounting policies applicable in fiscal year Financial Interests The fees being paid to Special Counsel and the District s Financial Advisor are contingent upon the execution and delivery of the Certificates. ADDITIONAL INFORMATION The references herein to the Lease, the Site Lease, the Trust Agreement and the Assignment Agreement are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and for full and complete statements of such provisions reference is made to said documents. Copies of the documents 59

68 mentioned under this heading are available for inspection at the District and following delivery of the Certificates will be on file at the Principal Office of the Trustee in Los Angeles, California. References are made herein to certain documents and reports which are brief summaries thereof which do not purport to be complete or definitive. Reference is made to such documents and reports for full and complete statements of the content thereof. Any statement in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Certificates. The execution and delivery of this Official Statement has been duly authorized by the District. HEMET UNIFIED SCHOOL DISTRICT By: Superintendent 60

69 APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of certain provisions of the legal documents related to the Certificates which are not described in the Official Statement to which this Appendix is attached. This summary is not intended to be definitive and is qualified in its entirety by reference to the Lease, the Trust Agreement, the Assignment Agreement and the Site Lease for the complete terms thereof. Copies of the Lease, the Trust Agreement, the Assignment Agreement and the Site Lease are available upon request from the District. DEFINITIONS The following are summaries of definitions of certain terms used in this Summary of Principal Legal Documents. All capitalized terms not defined herein or elsewhere in the Official Statement have the meanings set forth in the Lease or the Trust Agreement. Additional Certificates means certificates of participation authorized by a supplemental Trust Agreement that are executed and delivered by the Trustee under and pursuant to the Trust Agreement. Additional Payments means such amounts as will be required for the payment of all administrative costs of the Corporation relating to the Property or the Certificates, including without limitation all expenses, compensation and indemnification of the Trustee payable by the District under the Trust Agreement, taxes of any sort whatsoever payable by the Corporation as a result of its ownership of the Property or undertaking of the transactions contemplated in the Lease or the Trust Agreement, fees of auditors, accountants, attorneys or engineers, any and all amounts due to the Insurer and the Reserve Insurer under the Trust Agreement (other than amounts paid by the Insurer and the Reserve Insurer to Certificate Owners under the Policy and the Reserve Policy), and all other necessary administrative costs of the Corporation or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Certificates or of the Trust Agreement, including premiums on insurance maintained pursuant to the Lease Agreement or to indemnify the Corporation and its employees, officers and directors and the Trustee. Assignment Agreement means the Assignment Agreement related to the Certificates, dated on even date with the Lease and the Trust Agreement, by and between the Trustee and the Corporation, and any duly authorized and executed amendments thereto. Beneficial Owner means any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes. Business Day means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or the State of California are authorized or required by law or executive order to remain closed. Certificate or Certificates means, collectively, the Series A Certificates and the Series B Certificates. A-1

70 Certificate Payment Date means April 1 and October 1 of each year commencing April 1, 2017 with respect to the interest payments evidenced by the Certificates and October 1 of each year, commencing October 1, 2017, with respect to the principal payments evidenced by the Certificates. Certificate Year means the period beginning on October 2 of each year and ending on October 1 of the following year except that the first Certificate Year shall begin on the Closing Date. Closing Date means the date on which the Certificates, duly executed by the Trustee, are delivered to the Original Purchaser thereof. Code means the Internal Revenue Code of 1986, and the regulations issued thereunder, as the same may be amended from time to time, and any successor provisions of law. Reference to a particular section of the Code will be deemed to be a reference to any successor to any such section. Continuing Disclosure Certificate means that certain Continuing Disclosure Certificate, dated the Closing Date, executed by the District. Corporation means the Hemet Unified School District School Facilities Corporation, a nonprofit public benefit corporation organized under the laws of the State, its successors and assigns. Corporation Representative means the President, Vice President, Secretary / Treasurer, Executive Director or Chief Financial Officer of the Corporation, or any other person authorized to act on behalf of the Corporation under or with respect to the Lease. Defeasance Securities means the securities described in paragraph (a) of the definition of Permitted Investments. Delivery Cost Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Delivery Costs means and further includes all items of expense directly or indirectly payable by or reimbursable to the District or the Corporation relating to defeasing the Prior Certificates with the proceeds of the Certificates, including, but not limited to, the premium for any insurance policies purchased to satisfy the Reserve Requirement or to guarantee payment of the Certificates, filing and recording costs, settlement costs, printing costs, word processing costs, reproduction and binding costs, initial fees and charges of the Trustee, including its first annual administration fee and the fees of its counsel, legal fees and charges, financing and other professional consultant fees, costs of rating agencies and costs of providing information to such rating agencies, any computer and other expenses incurred in connection with the Certificates, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. District Representative means the Superintendent and the Assistant Superintendent, Business Services of the District or any other person authorized by the Superintendent of the District to act on behalf of the District with respect to the Lease or the Trust Agreement. Event of Default means an event of default under the Lease as described under the caption THE LEASE AGREEMENT Events of Default and Remedies herein. year. Fiscal Year means the fiscal year of the District commencing July 1 and ending June 30 of the next Insurance Business Day means any day other than (i) a Saturday or Sunday, or (ii) a day on which the Insurer s Fiscal Agent or banking institutions in the State of New York are authorized or required by law or executive order to remain closed. A-2

71 Insurance Policy or Policy means the financial guaranty insurance policy, and any endorsement thereto, issued by the Insurer insuring the scheduled payment of the interest components and principal components represented by the Certificates when due. Insurer means Assured Guaranty Municipal Corp. or any successor thereto or assignee thereof. Lease means the Lease Agreement related to the Certificates, dated as of November 1, 2014, by and between the District and the Corporation, and any duly authorized and executed amendments thereto. Lease Payment means any payment required to be paid by the District to the Corporation pursuant to the Lease. Lease Payment Date means the fifteenth day of the month (or, if such day is not a Business Day, the next succeeding Business Day) immediately preceding the respective Certificate Payment Date. Lease Payment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Lease Year means the extending from October 1 of each calendar year to September 30 of the subsequent calendar year provided that the first Lease Year shall commence on the Closing Date and end on September 30, Letter of Representations means the letter of the District delivered to and accepted by the Depository on or prior to delivery of the Certificates as book-entry certificates making reference to the DTC Operational Arrangements memorandum, as it may be amended from time to time, setting forth the basis on which the Depository serves as depository for such book-entry certificates, as such letters were originally executed or as they may be supplemented or revised or replaced by letters from the District delivered to and accepted by the Depository. Moody s means Moody s Investors Service Inc. or any successors or assigns thereto. Net Proceeds means any proceeds of any insurance, performance bonds or taking by eminent domain or condemnation paid with respect to the Property remaining after payment therefrom of any expenses (including attorneys fees) incurred in the collection thereof. Net Proceeds Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Nominee means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Trust Agreement. Original Purchaser means Morgan Stanley & Co. LLC, as original purchaser of the Certificates on the Closing Date. Outstanding, when used as of any particular time with respect to the Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except: (1) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Certificates for the payment or prepayment of which funds or Government Obligations, together with interest earned thereon, in the necessary amount will have theretofore been A-3

72 deposited with the Trustee (whether upon or prior to the maturity or prepayment date of such Certificates), provided that, if such Certificates are to be prepaid prior to maturity, notice of such prepayment will have been given as provided in the Trust Agreement or provision satisfactory to the Trustee will have been made for the giving of such notice; and (3) Certificates in lieu of or in exchange for which other Certificates will have been executed and delivered by the Trustee pursuant to the Trust Agreement. Owner or Certificate Owner or Owner of a Certificate, or any similar term, when used with respect to a Certificate means the person in whose name such Certificate is registered on the registration books maintained by the Trustee. Permitted Encumbrances means, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the District may, pursuant to provisions of the Lease, permit to remain unpaid; (ii) the Assignment Agreement; (iii) the Lease; (iv) the Site Lease; (v) any contested right or claim of any mechanic, laborer, materialman, supplier or vendor filed or perfected in the manner prescribed by law to the extent permitted under the Lease; (vi) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the District certifies will not materially impair the use of the Property by the District; and (vii) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease and to which the District certifies in writing do not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the owners of the Certificates by the Trust Agreement and the Assignment Agreement and to which the Corporation and the Insurer consent in writing. Permitted Investments means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (a) For all purposes, including defeasance investments, any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (i) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ( United States Treasury Obligations ), (ii) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (iii) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (iv) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. (b) For all purposes other than defeasance investments, any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (i) Federal Housing Administration debentures. A-4

73 (ii) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: -Federal Home Loan Mortgage Corporation (FHLMC) Participation certificates (but not including stripped mortgage securities which are purchased at prices exceeding their principal amounts) Senior Debt obligations -Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated system-wide bonds and notes -Federal Home Loan Banks (FHL Banks) Consolidated debt obligations -Federal National Mortgage Association (FNMA) Senior debt obligations Mortgage-backed securities (but not including stripped mortgage securities which are purchased at prices exceeding their principal amounts) (iii) Unsecured certificates of deposit (including those placed by a third party pursuant to an agreement between the Trustee and the Corporation), time deposits, trust accounts, trust funds, interest bearing deposits, overnight bank deposits, interest bearing money market accounts and bankers acceptances (having maturities of not more than 365 days) of any bank the short-term obligations of which are rated A-1+ or better by S&P and Prime-1 by Moody s, which may include the Trustee and its affiliates. (iv) Deposits and bank deposit products (including those of the Trustee or any of its affiliates) the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks which have capital and surplus of at least $15 million. (v) Commercial paper (having original maturities of not more than 270 days) rated at the time of purchase A-1+ by S&P and Prime-1 by Moody s. (vi) Money market mutual funds rated AAm or AAm-G by S&P, or better, and if rated by Moody s rated Aa2 or better, including mutual funds for which the Trustee, its parent company, if any, or any affiliates or subsidiaries of the Trustee provide investment advising or other management services or serves as investment administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives and retains a fee for services provided to the fund, whether as a custodian, transfer agent, investment advisor or otherwise, (ii) the Trustee collects fees for services rendered, which fees are separate from the fees received from such funds, and (iii) services performed for such funds may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee. (vii) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated A3 by Moody s and A- by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated. (viii) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (vii) above and rated A-1+ by S&P and MIG-1 by Moody s. (ix) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (vii) above and rated AA- or better by S&P and Aa3 or better by Moody s. A-5

74 (x) Pre-refunded municipal obligations rated in the highest rating category then assigned to the United States of America by S&P and Moody s meeting the following requirements: 1. such municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for such municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of such municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; 2. such municipal obligations are secured by cash or United States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; 3. the principal of and interest on the United States Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on such municipal obligations ( Verification ); 4. the cash or United States Treasury Obligations serving as security for such municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; 5. no substitution of a United States Treasury Obligation shall be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and 6. the cash or United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. (xi) Repurchase agreements entered into with (1) any domestic bank, or domestic branch of a foreign bank, the long term debt of which is rated at least A- by S&P and A3 by Moody s including the Trustee and any of its affiliates; or (2) any broker-dealer with retail customers or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, longterm debt rated at least A- by S&P and A3 by Moody s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated at least A- by S&P and A3 by Moody s and acceptable to the Insurer (each an Eligible Provider ), provided that: 1. (i) permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers), and (ii) collateral levels must be at least 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ); 2. the trustee or a third party acting solely as agent therefore or for the District (the Custodian ) has possession of the collateral or the collateral has been transferred to the Custodian in accordance with applicable state and federal laws (other than by means of entries on the transferor s books) and such collateral shall be marked to market; 3. the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee, the District and the Insurer setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; 4. the repurchase agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; A-6

75 5. the repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; 6. the repurchase agreement shall provide that if during its term the provider s rating by either Moody s or S&P is withdrawn or suspended or falls below A- by S&P or A3 by Moody s, as appropriate, the provider must notify the District, the Trustee and the Insurer within five (5) days of receipt of such notice. Within ten (10) days of receipt of such notice, the provider shall either: (i) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral, or (iii) assign the agreement to an Eligible Provider. If the provider does not perform a remedy within ten (10) business days, the provider shall, at the direction of the Trustee (who shall give such direction if so directed by the Insurer) repurchase all collateral and terminate the repurchase agreement, with no penalty or premium to the District or the Trustee. (xii) Investment agreements: with a domestic or foreign bank or corporation the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least AA- by S&P and Aa3 by Moody s, and acceptable to the Insurer, each of which shall be an Eligible Provider, provided that: 1. interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service; 2. the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven (7) days prior notice; the District and the Trustee agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; 3. the provider shall send monthly reports to the Trustee, the District and the Insurer setting forth the balance the District or Trustee has invested with the provider and the amounts and dates of interest accrued and paid by the provider; 4. the investment agreement shall state that is an unconditional and general obligation of the provider, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passé with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; 5. the investment agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; 6. the District, the Trustee and the Insurer shall receive an opinion of domestic counsel to the provider that such investment agreement is legal, valid, binding and enforceable against the provider in accordance with its terms; 7. the District, the Trustee and the Insurer shall receive an opinion of foreign counsel to the provider (if applicable) that (1) the investment agreement has been duly authorized, executed and delivered by the provider and constitutes the legal, valid and binding obligation of the provider, enforceable against the provider in accordance with its terms, (b) the choice of law of the state set forth in the investment agreement is valid under that country s laws and a court in such country would uphold such choice of law, and (c) any judgment rendered by a court in the United States would be recognized and enforceable in such country; A-7

76 8. the investment agreement shall provide that if during its term: (i) the provider s rating by either S&P or Moody s falls below AA- or Aa3, the provider shall, at its option, within ten (10) days of receipt of publication of such downgrade, either (i) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral with the District, the Trustee or a third party acting solely as agent therefore (the Custodian ) free and clear of any third party liens or claims, or (iii) assign the agreement to an Eligible Provider, or (iv) repay the principal of and accrued but unpaid interest on the investment; (ii) the provider s rating by either S&P or Moody s is withdrawn or suspended or falls below A- or A3, the provider must, at the direction of the District or the Trustee (who shall give such direction if so directed by the Insurer), within ten (10) days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the District or Trustee. 9. in the event the provider is required to collateralize, permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers) and collateral levels must be 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ). In addition, the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee, the District and the Insurer setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; 10. the investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; 11. the investment agreement must provide that if during its term: (i) the provider shall default in its payment obligations, the provider s obligations under the investment agreement shall, at the direction of the District or the Trustee (who shall give such direction if so directed by the Insurer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ( event of insolvency ), the provider s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate; and (xiii) Deposits in the Local Agency Investment Fund of the California State Treasurer, to the extent the Trustee is authorized to register such investments in its name. Prepayment means any payment made by the District pursuant to the Lease as a prepayment of Lease Payments. Prepayment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Principal Office means the principal corporate trust office of the Trustee in Los Angeles, California, or such other address as the Trustee may inform the District, or the principal office of any successor trustee pursuant to the Trust Agreement except that with respect to presentation of Certificates for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. A-8

77 Prior Certificates means the District s 2006 Certificates of Participation (2006 School Facilities Project). Proceeds Fund means that fund established pursuant to the Trust Agreement. Project means the Project described in Exhibit C to the Lease, and any and all additions thereto made as provided in the Lease. Property means the Property, as defined in the Lease. Record Date means the close of business on the fifteenth day of the month preceding each Certificate Payment Date, whether or not such fifteenth day is a Business Day. Reserve Facility means any line of credit, letter of credit, insurance policy, surety bond or other credit, including the Reserve Policy, deposited with the Trustee pursuant to the Trust Agreement. Reserve Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Reserve Insurer means Assured Guaranty Municipal Corp., or any successor thereto or assignee thereof. Reserve Policy means the financial guaranty insurance policy issued by the Reserve Insurer under which claims may be made in order to provide moneys in the Reserve Fund available for the purposes thereof. Reserve Replenishment Rent means Reserve Replenishment Rent payable pursuant to the Lease as further described under the caption THE LEASE AGREEMENT Reserve Replenishment Rent below. Reserve Requirement means, as of any calculation date, the lesser of (1) the maximum aggregate annual Lease Payments (in any twelve month period ending on September 1) then payable under the Lease, (2) 125% of the average annual aggregate Lease Payments calculated based on Fiscal Years then payable under the Lease, or (3) 10% of the face amount of the Certificates and/or the Additional Certificates, as applicable (less original issue discount if in excess of two percent (2%) of the stated prepayment amount at maturity); provided, however, that the reserve requirement for the Certificates shall not exceed $, which is the initial Reserve Requirement for the Certificates. S&P means Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business, a part of McGraw Hill Financial, or any successors or assigns thereto. Series A Certificates means the $ aggregate principal amount of Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) executed and delivered by the Trustee pursuant to the Trust Agreement. Series A Lease Payments means any payment required to be paid by the District to the Corporation pursuant to the Lease and deposited in the Series A Account of the Lease Payment Fund. Series A Prepayments means any payment made by the District pursuant to the Lease as a prepayment for the Series A Lease Payments. Series B Certificates means the $ aggregate principal amount of Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Taxable) executed and delivered by the Trustee pursuant to the Trust Agreement. A-9

78 Series B Lease Payments means any payment required to be paid by the District to the Corporation pursuant to the Lease and deposited in the Series B Account of the Lease Payment Fund. Series B Prepayments means any payment made by the District pursuant to the Lease as a prepayment for the Series B Lease Payments. Site Lease means the Site Lease related to the Certificates, dated the date of the Trust Agreement, by and between the Corporation and the District. Special Counsel means Stradling Yocca Carlson & Rauth, a Professional Corporation or any other attorney or firm of attorneys of nationally recognized standing in matters pertaining to the tax-exempt status of interest on obligations issued by states and their political subdivisions and acceptable to the District. State means the State of California. Tax Certificate means the Tax Certificate dated as of the Closing Date, concerning matters pertaining to the use and investment of proceeds of the Series A Certificates executed and delivered to the District on the date of execution and delivery of the Series A Certificates, including any and all exhibits attached thereto. Term means the time during which the Lease is in effect, as provided in the Lease, as further described under the caption THE LEASE AGREEMENT Term of the Lease herein. Trust Agreement or Agreement means the Trust Agreement, related to the Certificates, dated on even date with the Assignment Agreement and the Lease, by and among the Trustee, the Corporation and the District, and any duly authorized and executed amendment thereto. Trustee means U.S. Bank National Association, a national banking corporation duly organized under the laws of the United States of America, and any successor trustee. Lease; Interests in the Project THE LEASE AGREEMENT Pursuant to the terms of the Lease, the Corporation agrees to lease the Property to the District and the District agrees to lease the Property from the Corporation. During the Term of the Lease, the Corporation will hold a leasehold interest in the Property under the Site Lease. Upon the expiration of the Term of the Lease, the leasehold interest of the Corporation in the Property under the Site Lease and all right, title and interest of the Corporation in and to the Property will transfer to and vest in the District. Term of the Lease The Term of the Lease will commence as of the date of its execution and ends on October 1, 2036, unless extended pursuant to the Lease, or terminated prior thereto upon the earliest of any of the following events: (a) a default by the District and the Corporation s election to terminate the Lease; (b) the payment by the District of all Lease Payments, Reserve Replenishment Rent and any Additional Payments required by the Lease or (c) the deposit of funds or Defeasance Securities with the Trustee in amounts sufficient to pay all Lease Payments as the will become due. A-10

79 Extension of Lease Term If on October 1, 2036, the Certificates shall not be fully paid, or amounts shall be due hereunder or under the Trust Agreement to the Insurer with respect to the Insurance Policy or to the Reserve Insurer with respect to the Reserve Policy, or if the Lease Payments hereunder shall have been abated at any time and for any reason, then the Term shall be extended until all Certificates, all Reserve Replenishment Rent and all other such amounts due to the Insurer and the Reserve Insurer shall be fully paid, except that the Term shall in no event be extended beyond October 1, Lease Payments The District agrees to pay to the Corporation, its successors and assigns, as annual rental for the use and possession of the Property, the Series A Lease Payments and the Series B Lease Payments (denominated into interest components and principal components, the interest component of each Lease Payment being paid semiannually) in the amounts specified in the Lease in such semiannual amounts as are sufficient in both time and amount to pay when due the annual principal and interest represented by the Series A Certificates and the Series B Certificates. Lease Payments will be due and payable on the fifteenth day of the month (or if such date is not a Business Day, the next succeeding Business Day) immediately preceding the respective Certificate Payment Date. Certain amounts held in the Lease Payment Fund on any Lease Payment Date are credited towards the Lease Payment then due and payable. The District must make all Lease Payments, Additional Payments and Reserve Replenishment Rent payments when due notwithstanding any dispute between the Corporation and the District, including a dispute as to the failure of any portion of the Property to perform the task for which it is leased, and cannot withhold any Lease Payment pending the final resolution of such dispute. Any Lease Payment in default continues as an obligation of the District until fully paid, with interest, to the extent permitted by law, from the date such amount was originally payable at the rate equal to the original interest rate payable with respect to each Certificate then outstanding. The Corporation and the District have agreed and determined that the total rental under the Lease represents the fair rental value of the Property. The District covenants to take such action as may be necessary to include and maintain all Lease Payments, Additional Payments and Reserve Replenishment Rent in its annual budgets (to the extent the amounts of such Additional Payments and Reserve Replenishment Rent are known to the District at the time its annual budget is proposed) and to provide the Trustee annually with a certificate to this effect. Pursuant to the Assignment Agreement, the Corporation has assigned its right to receive and to collect Lease Payments, Reserve Replenishment Rent, certain Additional Payments and Prepayments to the Trustee in trust for the benefit of the Owners of the Certificates. (See THE ASSIGNMENT AGREEMENT herein.) Reserve Replenishment Rent The District has agreed to pay to the Trustee from its first legally available moneys, after payment of the Lease Payments, Reserve Replenishment Rent to reimburse the Reserve Insurer for the amounts drawn on the Reserve Policy plus interest thereon at the Late Payment Rate to the date of payment; provided, however, that such obligation to pay will only occur if (i) funds have been withdrawn from the Reserve Fund pursuant to a draw on the Reserve Policy, (ii) the Lease Payments are not in abatement, and (iii) the amount of the Lease Payments and Additional Payments due in each year is less than the fair market rental value of the Property as determined in an appraisal filed with the Trustee. The District s obligation to fund Reserve Replenishment Rent is subject to the District s right to pay such Reserve Replenishment Rent over a period of no later than the end of the then current Lease Year, in substantially equal monthly payments, in the event of a deficiency from a withdrawal of amounts from the Reserve Fund to pay principal and interest with respect to the Certificates; provided that if such payments prescribed in the Lease are inconsistent with fair market rental value, in such maximum amounts as will be recommended by an appraisal consistent with fair market rental value on each Lease Payment Date until the amount of such Reserve Replenishment Rent paid equals the amount of funds withdrawn from the Reserve Fund to pay interest or principal represented by the Certificates. A-11

80 Abatement of Lease Payments in Event of Loss of Use Lease Payments will be paid in consideration of the right of possession and the continued quiet use and enjoyment of the Property during each period for which such Lease Payments are to be paid. The obligation of the District to pay Lease Payments, Reserve Requirement Rent and Additional Payments will be abated, in whole or in part, during any period in which, by reason of damage, destruction, interference due to title defect or taking by eminent domain or condemnation with respect to any portion of the Property, there is substantial interference with the District s right to the use and possession of such portion of the Property by the District. The amount of such abatement will be determined by the District such that the resulting Lease Payments, Reserve Replenishment Rent and Additional Payments represent fair consideration for the use and possession of the portion of the Property not damaged, destroyed, interfered with or taken. Such abatement will commence with such damage, destruction, interference or taking and end with the substantial completion of the replacement or work or repair; provided, however, that during abatement, available moneys on deposit in the Reserve Fund and the Lease Payment Fund, as well as other special sources of money, including the proceeds of rental interruption or use and occupancy insurance, will be applied to pay the Lease Payments. Maintenance, Utilities, Taxes and Assessments The District is responsible for all repair and maintenance of the Property throughout the Term of the Lease. The District must pay for or otherwise arrange for the payment of the cost of the repair and replacement of any portion of the Property resulting from ordinary wear and tear or want of care on the part of the District or any sublessee thereof. The District will also pay all taxes and assessments, including but not limited to utility charges, charged to the Corporation or the District or levied, assessed or charged against any portion of the Property or the respective interests or estates therein. The District is obligated to pay special assessments or governmental charges only to the extent they are required to be paid during the Term of the Lease. No Liens Except for Permitted Encumbrances, the District will not permit any mechanic s or other lien to be established or remain against the Property for labor or materials furnished in connection with any additions, modifications or improvements made by the District; provided that if any such lien is established and the District must first notify or cause to be notified the Corporation of the District s intention to do so, the District may in good faith contest any lien filed or established against the Property, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and must provide the Corporation with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Trustee as assignee of the Corporation. Disclaimers The Corporation makes no warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the District of the Property or any portion thereof. Insurance The District must maintain or cause to be maintained the following insurance: Public Liability and Property Damage. The District must maintain or caused to be maintained, throughout the Term of the Lease, a standard comprehensive general public liability and property damage insurance policy or policies in protection of the District and the Corporation, their directors, officers, agents and employees. Said policy or policies must provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by A-12

81 reason of the use or operation of any District property or portion thereof. Said policy or policies will provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of the amount of $150,000 (subject to a deductible clause of not to exceed $75,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy covering all such risks in an amount equal to the liability limits set forth in the Lease. Such liability insurance, including the deductible, may be maintained as part of or in conjunction with any other insurance coverage carried by the District, and, subject to the provisions of the Lease, may be maintained in the form of self-insurance by the District. Workers Compensation. The District must maintain workers compensation insurance issued by a responsible carrier authorized under the laws of the State of California to insure its employees against liability for compensation under the Workers Compensation Insurance and Safety Act now in force in the State, or any act subsequently enacted as an amendment or supplement thereto (with provision for self-insurance of no more than $1,000,000). Casualty and Theft. The District must maintain, throughout the Term of the Lease, insurance against loss or damage to any item or portion of the Property caused by fire and lightning, with extended coverage and theft, vandalism and malicious mischief insurance. Such extended coverage insurance must, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards normally covered by such insurance. Such insurance will be maintained in an amount (except that such insurance may be subject to deductible clauses of not to exceed $50,000 for any one loss) not less than the greater of (i) the replacement cost of the Property and (ii) the aggregate principal amount of the Certificates at the time Outstanding. Such insurance may be maintained as part of or in conjunction with any other insurance carried or required to be carried by the District, and, subject to the provisions of the Lease, may be maintained in the form of self-insurance by the District. Rental Interruption or Use and Occupancy. The District must maintain rental income or use and occupancy insurance in an amount not less than the maximum remaining scheduled Lease Payments in any future 24-month period, to insure against loss of rental income from the Property caused by perils covered by the insurance described in the Lease. Such rental interruption or use and occupancy insurance shall name the Trustee as loss payee. Such insurance may be maintained as part of or in conjunction with any other rental income insurance carried by the District. Title Insurance. The District must obtain and, throughout the Term of the Lease, maintain or cause to be maintained title insurance on the Property, in the form of an ALTA title policy (with Western Regional exceptions), in an amount equal to the aggregate principal amount of the Certificates Outstanding, issued by a company of recognized standing, duly authorized to issue the same, payable to the Trustee for the benefit of the Owners and the Insurer subject only to Permitted Encumbrances. Said policy shall insure (a) the Corporation s ground leasehold estate in the Property under the Site Lease, and (b) the District s leasehold estate under the Lease in the Property, subject only to Permitted Encumbrances. The Net Proceeds of such insurance shall be applied as provided in the Lease. The Trustee shall be provided with a title insurance policy in an amount equal to principal amount of the Certificates. Substitution or Release of the Property The District has the right to substitute alternate real property for any portion of the Property described in the Lease or to release a portion of the Property from the lien of the Lease by providing the Trustee with a supplement to the Lease substantially in the form attached to the Lease and satisfying the conditions set forth below. All costs and expenses incurred in connection with such substitution or release will be borne by the District. Notwithstanding any such substitution, there will be no reduction in or abatement of the Lease Payments due from the District as a result of such substitution. No substitution will be permitted unless (1) any substituted property is free from any liens, other than Permitted Encumbrances, as certified by the A-13

82 District in a certificate delivered to the Trustee; (2) the District provides prior written notice thereof to each rating agency then rating the Certificates and receives a rating confirmation therefrom; (3) an independent MAI or equivalent certified real estate appraiser selected by the District finds (and delivers a certificate to the District and the Trustee setting forth its findings) that the substituted real property (i) has a fair rental value greater than or equal to the fair rental value of the Property to be released so that the Lease Payments secured by the Property to be released being payable by the District pursuant to the Lease will not be reduced and (ii) has an equivalent or greater useful life as the Property to be released and that the useful life of the substituted real property exceeds the remaining Term of the Lease Payments under the Lease; (4) the District obtains or causes to be obtained an ALTA title insurance policy (with Western Regional exceptions) with endorsement so as to be payable to the Trustee for the benefit of the Owners (such policy will comply with the Lease, will be in a form satisfactory to the Insurer and the Corporation, will be in the amount equal to the principal component of Lease Payments attributable to the substituted real property, and will insure the leasehold interest or the site leasehold interest of the Corporation or the District, as applicable, to the substituted real property); (5) the District provides the Corporation, the Insurer and the Trustee with an opinion of Special Counsel that such substitution does not cause, in and of itself, the interest evidenced and represented by the Certificates to be included in gross income for federal income tax purposes; (6) the District will give, or cause to be given, any notice of the occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Certificate; (7) upon the substitution of any real property and improvements thereon for all or a portion of the Property then existing, or the release of any portion of the Property, the District, the Corporation and the Trustee will execute and the District will record with the office of the County Recorder, County of Riverside, California, any document necessary to reconvey to the District the portion of the Property being substituted and to include the substituted real property and/or improvements thereon as all or a portion of the Property; and (8) the District will certify to the Trustee and the Insurer that the substituted real property is of approximately the same degree of essentiality to the District as the portion of the Property being replaced. Assignment and Subleasing Except as provided in the Lease, the Trust Agreement and the Assignment Agreement, the Corporation will not assign the Lease to any other person, firm or corporation so as to impair or violate the representations, covenants and warranties contained therein and any assignment in contravention thereof shall be void. The District may sublease all or any portion of the Property (with the prior written consent of the Insurer), so long as such sublease does not, in the opinion of Special Counsel, adversely affect (i) the exemption from State personal income tax or the exclusion from gross income for federal income tax purposes of the interest component evidenced by the Series A Certificates or (ii) affect the validity of the Lease, subject to all of the following conditions: (1) the Lease and the obligation of the District to make Lease Payments under the Lease will remain obligations of the District; (2) the District will, within 30 days after the delivery thereof, furnish or cause to be furnished to the Corporation, the Insurer, the Trustee and Moody s, a true and complete copy of such sublease; and (3) any sublease of the Property by the District shall expressly provide that such sublease is subject to all rights of the Corporation under the Lease Agreement, including, the right to re-enter and re-let the Property or terminate the Lease Agreement in the event of a default by the District. Events of Default and Remedies Events of Default Defined. The following constitute events of default under the Lease (each, an Event of Default ) and the terms events of default and default will mean, whenever they are used in the Lease, any one or more of the following events: (i) Failure by the District to pay any Lease Payment required to be paid under the Lease by the corresponding Lease Payment Date, and failure by the District to timely pay any Reserve Replenishment Rent, if and when required. (ii) Failure by the District to observe and perform any warranty, covenant, condition or agreement contained in the Lease or in the Trust Agreement or in the Site Lease, other than the default A-14

83 described in (i) above, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the District by the Corporation, the Insurer, the Trustee or the Owners of not less than 20% in aggregate principal amount of the Certificates then Outstanding, provided, however, that if the failure stated in the notice cannot be corrected within the applicable period, the Corporation or such Owners, as the case may be, will not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the District within the applicable period and diligently pursued until the default is corrected, except that such grace period shall not exceed 60 days without the prior written consent of the Insurer (iii) Filing by the District of a case in bankruptcy, or the subjection of any right or interest of the District under the Lease to any execution, garnishment or attachment, or adjudication of the District as a bankrupt, or assignment by the District for the benefit of creditors, or the entry by the District into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the District in any proceedings instituted under the provisions of the federal bankruptcy code, as amended, or under any similar act which may be enacted in the future. Remedies. Whenever any Event of Default described above will have happened and be continuing, the Corporation may exercise any and all remedies available pursuant to law or granted pursuant to the Lease as described below. The Corporation has no right under any circumstances, however, to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable. After the occurrence of an Event of Default under the Lease the District will surrender possession of the Property to the Corporation if requested to do so by the Corporation, the Trustee or the Certificate Owners, in accordance with the provisions of the Lease. So long as the Insurer is not in default under the Insurance Policy, the Insurer, acting alone, shall have the right to direct and control all remedies upon an event of default including, without limitation, the election to terminate or not to terminate the Lease. No Termination: Repossession and Re-Lease on Behalf of District. In the event the Corporation does not elect to terminate the Lease, the Corporation may, with the consent of the District, repossess the Property, and re-lease it for the account of the District, in which event the District s obligation will continue to accrue from year to year in accordance with such Lease and the District will continue to receive the value of the use of the Property to the Lease from year to year in the form of credits against its obligation to pay Lease Payments. The obligations of the District will remain the same as prior to such default; to pay Lease Payments, Reserve Replenishment Rent and Additional Payments whether the Corporation re-enters or not. The District agrees to and will remain liable for the payment of all Lease Payments, Reserve Replenishment Rent and Additional Payments and the performance of all conditions contained in such Lease, and to reimburse the Corporation for any deficiency arising out of the re-leasing of the Property, or, in the event that the Corporation is unable to re-lease the Property, then for the full amount of all Lease Payments, Reserve Replenishment Rent and Additional Payments to the end of the Lease Term, but said Lease Payments, Reserve Replenishment Rent and Additional Payments and/or deficiency will be payable only at the same time and in the same manner as provided above for the payment of Lease Payments, Reserve Replenishment Rent and Additional Payments under the Lease, notwithstanding such repossession by the Corporation, or any suit brought by the Corporation for repossession of the Property, or the exercise of any other remedy by the Corporation. The District irrevocably appoints the Corporation its agent and attorney-in-fact for purposes of repossessing or re-leasing the Property in the event of default. In addition, the District exempts and agrees to save harmless the Corporation from any cost, loss or damage arising from or occasioned by any such repossession and re-leasing of the Property. The District waives all claims for damages caused by the Corporation in repossessing the Property as provided in the Lease and all claims for damage that may result from the destruction of or injury to the Property, and all claims for damages to or loss of any property belonging to the District that may be in or upon the Property. A-15

84 Termination: Repossession and Re-Lease. In the event of the termination of the Lease by the Corporation at its option and in the manner provided by the Lease on account of default by the District (and notwithstanding any repossession of the Property by the Corporation in any manner whatsoever or the releasing of the Property), the District nevertheless agrees to pay to the Corporation all costs, losses or damages howsoever arising or occurring payable at the same time and in the same manner as is provided in the Lease in the case of payment of Lease Payments, Reserve Replenishment Rent and Additional Payments. Any proceeds of the re-lease or other disposition of the Property by the Corporation will be deposited into the Lease Payment Fund and be applied in accordance with the provisions of the Trust Agreement. Any surplus received by the Trustee, as assignee of the Corporation, from such re-leasing over total Lease Payments, Reserve Replenishment Rent and Additional Payments that would have been due under the Lease and the fees, expenses and costs of the Trustee as assignee of the Corporation on re-leasing the Property will be remitted to the District. Neither notice to pay rent or to deliver up possession of the Property given pursuant to law nor any proceeding taken by the Corporation to recover possession of the Property will of itself operate to terminate the Lease, and no termination of the Lease on account of default by the District will be or become effective by operation of law, or otherwise, unless and until the Corporation will have given written notice to the District of the election on the part of the Corporation to terminate the Lease. The District covenants and agrees that no surrender of the Property for the remainder of the Term of the Lease or any termination of the Lease will be valid in any manner or for any purpose whatsoever unless stated or accepted by the Corporation by such written notice. No such termination will be effected either by operation of law or act of the parties to the Lease, except only in the manner in the Lease expressly provided. The re-leasing of the Property shall be subject to the opinion of Special Counsel that such re-leasing will not cause the interest component evidenced by the Series A Certificates to be subject to State personal income tax or adversely affect the exclusion of such interest component from gross income for federal income tax purposes. In the event the Corporation does not elect to terminate the Lease in the manner provided therein or to exercise its right to re-enter and re-lease, the Corporation may collect each installment of Lease Payments as the same become due and enforce any other terms or provisions of the Lease to be kept or performed by the District, regardless of whether or not the District has abandoned the Property. The District s rights and remedies are assigned to the Trustee and are exercisable by the Trustee and the Owners of the Certificates as provided in the Trust Agreement. (See THE ASSIGNMENT AGREEMENT herein.) The Certificates of Participation THE TRUST AGREEMENT Additional Certificates. Subsequent to the execution and delivery by the Trustee of the Certificates, the Trustee will, with the written consent of the Insurer, upon written request or requests of the District Representative and of the Corporation Representative, execute and deliver from time to time one or more series of Additional Certificates in such aggregate principal amount as may be set forth in such written request or requests, provided that there shall have been compliance with all of the following conditions, which are conditions precedent to the preparation, execution and delivery of such Additional Certificates: (a) The parties to the Trust Agreement shall have executed a supplemental agreement setting forth the terms and provisions of such Additional Certificates, including the establishment of such funds and accounts, separate and apart from the funds and accounts established under the Trust Agreement for the Certificates executed and delivered on the Closing Date, as shall be necessary or appropriate, which supplemental agreement shall require that prior to the delivery of such Additional Certificates there shall be on deposit in the Reserve Fund established under the Trust Agreement or in a reserve fund established under such A-16

85 supplemental agreement an amount equal to the Reserve Requirement upon the execution and delivery of the Additional Certificates; (b) The principal and interest payable with respect to such Additional Certificates and any premium payable upon prepayment of such Additional Certificates will be payable only on Certificate Payment Dates applicable to the Certificates; (c) The Lease will have been amended by the parties thereto if necessary to (i) increase or adjust the Lease Payments due and payable on each Lease Payment Deposit Date to an amount sufficient to pay the principal, premium (if any) and interest payable with respect to all Outstanding Certificates, including all Additional Certificates as and when the same mature or become due and payable (except to the extent such principal, premium and interest may be payable out of moneys then in the Reserve Fund or otherwise on deposit with the Trustee in accordance with the Trust Agreement), (ii) if appropriate, amend the definition of Property to include as part of the Property all or any portion of additions, betterments, extensions, improvements or replacements, or such other real or personal property (whether or not located upon the Property as such Property is constituted as of the date of the Trust Agreement), to be financed, acquired or constructed by the preparation, execution and delivery of such Additional Certificates, and (iii) make such other revisions to the Lease as are necessitated by the execution and delivery of such Additional Certificates (provided, however, that such other revisions shall not prejudice the rights of the Owners of Outstanding Certificates as granted them under the terms of the Trust Agreement); (d) The District and the Corporation will have determined that the Lease Payments to be paid by the District (including those evidenced by the Additional Certificates) do not exceed the fair rental value of the Property pursuant to the Lease. (e) There will have been delivered to the Trustee a counterpart of the amendments required by the Trust Agreement; (f) The Trustee will have received a certificate of the Corporation Representative that there exists on the part of the Corporation no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default); (g) The Trustee will have received a certificate of the District Representative that (i) there exists on the part of the District no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) and (ii) the Lease Payments as increased or adjusted do not exceed in any year the fair rental value of the Property (as such term is defined in the amended Lease); (h) The Trustee will have received an opinion of Special Counsel substantially to the effect that (i) said supplemental agreement and said amendments to the Lease comply in all respects with the requirements of the Trust Agreement, (ii) said supplemental agreement and said amendments to the Lease have been duly authorized, executed and delivered by each of the respective parties thereto (provided that said opinion of Special Counsel, in rendering the opinions set forth in the Trust Agreement, shall be entitled to rely upon one or more other opinions of counsel, including counsel to any of the respective parties to said supplemental agreement or said amendments to the Lease), (iii) assuming that no Event of Default has occurred and is continuing, the Trust Agreement, as amended by said supplemental agreement, and the Lease, as amended by the respective amendments thereto, constitute the legal, valid and binding obligations of the respective parties thereto, enforceable against said parties in accordance with their respective terms (except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, moratorium, debt adjustment or other laws affecting creditors rights generally, and except to the extent that enforcement thereof may be limited by general principles of equity, regardless of whether enforcement is sought in a legal or equitable proceeding) and (iv) the execution of such supplemental agreement and said amendments to the Lease, and performance by the parties thereunder, will not result in the inclusion of the interest component of any Series A Lease Payments evidenced by any Series A Certificates, including Additional Certificates, theretofore A-17

86 prepared, executed and delivered, in the gross income of the Owners of the Series A Certificates for purposes of federal income taxation; (i) The District will have provided each rating agency then rating the Certificates written notice of the proposed execution and delivery of such Additional Certificates at the addresses indicated in the Trust Agreement and will receive a rating confirmation (with a copy to the Trustee) that the current rating or ratings of the Outstanding Certificates will not be reduced, withdrawn or suspended as a result of the execution and delivery of such Additional Certificates from each rating agency then rating the Certificates. (j) There will have been delivered to the Trustee an endorsement to or reissuance of the title insurance policy delivered under the Lease providing that the insured amount is at least equal to the aggregate principal amount of all of the Certificates and Additional Certificates outstanding upon the execution and delivery of such Additional Certificates; (k) Upon the execution and delivery of such Additional Certificates, there will have been delivered to the Trustee cash or a Reserve Facility sufficient to increase the amount on deposit in the Reserve Fund, or a reserve fund established under the supplemental agreement, to the Reserve Requirement (calculated with respect to all Outstanding Certificates and Additional Certificates); (l) Such other conditions will have been satisfied, and such other instruments will have been duly executed and delivered to the Trustee (with a copy to each rating agency then rating the Certificates), as the District or the Corporation shall have reasonably requested. Upon delivery to the Trustee of the foregoing instruments, the Trustee will cause to be executed and delivered Additional Certificates representing the aggregate principal amount specified in such supplemental agreement, and such Additional Certificates shall be equally and ratably secured with all Certificates, including any Additional Certificates, theretofore prepared, executed and delivered, all without preference, priority or distinction (other than with respect to maturity, payment, prepayment or sinking fund payment (if any)) of any one Certificate, including Additional Certificates, over any other; provided, however, that no provision of the Trust Agreement shall require the District to consent to or otherwise permit the preparation, execution and delivery of Additional Certificates, it being understood and agreed that any such consent or other action of the District to permit the preparation, execution and delivery of Additional Certificates, or lack thereof, shall be in the sole discretion of the District. The Trustee Indemnification. The District will, to the extent permitted by law, indemnify and save the Trustee and its officers, directors, agents and employees harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Property by the District, (ii) any breach or default on the part of the District in the performance of any of its obligations under the Trust Agreement and any other agreement made and entered into for purposes of the Property, (iii) any act of negligence of the District or of any of its agents, contractors, servants, employees or licensees with respect to the Property, (iv) any act of negligence of any assignee of, or purchaser from, the District or of any of its or their agents, contractors, servants, employees or licensees with respect to the Property or the Project, (v) the exercise and performance by the Trustee of its powers and duties under the Trust Agreement or any related document, (vi) the sale of the Certificates and the carrying out of any of the transactions contemplated by the Certificates or the Trust Agreement, (vii) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made in light of the circumstances in which they were made, not misleading in any official statement or other disclosure document utilized in connection with the sale of the Certificates or (viii) the construction or acquisition of the Project. The indemnification set forth in the Trust Agreement will extend to the Trustee s officers, agents, employees, successors and assigns. No indemnification will be made under the Trust Agreement or other agreements for willful misconduct or A-18

87 negligence by the Trustee, its officers, agents, employees, successors or assigns. The District s obligations under the Trust Agreement will remain valid and binding notwithstanding maturity and payment of the Certificates, or the resignation or removal of the Trustee. Removal. The Insurer and, so long as there is no Event of Default, the District (with the prior consent of the Insurer), may, with thirty (30) days prior written notice, remove the Trustee initially appointed, and any successor thereto, and may appoint a successor or successors thereto. Resignation. The Trustee may, upon prior written notice to the District, the Insurer and the Corporation, and so long as the Insurance Policy is in full force and effect, to the Insurer resign; provided that such resignation will not take effect until the successor Trustee is appointed. Upon receiving such notice of resignation, the District will promptly appoint a successor Trustee, subject to the written approval of the Insurer. In the event the District does not name a successor Trustee within 30 days of receipt of notice of the Trustee s resignation, then the Trustee may petition a court of suitable jurisdiction to seek the immediate appointment of a successor Trustee. Successor. Any successor Trustee will be a bank, association, corporation or trust company meeting the qualifications as set forth in the Trust Agreement. Any resignation or removal of the Trustee and appointment of a successor Trustee will become effective upon acceptance of appointment by the successor Trustee and upon receipt of written approval of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). Upon such acceptance, the successor Trustee will mail notice thereof to the Owners at their respective addresses set forth on the Certificate registration books. Funds; Pledge The Trust Agreement creates (1) a Delivery Cost Fund, (2) a Prepayment Fund, (3) a Lease Payment Fund, (4) a Reserve Fund, (5) a Net Proceeds Fund, (6) a Proceeds Fund, and (7) a Rebate Fund, to be held in trust by the Trustee. The Delivery Cost Fund. The moneys in the Delivery Cost Fund will be used and withdrawn by the Trustee from time to time to pay the Delivery Costs upon submission of a Delivery Cost Requisition of the District stating (a) the person to whom payment is to be made, (b) the amount to be paid, (c) the purpose for which the obligation was incurred, (d) that such payment is a proper charge against the Delivery Cost Fund, and (e) that such amounts have not been the subject of a prior Delivery Cost Requisition. On the earlier of (i) January 2, 2017, or (ii) the date of receipt by the Trustee of a Delivery Cost Requisition therefor, all amounts (if any) remaining in the Delivery Cost Fund will be withdrawn therefrom by the Trustee and transferred to the Lease Payment Fund. Thereafter, the Delivery Cost Fund will be closed. The Proceeds Fund. The moneys in the Proceeds Fund shall be used and withdrawn by the District to effect the discharge of the Prior Certificates and the termination of the Swap Agreement. Moneys in the Proceeds Fund shall be withdrawn upon the presentation to the Trustee of a certificate of a District Representative. The Proceeds Fund shall be closed on January 2, 2017 and all amounts therein on that date, if any, shall be transferred to the Lease Payment Fund. The Prepayment Fund. Within the Prepayment Fund, the Trustee will establish a Series A Account into which any Series A Prepayments will be deposited and a Series B Account into which any Series B Prepayments will be deposited. Moneys to be used for prepayment of the Certificates will be deposited into the Series A Account or Series B Account of the Prepayment Fund, as applicable, and used solely for the purpose of prepaying the Series A Certificates or Series B Certificates in advance of their maturity on the date designated for prepayment and, in the case of extraordinary or optional prepayment, upon presentation and surrender of such Certificates to the Trustee. Any funds remaining in the Prepayment Fund after prepayment and payment of all Certificates Outstanding with respect to such Prepayment Fund, including payment of any applicable fees and expenses to the Trustee and any other Additional Payments payable under A-19

88 the Lease, or provision made thereof satisfactory to the Trustee and provision for any amounts required to be transferred to the Rebate Fund, will be withdrawn by the Trustee and remitted to the District. The Lease Payment Fund. Within the Lease Payment Fund, the Trustee will establish a Series A Account and a Series B Account and Lease Payments and any proceeds from the re-letting or any other distribution of the Property pursuant to the Lease will be deposited in or credited to the applicable account of the Lease Payment Fund. Amounts in the Series A Account of the Lease Payment Fund must be used solely for the purpose of paying the principal and interest evidenced by the Series A Certificates and amounts in the Series B Account of the Lease Payment Fund must be used solely for the purpose of paying the principal and interest evidenced by the Series B Certificates, as the same become due and payable in accordance with the Trust Agreement, as follows: on each Certificate Payment Date, the Trustee first will set aside an amount sufficient to pay the interest evidenced by the Certificates becoming due and payable on such date, and mail such amount to the Owners; and second will set aside an amount sufficient to pay the principal evidenced by the Certificates becoming due and payable on such Certificate Payment Date. Any funds remaining in the Lease Payment Fund after payment of all Certificates Outstanding, including accrued interest and payment of any applicable fees, expenses or other amounts to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease, or provision made therefor satisfactory to the Trustee, and provision for any amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, will be withdrawn by the Trustee and remitted to the District. The Net Proceeds Fund. Any Net Proceeds received by the District in the event of any accident, destruction, theft or taking by eminent domain or condemnation with respect to the Property must be transferred to the Trustee and deposited by the Trustee in the Net Proceeds Fund. The Trustee will disburse Net Proceeds for replacement or repair of the Property as provided in the Lease, or transfer such proceeds to the Prepayment Fund upon notification of the District Representative as provided in the Lease. After all of the Certificates have been paid and the entire amount of principal and interest with respect to the Certificates has been paid in full, or provision made for payment satisfactory to the Trustee, including provision for all amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, the Trustee will pay any remaining moneys in the Net Proceeds Fund to the District after payment of any amounts due to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease. Proceeds of any policy of title insurance received by the Trustee with respect to the Property shall be applied and disbursed by the Trustee upon the Written Request of the District as follows: (i) If the District determines that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Property and will not result in an abatement of Lease Payments and Additional Payments payable by the District under the Lease (such determination to be certified by the District in writing), such proceeds shall be remitted to the District and used for any lawful purpose thereof; or (ii) If the District determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Property and will result in an abatement of Lease Payments and Additional Payments payable by the District under the Lease, then the Trustee will, with the prior consent of the Insurer, immediately deposit such proceeds in the Prepayment Fund and such proceeds shall be applied to the prepayment of Certificates. The Rebate Fund. All amounts at any time on deposit in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the requirement to make rebate payments to the United States pursuant to Section 148 of the Code and the Treasury Regulations. Such amounts will be free and clear of any lien A-20

89 under the Trust Agreement and will be governed by the provisions of the Trust Agreement relating to the Rebate Fund and tax covenants and by the Tax Certificate executed by the District. Any funds remaining in the Rebate Fund after prepayment of all of the Series A Certificates and any amounts including accrued interest and payment of any applicable fees to the Trustee, will be withdrawn by the Trustee and remitted to the District. Security Interest in Moneys and Funds. The Corporation and the District, as their interests may appear, grant to the Trustee for the benefit of the Owners a lien on and a security interest in all moneys in the funds held by the Trustee under the Trust Agreement (excepting only the Rebate Fund and any moneys to be deposited into the Rebate Fund), including without limitation, the Lease Payment Fund, the Reserve Fund (including the Reserve Policy), the Prepayment Fund and the Net Proceeds Fund, and all such moneys will be held by the Trustee in trust and applied to the respective purposes specified in the Trust Agreement and in the Lease. Pledge of Lease Payments and Proceeds. The Lease Payments and any proceeds from the re-letting or any other disposition of the Property pursuant to the Lease (the Lease Proceeds ) are irrevocably pledged to and will be used for the punctual payment of the interest and principal represented by the Certificates and, except as permitted under the Trust Agreement with respect to Additional Certificates, the Lease Payments and Lease Proceeds will not be used for any other purpose while any of the Certificates remain Outstanding. This pledge will constitute a first lien on the Lease Payments and Lease Proceeds in accordance with the terms of the Trust Agreement. The Reserve Fund All moneys at any time on deposit in the Reserve Fund (including the Reserve Policy and any Reserve Facility provided to satisfy the Reserve Requirement in whole or in part) will be held by the Trustee in trust for the benefit of the Owners of the Certificates, as a reserve for the payment when due of all the Lease Payments to be paid pursuant to the Lease and of all payments on the Certificates and applied solely as provided in the Trust Agreement. On the Closing Date, there will be deposited in the Reserve Fund the Reserve Policy. Reserve Replenishment Rent. Any Reserve Replenishment Rent payable pursuant to the Lease will be deposited in the Reserve Fund. Transfers of Excess. The Trustee will, on or before March 15 and September 15 of each year, provide written notice to the District of any moneys which are estimated to be on hand in the Reserve Fund in excess of the Reserve Requirement on the next succeeding April 1 or October 1, as the case may be, and one Business Day immediately preceding any Lease Payment Date, the Trustee will transfer such excess moneys to the Lease Payment Fund to be applied to the Lease Payment then due from the District. In the event of the partial Prepayment of Lease Payments the District may instruct the Trustee to reduce the cash amounts on deposit in the Reserve Fund to the Reserve Requirement as of such date and may direct the Trustee to transfer excess cash amounts from the Reserve Fund for any lawful purpose. The transfers described above are in each case subject to the requirement that if the Series A Certificate proceeds will have become subject to the arbitrage rebate provisions of Section 148(f) of the Code as described in the Trust Agreement then certain investment earnings are to be transferred to the Rebate Fund at the direction of the District as provided in the Trust Agreement. Application of Reserve Fund in Event of Deficiency in Lease Payment Fund. At least five (5) Business Days immediately preceding any Certificate Payment Date, the Trustee shall ascertain the necessity for a claim under the Reserve Policy or other Reserve Facility in accordance with the terms of the Trust Agreement, and shall provide notice to the Reserve Insurer and the provider of any other Reserve Facility at least five (5) Business Days prior to each date upon which interest or principal is due on the Certificates. A-21

90 Whether or not Lease Payments are then in abatement, if five (5) Business Days immediately preceding any Certificate Payment Date, the moneys available in the Lease Payment Fund do not equal the amount of the principal and interest with respect to the Certificates then coming due and payable, the Trustee first shall apply the moneys available in the Reserve Fund to make delinquent or abated Lease Payments on behalf of the District by transferring the amount necessary for such purpose to the Lease Payment Fund. All cash and investments in the Reserve Fund shall be transferred to the Lease Payment Fund before any drawing shall be made on the Reserve Policy or any other Reserve Facility. The Trustee shall take whatever action is necessary to liquidate or draw upon investments of funds held in the Reserve Fund or draw upon the Reserve Policy or other Reserve Facility to make such funds available for application as provided under the Trust Agreement on the Certificate Payment Date. Draws on all Reserve Facilities (including the Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Reserve Fund. Available coverage means the coverage then available for disbursement pursuant to the terms of the applicable Reserve Facilities without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provide to honor any such claim or draw. The Trustee shall repay the Reserve Insurer any draws under the Reserve Policy together with interest thereon at the Late Payment Rate (defined below) from Reserve Replenishment Rent paid by the District pursuant to the Lease. The Trustee shall also pay all related reasonable expenses incurred by the Reserve Insurer together with interest thereon at the Late Payment Rate from Additional Payments made by the District pursuant to the Lease. Late Payment Rate means, as calculated by the Reserve Insurer, the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, New York, as its prime or base lending rate ( Prime Rate ) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest due with respect to the Certificates, and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, the Prime Rate shall be the publicly announced prime or base lending rate of such national bank as the Reserve Insurer shall specify. Repayment of draws under the Reserve Policy and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, Policy Costs ) shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Policy Costs related to such draw. Payment of any Policy Costs and reimbursements of amounts with respect to other Reserve Facilities shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Fund. Amounts in respect of Policy Costs paid to the Reserve Insurer shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to the Reserve Insurer on account of principal drawn on the Reserve Policy, the coverage under the Reserve Policy will be increased by a like amount, subject to the terms of the Reserve Policy. If the District shall fail to pay any Policy Costs in accordance with the requirements of the Trust Agreement, the Reserve Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided thereunder, other than remedies which would adversely affect owners of the Certificates. The Trust Agreement and the Lease shall not be discharged or terminated prior to October 1, 2036 until all Policy Costs owing the Reserve Insurer shall have been paid in full. The District s obligation to pay such amounts shall expressly survive payment in full of the Certificates. A-22

91 Prepayment Provisions Notice of Prepayment. Content. When prepayment is authorized or required pursuant to the Trust Agreement, the Trustee shall give notice of the prepayment of the Certificates. Such notice shall specify: (a) the prepayment date, (b) the prepayment price, (c) if less than all of the Outstanding Certificates are to be prepaid, the Certificate numbers (and in the case of partial prepayment, the respective principal amounts), (d) the CUSIP numbers of the Certificates to be prepaid, (e) the place or places where the prepayment will be made, (f) the original date of execution and delivery of the Certificates, (g) the rate of interest payable with respect to each Certificate being prepaid, (h) any other descriptive information regarding the Certificates needed to identify accurately the Certificates being prepaid and (i) if the notice is conditional, a statement to that effect. Such notice shall further state that on the specified date there shall become due and payable upon each Certificate to be prepaid, the portion of the principal amount of such Certificate to be prepaid, together with interest accrued to said date, and that from and after such date, provided that moneys therefor have been deposited with the Trustee, interest with respect thereto shall cease to accrue and be payable. Such redemption notices may state that no representation is made as to the accuracy or correctness of the CUSIP numbers printed therein or on the Certificates. Any notice of prepayment for an optional prepayment of the Certificates pursuant to the Trust Agreement may be conditional, and, if any condition stated in the notice of prepayment shall not have been satisfied on or prior to the prepayment date: (i) the notice of prepayment shall be of no force and effect, (ii) the Trustee shall not be required to prepay such Certificates, (iii) the prepayment shall not be made, and (iv) the Trustee shall within a reasonable time thereafter give notice to the persons in the manner in which the conditional notice of prepayment was given that such condition or conditions were not met and that the prepayment was canceled. Recipients; Timing. Notice of such prepayment shall be sent by first class mail or delivery service postage prepaid, or by telecopy, facsimile or electronically, to the Depository on the date of mailing of notice to the Owners by first class mail and by first class mail, postage prepaid, to the Corporation and the respective Owners of any Certificates designated for prepayment at their addresses appearing on the Certificate registration books, at least thirty (30) days, but not more than sixty (60) days, prior to the prepayment date; provided that neither failure to receive such notice nor any defect in any notice so mailed shall affect the sufficiency of the proceedings for the prepayment of such Certificates. Notwithstanding the foregoing, so long as the Certificates are held in book-entry form by the Depository, notice of prepayment shall be given to the Depository in the manner agreed to by the Depository and the Trustee. In addition, notice of such prepayment shall also be sent to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access system simultaneously with the mailing of notices required by the first paragraph above; provided, that neither failure to provide such notice nor any defect in any notice shall affect the sufficiency of the proceedings for the prepayment of such Certificates. Partial Prepayment of Certificates. Upon surrender by the Owner of a Certificate for partial prepayment at the Principal Office, payment of such partial prepayment of the principal amount of a Certificate will be paid to such Owner. Upon surrender of any Certificate prepaid in part only, the Trustee shall execute and deliver to the registered Owner thereof, at the expense of the District, a new Certificate or Certificates which shall be of authorized denominations equal in aggregate principal amount to the unprepaid portion of the Certificate surrendered and of the same interest rate and the same maturity. Such partial prepayment shall be valid upon payment of the amount thereby required to be paid to such Owner, and the District, the Corporation and the Trustee shall be released and discharged from all liability to the extent of such payment. Effect of Notice of Prepayment. Notice having been given to the Owners of the Certificates as aforesaid, and the moneys for the prepayment (including the interest to the applicable date of prepayment), A-23

92 having been set aside in the Prepayment Fund, the Certificates shall become due and payable on said date of prepayment, and, upon presentation and surrender thereof at the Principal Office, said Certificates shall be paid at the prepayment price with respect thereto, plus interest accrued and unpaid to said date of prepayment. If, on said date of prepayment, moneys for the prepayment of all the Certificates to be prepaid, together with interest to said date of prepayment, shall be held by the Trustee so as to be available therefor on such date of prepayment, and, if notice of prepayment thereof shall have been given as aforesaid, then, from and after said date of prepayment, interest evidenced by the Certificates to be prepaid shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the prepayment of Certificates shall be held in trust for the account of the Owners of the Certificates so to be prepaid, without liability for interest thereon. All Certificates paid at maturity or prepaid prior to maturity shall be cancelled upon surrender thereof and destroyed. Moneys in Funds; Investment Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement are irrevocably held in trust for the benefit of the Owners and, in the case of the Rebate Fund, for payment as required to the United States Treasury, and for the purposes specified in the Trust Agreement, and such moneys, and any income or interest earned thereon, will be expended only as provided in the Trust Agreement, and will not be subject to levy or attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee or the District, or any of them. Investment. Moneys held by the Trustee under the Trust Agreement will be invested and reinvested on maturity by the Trustee pursuant to the Trust Agreement. The Trustee will report any such investments to the District on a monthly basis in its regular statements. Such investments and reinvestments will be made giving full consideration for the time at which funds are required to be available based upon information supplied by the District. Investments purchased with funds on deposit in the Lease Payment Fund and Prepayment Fund will mature not later than the Certificate Payment Date or prepayment date, as appropriate, immediately succeeding the investment. Notwithstanding anything to the contrary contained in the Trust Agreement, investments purchased with funds on deposit in the Reserve Fund should have an average aggregate weighted term to maturity of not greater than five years unless invested as permitted in the Trust Agreement pursuant to which funds may be withdrawn, without penalty, to make payments. Any income, profit or loss on the investment of moneys held by the Trustee under the Trust Agreement will be credited to the respective fund for which it is held, except as otherwise provided in the Trust Agreement. Amendments Permitted With Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time, with notice to any rating agency then rating the Certificates, by a supplemental agreement or amendment thereto which will become effective when the written consents of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy) and Owners of a majority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided below, will be filed with the Trustee. No such modification or amendment will (1) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof or reducing any premium payable upon the prepayment thereof, or diminish the security afforded by the Insurance Policy without the prior written consent of the Owner of such Certificate and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy), or (2) reduce the percentage of Owners whose consent is required for the execution of any amendment of the Trust Agreement or supplement thereto without the prior written consent of the Owners of all Certificates then Outstanding and the Insurer (so long as the Insurer is not in default in its A-24

93 payment obligations under the Insurance Policy), or (3) modify any of the rights or obligations of the Trustee without its written assent thereto, or (4) amend the section of the Trust Agreement pertaining to amendments without the prior written consent of the Owners of all Certificates then outstanding and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). The Trustee will have the right to require such opinions of counsel as it deems necessary concerning (i) the lack of material adverse effect of the amendment on Owners, (ii) the amendment not affecting the tax status of the interest component of the Series A Lease Payments and the interest evidenced by the Series A Certificates, and (iii) that such amendment is authorized or permitted under the terms of the Trust Agreement (and, if applicable, the Lease) and complies with the provisions thereof. Any such supplemental agreement or amendment will become effective as provided in the Trust Agreement. Without Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement or amendments thereto, with the prior written consent of the Insurer, with notice to any rating agency then rating the Certificates, but without the consent of any such Owners, but only to the extent permitted by law and only: (1) to add to the covenants and agreements of the District and the Corporation under the Trust Agreement; (2) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement or in the Lease; (3) in regard to matters arising under the Trust Agreement or the Lease, as the parties thereto may deem necessary or desirable and which will not adversely affect the interest of the Owners or the Insurer (unless the Insurer has consented, in writing, to such amendment); (4) to substitute the Property or add to the Project, or a portion thereof, with the consent of the Insurer; (5) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the interest component of the Series A Lease Payments and the interest evidenced by the Series A Certificates; (6) to add to the rights of the Trustee; (7) to maintain the rating or ratings assigned to the Certificates; or (8) to provide for the execution and delivery of Additional Certificates in accordance with the provisions of the Trust Agreement. No such modification or amendment, however, will modify any of the rights or obligations of the Trustee or the Insurer without their written assent thereto. Any such supplemental agreement will become effective upon execution and delivery by the parties thereto. Tax Covenants The District and the Corporation covenant with the holders of the Series A Certificates that, notwithstanding any other provisions of the Trust Agreement, they will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest component evidenced by the Series A Certificates under Section 103 of the Code. The District and the Corporation will not, directly or indirectly, use or permit the use of proceeds of the Series A Certificates, the Project, or any portion thereof, by any person other than a governmental unit (as such term is used in Section 141 of the Code), in such manner or to such extent as would result in the loss of exclusion from gross income for federal income tax purposes of the interest component of the Series A Lease Payments and the interest evidenced by the Series A Certificates. The District and the Corporation will not take any action, or fail to take any action, if any such action or failure to take action would cause the Series A Lease Payments evidenced by the Series A Certificates to be private activity bonds within the meaning of Section 141 of the Code, and in furtherance thereof, will not make any use of the proceeds of the Series A Certificates or the Project, or any portion thereof, or any other funds of the District, that would cause the Series A Lease Payments evidenced by the Series A Certificates to be private activity bonds within the meaning of Section 141 of the Code. The District will establish reasonable procedures necessary to ensure continued compliance with Section 141 of the Code and the continued qualification of the Series A Certificates as governmental bonds. The District and the Corporation will not, directly or indirectly, use or permit the use of any proceeds of any Series A Certificates, or of the Project, or other funds of the District, or take or omit to take any action, A-25

94 that would cause the Series A Lease Payments evidenced by the Series A Certificates to be arbitrage bonds within the meaning of Section 148 of the Code. To that end, the District and the Corporation will comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the Series A Lease Payments evidenced by the Series A Certificates. Limitation of Liability Limited Liability of the District. Except for the payment of Lease Payments, Additional Payments, Reserve Replenishment Rent and Prepayments when due in accordance with the Lease and the performance of the other covenants and agreements of the District contained in the Trust Agreement and in the Lease, the District will have no obligation or liability to any of the other parties or to the Owners with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee. No Liability of the District or Corporation for Trustee Performance. Except as expressly provided in the Trust Agreement, neither the District nor the Corporation will have any obligation or liability to any other parties or to the Owners with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. Limited Liability of Trustee. The Trustee will have no obligation or responsibility for providing information to the Owners concerning the investment character of the Certificates. The Trustee makes no representations as to the validity or sufficiency of the Certificates, will incur no responsibility in respect thereof, other than in connection with the duties or obligations in the Trust Agreement or in the Certificates assigned to or imposed upon it. The Trustee will not be responsible for the sufficiency or enforceability of the Lease, Site Lease or Assignment Agreement. The Trustee will not be liable for the sufficiency or collection of any Lease Payments or other moneys required to be paid to it under the Lease (except as provided in the Trust Agreement), its right to receive moneys pursuant to said Lease, or the value of or title to the Property. The Trustee will have no obligation or liability to any of the other parties or the Owners with respect to the Trust Agreement or failure or refusal of any other party to perform any covenant or agreement made by any of them under the Trust Agreement or the Lease, but will be responsible solely for the performance of the duties and obligations expressly imposed upon it under the Trust Agreement. The recitals of facts, covenants and agreements in the Trust Agreement and in the Certificates will be taken as statements, covenants and agreements of the District or the Corporation (as the case may be), and the Trustee assumes no responsibility for the correctness of the same. Events of Default and Remedies Remedies. If an Event of Default happens, then, and in each and every such case during the continuance of such Event of Default, the Trustee may exercise any and all remedies available pursuant to law or granted pursuant to the Lease; provided, however, that notwithstanding anything in the Trust Agreement or in the Lease to the contrary, THERE WILL BE NO RIGHT UNDER ANY CIRCUMSTANCES TO ACCELERATE THE MATURITIES OF THE CERTIFICATES OR OTHERWISE TO DECLARE ANY LEASE PAYMENTS NOT THEN IN DEFAULT TO BE IMMEDIATELY DUE AND PAYABLE; provided further that so long as the Insurer will not be in default in its payment obligations under the Insurance Policy, the Insurer will control all remedies upon an Event of Default. Application of Funds. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Trust Agreement or of the Lease, will be deposited into the Lease Payment A-26

95 Fund and be applied by the Trustee after payment of all amounts due and payable under the Trust Agreement and of the Lease in the following order upon presentation of the several Certificates, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid Defeasance First, Costs and Expenses: to the payment of the costs, fees and expenses of the Trustee and then of the Owners in declaring such Event of Default and in performing its duties under the Trust Agreement, including reasonable compensation to its or their agents, attorneys and counsel; Second, Interest: to the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installment, and, if the amount available will not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; Third, Principal: to the payment to the persons entitled thereto of the unpaid principal with respect to any Certificates which will have become due, whether at maturity or by call for prepayment, in the order of their due dates, with interest on the overdue principal and interest at a rate equal to the rate paid with respect to the Certificates and, if the amount available will not be sufficient to pay in full all the amounts due with respect to the Certificates on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference; and Fourth, Insurer: to the extent not included in clauses First, Second or Third above, to the payment of all amounts then due to the Insurer, as certified in writing to the Trustee. If and when any Outstanding Certificates will be paid and discharged in any one or more of the following ways (1) Payment or Prepayment: by well and truly paying or causing to be paid the principal of and interest and prepayment premiums (if any) with respect to such Certificates Outstanding, as and when the same become due and payable; (2) Cash: if prior to maturity and having given at least thirty (30) days prior written notice of prepayment by depositing with the Trustee, in trust, concurrent with the giving of such notice, an amount of cash which (together with cash then on deposit in the Lease Payment Fund and the Reserve Fund together with the interest to accrue thereon, in the event of payment or provision for payment of all Outstanding Certificates) is sufficient to pay such Certificates Outstanding, including all principal and interest and premium, if any; or (3) Defeasance Securities: by irrevocably depositing with the Trustee, in trust, Defeasance Securities together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon (and, in the event of payment or provision for payment of all Outstanding Certificates, moneys then on deposit in the Lease Payment Fund and the Reserve Fund together with the interest to accrue thereon), be fully sufficient to pay and discharge such Certificates (including all principal and interest represented thereby and prepayment premiums if any) at or before their maturity date; and all other amounts due under the Trust Agreement have been paid in full, then, notwithstanding that any Certificates will not have been surrendered for payment, all obligations of the Corporation, the Trustee and the District with respect to such Certificates will cease and terminate, except only the obligation of the Trustee to pay or cause to be paid, from Lease Payments paid by or on behalf of the District from funds deposited A-27

96 pursuant to paragraphs (2) and (3) above, to the Owners of the Certificates not so surrendered and paid all sums due with respect thereto, and in the event of deposits pursuant to paragraphs (2) and (3) above, the Certificates will continue to represent direct and proportionate interests of the Owners thereof in the Lease Payments under the Lease. Notwithstanding anything in the Trust Agreement to the contrary, in the event that the principal and/or interest with respect to the Certificates will be paid by the Insurer pursuant to the Insurance Policy, the Certificates will remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the District, and the assignment and pledge of the Lease Payments and all covenants, agreements and other obligations of the District to the Owners will continue to exist and will run to the benefit of the Insurer, and the Insurer will be subrogated to the rights of such Owners. Prior to any defeasance becoming effective, (A) all amounts currently due to the Insurer under the Insurance Policy and Reserve Policy shall have been paid in full, and (B) the District shall cause to be delivered at least five Business Days prior to any defeasance becoming effective (i) an executed copy of a report, addressed to the Trustee, the District and the Insurer, in form and substance acceptable to the Trustee, the District and the Insurer of a nationally recognized firm of certified public accountants, verifying that the Defeasance Securities and cash, if any, satisfy the requirements of the Trust Agreement, (ii) a copy of the escrow deposit agreement entered into in connection with such defeasance, which escrow deposit agreement shall be in form and substance acceptable to the Insurer, and (iii) a copy of an opinion of Special Counsel, dated the date of such defeasance and addressed to the Trustee, the District and the Insurer, in form and substance acceptable to the Trustee, the District and the Insurer, to the effect that such Certificates are no longer Outstanding under the Trust Agreement. In the event a forward purchase agreement will be employed in the refunding, such agreement shall be subject to the approval of the Insurer and shall be accompanied by such opinions of counsel as may be require by the Insurer. The Insurer shall be provided with final drafts of the above-referenced documentation not less than five Business Days prior to the funding of the escrow. Amounts paid by the Insurer under the Insurance Policy shall not be deemed paid for purposes of the Trust Agreement and the Certificates relating to such payments shall remain Outstanding and continue to be due and owing until paid by the Corporation in accordance with the Trust Agreement. The Trust Agreement shall not be discharged unless all amounts due or to become due to the Insurer have been paid in full or duly provided for. Any funds held by the Trustee, at the time of payment or provision for payment of all Outstanding Certificates pursuant to one of the procedures described in the Trust Agreement, which are not required for the payment to be made to Owners, will be paid over to the District, after the payment of any amounts due to the Trustee pursuant to the Trust Agreement, any amounts due and owing to the Insurer, and any other Additional Payments due under the Lease. THE ASSIGNMENT AGREEMENT The Assignment Agreement provides for the transfer, assignment and setting over by the Corporation to the Trustee, for the benefit of the Owners of Certificates, all of the Corporation s rights under the Lease (excepting only the Corporation s rights to recover attorneys fees and expenses in the event the Corporation is a non-defaulting party to a Lease after a default), including, without limitation, (1) the right to receive and collect all of the Lease Payments, Additional Payments, Prepayments and Reserve Replenishment Rent from the District under the Lease; (2) the right to receive and collect any proceeds of any insurance maintained pursuant to the Lease, or any condemnation award rendered with respect to the Property or any lease of the Property in the event of a default by the District under the Lease; (3) the right to take all actions and give all consents under the Lease; (4) the right to exercise such rights and remedies conferred on the Corporation under the Lease as may be necessary or convenient (a) to enforce payment of the Lease Payments, Additional A-28

97 Payments, Prepayments, Reserve Replenishment Rent, and any other amounts required to be deposited in the Lease Payment Fund, the Prepayment Fund, the Reserve Fund, the Net Proceeds Fund or any other fund established under the Trust Agreement, or (b) otherwise to protect the interests of the Corporation in the event of a default by the District under the Lease; and (5) the right of the Corporation be paid its fees and expenses for re-leasing the Property upon events of default under the Lease. The Trustee accepts such assignment for the benefit of the Owners of the Certificates, subject to the provisions of the Trust Agreement. THE SITE LEASE Pursuant to the Site Lease, the District, as lessor, leases to the Corporation, as lessee, right, title and interest in the Property. The term of the Site Lease will commence as of the date of the Lease to the Site Lease and will remain in effect until the expiration of the term of such Lease. The Property will be simultaneously leased back to the District under the Lease, and title will remain in the District. A-29

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99 APPENDIX B CITY OF HEMET AND RIVERSIDE COUNTY GENERAL ECONOMIC DATA The following information concerning the City of Hemet ( Hemet ), the County of Riverside (the County ) and the State of California (the State ) are presented as general background information. The Certificates are not an obligation of Hemet, the County or the State and the taxing the power of Hemet, the County and the State are not pledged to the payment of the Certificates. General Hemet is located in Western Riverside County 88 miles southeast of Los Angeles along California State Highway 74. Hemet is approximately square miles in area. Incorporated on January 20, 1910, Hemet operates as a general law city. It has a council-manager form of government, with the five City Council members elected at large for staggered four-year terms. The City Council elects one of the Council members as Mayor. Hemet provides police protection, fire protection, building safety regulation and inspection, street lighting, beautification, refuse collection, land use planning, and zoning, housing and community services, maintenance and improvement of streets and related structures, traffic safety maintenance and improvement and recreational and cultural programs for citizen participation. Population The following table offers population figures for Hemet, the County and the State as of January 1 for the years 2012 through Area City of Hemet 80,330 80,899 81,537 79,548 80,070 County of Riverside 2,234,209 2,255,653 2,279,967 2,317,924 2,347,828 State of California 37,668,804 37,984,138 38,340,074 38,907,642 39,255,883 Source: State of California, Department of Finance E-4 Population Estimates for Cities, Counties and State, , with 2010 Benchmark, Sacramento, California, May B-1

100 Construction Activity The following table shows building permit valuations and new housing units in Hemet for 2011 through CITY OF HEMET Building Permit Valuation and New Housing Units (1) Residential Single Family $ 15,970,225 $ 6,186,733 $ 27,202,113 $ 32,171,013 $ 21,147,125 Multi-Family Alteration/Additions 28,469, ,877 1,885, ,089 5,242,189 Total $ 44,439,697 $ 6,862,610 $ 29,087,891 $ 33,082,102 $ 26,389,314 Non-Residential New Commercial $ 0 $ 0 $ 1,799,676 $ 5,300,000 $ 1,956,000 New Industry ,000 Other (1) 1,113,700 3,347,000 9,304,902 2,307,920 43,829,122 Alteration/Additions 8,275, ,000 6,749,555 5,016,753 8,365,745 Total $ 9,389,473 $ 4,267,000 $ 17,854,133 $ 12,624,673 $ 54,185,867 Total All Industry $ 53,829,170 $ 11,129,610 $ 46,942,024 $ 45,706,775 $ 80,575,181 New Housing Units Single Family Units Multi-Family Units Total Includes churches and religious building, hospitals and institutional buildings, schools and educational buildings, residential garages, public works and utilities buildings and non-residential alterations and additions. Source: California Homebuilding Foundation/Construction Industry Research Board B-2

101 Employment The following tables set forth the major employers located in the City. CITY OF HEMET PRINCIPAL EMPLOYERS June 30, 2015 Company Name No. of Employees Type of business or entity Hemet Unified School District 3,642 Education Physicians For Health Hospitals 1,220 Healthcare Horizon Solar 650 Solar Energy County of Riverside 500* Government Gosch Ford, Toyota, Hyundai & Inland Chevrolet 380 Automobile TE Connectivity 377 Electronics Walmart Supercenter 310 Retail Manorcare Health Services 297 Healthcare City of Hemet 280 Government Stater Bros 219 Retail Village Healthcare Retirement 217 Healthcare * Estimate from prior year. Source: City of Hemet, Comprehensive Annual Financial Report for the year ended June 30, B-3

102 Employment and Industry Employment data by industry is not separately reported on an annual basis for Hemet but is compiled for the Riverside-San Bernardino-Ontario Metropolitan Statistical Area (the MSA ), which includes all of Riverside and San Bernardino Counties. In addition to varied manufacturing employment, the MSA has large and growing commercial and service sector employment, as reflected in the table below. The following table represents the Annual Average Labor Force and Industry Employment for the MSA for the years 2011 through RIVERSIDE-SAN BERNARDINO-ONTARIO MSA INDUSTRY EMPLOYMENT & LABOR FORCE - BY ANNUAL AVERAGE Civilian Labor Force 1,867,000 1,882,200 1,897,700 1,927,600 1,961,800 Civilian Employment 1,623,800 1,665,100 1,711,000 1,771,700 1,832,300 Civilian Unemployment 243, , , , ,500 Civilian Unemployment Rate 13.0% 11.5% 9.8% 8.1% 6.6% Total Farm 14,900 15,000 14,500 14,400 15,100 Total Nonfarm 1,154,500 1,185,200 1,233,300 1,289,300 1,347,400 Total Private 927, ,600 1,008,100 1,060,500 1,114,000 Goods Producing 145, , , , ,100 Mining & Logging 1,000 1,200 1,200 1,300 1,300 Construction 59,100 62,600 70,000 77,600 85,200 Manufacturing 85,100 86,700 87,300 91,300 95,600 Service Providing 1,009,300 1,034,700 1,074,700 1,119,100 1,165,200 Trade, Transportation & Utilities 276, , , , ,500 Wholesale Trade 49,200 52,200 56,400 58,900 61,700 Retail Trade 158, , , , ,500 Transportation, Warehousing & 67,900 73,000 78,400 86,600 97,300 Utilities Information 12,200 11,700 11,500 11,300 11,300 Financial Activities 39,500 40,200 41,300 42,300 43,200 Professional & Business Services 126, , , , ,400 Educational & Health Services 165, , , , ,000 Leisure & Hospitality 124, , , , ,500 Other Services 39,100 40,100 41,100 43,000 44,000 Government 227, , , , ,400 Total, All Industries 1,169,400 1,200,200 1,247,800 1,303,700 1,362,400 Note: Does not include proprietors, self-employed, unpaid volunteers or family workers, domestic workers in households and persons involved in labor-management trade disputes. Employment reported by place of work. Items may not add to total due to independent rounding. The Total, All Industries data is not directly comparable to the employment data found in this Appendix C. Source: State of California, Employment Development Department, Riverside San Bernardino Ontario MSA Industry Employment & Labor Force - by Annual Average, March 2015 Benchmark B-4

103 The following table summarizes the labor force, employment and unemployment figures over the past five years for Hemet, the County, the State and the nation as a whole. CITY OF HEMET, COUNTY OF RIVERSIDE, STATE OF CALIFORNIA AND UNITED STATES Average Annual Civilian Labor Force, Employment and Unemployment Labor Force Employment (1) Unemployment (2) Rate (3) Unemployment 2011 City of Hemet 27,600 22,800 4, % Riverside County 939, , , California 18,415,100 16,258,100 2,157, United States (4) 153,617, ,869,000 13,747, City of Hemet 27,600 23,300 4, % Riverside County 944, , , California 18,551,400 16,627,800 1,923, United States (4) 154,975, ,469,000 12,506, City of Hemet 27,700 24,100 3, % Riverside County 953, ,300 97, California 18,670,100 17,001,000 1,669, United States (4) 155,389, ,929,000 11,460, City of Hemet 28,600 25,400 3, % Riverside County 1,011, ,200 83, California 18,827,900 17,418,000 1,409, United States (4) 155,922, ,305,000 9,617, City of Hemet 28,900 26,200 2, % Riverside County 1,035, ,500 69, California 18,981,800 17,798,600 1,183, United States (4) 157,130, ,834,000 8,296, (1) Includes persons involved in labor-management trade disputes. (2) Includes all persons without jobs who are actively seeking work. (3) The unemployment rate is computed from unrounded data; therefore, it may differ from rates computed from rounded figures in this table. (4) Not strictly comparable with data for prior years. Source: California Employment Development Department, March 2015 Benchmark and U.S. Department of Labor, Bureau of Labor Statistics. B-5

104 Personal Income Personal income is the income that is received by all persons from all sources. It is calculated as the sum of wage and salary disbursements, supplements to wages and salaries, proprietors income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustment, personal dividend income, personal interest income, and personal current transfer receipts, less contributions for government social insurance. The personal income of an area is the income that is received by, or on behalf of, all the individuals who live in the area; therefore, the estimates of personal income are presented by the place of residence of the income recipients. Total personal income in the County increased by 62.9% between 2003 and The following tables summarize personal income for the County for 2003 through 2014, the latest year for which such information is available. Year PERSONAL INCOME Riverside County (Dollars in Thousands) Annual Riverside County Percent Change ,030, ,733, ,179, ,791, ,545, ,450, ,119,679 (3.5) ,532, ,531, ,303, ,657, ,239, Source: U.S. Department of Commerce, Bureau of Economic Analysis. B-6

105 The following tables summarizes per capita personal income for the County, the State of California and the United States for the years 2003 through This measure of income is calculated as the personal income of the residents of the area divided by the resident population of the area. PER CAPITA PERSONAL INCOME Riverside County, State of California and the United States Year Riverside County California United States 2003 $27,111 $35,381 $32, ,404 37,244 34, ,599 39,046 35, ,203 41,693 38, ,586 43,182 39, ,497 43,786 41, ,869 41,588 39, ,753 42,411 40, ,073 44,852 42, ,879 47,614 44, ,503 48,125 44, ,590 49,985 46,049 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Commercial Activity A summary of taxable sales within the City for years 2010 through 2014 are shown in the following tables. Year Retail and Food Permits TAXABLE SALES City of Hemet (Dollars in Thousands) Retail and Food Taxable Transactions Total Permits Total Outlets Taxable Transactions $698, $178, , ,862 1, , , ,242 1, , ,983 1, , , ,493 1, ,533 Source: Taxable Sales in California (Sales & Use Tax) - California State Board of Equalization. B-7

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107 APPENDIX C PROPOSED FORM OF OPINION OF SPECIAL COUNSEL, 2016 Honorable Members of the Governing Board Hemet Unified School District Hemet, California Re: $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Federally Taxable) Dear Honorable Members of the Governing Board: We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the Hemet Unified School District (the District ) in connection with the authorization, execution and delivery by the District of that certain Lease Agreement, dated as of September 1, 2016 (the Lease ), by and between the Hemet Unified School District Facilities Financing Corporation (the Corporation ) and the District. We have also reviewed that certain Trust Agreement, dated as of September 1, 2016 (the Trust Agreement ), by and among U.S. Bank National Association, as trustee (the Trustee ), the Corporation and the District. All capitalized terms used herein shall have the meaning given them in the Trust Agreement unless otherwise defined. Pursuant to the Trust Agreement, the Trustee will execute and deliver the $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) (the Series A Certificates ) and the $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Federally Taxable) (the Series B Certificates, and with the Series A Certificates, the Certificates ). The Series A Certificates evidence undivided proportionate interests of the owners of the Series A Certificates in the Series A Lease Payments to be made by the District pursuant to the Lease and the Series B Certificates evidence undivided proportionate interests of the owners of the Series B Certificates in the Series B Lease Payments to be made by the District pursuant to the Lease. Pursuant to that certain Assignment Agreement, dated as of September 1, 2016 (the Assignment Agreement ), the Corporation has assigned to the Trustee the Corporation s right to receive Lease Payments and certain other rights of the District under the Lease. The Certificates are dated their date of delivery. The Certificates mature on the dates and in the amounts set forth in the Trust Agreement. Interest due with respect to the Certificates is payable on the dates and at the rates per annum set forth in the Trust Agreement. The Certificates are registered Certificates in the form set forth in the Trust Agreement and are subject to prepayment prior to maturity in the manner and upon the terms set forth in the Trust Agreement. In rendering the opinions set forth below, we have examined certified copies of the proceedings of the District and the Corporation, and other information submitted to us relative to the execution and delivery of the Certificates. We have examined originals, or copies identified to our satisfaction as being true copies, of the Trust Agreement, the Lease, the Tax Certificate relating to the Series A Certificates, the resolutions of the District and the Corporation adopted with respect to the Certificates, and such other documents, agreements, C-1

108 opinions and matters as we have considered necessary or appropriate under the circumstances to render the opinions set forth herein. We have assumed the genuineness of all documents and signatures presented to us, the authenticity of documents submitted as originals and the conformity to originals of documents submitted as copies. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in the preceding paragraph of this opinion. Furthermore, we have assumed compliance with all covenants and agreements contained in the Trust Agreement, the Lease and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest due with respect to the Series A Certificates to be included in gross income for federal income tax purposes. Based upon our examination of the foregoing, and in reliance thereon and on all matters of fact as we deem relevant under the circumstances, and upon consideration of applicable laws, we are of the opinion that: (1) The obligation of the District to pay Lease Payments in accordance with the terms of the Lease is a valid and binding obligation payable from the funds of the District lawfully available therefor, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against school districts in the State of California. The obligation of the District to make Lease Payments under the Lease does not constitute a debt of the District, the State of California or any political subdivision thereof within the meaning of any statutory or constitutional debt limitation or restriction and does not constitute a pledge of the faith and credit or taxing power of the District, the State of California or any political subdivision thereof. (2) The Site Lease, the Lease and the Trust Agreement have been duly authorized, executed and delivered by the District and constitute valid and legally binding agreements of the District enforceable against the District in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against school districts in the State of California, except that we express no opinion as to any provisions in the Lease or the Trust Agreement with respect to indemnification, penalty, contribution, choice of law, choice of forum or waiver provisions contained therein. (3) Under existing statutes, regulations, rulings and judicial decisions, interest (and original issue discount) with respect to the Series A Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, any such interest (and original issue discount) may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of corporations. Interest on the Series B Certificate is not excluded from gross income for federal income tax purposes. (4) Interest (and original issue discount) with respect to the Certificates is exempt from personal income taxes imposed in the State of California. (5) The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity is to be sold to the public) and the stated payment price at maturity with respect to such Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Certificate owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Certificate owner will increase the Certificate owner s basis in the applicable Certificate. Original issue C-2

109 discount that accrues for the Series A Certificate owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals or corporations (as described in paragraph (3) above) and is exempt from State of California personal income tax. (6) The amount by which a Certificate owner s original basis for determining loss on sale or exchange in the applicable Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Certificate premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the Code ), by owners of the Series A Certificates and which may at the election of the owners of the Series B Certificates be amortized under Section 171 of the Code. With respect to the Series A Certificates, such amortizable premium reduces the Series A Certificate owner s basis in the applicable Series A Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. With respect to the Series B Certificates, such amortizable premium reduces the owner s basis in the applicable Series B Certificates (and the amount of taxable interest received) and is deductible for federal income tax purposes. The basis reduction as a result of the amortization of Certificate premium may result in a Certificate owner realizing a taxable gain when a Certificate is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the owner. The opinions expressed in paragraphs (3) and (5) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Series A Certificates are subject to the condition that the District complies with all requirements of the Code that must be satisfied subsequent to the execution and delivery of the Series A Certificates to assure that such interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) with respect to the Series A Certificates to be included in gross income for federal income tax purposes retroactive to the date of delivery of the Series A Certificates. The District has covenanted to comply with all such requirements. Except as set forth in paragraphs (3), (4), (5) and (6) above, we express no opinion as to any tax consequences related to the Certificates. Certain agreements, requirements and procedures contained or referred to in the Trust Agreement, the Tax Certificate executed by the District and other documents related to the Certificates may be changed and certain actions may be taken or omitted, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. We express no opinion as to the effect on the exclusion from gross income for federal income tax purposes of the portion of each Series A Certificate constituting interest if any such change occurs or action is taken or omitted upon advice or approval of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. We have not made or undertaken to make an investigation of the state of title to any of the real property described in the Lease, the Site Lease and the Assignment Agreement or of the accuracy or sufficiency of the description of such property contained therein, and we express no opinion with respect to such matters. Our opinion is limited to matters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction. The opinions expressed herein are based upon our analysis and interpretation of existing statutes, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken (or not taken) or do occur (or do not occur). Our engagement as Special Counsel terminates upon the execution and delivery of the Certificates. C-3

110 We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Certificates or other offering material relating to the Certificates and expressly disclaim any duty to advise the owners of the Certificates with respect to matters contained in the Official Statement. Respectfully submitted, C-4

111 APPENDIX D DISTRICT S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015 D-1

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113 HEMET UNIFIED SCHOOL DISTRICT ANNUAL FINANCIAL REPORT JUNE 30, 2015

114 HEMET UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2015 FINANCIAL SECTION Independent Auditor's Report 2 Management's Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 18 Statement of Activities 19 Fund Financial Statements Governmental Funds - Balance Sheet 20 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 21 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balances 23 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 24 Proprietary Fund - Statement of Net Position 26 Proprietary Fund - Statement of Revenues, Expenses, and Changes in Fund Net Position 27 Proprietary Fund - Statement of Cash Flows 28 Fiduciary Funds - Statement of Net Position 29 Notes to Financial Statements 30 REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 84 Schedule of Other Postemployment Benefits (OPEB) Funding Progress 85 Schedule of the District's Proportionate Share of the Net Pension Liability 86 Schedule of the District Contributions 87 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 89 Local Education Agency Organization Structure 91 Schedule of Average Daily Attendance 92 Schedule of Instructional Time 94 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements 96 Schedule of Financial Trends and Analysis 97 Schedule of Charter Schools 98 Combining Statements - Non-Major Governmental Funds Combining Balance Sheet 99 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 100 Note to Supplementary Information 101 INDEPENDENT AUDITOR'S REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 104 Report on Compliance for Each Major Program and Report on Internal Control Over Compliance Required by OMB Circular A Report on State Compliance 108

115 HEMET UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2015 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditor's Results 112 Financial Statement Findings 113 Federal Awards Findings and Questioned Costs 114 State Awards Findings and Questioned Costs 115 Summary Schedule of Prior Audit Findings 116 Management Letter 117

116 FINANCIAL SECTION 1

117 INDEPENDENT AUDITOR'S REPORT Governing Board Hemet Unified School District Hemet, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the Hemet Unified School District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, issued by the California Education Audit Appeals Panel as regulations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 2

118 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the Hemet Unified School District, as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Change in Accounting Principles As discussed in Notes 1 and 16 to the financial statements, in 2015, the District adopted new accounting guidance, GASB Statement No. 68, Accounting and Financial Reporting for Pensions, and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the required supplementary information, such as management's discussion and analysis on pages 5 through 17, the budgetary comparison, other postemployment benefit information, District's proportionate share of the net pension liability, and the District contributions on pages 84 through 87, respectively, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Hemet Unified School District's basic financial statements. The accompanying supplementary information such as the combining and individual nonmajor fund financial statements and Schedule of Expenditures of Federal Awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations and the other supplementary information as listed on the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 3

119 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 11, 2015, on our consideration of the Hemet Unified School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Hemet Unified School District's internal control over financial reporting and compliance. Rancho Cucamonga, California December 11,

120 Dr. Barry L. Kayrell Superintendent This section of Hemet Unified School District's (the District) ( ) annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, 2015, with comparative information from Please read it in conjunction with the District's financial statements, which immediately follow this section. Dr. LaFaye Platter Deputy Superintendent Dr. David Horton Assistant Superintendent Vince Christakos Assistant Superintendent Professional Development Service Center 1791 W. Acacia Avenue Hemet, CA (951) Fax: (951) Professional Development Academy 2085 W. Acacia Avenue Hemet, CA (951) Fax: (951) OVERVIEW OF THE FINANCIAL STATEMENTS The Financial Statements The financial statements presented herein include all of the activities of the District and its component units using the integrated approach as prescribed by Government Accounting Standards Board (GASB) Statement No 34. The Government-Wide Financial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting. These statements include all assets of the District as well as all liabilities (including long-term obligations). Additionally, certain eliminations have occurred as prescribed by the statement in regards to interfund activity, payables, and receivables. Governmental Activities are prepared using the economic resources measurement focus and the accrual basis of accounting. The Business-Type Activities are prepared using the economic resources measurement focus and the accrual basis of accounting. The Fund Financial Statements include statements for each of the three categories of activities: governmental, proprietary, and fiduciary. The Governmental Funds are prepared using the current financial resources measurement focus and modified accrual basis of accounting. The Proprietary Funds are prepared using the economic resources measurement focus and the accrual basis of accounting. Governing Board Marilyn Forst Megan Haley Vic Scavarda Patrick Searl James Smith Ross Valenzuela Joe Wojcik The Fiduciary Funds are agency funds, which only report a balance sheet and do not have a measurement focus. Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach. The Primary unit of the government is the Hemet Unified School District. 5

121 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Figure 1 Organization of Hemet Unified School District's Annual Financial Report Management's Discussion and Analysis Basic Financial Statements District-wide Financial Statements Fund Financial Statements Notes to the Financial Statements FINANCIAL HIGHLIGHTS OF THE PAST YEAR Total net position decreased by $187.2 million or 63 percent over the prior year for a new net position of $104.7 (page 12). Pension liabilities in the amount of $146.7 million were reported as reduction to the net for the period ending June 30, 2015, and were included for the first time in the District's annual financial report as both a liability and as a restated item in the District's net position (page 11). Revenues, transfers in, and other financing sources for all funds, including bond issuances, totaled $394.6 million (page 22). Expenses, transfers out and other uses totaled $386.0 million. The General Fund audited ending balance, which includes a balance in Fund 20 - Special Reserve for Post-Employment Benefits, decreased by $10.9 million from the prior year. The combined ending balance in the General Fund and Fund 20 as of June 30, 2015 was $24.6 million General Obligation Bonds were issued in the amount of $49.0 million. Capital lease agreements totaling $4.1 million were also issued in under the District's Enterprise Fund for transportation services, and $0.4 million in capital leases were issued under the District's General Fund. All capital leases were for the purchase of buses and other vehicles. The District's P-2 Average Daily Attendance (ADA), excluding charter schools and students in County programs, was reported at 19,656, a drop of 168 from the prior year. The District filed a positive status with both its First and Second Interim reports in

122 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Figure 2 summarizes the District's Combined General Fund activities, including activity reported in Funds 17- Special Reserve for Other Than Capital Outlay and Fund 20- Reserve for Post-Employment Benefits, for the fiscal year. The District's total General Fund revenues as of June 30, 2015, were $197.8 million. Final expenditures were $205.2 million. Other financial activities reduced the General Fund ending balance by $3.5 million and include transfers in to other funds, transfers out to other funds, and other financing sources/uses. The June 30, 2015 ending fund balance for the combined General Fund was $24.6 million, included $1.5 million reserved in Fund 20 for other postemployment benefit costs. Figure 2 Combined General Fund and Fund 20 Audited Actuals (a) Total Revenues $197.8 (b) Total Expenditures $205.2 (c) Other Financial Activities ($ 3.5) Net Increase/(Decrease) a-b+c ($ 10.9) Available Fund Balance $ 24.6 REVENUE SUMMARY The Local Control Funding Formula (LCFF) generated $151.6 million or 77.0 percent of the District's $197.8 million combined General Fund revenues for the fiscal year. As shown in Figure 3, Average Daily Attendance (ADA) remained essentially unchanged from the prior year P-2 ADA Figure P-2 ADA P-2 ADA Difference Adjusted ADA for LCFF K-12 ADA 19,824 19, ,796 Charters N/A 7

123 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 LCFF, Federal, Other State, and Local Revenues Including on behalf contributions from the State for CalSTRS and CalPERS, combined General Fund LCFF, Federal, other State, and local revenues at year-end was $197.8 million or 10.4 percent more than the prior year's total of $179.3 million. EXPENDITURE SUMMARY Salaries and Benefits Salaries and benefits represent a substantial percentage of all District expenditures. In , salaries and benefits accounted for nearly 80.0 percent of all combined General Fund expenditures. General Fund salaries and benefit costs totaled $169.2 million, including on behalf payments to CalSTRS/CalPERS. Salaries and benefits costs increased 13.4 percent over the prior year due to salary increases and added staff. 8

124 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Operating Expenditures At the close of the fiscal year, combined General Fund expenses in the books and supplies category totaled $11.9 million which was $2.8 million more than reported for the prior year. Services and other operating expenses, which include consultants, maintenance contracts, legal fees, and utilities, ended the year at amounted to $20.6 million or approximately $2.8 million more than was spent in this category in Capital Outlay costs for the year ending June 30, 2015 totaled $2.7 million which was more than twice the amount spent on capital equipment in the prior year. Increases in this area were related to the purchase of buses for expended transportation services and construction of modular office space for technology and special education staff. 9

125 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 DISTRICT-WIDE STATEMENTS The Statement of Net Position and the Statement of Activities The Statement of Net Position and the Statement of Activities report information about the District as a whole and about its activities. These statements include all assets and liabilities of the District using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the District's net position and changes in them. Net position is the difference between assets and deferred outflows of resources, and liabilities and deferred inflows of resources, which is one way to measure the District's financial health, or financial position. Over time, increases or decreases in the District's net position will serve as a useful indicator of whether the financial position of the District is improving or deteriorating. The relationship between revenues and expenses is the District's operating results. Since the Board's responsibility is to provide services to our students and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District. The quality of the education and the safety of our schools will likely be an important component in this evaluation. In the Statement of Net Position and the Statement of Activities, we separate the District activities as follows: Governmental Activities - Most of the District's services are reported in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development activities, and the on-going effort to improve and maintain buildings and sites. Property taxes, State income taxes, user fees, interest income, Federal, State and local grants, as well as certificates of participation, finance these activities. Business-Type Activities - The District charges fees to help it cover the costs of certain services it provides. The District's transportation operations are included in this category. 10

126 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 REPORTING THE DISTRICT'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds - not the District as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. Department of Education. Governmental Funds - The District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The differences of results in the governmental fund financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. Proprietary Funds - When the District charges users for the services it provides, whether to outside customers or to other departments within the District, these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Fund Net Position. We use internal service funds to report activities that provide supplies and services for the District's other programs and activities - such as the District's Self-Insurance Fund and Transportation (Enterprise Fund). The internal service funds are reported with governmental activities in the government-wide financial statements. THE DISTRICT AS TRUSTEE Reporting the District's Fiduciary Responsibilities The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities. The District's fiduciary activities are reported in separate Statements of Fiduciary Net Position. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. 11

127 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net Position The District's net position was $98.1 million for the fiscal year ended June 30, Restricted net position is reported separately to show legal constraints from debt covenants, grantors, constitutional provisions, and enabling legislation that limit the governing board's ability to use net position for day-to-day operations. Our analysis below, in summary form, focuses on the net position (Table 1) and change in net position (Table 2) of the District's governmental and business-type activities. Table 1 Governmental Business-Type School District (Amounts in millions) Activities Activities Activities (As Restated) (As Restated) Assets Current and other assets $ $ $ 4.9 $ 1.4 $ $ Capital assets Total Assets Deferred Outflows of Resources Liabilities Current liabilities Long-term obligations Aggregate net pension liability Total Liabilities Deferred Inflows of Resources Net Position Net investment in capital assets Restricted Unrestricted (159.2) (151.5) - - (159.2) (151.5) Total Net Position $ 98.1 $ $ 6.6 $ 2.7 $ $

128 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Changes in Net Position The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 19. Table 2 takes the information from the Statement for the year. Table 2 Governmental Business-Type School District (Amounts in millions) Activities Activities Activities Revenues Program Revenues: Charges for services $ 10.5 $ 1.2 $ 16.7 $ 12.6 $ 27.2 $ 13.8 Operating grants and contributions Capital grants and contributions General Revenues: Federal and State aid Property taxes Other general revenues Total Revenues Expenses Instruction-related Pupil services Administration Plant services Ancillary Other Total Expenses Transfers (1.1) - - Change in Net Position $ (22.4) $ (5.9) $ 3.9 $ 2.7 $ (18.5) $ (3.2) Governmental Activities As reported in the Statement of Activities on page 19, the cost of all governmental activities in was $259.9 million. The amount that our taxpayers ultimately financed for these activities through local taxes was $37.1 million. The remaining cost of was paid by those who benefited from the programs $10.5 million or by other governments and organizations who subsidized certain programs with $57.2 million in grants and contributions. The remaining "public benefit" portion of our governmental activities were paid with $100.0 million in Federal and State aid and $32.7 million with other General Fund revenue sources such as interest and general entitlements. 13

129 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 In Table 3, we have presented the cost of each of the District's largest functions - instruction, instruction-related activities, pupil services, administration, plant services, ancillary services, and other activities, as well as each program's net cost (total cost less revenues generated by the activities). As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits provided by that function. Table 3 (Amounts in millions) Total Cost of Services Total Net Cost of Services Instruction $ $ $ $ Instruction-related activities Pupil services Administration Plant services Ancillary services Other Total $ $ $ $ THE DISTRICT'S FUNDS Upon completion of the fiscal year, the District's governmental funds reported a combined fund balance of $86.7 million, an increase of $8.6 million from (Table 4). Table 4 (Amounts in millions) Balances and Activity July 1, 2014 Revenues Expenditures June 30, 2015 General Fund $ 35.5 $ $ $ 24.6 Building Fund Bond Interest and Redemption Fund Non-Major Governmental Funds Total $ 78.1 $ $ $ 86.7 General Fund Budgetary Highlights Over the course of the year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on September 15, (A schedule showing the District's original and final budget amounts compared with amounts actually paid and received is provided in this annual financial report on page 84.) 14

130 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2015, the District had $452.9 million in a broad range of capital assets (net of depreciation), including land, construction, buildings, and furniture and equipment. This amount represents a net decrease (including additions, deductions, and depreciation) of $1.7 million, or 0.37 percent, over the prior year (Table 5). Table 5 (Amounts in millions) Governmental Activities Business-Type Activities School District Activities Land $ 24.7 $ 24.7 $ - $ - $ 24.7 $ 24.7 Construction in progress Buildings and improvements Equipment Total $ $ $ 7.2 $ 4.4 $ $ This year's additions totaled $14.1 million, with the majority of expenses related to the capital facilities improvement project at Acacia Middle and additional bus purchases. The District's capital assets additions, deletions, and balances are presented in Note 4 in these financial statements. Capital projects planned for the year include a modernization project at Acacia Middle school, preliminary planning for construction of a school to replace Hemet Elementary, and miscellaneous small projects at other district schools. 15

131 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Long-Term Obligations At June 30, 2015, the District had $240.5 million in general obligation bonds, bond anticipation notes, and certificates of participation outstanding compared to $214.6 million in June 30, 2014, an increase of $25.9 million, or 12.1 percent. Other obligations consisted of those items listed in Table 6 below. Governmental Activities Table 6 Business-Type Activities School District Activities (Amounts in millions) (As Restated) General obligation bonds $ $ $ - $ - $ $ Bond anticipation notes Certificates of participation Lease revenue bonds Capital leases Accumulated vacation SERP Claims liability Net OPEB obligation Total $ $ $ 5.3 $ 2.7 $ $ Other obligations include compensated absences payable, postemployment benefits (not including health benefits), capital leases, and other long-term obligations. We present more detailed information regarding our long-term obligations in Note 8 of the financial statements. Net Pension Liability (NPL) At year-end, the District had a pension liability of $146.7 million, as a result of the adoption of GASB Statement No. 68, Accounting and Financial Reporting for Pensions. The District therefore recorded its proportionate share of net pension liabilities for CalSTRS and CalPERS. 16

132 HEMET UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Table 7 lists the District's budget assumptions. These assumptions were based on the most current information available to the District at the time the budget was adopted in June Budgetary goals were developed and prioritized by the District's leadership team and governing board. Input provided by these two groups was used as the framework to develop the District's budget, which includes site and department allocations for both staffing and operating budgets Budget Assumptions Table 7 Cost of Living Adjustment (COLA) (applied to LCFF targeted base) 1.02% Enrollment (excluding charters) 21,045 Enrollment Growth (Decline) 228 ADA Average Daily Attendance 19,781 ADA Funded 19,781 ADA Percentage 94.0% Salary Increase 2.0% Step and Column Percent of Salaries 1.00% Deferred/Routine Maintenance - Percent of Total Expenditures 3.00% New Schools/(School Closures) 1 Reserve for Economic Uncertainties 5.00% CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, investors, and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need any additional information contact the Assistant Superintendent, Business Services, at Hemet Unified School District, 1791 West Acacia Avenue, Hemet, California, , or at: vchristakos@hemetusd.k12.ca.us. 17

133 HEMET UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2015 Governmental Business-Type Activities Activities Total ASSETS Deposits and investments $ 93,106,984 $ 973,197 $ 94,080,181 Receivables 10,537,501 5,748,966 16,286,467 Internal balances 1,823,548 (1,823,548) - Stores inventories 651, ,816 Capital assets Land and construction in process 55,657,498-55,657,498 Other capital assets 536,831,346 12,263, ,094,394 Less: Accumulated depreciation (146,842,367) (5,016,076) (151,858,443) Total Capital Assets 445,646,477 7,246, ,893,449 TOTAL ASSETS 551,766,326 12,145, ,911,913 DEFERRED OUTFLOWS OF RESOURCES Net change in proportionate share of net pension liability 3,745,378-3,745,378 Current year pension contribution 13,277,739-13,277,739 TOTAL DEFERRED OUTFLOWS OF RESOURCES 17,023,117-17,023,117 LIABILITIES Accounts payable 6,750, ,353 6,947,424 Accrued interest payable 3,599,402-3,599,402 Unearned revenue 303, ,868 Claims liabilities 1,850,573-1,850,573 Long-term obligations Current portion of long-term obligations other than pensions 9,121,512 1,153,953 10,275,465 Noncurrent portion of long-term obligations other than pensions 262,314,919 4,157, ,472,103 Total Long-Term Obligations 271,436,431 5,311, ,747,568 Aggregate net pension liability 146,735, ,735,107 TOTAL LIABILITIES 430,675,452 5,508, ,183,942 DEFERRED INFLOWS OF RESOURCES Difference between projected and actual earnings on pension plan investments 40,031,645-40,031,645 NET POSITION Net investment in capital assets 229,465,458 1,935, ,401,293 Restricted for: Debt service 13,708,445-13,708,445 Capital projects 7,532,832-7,532,832 Educational programs 1,243,082-1,243,082 Other activities 5,327,158-5,327,158 Unrestricted (159,194,629) 4,701,262 (154,493,367) TOTAL NET POSITION $ 98,082,346 $ 6,637,097 $ 104,719,443 The accompanying notes are an integral part of these financial statements. 18

134 HEMET UNIFIED SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Program Revenues Charges for Operating Capital Services and Grants and Grants and Functions/Programs Expenses Sales Contributions Contributions Governmental Activities: Instruction $ 148,293,809 $ 66,960 $ 20,201,199 $ 12,547,740 Instruction-related activities: Supervision of instruction 8,870,112 7,973 5,693,163 - Instructional library, media and technology 1,514, ,979 - School site administration 16,661,064 3, ,239 - Pupil services: Home-to-school transportation 4,967,080 8,377,365 1,728,141 - Food services 12,169, ,203 8,330,721 - All other pupil services 14,032,158 3,953 3,881,679 - Administration: Data processing 3,331, ,777 - All other administration 10,280, ,093 1,696,742 - Plant services 20,820,273 42, ,036 - Ancillary services 1,949, ,829 - Community services 116, Enterprise services 51, Interest on long-term obligations 16,348, Other outgo 491, ,257 1,274,592 - Total Governmental Activities 259,898,308 10,539,637 44,671,097 12,547,740 Business-Type Activities Transportation 12,773,781 16,718, Total School District $ 272,672,089 $ 27,257,885 $ 44,671,097 $ 12,547,740 General Revenues and Subventions: Property taxes, levied for general purposes Property taxes, levied for debt service Taxes levied for other specific purposes Federal and State aid not restricted to specific purposes Interest and investment earnings Transfers between agencies Miscellaneous Subtotal, General Revenues Excess of Revenues Over Expenses Transfers between funds Total General Revenues and Transfers Change in Net Position Net Position - Beginning Restatement Net Position - Beginning (As Restated) Net Position - Ending The accompanying notes are an integral part of these financial statements. 19

135 Net (Expenses) Revenues and Changes in Net Position Business- Governmental Type Activities Activities Total $ (115,477,910) $ - $ (115,477,910) (3,168,976) - (3,168,976) (717,481) - (717,481) (16,177,393) - (16,177,393) 5,138,426-5,138,426 (2,969,195) - (2,969,195) (10,146,526) - (10,146,526) (3,328,636) - (3,328,636) (8,042,104) - (8,042,104) (20,206,764) - (20,206,764) (1,934,648) - (1,934,648) (116,917) - (116,917) (51,807) - (51,807) (16,348,742) - (16,348,742) 1,408,839-1,408,839 (192,139,834) - (192,139,834) - 3,944,467 3,944,467 (192,139,834) 3,944,467 (188,195,367) 24,272,300-24,272,300 10,203,248-10,203,248 2,605,876-2,605,876 99,951,470-99,951, ,315 4, ,598 2,316,905-2,316,905 30,228,536-30,228, ,693,650 4, ,697,933 (22,446,184) 3,948,750 (18,497,434) 34,000 (34,000) - (22,412,184) 3,914,750 (18,497,434) 289,073,154 2,722, ,795,501 (168,578,624) - (168,578,624) 120,494,530 2,722, ,216,877 $ 98,082,346 $ 6,637,097 $ 104,719,443 19

136 HEMET UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2015 Bond Interest General Building and Redemption Fund Fund Fund ASSETS Deposits and investments $ 20,941,650 $ 23,999,587 $ 12,862,289 Receivables 8,930,432 12,098 - Due from other funds 813, Stores inventories 220, Total Assets $ 30,906,091 $ 24,011,685 $ 12,862,289 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 5,067,715 $ 7,774 $ - Due to other funds 991,466 2,054 - Unearned revenue 261, Total Liabilities 6,320,667 9,828 - Fund Balances: Nonspendable 245, Restricted 1,164,301 24,001,857 12,862,289 Committed 1,509, Assigned 11,176, Unassigned 10,489, Total Fund Balances 24,585,424 24,001,857 12,862,289 Total Liabilities and Fund Balances $ 30,906,091 $ 24,011,685 $ 12,862,289 The accompanying notes are an integral part of these financial statements. 20

137 Non-Major Governmental Funds Total Governmental Funds $ 24,380,256 $ 82,183,782 1,585,232 10,527, ,383 1,791, , ,816 $ 27,374,750 $ 95,154,815 $ 1,445,531 $ 6,521, ,269 1,664,789 42, ,868 2,159,182 8,489, , ,306 22,403,316 60,431,763 1,353,139 2,862,530 1,024,744 12,200,764-10,489,775 25,215,568 86,665,138 $ 27,374,750 $ 95,154,815 20

138 HEMET UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2015 Total Fund Balance - Governmental Funds $ 86,665,138 Amounts Reported for Governmental Activities in the Statement of Net Position are Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is: $ 592,488,844 Accumulated depreciation is: (146,842,367) Net Capital Assets 445,646,477 Expenditures relating to contributions made to pension plans were recognized on the modified accrual basis, but are not recognized on the accrual basis. 13,277,739 In governmental funds, unmatured interest on long-term obligations is recognized in the period when it is due. On the government-wide financial statements, unmatured interest on long-term obligations is recognized when it is incurred. (3,599,402) An internal service fund is used by the District's management to charge the costs of the health and welfare benefits and workers' compensation program to the individual funds. The assets and liabilities of the Internal Service Fund are included with governmental activities. Internal Service Fund net assets are: 6,115,932 The net change in proportionate share of net pension liability as of the measurement date is not recognized as an expenditure under the modified accrual basis, but is recognized on the accrual basis over the expected remaining service life of members receiving pension benefits. 3,745,378 The difference between projected and actual earnings on pension plan investments are not recognized on the modified accrual basis, but are recognized on the accrual basis as an adjustment to pension expense. (40,031,645) Net pension liability is not due and payable in the current period, and is not reported as a liability in the funds. (146,735,107) The accompanying notes are an integral part of these financial statements. 21

139 HEMET UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION (CONTINUED) JUNE 30, 2015 Long-term obligations, including general obligation bonds, certificates of participation, capital lease obligations, compensated absences, and postemployment benefits are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Long-term obligations at year-end consist of: General obligation bonds $ 181,095,000 Premium on issuance, net of amortization 9,136,337 Discount on issuance, net of amortization (96,846) Certificates of participation 50,504,015 Discount on issuance, net of amortization (102,812) Lease revenue bonds 3,360,000 Discount on issuance, net of amortization (6,476) Capital lease obligations 1,312,645 Compensated absences - accumulated vacation 1,004,238 Supplemental early retirement program 1,274,884 Net OPEB obligation 19,521,179 Total Long-Term Obligations (267,002,164) Total Net Position - Governmental Activities $ 98,082,346 The accompanying notes are an integral part of these financial statements. 22

140 HEMET UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2015 Bond Interest General Building and Redemption Fund Fund Fund REVENUES Local Control Funding Formula $ 151,592,331 $ - $ - Federal sources 15,334, Other State sources 13,954, ,049 Other local sources 16,963,433 43,169 11,306,519 Total Revenues 197,844,038 43,169 11,486,568 EXPENDITURES Current Instruction 125,961, Instruction-related activities: Supervision of instruction 8,444, Instructional library, media and technology 1,497, School site administration 14,892, Pupil services: Home-to-school transportation 4,934, Food services 32, All other pupil services 13,395, Administration: Data processing 3,331, All other administration 9,707, Plant services 17,919, Facility acquisition and construction 1,486,283 7,344,587 - Ancillary services 1,907, Community services 115, Other outgo 491, Debt service Principal 535, ,375,000 Interest and other 553, ,198,498 Total Expenditures 205,206,530 7,345, ,573,498 Excess (Deficiency) of Revenues Over Expenditures (7,362,492) (7,301,832) (124,086,930) OTHER FINANCING SOURCES (USES) Transfers in 585, Other sources 420,268 24,000, ,387,248 Transfers out (4,588,879) (5,460,382) - Net Financing Sources (Uses) (3,583,439) 18,539, ,387,248 NET CHANGE IN FUND BALANCES (10,945,931) 11,237,787 3,300,318 Fund Balance - Beginning 35,531,355 12,764,070 9,561,971 Fund Balances - Ending $ 24,585,424 $ 24,001,857 $ 12,862,289 The accompanying notes are an integral part of these financial statements. 23

141 Non-Major Governmental Funds Total Governmental Funds $ 5,483,207 $ 157,075,538 10,746,953 26,080,970 2,990,259 17,124,565 1,980,850 30,293,971 21,201, ,575,044 4,400, ,361, ,799 8,630,635-1,497, ,717 15,710,986-4,934,462 11,363,830 11,395, ,383 13,576,264 2,640 3,334, ,631 10,579,722 2,507,045 20,426,627 1,501,139 10,332,009 13,494 1,920,819 1, , ,010 1,475, ,385,634 3,604,907 17,357,721 26,927, ,052,342 (5,726,044) (144,477,298) 10,417,696 11,002,868 1,245, ,053,173 (919,607) (10,968,868) 10,743, ,087,173 5,017,701 8,609,875 20,197,867 78,055,263 $ 25,215,568 $ 86,665,138 23

142 HEMET UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Total Net Change in Fund Balances - Governmental Funds $ 8,609,875 Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures, however, for governmental activities, those costs are shown in the Statement of Net Position and allocated over their estimated useful lives as annual depreciation expenses in the Statement of Activities. This is the amount by which depreciation exceeded capital outlay in the period. Capital outlays $ 10,624,610 Depreciation expense (15,196,760) Net Expense Adjustment (4,572,150) In the Statement of Activities, certain operating expenses - compensated absences (vacations) and special termination benefits (early retirement) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). This year, special termination benefits used was more than amounts earned by $1,404,578. Vacation used was less than amounts earned by $50,798. 1,353,780 In the governmental funds, pension costs are based on employer contributions made to pension plans during the year. However, in the Statement of Activities, pension expense is the net effect of all changes in the deferred outflows, deferred inflows and net pension liability during the year. (1,165,011) In the Statement of Activities Other Postemployment Benefit Obligations (OPEB) are measured by an actuarially determined Annual Required Contribution (ARC). In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). This year, amounts contributed toward the OPEB obligation were less than the ARC by $834,632. (834,632) Proceeds received from issuance of debt is a revenue in the governmental funds, but it increases long-term obligations in the Statement of Net Position and does not affect the Statement of Activities: Sale of general obligation refunding bonds (142,170,000) Capital lease obligations (392,075) Governmental funds report the effect of premiums and discounts when the debt is first issued, whereas the amounts are deferred and amortized over the life of the debt in the Statement of Activities. This amount is the net effect of these related items: Premium on issuance for general obligation refunding bonds (9,217,248) The accompanying notes are an integral part of these financial statements. 24

143 HEMET UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES (Continued) FOR THE YEAR ENDED JUNE 30, 2015 Repayment of principal is an expenditure in the governmental funds, but it reduces long-term obligations in the Statement of Net Position and does not affect the Statement of Activities: General obligation bonds and bond anticipation notes $ 122,375,000 Certificates of participation 1,535,665 Lease revenue bonds 215,000 Capital lease obligations 423,319 Governmental funds report the effect of premiums and discounts when the debt is first issued, whereas the amounts are deferred and amortized over the life of the debt in the Statement of Activities. This amount is the net effect of the amortization of the related items: Premium on issuance for general obligation bonds $ 1,723,764 Discount on issuance for general obligation bonds (6,918) Discount on issuance for bond anticipation notes (100,000) Discount on issuance for certificates of participation (5,245) Discount on issuance for lease revenue bonds (522) Combined Adjustment 1,611,079 Interest on long-term obligations in the Statement of Activities differs from the amount reported in the governmental funds because interest is recorded as an expenditure in the funds when it is due, and thus requires the use of current financial resources. In the Statement of Activities, however, interest expense is recognized as the interest accrues, regardless of when it is due. (765,450) An internal service fund is used by the District's management to charge the costs of the health and welfare benefits and workers' compensation insurance program to the individual funds. The net revenue of the Internal Service Fund is reported with governmental activities. 580,664 Change in Net Position of Governmental Activities $ (22,412,184) The accompanying notes are an integral part of these financial statements. 25

144 HEMET UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF NET POSITION JUNE 30, 2015 Business-Type Activities Governmental Enterprise Fund Activities Internal Transportation Service Fund ASSETS Current Assets Deposits and investments $ 973,197 $ 10,923,202 Receivables 5,748,966 9,739 Due from other funds 493 1,726,765 Total Assets 6,722,656 12,659,706 Noncurrent Assets Capital assets 12,263,048 - Less: accumulated depreciation (5,016,076) - Total Noncurrent Assets 7,246,972 - Total Assets $ 13,969,628 $ 12,659,706 LIABILITIES Current Liabilities Accounts payable $ 197,353 $ 229,051 Due to other funds 1,824,041 29,883 Claims liability - 1,850,573 Total Current Liabilities 2,021,394 2,109,507 Noncurrent Liabilities Long-term claims liability - 4,434,267 Capital lease 5,311,137 - Total Liabilities 7,332,531 6,543,774 NET POSITION Net investment in capital assets 1,935,835 - Unrestricted 4,701,262 6,115,932 Total Net Position $ 6,637,097 $ 6,115,932 The accompanying notes are an integral part of these financial statements. 26

145 HEMET UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION FOR THE YEAR ENDED JUNE 30, 2015 Business-Type Activities Governmental Enterprise Fund Activities Internal Transportation Service Fund OPERATING REVENUES Charges to other funds and miscellaneous revenues $ 16,718,248 $ 3,194,359 OPERATING EXPENSES Payroll costs 8,170,391 - Professional and contract services 1,035,795 2,639,620 Supplies and materials 2,247,862 15,157 Facility rental 712,020 - Depreciation 607,715 - Total Operating Expenses 12,773,783 2,654,777 Operating Income 3,944, ,582 NONOPERATING REVENUES Interest income 4,285 41,082 Income Before Transfers 3,948, ,664 Transfers out (34,000) - Change in Net Position 3,914, ,664 Total Net Position - Beginning 2,722,347 5,535,268 Total Net Position - Ending $ 6,637,097 $ 6,115,932 The accompanying notes are an integral part of these financial statements. 27

146 HEMET UNIFIED SCHOOL DISTRICT PROPRIETARY FUNDS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2015 Business-Type Activities Enterprise Fund Governmental Activities Internal Service Fund Transportation CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers $ 16,722,533 $ 1,580,178 Cash received from assessments made to other funds (493) - Cash payments to employees for services (8,170,391) - Cash payments to suppliers for goods and services (3,995,677) (15,157) Other operating cash payments (126,969) (2,162,013) Net Cash Provided by (Used in) Operating Activities 4,429,003 (596,992) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets (3,514,025) - CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 4,285 41,082 Net Increase (Decrease) in Cash and Cash Equivalents 919,263 (555,910) Cash and Cash Equivalents - Beginning 53,934 11,479,112 Cash and Cash Equivalents - Ending $ 973,197 $ 10,923,202 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Operating income $ 3,944,465 $ 539,582 Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation 607,715 - Changes in assets and liabilities: Receivables (670,510) (1,072) Due from other funds 39,790 (1,614,181) Accounts payable (231,074) 22,600 Due to other funds (1,866,858) 29,883 Capital leases 2,605,475 - Claims liabilities - 426,196 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 4,429,003 $ (596,992) The accompanying notes are an integral part of these financial statements. 28

147 HEMET UNIFIED SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF NET POSITION JUNE 30, 2015 Agency Funds Debt Service Fund for Associated Total Special Tax Student Agency Bonds Body Funds ASSETS Deposits and investments $ 4,616,624 $ 1,055,409 $ 5,672,033 Stores inventories - 2,491 2,491 Total Assets $ 4,616,624 $ 1,057,900 $ 5,674,524 LIABILITIES Due to student groups $ - $ 1,057,900 $ 1,057,900 Due to bond holders 4,616,624-4,616,624 Total Liabilities $ 4,616,624 $ 1,057,900 $ 5,674,524 The accompanying notes are an integral part of these financial statements. 29

148 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Hemet Unified School District (the District) was established on July 1, 1966, under the laws of the State of California. The District operates under a locally elected seven-member Board form of government and provides educational services to grades K-12 as mandated by the State and/or Federal agencies. The District operates fourteen elementary schools, four middle schools, three high schools, one continuation school, two alternative independent study schools, an adult school, and two charter schools. A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, and agencies that are not legally separate from the District. For Hemet Unified School District, this includes general operations, food service, and student related activities of the District. Component Units Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. For financial reporting purposes, the component units have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are included in the financial statements of the District. The component units, although legally separate entities, are reported in the financial statements using the blended presentation method as if they were part of the District's operations because the governing board of the component units is essentially the same as the governing board of the District and because their purpose is to finance the construction of facilities to be used for the direct benefit of the District. The Golden West Schools Financing Authority (the Authority) and the Hemet Unified School District School Facilities Corporation (the Corporation) financial activity are presented in the financial statements as the Capital Projects for Blended Component Units Fund and the Debt Service for Blended Component Units Fund. Certificates of participation and other debt issued by the Authority and the Corporation are included as long-term liabilities in the government-wide financial statements. Individually prepared financial statements are not prepared for the Authority or the Corporation. The Hemet Unified School District Community Facilities Districts (CFDs) financial activity is presented in the financial statements as the Capital Projects Fund for Blended Component Units and in the Fiduciary Funds Statement as the Debt Service Fund for Special Tax Bonds. Special Tax Bonds issued by the CFDs are not included in the long-term obligations of the Statement of Net Position as they are not obligations of the District. Individually prepared financial statements are not prepared for each of the CFDs. 30

149 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Charter School The District has approved a Charter for the College Prep High Charter School and the Western Center Academy Charter School pursuant to Education Code Section The Charter Schools are operated by the District, and their financial activities are presented in the Charter School Special Revenue Fund. Other Related Entity Joint Powers Authority The District is associated with one joint powers authority. This organization does not meet the criteria for inclusion as a component unit of the District. Additional information is presented in Note 15 to the financial statements. This organization is: Southern California Regional Liability Excess Fund (So Cal ReLiEF) Basis of Presentation - Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major and non-major governmental funds: Major Governmental Funds General Fund The General Fund is the chief operating fund for all districts. It is used to account for the ordinary operations of the District. All transactions except those accounted for in another fund are accounted for in this fund. One fund currently defined as a special revenue fund in the California State Accounting Manual (CSAM) does not meet the GASB Statement No. 54 special revenue fund definition. Specifically, Fund 17, Special Reserve Fund for Other Than Capital Outlay Projects and Fund 20, Special Reserve Fund for Postemployment Benefits, is not substantially composed of restricted or committed revenue sources. While this fund is authorized by statute and will remain open for internal reporting purposes, this fund functions effectively as an extension of the General Fund, and accordingly has been combined with the General Fund for presentation in these audited financial statements. As a result, the General Fund reflects an increase in the fund balance of $5,103,953. Building Fund The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued. 31

150 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a district (Education Code Sections ). Non-Major Governmental Funds Special Revenue Funds The Special Revenue funds are used to account for the proceeds from specific revenue sources (other than trusts, major capital projects, or debt service) that are restricted or committed to expenditures for specified purposes and that compose a substantial portion of the inflows of the fund. Additional resources that are restricted, committed, or assigned to the purpose of the fund may also be reported in the fund. Charter Schools Fund The Charter Schools Fund is used by the District to account separately for the activities of district-operated charter schools that would otherwise be reported in the authorizing district's General Fund. Child Development Fund The Child Development Fund is used to account separately for Federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs. Cafeteria Fund The Cafeteria Fund is used to account separately for Federal, State, and local resources to operate the food service program (Education Code Sections ) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections and 38100). Deferred Maintenance Fund The Deferred Maintenance Fund is used to account separately for State apportionments and the District's contributions for deferred maintenance purposes (Education Code Sections ) and for items of maintenance approved by the State Allocation Board. Capital Project Funds The Capital Project funds are used to account for financial resources that are restricted, committed, or assigned to the acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary funds and trust funds). Capital Facilities Fund The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections ). Expenditures are restricted to the purposes specified in Government Code Sections or to the items specified in agreements with the developer (Government Code Section 66006). County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section to receive apportionments from the 1998 State School Facilities Fund (Proposition la), the 2002 State School Facilities Fund (Proposition 47), the 2004 State School Facilities Fund (Proposition 55), or the 2006 State Schools Facilities Fund (Proposition 1D) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section et seq.). 32

151 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Special Reserve Fund for Capital Outlay Projects The Special Reserve Fund for Capital Outlay Projects exists primarily to provide for the accumulation of General Fund monies for capital outlay purposes (Education Code Section 42840). Capital Projects for Blended Component Units Fund The Capital Projects for Blended Component Units Fund is used to account for capital projects financed by the 2004 COP, 2006 COP, 2007 COP, CFD, and CFD issuances that are considered blended component units of the District under generally accepted accounting principles (GAAP). Debt Service Funds The Debt Service funds are used to account for the accumulation of restricted, committed, or assigned resources for and the payment of principal and interest on general long-term obligations. Debt Service for Blended Component Units Fund The Debt Service for Blended Component Units Fund is used to account for the accumulation of resources for the payment of the principal and interest on bonds issued by Financing Authorities and similar entities that are considered blended component units of the District under generally accepted accounting principles (GAAP). Proprietary Funds Proprietary funds are used to account for activities that are more business-like than government-like in nature. Business-type activities include those for which a fee is charged to external users or to other organizational units of the Local Education Agency, normally on a full cost-recovery basis. Proprietary funds are generally intended to be self-supporting and are classified as enterprise or internal service. The District has the following proprietary funds: Enterprise Funds Enterprise funds may be used to account for any activity for which a fee is charged to external users for goods or services. These funds of the District account for the financial transactions related to the Transportation activities of the District. Internal Service Fund Internal service funds may be used to account for goods or services provided to other funds of the District in return for a fee to cover the cost of operations. The District operates a Self-Insurance program for health and welfare and workers' compensation services that is accounted for in an internal service fund. Fiduciary Funds Fiduciary funds are used to account for assets held in trustee or agent capacity for others that cannot be used to support the District's own programs. The fiduciary fund category is split into four classifications: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds. The key distinction between trust and agency funds is that trust funds are subject to a trust agreement that affects the degree of management involvement and the length of time that the resources are held. Basis of Accounting - Measurement Focus Government-Wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements, but differs from the manner in which governmental fund financial statements are prepared. 33

152 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The government-wide financial Statement of Activities presents a comparison between direct expenses and program revenues for each segment of the District and for each governmental program, and excludes fiduciary activity. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program is self-financing or draws from the general revenues of the District. Eliminations have been made to minimize the double counting of internal activities. Net position should be reported as restricted when constraints placed on net position are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net position restricted for other activities result from special revenue funds and the restrictions on their net asset use. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. The internal service fund is presented in a single column on the face of the proprietary fund statements. Governmental Funds All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balances reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements therefore include reconciliation with brief explanations to better identify the relationship between the government-wide financial statements and the statements for the governmental funds on a modified accrual basis of accounting and the current financial resources measurement focus. Under this basis, revenues are recognized in the accounting period in which they become measurable and available. Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable. Proprietary Funds Proprietary funds are accounted for using a flow of economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the Statement of Net Position. The statement of changes in fund net position presents increases (revenues) and decreases (expenses) in net total assets. The statement of cash flows provides information about how the District finances and meets the cash flow needs of its proprietary fund. Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of the District. 34

153 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. Generally, available is defined as collectible within 60 days. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to state-aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Unearned Revenue Unearned revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for unearned revenue is removed from the combined balance sheet and revenue is recognized. Certain grants received that have not met eligibility requirements are recorded as unearned revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as unearned revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable. Principal and interest on long-term obligations, which has not matured, are recognized when paid in the governmental funds. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows. Investments Investments held at June 30, 2015, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county and State investment pools are determined by the program sponsor. 35

154 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Stores Inventories Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost, on the first-in, first-out basis. The costs of inventory items are recorded as expenditures in the governmental-type funds when used. Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. General capital assets are long-lived assets of the District. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide financial Statement of Net Position. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation basis for proprietary fund capital assets is the same as those used for the capital assets of governmental funds. Depreciation of capital assets is computed and recorded by the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings, 20 to 50 years; improvements, 5 to 50 years; equipment, 2 to 15 years. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables". Compensated Absences Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide statement of net position. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year-end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January 1, At retirement, each member will receive.004 year of service credit for each day of unused sick leave. 36

155 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Accrued Liabilities and Long-Term Obligations All payables, accrued liabilities, and long-term obligations are reported in the government-wide and proprietary fund financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the funds. However, claims and judgments and special termination benefits that will be paid from governmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and long-term loans are recognized as liabilities in the governmental fund financial statements when due. Debt Issuance Costs, Premiums and Discounts In the government-wide financial statements, long-term obligations are reported as liabilities in the applicable governmental activities Statement of Net Position. Debt premiums and discounts, as well as issuance costs, related to prepaid insurance costs are amortized over the life of the bonds using the straight line method. In governmental fund financial statements, bond premiums and discounts, as well as debt issuance costs are recognized in the current period. The face amount of the debt is reported as other financing sources. Premiums received on debt issuance are also reported as other financing sources. Issuance costs, whether or not withheld from the actual debt proceeds, are reported as debt service expenditures. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position also reports deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The District reports deferred outflows of resources for the current year pension contributions and for the unamortized amount on net change in proportionate share of net pension liability. In addition to liabilities, the statement of net position reports a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. The District reports deferred inflows of resources for the difference between projected and actual earnings on pension plan investments specific to the net pension liability. Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the California State Teachers Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) plan for schools (Plans) and additions to/deductions from the Plans' fiduciary net position have been determined on the same basis as they are reported by CalSTRS and CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Member contributions are recognized in the period in which they are earned. Investments are reported at fair value. 37

156 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Fund Balances - Governmental Funds As of June 30, 2015, fund balances of the governmental funds are classified as follows: Nonspendable - amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact. Restricted - amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments. Committed - amounts that can be used only for specific purposes determined by a formal action of the governing board. The governing board is the highest level of decision-making authority for the District. Commitments may be established, modified, or rescinded only through resolutions or other action as approved by the governing board. Assigned - amounts that do not meet the criteria to be classified as restricted or committed but that are intended to be used for specific purposes. Under the District's adopted policy, only the governing board or chief business officer/assistant superintendent of business services may assign amounts for specific purposes. Unassigned - all other spendable amounts. Spending Order Policy When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the District considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the District considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds, as needed, unless the governing board has provided otherwise in its commitment or assignment actions. Minimum Fund Balance Policy The governing board adopted a minimum fund balance policy for the General Fund in order to protect the District against revenue shortfalls or unpredicted on-time expenditures. The policy requires a Reserve for Economic Uncertainties consisting of unassigned amounts equal to no less than five percent of General Fund expenditures and other financing uses. Net Position Net position represents the difference between assets and liabilities. Net position net of investment in capital assets, consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. The District has related debt outstanding as of June 30, Net position is reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position is available. The government-wide financial statements report $27,811,517 of restricted net position. 38

157 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Operating Revenues and Expenses Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. For the District, these revenues are charges to other funds for self-insurance. Operating expenses are necessary costs incurred to provide the good or service that are the primary activity of the fund. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Interfund Activity Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented on the financial statements. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For purposes of the budget, on-behalf payments have been included as revenue and expenditures as required under generally accepted accounting principles. Property Tax Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Riverside bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. 39

158 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Changes in Accounting Principles In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements No. 27 and No. 50 remain applicable for pensions that are not covered by the scope of this Statement. The scope of this Statement addresses accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts that have the following characteristics: Contributions from employers and non-employer contributing entities to the pension plan and earnings on those contributions are irrevocable. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms. Pension plan assets are legally protected from the creditors of employers, non-employer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. Distinctions are made regarding the particular requirements for employers based on the number of employers whose employees are provided with pensions through the pension plan and whether pension obligations and pension plan assets are shared. Employers are classified in one of the following categories for purposes of this Statement: Single employers are those whose employees are provided with defined benefit pensions through singleemployer pension plans pension plans in which pensions are provided to the employees of only one employer (as defined in this Statement). 40

159 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Agent employers are those whose employees are provided with defined benefit pensions through agent multiple-employer pension plans pension plans in which plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer's share of the pooled assets is legally available to pay the benefits of only its employees. Cost-sharing employers are those whose employees are provided with defined benefit pensions through cost-sharing multiple-employer pension plans pension plans in which the pension obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan. In addition, this Statement details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. This Statement also addresses circumstances in which a non-employer entity has a legal requirement to make contributions directly to a pension plan. The District has implemented the Provisions of this Statement for the year ended June 30, In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68. The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government's beginning net pension liability. Statement No. 68 requires a state or local government employer (or nonemployer contributing entity in a special funding situation) to recognize a net pension liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. If a state or local government employer or nonemployer contributing entity makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government's reporting period, Statement No. 68 requires that the government recognize its contribution as a deferred outflow of resources. In addition, Statement No. 68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer or nonemployer contributing entity that arise from other types of events. At transition to Statement No. 68, if it is not practical for an employer or nonemployer contributing entity to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, paragraph 137 of Statement No. 68 required that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported. Consequently, if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, contributions made after the measurement date of the beginning net pension liability could not have been reported as deferred outflows of resources at transition. This could have resulted in a significant understatement of an employer or nonemployer contributing entity's beginning net position and expense in the initial period of implementation. 41

160 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 This Statement amends paragraph 137 of GASB Statement No. 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. Statement No. 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. The District has implemented the Provisions of this Statement for the year ended June 30, As the result of implementing GASB Statement No. 68, the District has restated the beginning net position in the government wide Statement of Net Position, effectively decreasing net position as of July 1, 2014, by $168,578,624. The decrease results from recognizing the net pension liability, net of related deferred outflows of resources. The restatement does not include deferred inflows of resources, as this information was not available. New Accounting Pronouncements In February 2015, the GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. The definition of fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. In June 2015, the GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That are not Within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. The objective of this Statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement No. 68. It also amends certain provisions of Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68 for pension plans and pensions that are within their respective scopes. The requirements of this Statement extend the approach to accounting and financial reporting established in Statement No. 68 to all pensions, with modifications as necessary to reflect that for accounting and financial reporting purposes, any assets accumulated for pensions that are provided through pension plans that are not administered through trusts that meet the criteria specified in Statement No. 68 should not be considered pension plan assets. It also requires that information similar to that required by Statement No. 68 be included in notes to financial statements and required supplementary information by all similarly situated employers and nonemployer contributing entities. 42

161 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 This Statement also clarifies the application of certain provisions of Statements No. 67 and No. 68 with regard to the following issues: Information that is required to be presented as notes to the ten-year schedules of required supplementary information about investment-related factors that significantly affect trends in the amounts reported Accounting and financial reporting for separately financed specific liabilities of individual employers and nonemployer contributing entities for defined benefit pensions Timing of employer recognition of revenue for the support of nonemployer contributing entities not in a special funding situation. The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. In June 2015, the GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. It also includes requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement No. 43, and Statement No. 50, Pension Disclosures. Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, establishes new accounting and financial reporting requirements for governments whose employees are provided with OPEB, as well as for certain nonemployer governments that have a legal obligation to provide financial support for OPEB provided to the employees of other entities. The scope of this Statement includes OPEB plans defined benefit and defined contribution administered through trusts that meet the following criteria: Contributions from employers and nonemployer contributing entities to the OPEB plan and earnings on those contributions are irrevocable. OPEB plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms. OPEB plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the OPEB plan administrator. If the plan is a defined benefit OPEB plan, plan assets also are legally protected from creditors of the plan members. 43

162 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 This Statement also includes requirements to address financial reporting for assets accumulated for purposes of providing defined benefit OPEB through OPEB plans that are not administered through trusts that meet the specified criteria. The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. In June 2015, the GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). It also improves information provided by state and local governmental employers about financial support for OPEB that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB. Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, establishes new accounting and financial reporting requirements for OPEB plans. The scope of this Statement addresses accounting and financial reporting for OPEB that is provided to the employees of state and local governmental employers. This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. For defined benefit OPEB, this Statement identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about defined benefit OPEB also are addressed. In addition, this Statement details the recognition and disclosure requirements for employers with payables to defined benefit OPEB plans that are administered through trusts that meet the specified criteria and for employers whose employees are provided with defined contribution OPEB. This Statement also addresses certain circumstances in which a nonemployer entity provides financial support for OPEB of employees of another entity. In this Statement, distinctions are made regarding the particular requirements depending upon whether the OPEB plans through which the benefits are provided are administered through trusts that meet the following criteria: Contributions from employers and nonemployer contributing entities to the OPEB plan and earnings on those contributions are irrevocable. OPEB plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms. OPEB plan assets are legally protected from the creditors of employers, nonemployer contributing entities, the OPEB plan administrator, and the plan members. 44

163 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. In June 2015, the GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify in the context of the current governmental financial reporting environment the hierarchy of generally accepted accounting principles (GAAP). The "GAAP hierarchy" consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This Statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and non-authoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. This Statement supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2015, and should be applied retroactively. Earlier implementation is permitted. NOTE 2 - DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2015, are classified in the accompanying financial statements as follows: Governmental activities $ 93,106,984 Business-type activities 973,197 Fiduciary funds 5,672,033 Total Deposits and Investments $ 99,752,214 Deposits and investments as of June 30, 2015, consisted of the following: Cash on hand and in banks $ 5,413,670 Cash in revolving 28,490 Investments 94,310,054 Total Deposits and Investments $ 99,752,214 45

164 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations; the Riverside County Investment Pool. Investment in County Treasury - The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: Maximum Maximum Maximum Authorized Remaining Percentage Investment Investment Type Maturity of Portfolio in One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker's Acceptance 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements 1 year None None Reverse Repurchase Agreements 92 days 20% of base None Medium-Term Corporate Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass-Through Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None 46

165 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Authorized Under Debt Agreements Investments of debt proceeds held by bond trustees are governed by provisions of the debt agreements, rather than the general provisions of the California Government. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The District manages its exposure to interest rate risk by investing in the County Pool and purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investments by maturity: Fair Maturity Investment Type Value Date Federal Home Loan Banks $ 1,714,752 3/9/2018 Certificates of Deposit 3,256,595 9/26/2015 Riverside County Investment Pool 80,233, * Federal Home Loan Mortgage Corp. - MTN 1,714,752 3/9/2018 Federal National Mortgage Association - MTN 1,380,357 3/16/2016 Money Market Mutual Funds 5,435,333 7/1/2015 Private Export Funding Note 1,063,580 11/15/2015 Total $ 94,798,803 *Weighted-average days to maturity. 47

166 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The District's investments in the County Pool are not required to be rated. Minimum Rating Legal as of Investment Type Rating June 30, 2015 Fair Value Federal Home Loan Banks AA AAA $ 1,714,752 Certificates of Deposit AA AAA 3,256,595 Riverside County Investment Pool Not Required AAA/V1 80,233,434 Federal Home Loan Mortgage Corp. - MTN AA AAA 1,714,752 Federal National Mortgage Association - MTN AA AAA 1,380,357 Money Market Mutual Funds Not Required Not Required 5,435,333 Private Export Funding Note AA AAA 1,063,580 Total $ 94,798,803 Custodial Credit Risk - Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2015, the District's bank balance was not exposed to custodial credit risk. 48

167 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 3 - RECEIVABLES Receivables at June 30, 2015, consisted of intergovernmental grants, entitlements, interest, and other local sources. All receivables are considered collectible in full. Non-Major Internal Total Transportation General Building Governmental Service Governmental Enterprise Fund Fund Funds Fund Activities Fund Federal Government Categorical aid $ 4,120,026 $ - $ 1,116,247 $ - $ 5,236,273 $ - State Government Categorical aid 2,206, ,152-2,580,330 - Lottery ,077-49,077 - Local Government Interest 16,079 12,098 7,565 9,739 45, Other local sources 1,205,308-10,564-1,215,872 5,748,143 Master Plan - Charter Schools 1,382,841-27,627-1,410,468 - Total $ 8,930,432 $ 12,098 $ 1,585,232 $ 9,739 $ 10,537,501 $ 5,748,966 49

168 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 4 - CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2015, was as follows: Balance Balance July 1, 2014 Additions Deductions June 30, 2015 Governmental Activities Capital Assets Not Being Depreciated Land $ 24,701,180 $ - $ - $ 24,701,180 Construction in progress 24,184,887 6,771,431-30,956,318 Total Capital Assets Not Being Depreciated 48,886,067 6,771,431-55,657,498 Capital Assets Being Depreciated Buildings and improvements 515,046,526 2,923, ,969,543 Furniture and equipment 18,436, , ,156 18,861,803 Total Capital Assets Being Depreciated 533,483,323 3,853, , ,831,346 Total Capital Assets 582,369,390 10,624, , ,488,844 Less Accumulated Depreciation Buildings and improvements 120,972,689 13,468, ,441,441 Furniture and equipment 11,178,074 1,728, ,156 12,400,926 Total Accumulated Depreciation 132,150,763 15,196, , ,842,367 Governmental Activities Capital Assets, Net $ 450,218,627 $ (4,572,150) $ - $ 445,646,477 Business-Type Activities Furniture and equipment $ 8,783,023 $ 3,480,025 $ - $ 12,263,048 Less Accumulated Depreciation 4,408, ,715-5,016,076 Business-Type Activities Capital Assets, Net $ 4,374,662 $ 2,872,310 $ - $ 7,246,972 Depreciation expense was charged as a direct expense to governmental functions as follows: Governmental Activities Instruction $ 12,552,502 School site administration 410,313 Food services 714,247 All other administration 896,608 Plant services 623,090 Total Depreciation Expenses Governmental Activities $ 15,196,760 Business-Type Activities Home-to-school transportation 607,715 Total Depreciation Expenses All Activities $ 15,804,475 50

169 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 5 - INTERFUND TRANSACTIONS Interfund Receivables/Payables (Due To/Due From) Interfund receivable and payable balances at June 30, 2015, between major and non-major governmental funds, and internal service funds are as follows: Due From Non-Major Transportation Internal General Building Governmental Enterprise Service Due To Fund Fund Funds Fund Fund Total General Fund $ - $ - $ 459,148 $ 324,041 $ 29,883 $ 813,072 Non-Major Governmental Funds 964,211 2,054 12, ,383 Transportation Enterprise Fund Internal Service Fund 26, ,003 1,500,000-1,726,765 Total $ 991,466 $ 2,054 $ 671,269 $ 1,824,041 $ 29,883 $ 3,518,713 A balance of $121,507 is due to the Child Development Non-Major Governmental Fund from the General Fund to reverse fund transfer for costs intended to cover Title I. A balance of $517,805 is due to the Special Reserve Non-Major Governmental Fund for Capital Outlay Projects from the General Fund for the First 5 facility. A balance of $207,000 is due to the Special Reserve Non-Major Governmental Fund for Capital Outlay Projects from the General Fund for Prop 39 Clean Energy Expenditures. A balance of $225,311 is due to the General Fund from the Special Reserve Non-Major Governmental Fund for Capital Outlay Projects for Prop 39 clean energy expenditures. A balance of $153,452 is due to the General Fund from the Transportation Enterprise Fund for bus insurance. A balance of $34,000 is due to the General Fund from the Transportation Enterprise Fund to cover transportation expenses. A balance of $135,009 is due to the General Fund from the Transportation Enterprise Fund to cover transportation substitute costs. A balance of $29,883 is due to the General Fund from the Internal Service Fund for workers compensation vouchers. A balance of $200,000 is due to the Internal Service Fund from the Child Development Non-Major Governmental Fund for a temporary loan. A balance of $1,500,000 is due to the Internal Service Fund from the Transportation Enterprise Fund for a temporary loan. Remaining balances resulted from the time lag between the date that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made. 51

170 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Operating Transfers Interfund transfers for the year ended June 30, 2015, consisted of the following: Transfer From Non-Major Transportation General Building Governmental Enterprise Transfer To Fund Fund Funds Fund Total General Fund $ - $ - $ 551,172 $ 34,000 $ 585,172 Non-Major Governmental Funds 4,588,879 5,460, ,435-10,417,696 Total $ 4,588,879 $ 5,460,382 $ 919,607 $ 34,000 $ 11,002,868 The Transportation Enterprise Fund transferred to the General Fund to move all non enterprise transportation related activities. $ 34,000 The Charter School Non-Major Governmental Fund transferred to the General Fund for transportation and special education encroachment. The General Fund transferred to the Charter School Non-Major Governmental Fund to support 317,755 excess costs. The General Fund transferred to the Cafeteria Non-Major Governmental Fund to cover costs 100,000 for unpaid student meals. The General Fund transferred to the Special Reserve Non-Major Governmental Fund for Capital Outlay Projects for pending construction of pre-school facility. The General Fund transferred to the Special Reserve Non-Major Governmental Fund for 28, ,805 Capital Outlay Projects for future capital equipment. The General Fund transferred to the Debt Service for Blended Component Units Non-Major 476,700 Governmental Fund for debt service payments. The Cafeteria Non-Major Governmental Fund transferred to the Debt Service for Blended 3,465,783 Component Units Non-Major Governmental Fund for debt service payments. The Building Fund transferred to the County School Facilities Non-Major Governmental Fund for unspent balance in GO bonds related to OPSC reimbursements. The Special Reserve Non-Major Governmental Fund for Capital Outlay Projects transferred to the General Fund for donations of school site constructions of shade structure. The Special Reserve Non-Major Governmental Fund for Capital Outlay Projects transferred to the General Fund for Prop 39 energy. 368,435 5,460,382 8, ,311 Total $ 11,002,868 52

171 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 6 - ACCOUNTS PAYABLE Accounts payable at June 30, 2015, consisted of the following: Non-Major Internal Total Transportation General Building Governmental Service Governmental Enterprise Fund Fund Funds Fund Activities Fund Vendor payables $ 2,506,541 $ - $ 941,993 $ 229,051 $ 3,677,585 $ 197,353 State principle apportionment 2,359,021-54,898-2,413,919 - Salaries and benefits 58, ,283 - Construction 144,003 7, , ,284 - Claims liability ,850,573 1,850,573 - Total $ 5,067,715 $ 7,774 $ 1,445,531 $ 2,079,624 $ 8,600,644 $ 197,353 NOTE 7 - UNEARNED REVENUE Unearned revenue at June 30, 2015, consisted of the following: Non-Major Total General Governmental Governmental Fund Funds Activities Federal financial assistance $ 159,953 $ - $ 159,953 State categorical aid 101, ,533 Other local - 42,382 42,382 Total $ 261,486 $ 42,382 $ 303,868 53

172 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 8 - LONG-TERM OBLIGATIONS Summary A schedule of changes in long-term obligations for the year ended June 30, 2015, is shown below: (As Restated) Balance Balance Due in July 1, 2014 Additions Deductions June 30, 2015 One Year Governmental Activities General Obligation Bonds $ 136,300,000 $ 142,170,000 $ 97,375,000 $ 181,095,000 $ 6,227,000 Premium on issuance 1,642,853 9,217,248 1,723,764 9,136,337 - Discount on issuance (103,764) - (6,918) (96,846) - Bond Anticipation Notes 25,000,000-25,000, Discount on issuance (100,000) - (100,000) - - Certificates of Participation 52,039,680-1,535,665 50,504,015 1,600,665 Discount on issuance (108,057) - (5,245) (102,812) - Lease Revenue Bonds 3,575, ,000 3,360, ,000 Discount on issuance (6,998) - (522) (6,476) - Capital Leases 1,343, , ,319 1,312, ,405 Accumulated Vacation - net 953,440 50,798-1,004,238 - Supplemental Early Retirement Program 2,679,462-1,404,578 1,274, ,442 Claims Liability 4,117, ,519-4,434,267 - Net OPEB Obligation 18,686,547 2,236,999 1,402,367 19,521,179 - Total Governmental Activities $ 246,019,800 $ 154,383,639 $ 128,967,008 $ 271,436,431 $ 9,121,512 Business-Type Activities Capital Leases $ 2,705,662 $ 3,605,516 $ 1,000,041 $ 5,311,137 $ 1,153,953 Payments on General Obligation Bonds are made by the Bond Interest and Redemption Fund with local revenues. Payments on the Certificates of Participation and Lease Revenue Bonds are made by the Debt Service for Blended Component Units Fund. Payments for Capital Leases are made by the General Fund, Capital Facilities Fund, and the Transportation Fund. The Accumulated Vacation will be paid by the fund for which the employee worked. Payments for Supplemental Early Retirement obligations are made by the General Fund. Payments for the OPEB obligation will be paid by the fund for which the employee worked. 54

173 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 General Obligation Bonds Summary The outstanding general obligation bonded debt is as follows: Bonds Bonds Issue Maturity Interest Original Outstanding Outstanding Date Date Rate Issue July 1, 2014 Issued Redeemed June 30, /18/05 8/1/ % % $ 6,000,000 $ 2,555,000 $ - $ 2,335,000 $ 220,000 1/17/06 8/1/ % % 6,000,000 4,930,000-4,725, ,000 3/1/07 8/1/ % % 60,000,000 54,410,000-53,025,000 1,385,000 3/4/08 8/1/ % % 40,000,000 36,920,000-35,355,000 1,565,000 7/28/10 8/1/ % % 18,740,000 16,405, ,000 15,545,000 7/18/12 8/1/ % % 21,260,000 21,080,000-1,075,000 20,005,000 12/16/14 8/1/ % % 93,170,000-93,170,000-93,170,000 5/19/15 8/1/ % % 49,000,000-49,000,000-49,000,000 $ 294,170,000 $ 136,300,000 $ 142,170,000 $ 97,375,000 $ 181,095, General Obligation Bonds, Series D In May 2005, the District issued $6,000,000 of the 2002 General Obligation Bonds, Series D. The bonds mature on August 1, 2015, with interest yields ranging from 3.50 to 5.00 percent. The proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $220,000 and unamortized premium was $3,073. The bonds mature through 2016 as follows: Fiscal Year Principal Interest Total 2016 $ 220,000 $ 4,400 $ 224, General Obligation Bonds, Series E In January 2006, the District issued $6,000,000 of the 2002 General Obligation Bonds, Series E. The bonds mature on August 1, 2015, with interest yields ranging from 4.00 to 6.50 percent. The proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms, and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $205,000 and unamortized premium was $4,

174 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The bonds mature through 2016 as follows: Fiscal Year Principal Interest Total 2016 $ 205,000 $ 4,100 $ 209, General Obligation Bonds, Series A In March 2007, the District issued $60,000,000 of the 2006 General Obligation Bonds, Series A. The bonds mature on August 1, 2015, with interest yields ranging from 4.00 to 5.75 percent. The proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms, and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $1,385,000 and unamortized premium was $34,544. The bonds mature through 2016 as follows: Fiscal Year Principal Interest Total 2016 $ 1,385,000 $ 38,953 $ 1,423, General Obligation Bonds, Series B In March 2008, the District issued $40,000,000 of the 2006 General Obligation Bonds, Series B. The bonds mature on August 1, 2016, with interest yields ranging from 4.50 to 5.25 percent. The proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms, and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $1,565,000 and unamortized premium was $43,722. The bonds mature through 2017 as follows: Fiscal Year Principal Interest Total 2016 $ 760,000 $ 60,774 $ 820, ,000 20, ,643 Total $ 1,565,000 $ 81,417 $ 1,646,417 56

175 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, General Obligation Refunding Bonds In July 2010, the District issued $18,740,000 of the 2010 General Obligation Refunding Bonds. The bonds mature on August 1, 2026, with interest yields ranging from 4.00 to 4.50 percent. The proceeds from the sale of the bonds were used to refund the outstanding 2002 General Obligation Bonds, Series A. At June 30, 2015, the principal balance outstanding was $15,545,000 and unamortized premium was $199,944. The bonds mature through 2027 as follows: Fiscal Year Principal Interest Total 2016 $ 900,000 $ 609,182 $ 1,509, ,090, ,351 1,659, ,135, ,705 1,662, ,170, ,413 1,654, ,225, ,504 1,661, ,870,000 1,421,025 8,291, ,155, ,893 3,296,893 Total $ 15,545,000 $ 4,190,073 $ 19,735, General Obligation Refunding Bonds In July 2012, the District issued $21,260,000 of the 2012 General Obligation Refunding Bonds. The bonds mature on August 1, 2028, with interest yields ranging from 2.00 to 4.00 percent. The proceeds from the sale of the bonds were used to refund the outstanding 2002 General Obligation Bonds, Series B, and C. At June 30, 2015, the principal balance outstanding was $20,005,000 and unamortized discount was $96,846. The bonds mature through 2029 as follows: Fiscal Year Principal Interest Total 2016 $ 1,110,000 $ 566,875 $ 1,676, ,370, ,975 1,907, ,395, ,300 1,901, ,450, ,375 1,906, ,510, ,388 1,913, ,900,000 1,437,463 9,337, ,270, ,350 5,598,350 Total $ 20,005,000 $ 4,236,726 $ 24,241,726 57

176 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, General Obligation Refunding Bonds In December 2014, the District issued $93,170,000 of the 2014 General Obligation Refunding Bonds. The bonds mature on August 1, 2038, with interest yields ranging from 3.00 to 5.00 percent. The proceeds from the sale of the bonds were used to refund a portion of the outstanding 2002 General Obligation Bonds, Series D and E and the 2006 General Obligation Bonds, Series A and B. The additional proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms, and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $93,170,000 and unamortized premium was $7,311,995. The bonds mature through 2039 as follows: Fiscal Year Principal Interest Total 2016 $ 1,845,000 $ 3,905,206 $ 5,750, ,685,000 3,816,956 5,501, ,630,000 3,709,081 6,339, ,770,000 3,574,081 6,344, ,915,000 3,431,956 6,346, ,170,000 14,780,231 31,950, ,435,000 10,829,131 33,264, ,315,000 6,274,241 29,589, ,405,000 1,291,419 19,696,419 Total $ 93,170,000 $ 51,612,302 $ 144,782, General Obligation Bonds, Series A In May 2015, the District issued $49,000,000 of the 2012 General Obligation Bonds, Series A. The bonds mature on August 1, 2040, with interest yields ranging from 3.00 to 5.00 percent. The proceeds from the sale of the bonds will be used to finance the acquisition and construction of new schools, classrooms, and facilities, and to repair existing schools. At June 30, 2015, the principal balance outstanding was $49,000,000 and unamortized premium was $1,539,

177 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The bonds mature through 2041 as follows: Fiscal Year Principal Interest Total 2016 $ - $ 1,183,901 $ 1,183, ,170,486 2,170, ,000 1,966,544 2,231, ,000 1,951,044 2,306, ,000 1,930,794 2,385, ,015,000 9,158,469 13,173, ,830,000 7,859,394 15,689, ,620,000 6,073,247 18,693, ,785,000 2,943,725 21,728, ,675,000 93,500 4,768,500 Total $ 49,000,000 $ 35,331,104 $ 84,331,104 Certificates of Participation Summary The outstanding certificates of participation are as follows: COP COP Issue Maturity Original Outstanding Outstanding Date Date Issue July 1, 2014 Issued Redeemed June 30, /14/04 10/01/32 $ 23,425,000 $ 17,495,000 $ - $ 790,000 $ 16,705,000 12/13/05 12/27/20 5,000,000 2,794, ,665 2,519,015 06/13/06 10/01/36 29,445,000 28,215, ,000 27,745,000 11/21/07 10/01/36 4,610,000 3,535, ,535,000 $ 62,480,000 $ 52,039,680 $ - $ 1,535,665 $ 50,504, Certificates of Participation On October 14, 2004, the Hemet Unified School District School Facilities Corporation issued the 2004 Certificates of Participation in the amount of $23,425,000. The certificates were issued at an aggregate price of $22,833,528 (representing the principal amount of $23,425,000 less an original issue discount of $51,382 less underwriter's discount and cost of issuance of $540,090). The bonds mature October 1,

178 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 A portion of the certificates of participation are being issued to prepay $6,945,000 of the outstanding Hemet Unified School District School Facilities Corporation 1993 Certificates of Participation. The certificates associated with the $6,945,000 of 1993 Certificates of Participation were prepaid December The remaining portion of the 2004 Certificates of Participation were used to acquire, construct, deliver, and install school facilities, buildings, land and capital projects, fund a reserve fund, and pay the cost related to the execution and delivery of the issuance. As of June 30, 2015, the principal balance outstanding was $16,705,000 and unamortized discount was $31,197. The certificates mature through 2033 as follows: Interest to Fiscal Year Principal Maturity Total 2016 $ 805,000 $ 729,939 $ 1,534, , ,721 1,531, , ,334 1,531, , ,606 1,528, , ,359 1,528, ,400,000 2,243,075 7,643, ,990, ,663 6,880, ,000 42, ,666 Total $ 16,705,000 $ 6,471,363 $ 23,176, Qualified Zone Academy Bond Certificates of Participation On December 13, 2005, the District issued $5,000,000 aggregate principal amount of Qualified Zone Academy Bond Program (QZAB) certificates of participation. The QZAB certificates represent interest free financing for the District. Owners of the QZAB certificates receive a Federal tax credit in lieu of charging the District interest on the certificates. The certificates mature on December 27, The District received net proceeds of $4,876,231 (after payment of $123,769 in underwriter fees, and issuance costs). The District began making annual deposits of $275,665 on December 27, 2006, into an investment account with US Bank for payment of the QZAB at maturity. Fifteen payments will be made from December 27, 2006 to December 27, 2020, which will total $4,134,975. The total expected interest to be earned in the investment account is $865,025. As of June 30, 2015, US Bank held $2,806,017 for payment of principal. 60

179 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The certificates mature through 2021 as follows: Year Ending District Expected June 30, Payment Earned Interest Total 2016 $ 275,665 $ 120,017 $ 395, , , , , , , , , , , , , ,665 96, ,231 Total $ 1,653,990 $ 865,025 $ 2,519, Certificates of Participation On June 13, 2006, the District, pursuant to a lease agreement with the Hemet Unified School District Facilities Corporation, issued certificates of participation in the amount of $29,445,000 with variable interest rate (weekly). The certificates were issued to finance the acquisition and construction of school facilities, fund a reserve account, and pay issuance costs associated with the execution and delivery of the certificates. At June 30, 2015, the principal balance outstanding was $27,745,000. The certificates mature through 2037 as follows: Interest to Fiscal Year Principal Maturity Total 2016 $ 520,000 $ 1,221,546 $ 1,741, ,000 1,192,533 1,757, ,000 1,167,067 1,862, ,000 1,135,137 1,880, ,000 1,103,218 1,898, ,855,000 4,905,618 9,760, ,400,000 3,618,771 11,018, ,460,000 1,281,862 11,741, ,710,000 76,195 1,786,195 Total $ 27,745,000 $ 15,701,947 $ 43,446,947 61

180 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, Certificates of Participation On November 21, 2007, the District, pursuant to a lease agreement with the Hemet Unified School District Facilities Corporation, issued certificates of participation in the amount of $4,610,000. The certificates were issued to finance the acquisition and construction of school facilities, fund a reserve account, and pay issuance costs associated with the execution and delivery of the certificates. At June 30, 2015, the principal balance outstanding was $3,535,000 and unamortized discount was $71,615. The certificates mature through 2037 as follows: Interest to Fiscal Year Principal Maturity Total 2016 $ - $ 159,075 $ 159, , , , , , , , , , , , ,063 1,246, ,590, ,375 2,115, ,460,000 78,075 1,538,075 Total $ 3,535,000 $ 2,955,263 $ 6,490, Refunding Lease Revenue Bonds On November 22, 2005, the Hemet Unified School District issued the 2005 Refunding Lease Revenue Bonds in the amount of $5,205,000. The bonds were issued at an aggregate price of $4,907,466 (representing the principal amount of $5,205,000 less discount of $11,478, underwriter's discount of $71,281 and cost of issuance of $214,775). The bonds mature April 1, 2027, and yield interest rates of 3.40 to 4.50 percent. 62

181 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The bonds were issued to refund the outstanding Hemet Unified School District School Facilities Corporation 1997 Certificates of Participation (COP). The 1997 COP were redeemed April 1, As this advance refunding has met the requirements of an in-substance defeasance, debt obligations outstanding of the 1997 COP has been removed as long-term obligations of the District. As of June 30, 2015, the principal balance of $3,360,000 remains outstanding and unamortized discount was $6,476. The bonds mature through 2027 as follows: Interest to Fiscal Year Principal Maturity Total 2016 $ 225,000 $ 145,373 $ 370, , , , , , , , , , , , , ,475, ,656 1,830, ,000 46, ,575 Total $ 3,360,000 $ 1,036,501 $ 4,396,501 Capital Leases Governmental Activities The District's liability on lease agreements with options to purchase is summarized below: Energy Management Vehicles Equipment Total Balance, July 1, 2014 $ 23,728 $ 1,468,934 $ 1,492,662 Additions 431, ,844 Payments 54, , ,066 Balance, June 30, 2015 $ 400,998 $ 1,030,442 $ 1,431,440 63

182 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The capital leases have minimum lease payments as follows: Year Ending Lease June 30, Payment 2016 $ 486, , , , , ,538 Total 1,431,440 Less: Amount Representing Interest 118,795 Present Value of Minimum Lease Payments $ 1,312,645 Capital Leases Business-Type Activities The District's liability on lease agreements with options to purchase is summarized below: Buses Balance, July 1, 2014 $ 2,870,244 Additions 4,133,343 Payments 1,125,709 Balance, June 30, 2015 $ 5,877,878 64

183 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The capital leases have minimum lease payments as follows: Year Ending Lease June 30, Payment 2016 $ 1,302, ,153, , , , ,517,098 Total 5,877,878 Less: Amount Representing Interest 566,741 Present Value of Minimum Lease Payments $ 5,311,137 Accumulated Unpaid Employee Vacation The long-term portion of accumulated unpaid employee vacation for the District at June 30, 2015, amounted to $1,004,238. Supplemental Employee Retirement Plan (SERP) The District offered an early retirement incentive to qualified employees under a qualified plan of Section 401A of the Internal Revenue Code. Eligibility requirements are that the employees attain age 50 with at least ten years of service with the District. The retiree receives an annual benefit payment equal to five percent of their final annual salary on the salary schedule. This benefit is paid out annually to the retiree in equal installments. Currently, there are 248 employees participating in this plan and the District's obligation to those retirees as of June 30, 2015, is $1,274,884. Future payments are as follows: Year Ending June 30, Amount 2016 $ 672, ,502 Total 1,345,004 Less: Amount Representing Interest 70,120 Total $ 1,274,884 65

184 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Claims Liability The District has an outstanding long-term liability for claims for the District's Workers' Compensation Insurance Program in the amount of $4,434,267. Other Postemployment Benefit (OPEB) Obligation The District's annual required contribution for the year ended June 30, 2015, was $1,396,104, and contributions made by the District during the year were $532,316. Interest on the net OPEB obligation and adjustments to the annual required contribution were $840,895 and $(870,051), respectively, which resulted in an increase to the net OPEB obligation of $834,632. As of June 30, 2015, the net OPEB obligation was $19,521,179. See Note 11 for additional information regarding the OPEB obligation and the postemployment benefits plan. NOTE 9 - NON-OBLIGATORY DEBT Non-obligatory debt relates to debt issuances by the Community Facility Districts, as authorized by the Mello- Roos Community Facilities Act of 1982 as amended, and the Mark-Roos Local Bond Pooling Act of 1985, and are payable from special taxes levied on property within the Community Facilities Districts according to a methodology approved by the voters within the District. Neither the faith and credit nor taxing power of the District is pledged to the payment of the bonds. Reserves have been established from the bond proceeds to meet delinquencies should they occur. If delinquencies occur beyond the amounts held in those reserves, the District has no duty to pay the delinquency out of any available funds of the District. The District acts solely as an agent for those paying taxes levied and the bondholders, and may initiate foreclosure proceedings. Special assessment debt of $31,620,000 as of June 30, 2015, does not represent debt of the District and, as such, does not appear in the accompanying basic financial statements. 66

185 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 10 - FUND BALANCES Fund balances are composed of the following elements: Bond Interest General Building and Redemption Fund Fund Fund Nonspendable Revolving cash $ 25,000 $ - $ - Stores inventories 220, Total Nonspendable 245, Restricted Legally restricted programs 1,164, Capital projects - 24,001,857 - Debt services ,862,289 Total Restricted 1,164,301 24,001,857 12,862,289 Committed Deferred maintenance program OPEB reserves 1,509, First 5 preschool facility Capital equipment and improvements Total Committed 1,509, Assigned Site discretionary - instructional materials 774, Implementation of LCAP initiatives 1,711, HTA Health and Welfare 637, CSEA Health and Welfare 474, Capital equipment and improvements 274, Network infrastructure 349, Donations - instructional materials and field trips 401, ROTC program 13, Instructional intervention materials 50, Unclaimed property 35, Adult Education program 30, LCFF gap funding reserve 6,225, Instructional materials and services 197, CPHS CPHS donations CPHS - LCFF supplemental WCA WCA donations WCA - LCFF supplemental CPHS lottery WCA lottery Total Assigned 11,176, Unassigned Economic uncertainties 10,489, Total $ 24,585,424 $ 24,001,857 $ 12,862,289 67

186 Non-Major Governmental Funds Total $ 3,490 $ 28, , , , ,306 5,405,939 6,570,240 12,551,819 36,553,676 4,445,558 17,307,847 22,403,316 60,431, , ,794-1,509, , , , ,540 1,353,139 2,862, ,454-1,711, , , , , ,154-13,463-50,962-35,912-30,150-6,225, ,085 22,946 22,946 4,258 4,258 24,638 24, , ,372 54,396 54,396 43,591 43,591 18,069 18,069 47,474 47,474 1,024,744 12,200,764-10,489,775 $ 25,215,568 $ 86,665,138 67

187 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 11 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The Postemployment Benefit Plan (the Plan) is a single-employer defined benefit healthcare plan administered by the Hemet Unified School District. The Plan provides medical, dental, and vision insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 113 retirees and beneficiaries currently receiving benefits and 2201 active Plan members. Contribution Information The contribution requirements of Plan members and the District are established and may be amended by the District and the Hemet Teachers Association (HTA), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year , the District contributed $532,316 to the Plan, all of which was used for current premiums. Annual OPEB Cost and Net OPEB Obligation The District's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the Plan, and changes in the District's net OPEB obligation to the Plan: Annual required contribution $ 1,396,104 Interest on net OPEB obligation 840,895 Adjustment to annual required contribution (870,051) Annual OPEB cost (expense) 1,366,948 Contributions made (532,316) Increase in net OPEB obligation 834,632 Net OPEB obligation, beginning of year 18,686,547 Net OPEB obligation, end of year $ 19,521,179 68

188 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Trend Information Trend information for annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation is as follows: Annual Actual Year Ended OPEB Employer Percentage Net OPEB June 30, Cost Contribution Contributed Obligation 2013 $ 4,104,392 $ 1,351, % $ 16,194, ,089,774 1,597, % 18,686, ,366, , % 19,521,179 Funded Status and Funding Progress A schedule of funding progress as of the most recent actuarial valuation is as follows: Actuarial Accrued Liability Unfunded UAAL as a Actuarial Actuarial (AAL) - AAL Funded Percentage of Valuation Value of Entry Age (UAAL) Ratio Covered Covered Payroll Date Assets (a) Normal (b) (b - a) (a / b) Payroll (c) ([b - a] / c) March 1, 2015 $ - $ 13,325,446 $ 13,325,446 0% $ 106,594,016 13% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 69

189 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the March 1, 2015, actuarial valuation, the Entry Age Normal Actuarial Cost Method was used. The actuarial assumptions included a 4.0 percent investment rate of return, based on assumed long-term return on plan assets or employer assets, as appropriate. Healthcare cost trend rates were assumed at four percent for the plan year beginning July 1, NOTE 12 - RISK MANAGEMENT Description The District's risk management activities are recorded in the General and Self-Insurance Funds. Employee life, health, vision, dental, disability, and workers' compensation programs are administered by the District. The District is exposed to various risks of loss related to torts; theft, damage and destruction of assets; errors and omissions; injuries to employees; life and health of employees; and natural disasters. The District purchases commercial insurance through Southern California Regional Liability Excess Fund Joint Powers Authority for first party damage with coverage up to a maximum of $250 million, subject to Member Retained Limits ranging from $250 to $5,000 per occurrence. The District also purchases commercial insurance for general liability claims with coverage up to $1 million per occurrence with excess liability coverage up to $24 million per occurrence and $52 million aggregate, all subject to a $5,000 Member Retained Limit per occurrence. The District self-insures workers' compensation coverage up to $1,000,000 per occurrence with excess coverage up to $10,000,000. Claims Liabilities The District records an estimated liability for indemnity torts and other claims against the District. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred, but not reported based on historical experience. 70

190 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Unpaid Claims Liabilities The fund establishes a liability for both reported and unreported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District from July 1, 2013 to June 30, 2015: Workers' Health Care Compensation Total Liability Balance, July 1, 2013 $ 68,000 $ 5,601,279 $ 5,669,279 Claims provision 634,367 2,106,028 2,740,395 Claims paid (632,367) (1,918,663) (2,551,030) Liability Balance, June 30, ,000 5,788,644 5,858,644 Claims provision 462,316 2,465,764 2,928,080 Claims paid (532,316) (1,969,568) (2,501,884) Liability Balance, June 30, 2015 $ - $ 6,284,840 $ 6,284,840 Amount available to pay claims $ - $ 12,659,706 $ 12,659,706 NOTE 13 - EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Academic employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). The District implemented GASB Statements No. 68 and No. 71 for the fiscal year ended June 30, As a result, the District reported its proportionate share of the net pension liabilities, pension expense, and deferred inflow of resources for each of the above plans and a deferred outflow of resources for each of the above plans as follows: Proportionate Deferred Proportionate Proportionate Share of Net Outflow of Share of Deferred Share of Pension Plan Pension Liability Resources Inflow of Resources Pension Expense CalSTRS $ 106,695,256 $ 8,384,699 $ 26,273,504 $ 9,246,982 CalPERS 40,039,851 4,893,040 13,758,141 8,941,146 Total $ 146,735,107 $ 13,277,739 $ 40,031,645 $ 18,188,128 71

191 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The details of each plan are as follows: California State Teachers' Retirement System (CalSTRS) Plan Description The District contributes to the State Teachers Retirement Plan (STRP) administered by the California State Teachers' Retirement System (CalSTRS). STRP is a cost-sharing multiple-employer public employee retirement system defined benefit pension plan. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2013, annual actuarial valuation report, Defined Benefit Program Actuarial Valuation. This report and CalSTRS audited financial information are publically available reports that can be found on the CalSTRS website under Publications at: Benefits Provided The STRP provides retirement, disability and survivor benefits to beneficiaries. Benefits are based on members' final compensation, age, and years of service credit. Members hired on or before December 31, 2012, with five years of credited service are eligible for the normal retirement benefit at age 60. Members hired on or after January 1, 2013, with five years of credited service are eligible for the normal retirement benefit at age 62. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service. The STRP is comprised of four programs: Defined Benefit Program, Defined Benefit Supplement Program, Cash Balance Benefit Program, and Replacement Benefits Program. The STRP holds assets for the exclusive purpose of providing benefits to members and beneficiaries of these programs. CalSTRS also uses plan assets to defray reasonable expenses of administering the STRP. Although CalSTRS is the administrator of the STRP, the state is the sponsor of the STRP and obligor of the trust. In addition, the state is both an employer and nonemployer contributing entity to the STRP. The District contributes exclusively to the STRP Defined Benefit Program, thus disclosures are not included for the other plans. 72

192 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The STRP provisions and benefits in effect at June 30, 2015, are summarized as follows: STRP Defined Benefit Program Hire date On or before December 31, 2012 On or after January 1, 2013 Benefit formula 2% at 60 2% at 62 Benefit vesting schedule 5 Years of Service 5 Years of Service Benefit payments Monthly for Life Monthly for Life Retirement age Monthly benefits as a percentage of eligible compensation 2.0% - 2.4% 2.0% - 2.4% Required employee contribution rate 8.15% 8.15% Required employer contribution rate 8.88% 8.88% Required state contribution rate 5.95% 5.95% Contributions Required member, District, and State of California contributions rates are set by the California Legislature and Governor and detailed in Teachers' Retirement Law. The contributions rates are expressed as a level percentage of payroll using the entry age normal actuarial method. In accordance with AB 1469, employer contributions into the CalSTRS will be increasing to a total of 19.1 percent of applicable member earnings phased over a seven year period. The contribution rates for each plan for the year ended June 30, 2015, are presented above and the District's total contributions were $8,384,699. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2015, the District reported a liability for its proportionate share of the net pension liability that reflected a reduction for State pension support provided to the District. The amount recognized by the District as its proportionate share of the net pension liability, the related state support and the total portion of the net pension liability that was associated with the District were as follows: Total Net Pension Liability, Including State Share: District's proportionate share of net pension liability $ 106,695,256 State's proportionate share of the net pension liability associated with the District 64,427,202 Total $ 171,122,458 The net pension liability was measured as of June 30, The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts and the State, actuarially determined. At June 30, 2015, the District's proportion was percent. 73

193 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 For the year ended June 30, 2015, the District recognized pension expense of $9,246,982. In addition, the District recognized revenue and pension expense of $5,562,148 for support provided by the State. At June 30, 2015, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Deferred Outflows of Inflows of Resources Resources Pension contributions subsequent to measurement date $ 8,384,699 $ - Difference between projected and actual earnings on pension plan investments - 26,273,504 Total $ 8,384,699 $ 26,273,504 The deferred outflow of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, The deferred inflow of resources will be amortized over a closed five-year period and will be recognized in pension expense as follows: Year Ended June 30, Amortization 2016 $ 6,568, ,568, ,568, ,568,376 Total $ 26,273,504 Actuarial Methods and Assumptions Total pension liability for STRP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2013, and rolling forward the total pension liability to June 30, The financial reporting actuarial valuation as of June 30, 2013, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date June 30, 2013 Measurement date June 30, 2014 Experience study July 1, 2006 through June 30, 2010 Actuarial cost method Entry age normal Discount rate 7.60% Investment rate of return 7.60% Consumer price inflation 3.00% Wage growth 3.75% 74

194 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 CalSTRS uses custom mortality tables to best fit the patterns of mortality among its members. These custom tables are based on RP2000 series tables adjusted to fit CalSTRS experience. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. The best estimate ranges were developed using capital market assumptions from CalSTRS general investment consultant. Based on the model for CalSTRS consulting actuary' investment practice, a best estimate range was determined be assuming the portfolio is re-balanced annually and that the annual returns are lognormally distributed and independently from year to year to develop expected percentile for the long-term distribution of annualized returns. The assumed asset allocation is based on board policy for target asset allocation in effect on February 2, 2012, the date the current experience study was approved by the board. Best estimates of 10-year geometric real rates of return and the assumed asset allocation for each major asset class used as input to develop the actuarial investment rate of return are summarized in the following table: Long-term Assumed Asset Expected Real Asset Class Allocation Rate of Return Global equity 47% 4.50% Private equity 12% 6.20% Real estate 15% 4.35% Inflation sensitive 5% 3.20% Fixed income 20% 0.20% Cash/liquidity 1% 0.00% Discount Rate The discount rate used to measure the total pension liability was 7.60 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Projected inflows from investment earnings were calculated using the long-term assumed investment rate of return (7.60 percent) and assuming that contributions, benefit payments and administrative expense occurred midyear. Based on these assumptions, the STRP's fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. 75

195 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Discount Rate Liability 1% decrease (6.60%) $ 166,310,001 Current discount rate (7.60%) 106,695,256 1% increase (8.60%) 56,987,394 California Public Employees Retirement System (CalPERS) Plan Description Qualified employees are eligible to participate in the School Employer Pool (SEP) [and the Safety Risk Pool] under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2013, annual actuarial valuation report, Defined Benefit Program Actuarial Valuation. This report and CalSTRS audited financial information are publically available reports that can be found on the CalSTRS website under Publications at: Benefits Provided CalPERS provide service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of service credit, a benefit factor, and the member's final compensation. Members hired on or before December 31, 2012, with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. Members hired on or after January 1, 2013, with five years of total service are eligible to retire at age 52 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after five years of service. The Basic Death Benefit is paid to any member's beneficiary if the member dies while actively employed. An employee's eligible survivor may receive the 1957 Survivor Benefit if the member dies while actively employed, is at least age 50 (or 52 for members hired on or after January 1, 2013), and has at least five years of credited service. The cost of living adjustments for each plan are applied as specified by the Public Employees' Retirement Law. 76

196 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The CalPERS provisions and benefits in effect at June 30, 2015, are summarized as follows: School Employer Pool (CalPERS) Hire date On or before December 31, 2012 On or after January 1, 2013 Benefit formula 2% at 55 2% at 62 Benefit vesting schedule 5 Years of Service 5 Years of Service Benefit payments Monthly for Life Monthly for Life Retirement age Monthly benefits as a percentage of eligible compensation 1.1% - 2.5% 1.0% - 2.5% Required employee contribution rate 7.000% 6.000% Required employer contribution rate % % Contributions Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Total plan contributions are calculated through the CalPERS annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. The contributions rates are expressed as percentage of annual payroll. The contribution rates for each plan for the year ended June 30, 2015, are presented above and the total District contributions were $4,893,040. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions As of June 30, 2015, the District reported net pension liabilities for its proportionate share of the CalPERS net pension liability totaling $40,039,851. The net pension liability was measured as of June 30, The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts, actuarially determined. The District's proportionate share for the measurement period June 30, 2014 and June 30, 2013, respectively was percent and percent, resulting in a net increase in the proportionate share of percent. 77

197 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 For the year ended June 30, 2015, the District recognized pension expense of $8,941,146. At June 30, 2015, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Deferred Outflows of Inflows of Resources Resources Pension contributions subsequent to measurement date $ 4,893,040 $ - Net change in proportionate share of net pension liability 3,745,378 - Difference between projected and actual earnings on pension plan investments - 13,758,141 Total $ 8,638,418 $ 13,758,141 The deferred outflow of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, The deferred outflows of resources related to the net change in proportionate share of net pension liability will be amortized over the expected average remaining service lives (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the measurement period is 3.9 years and the pension expense will be recognized as follows: Year Ended June 30, Amortization 2016 $ 1,248, ,248, ,248,460 Total $ 3,745,378 The deferred inflow of resources related to the difference between projected and actual earnings on pension plan investments will be amortized over a closed five-year period and will be recognized in pension expense as follows: Year Ended June 30, Amortization 2016 $ 3,439, ,439, ,439, ,439,536 Total $ 13,758,141 78

198 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Actuarial Methods and Assumptions Total pension liability for the SEP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2013, and rolling forward the total pension liability to June 30, The financial reporting actuarial valuation as of June 30, 2013, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date June 30, 2013 Measurement date June 30, 2014 Experience study July 1, 1997 through June 30, 2011 Actuarial cost method Entry age normal Discount rate 7.50% Investment rate of return 7.50% Consumer price inflation 2.75% Wage growth 3.00% Mortality assumptions are based on mortality rates resulting from the most recent CalPERS experience study adopted by the CalPERS Board. For purposes of the post-retirement mortality rates, those revised rates include five years of projected ongoing mortality improvement using Scale AA published by the Society of Actuaries. In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound returns were calculated over the short-term (first ten years) and the longterm (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Long-Term Assumed Asset Expected Real Asset Class Allocation Rate of Return Global equity 47% 5.25% Global fixed income 19% 0.99% Private equity 12% 6.83% Real estate 11% 4.50% Inflation sensitive 6% 0.45% Infrastructure and Forestland 3% 4.50% Liquidity 2% -0.55% 79

199 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Discount Rate The discount rate used to measure the total pension liability was 7.50 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Based on these assumptions, the School Employer Pool fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Discount rate Liability 1% decrease (6.50%) $ 70,239,038 Current discount rate (7.50%) 40,039,851 1% increase (8.50%) 14,805,385 Social Security As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (CalSTRS or CalPERS) must be covered by social security or an alternative plan. The District has elected to use the Social Security as its alternative plan. On Behalf Payments The State of California makes contributions to CalSTRS and CalPERS on behalf of the District. These payments consist of State General Fund contributions to CalSTRS in the amount of $4,419,047 (5.679 percent of annual payroll). Contributions are no longer appropriated in the annual Budget Act for the legislatively mandated benefits to CalPERS. Therefore, there is no on behalf contribution rate for CalPERS). No contributions were made to CalPERS for the year ended June 30, Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budget amounts reported in the General Fund - Budgetary Comparison Schedule. 80

200 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 14 - COMMITMENTS AND CONTINGENCIES Grants The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the General Fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, Litigation The District is involved in various litigation arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30, Construction Commitments As of June 30, 2015, the District had the following commitments with respect to the unfinished capital projects: Remaining Expected Construction Date of Capital Projects Commitments Completion Hemet El. - Reconstruction $ 27,500,000 December 1, 2017 Nutrition Freezer (3 sites) 600,000 December 31, 2016 HVAC Design 2,002,000 December 31, 2015 $ 30,102,000 NOTE 15 - PARTICIPATION JOINT POWERS AUTHORITY The District is a member of the Southern California Regional Liability Excess Fund (SoCal ReLiEF) a joint powers authority (JPA). The District pays an annual premium for its property liability coverage. The relationship between the District and the JPA is such that it is not a component unit of the District for financial reporting purposes. The JPA has budgeting and financial reporting requirements independent of member units and their financial statements are not presented in these financial statements; however, fund transactions between the JPA and the District are included in these statements. Audited financial statements are available from the JPA. During the year ended June 30, 2015, the District made payments of $820,492 to SoCal ReLiEF, for services received. 81

201 HEMET UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 16 - RESTATEMENT OF PRIOR YEAR NET POSITION The District adopted GASB Statement No. 68, Accounting and Financial Reporting for Pensions, in the current year. As a result, the effect on the current fiscal year is as follows: Statement of Net Position Net Position - Beginning $ 289,073,154 Inclusion of net pension liability from the adoption of GASB Statement No. 68 (179,524,068) Inclusion of deferred outflow of resources from the adoption of GASB Statement No ,945,444 Net Position - Beginning as Restated $ 120,494,530 82

202 REQUIRED SUPPLEMENTARY INFORMATION 83

203 HEMET UNIFIED SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2015 Variances - Positive (Negative) Budgeted Amounts Actual Final Original Final (GAAP Basis) to Actual REVENUES Local Control Funding Formula $ 152,350,511 $ 150,863,008 $ 151,592,331 $ 729,323 Federal sources 14,213,652 15,969,704 15,334,017 (635,687) Other State sources 7,912,931 9,627,480 13,954,257 4,326,777 Other local sources 14,104,578 15,526,810 16,963,433 1,436,623 Total Revenues 1 188,581, ,987, ,844,038 5,857,036 EXPENDITURES Current Certificated salaries 93,634,726 95,479,041 95,295, ,691 Classified salaries 33,931,333 33,587,685 33,951,271 (363,586) Employee benefits 37,837,807 36,855,454 39,944,851 (3,089,397) Books and supplies 11,472,499 11,882,565 11,919,463 (36,898) Services and operating expenditures 22,686,276 21,514,538 20,644, ,564 Capital outlay 550,189 2,431,977 2,735,025 (303,048) Other outgo (691,554) (195,572) (373,940) 178,368 Debt service Principal 2,412,084 1,639, ,634 1,104,260 Interest 1,600,148 2,575, ,902 2,021,433 Total Expenditures 1 203,433, ,770, ,206, ,387 Excess (Deficiency) of Revenues Over Expenditures (14,851,836) (13,783,915) (7,362,492) 6,421,423 Other Financing Sources (Uses) Transfers in 347,552 3,928, ,172 (3,343,519) Other sources - 419, , Transfers out (2,198,227) (605,221) (4,588,879) (3,983,658) Net Financing Sources (Uses) (1,850,675) 3,743,227 (3,583,439) (7,326,666) NET CHANGE IN FUND BALANCES (16,702,511) (10,040,688) (10,945,931) (905,243) Fund Balance - Beginning 35,531,355 35,531,355 35,531,355 - Fund Balance - Ending $ 18,828,844 $ 25,490,667 $ 24,585,424 $ (905,243) 1 On behalf payments of $4,419,047 are included in the actual revenues and expenditures, but have not been included in the budgeted amounts. In addition, due to the consolidation of Fund 20, Special Reserve Fund for Postemployment Benefits for reporting purposes into the General Fund, additional revenues and expenditures pertaining to these other funds are included in the Actual (GAAP Basis) revenues and expenditures, however are not included in the original and final General Fund budgets. 84

204 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS FOR THE YEAR ENDED JUNE 30, 2015 Actuarial Accrued Liability Unfunded UAAL as a Actuarial Actuarial (AAL) - AAL Funded Percentage of Valuation Value of Entry Age (UAAL) Ratio Covered Covered Payroll Date Assets (a) Normal (b) (b - a) (a / b) Payroll (c) ([b - a] / c) July 1, 2010 $ - $ 34,505,420 $ 34,505,420 0% $ 100,578,069 34% July 1, ,183,794 38,183,794 0% 103,466,098 37% March 1, ,325,446 13,325,446 0% 106,594,016 13% 85

205 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF THE DISTRICT PROPORTIONATE SHARE OF THE NET PENSION LIABILITY FOR THE YEAR ENDED JUNE 30, 2015 CalSTRS 2015 District's proportion of the net pension liability (asset) % District's proportionate share of the net pension liability (asset) $ 106,695,256 State's proportionate share of the net pension liability (asset) associated with the District 64,427,202 Total $ 171,122,458 District's covered - employee payroll $ 82,033,055 District's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll % Plan fiduciary net position as a percentage of the total pension liability 77% CalPERS District's proportion of the net pension liability (asset) % District's proportionate share of the net pension liability (asset) $ 40,039,851 District's covered - employee payroll $ 37,090,893 District's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll % Plan fiduciary net position as a percentage of the total pension liability 83% Note: In the future, as data become available, ten years of information will be presented. 86

206 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF DISTRICT CONTRIBUTIONS FOR THE YEAR ENDED JUNE 30, 2015 CalSTRS 2015 Contractually required contribution $ 8,384,699 Contributions in relation to the contractually required contribution 8,384,699 Contribution deficiency (excess) $ - District's covered - employee payroll $ 94,422,286 Contributions as a percentage of covered - employee payroll 8.88% CalPERS Contractually required contribution $ 4,893,040 Contributions in relation to the contractually required contribution 4,893,040 Contribution deficiency (excess) $ - District's covered - employee payroll $ 41,572,133 Contributions as a percentage of covered - employee payroll 11.77% Note: In the future, as data become available, ten years of information will be presented. 87

207 SUPPLEMENTARY INFORMATION 88

208 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2015 Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF EDUCATION Indian Education - Grants to Local Educational Agencies $ 8,790 Carl D. Perkins Vocational and Technical Education Act of 1998 Secondary Education ,850 Passed through Riverside County Special Education Local Plan Area: Individuals with Disabilities Act (IDEA) Special Education (IDEA) Cluster: Basic Local Assistance Entitlement, Part B, Section ,482,410 Local Assistance, Part B, Section 611, Private School ISPs ,281 Preschool Grants, Part B, Section 619 (Age 3-4-5) ,330 Preschool Local Entitlement, Part B, Section 611 (Age 3-4-5) A ,773 IDEA Mental Health Allocation Plan, Part B, Section A ,989 IDEA, Quality Assurance and Focused Monitoring, Part B, Section Preschool Staff Development, Part B, Section A Total Special Education (IDEA) Cluster 4,874,182 Passed through Napa County Office of Education Local Plan Area: Special Education: Project Read ,820 Passed through California Department of Education (CDE): No Child Left Behind Act (NCLB): Title I, Part A, Basic Grants Low Income and Neglected ,939,926 Title II, Part A, Improving Teacher Quality Local Grants ,949 Title III Cluster: Title III, Limited English Proficient (LEP) Student Program ,541 Title III, Immigrant Education Program ,009 Title III Cluster 187,550 Title I, Part G: Advanced Placement (AP) Test Fee ,849 Title IV, Part B, 21st Century Community Learning Centers Program ,800 Elementary and Secondary School Counseling Discretionary Grants E [1] 226,659 ARRA - Investing in Innovation (i3) Fund ,704 Total U.S. Department of Education 13,374,079 [1] Pass-Through Entity Identifying Number not available. See accompanying note to supplementary information. 89

209 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2015 Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF AGRICULTURE Forest Reserve $ 63,131 Passed through California Department of Education (CDE): Child Nutrition Cluster: School Basic Breakfast ,173 Especially Needy Breakfast ,190,168 National School Lunch Program ,351,982 Meal Supplement ,228 Food Distribution ,951 Total Child Nutrition Cluster 10,483,502 CCFP Claims - Centers and Family Day Care ,099 Equipment Assistance Grants [1] 64,000 Total U.S. Department of Agriculture 10,808,732 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Passed through California Department of Health Services: Medicaid Cluster: Medi-Cal Billing Option ,181,187 Medical Administrative Activities Program ,965 Total Medicaid Cluster 1,357,152 Passed through Riverside County Office of Education (RCOE): Head Start ,016,177 Total U.S. Department of Health and Human Services 2,373,329 Total Federal Programs $ 26,556,140 [1] Pass-Through Entity Identifying Number not available. See accompanying note to supplementary information. 90

210 HEMET UNIFIED SCHOOL DISTRICT LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2015 ORGANIZATION The Hemet Unified School District was established on July 1, 1966, and consists of an area comprising approximately 640 square miles. The District operates fourteen elementary schools, four middle schools, three high schools, one continuation school, two alternative independent study schools, an adult school, and two-charter school. There were no boundary changes during the year. GOVERNING BOARD MEMBER OFFICE TERM EXPIRES Ross Valenzuela President 2018 Jim Smith Vice President 2016 Megan Haley Member 2018 Vic Scavarda Member 2018 Patrick Searl Member 2016 Marilyn Forst Member 2016 Joe Wojcik Member 2018 ADMINISTRATION Dr. Barry Kayrell Vincent Christakos Dr. David Horton Dr. LaFaye Platter Pam Buckhout Superintendent Assistant Superintendent, Business Services Assistant Superintendent, Educational Services Deputy Superintendent, Human Resources Director of Fiscal Services See accompanying note to supplementary information. 91

211 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2015 Final Report Second Period Annual Report Report Regular ADA Transitional kindergarten through third 6, , Fourth through sixth 4, , Seventh and eighth 2, , Ninth through twelfth 6, , Total Regular ADA 19, , Extended Year Special Education Transitional kindergarten through third Fourth through sixth Seventh and eighth Ninth through twelfth Total Extended Year Special Education Special Education, Nonpublic, Nonsectarian Schools Transitional kindergarten through third Fourth through sixth Seventh and eighth Ninth through twelfth Total Special Education, Nonpublic, Nonsectarian Schools Extended Year Special Education, Nonpublic, Nonsectarian Schools Transitional kindergarten through third Fourth through sixth Ninth through twelfth Total Extended Year Special Education, Nonpublic, Nonsectarian Schools Total ADA 19, , See accompanying note to supplementary information. 92

212 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE (Continued) FOR THE YEAR ENDED JUNE 30, 2015 Final Report Second Period Annual Report Report COLLEGE PREP HIGH CHARTER Regular ADA Ninth through twelfth Classroom based ADA Regular ADA Ninth through twelfth WESTERN CENTER ACADEMY CHARTER Regular ADA Fourth through sixth Seventh and eighth Total Regular ADA Classroom based ADA Regular ADA Fourth through sixth Seventh and eighth Total Regular ADA See accompanying note to supplementary information. 93

213 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME FOR THE YEAR ENDED JUNE 30, 2015 Reduced Number of Days Minutes Minutes Actual Traditional Multitrack Grade Level Requirement Requirement Minutes Calendar Calendar Status Kindergarten 36,000 35,000 36, N/A Complied Grades ,400 49,000 Grade 1 51, N/A Complied Grade 2 51, N/A Complied Grade 3 51, N/A Complied Grades ,000 52,500 Grade 4 54, N/A Complied Grade 5 54, N/A Complied Grade 6 57, N/A Complied Grades ,000 52,500 Grade 7 57, N/A Complied Grade 8 57, N/A Complied Grades ,800 63,000 Grade 9 64, N/A Complied Grade 10 64, N/A Complied Grade 11 64, N/A Complied Grade 12 64, N/A Complied See accompanying note to supplementary information. 94

214 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME (Continued) FOR THE YEAR ENDED JUNE 30, 2015 College Prep High School & Western Center Academy Reduced Number of Days Minutes Minutes Actual Traditional Multitrack Grade Level Requirement Requirement Minutes Calendar Calendar Status Grades ,000 52,547 Grade 6 57, N/A Complied Grade 7 57, N/A Complied Grade 8 57, N/A Complied Grades ,800 62,949 Grade 9 65, N/A Complied Grade 10 65, N/A Complied Grade 11 65, N/A Complied Grade 12 65, N/A Complied See accompanying note to supplementary information. 95

215 HEMET UNIFIED SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2015 Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements. Transportation Enterprise Fund FUND BALANCE Balance, June 30, 2015, Unaudited Actuals $ 6,988,279 Increase in: Capital assets 3,502,311 Accumulated depreciation (607,715) Capital lease obligations (3,878,300) Cash with fiscal agent 632,522 Balance, June 30, 2015, Audited Financial Statement $ 6,637,097 See accompanying note to supplementary information. 96

216 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 (Budget) (as restated) GENERAL FUND 5 Revenues $ 230,995,156 $ 197,844,038 $ 179,319,718 $ 178,926,157 Other sources and transfers in 1,078,175 1,005,440 1,502,778 1,707,303 Total Revenues and Other Sources 232,073, ,849, ,822, ,633,460 Expenditures 226,746, ,206, ,974, ,148,467 Other uses and transfers out 2,495,600 4,588,879 4,387,145 2,980,162 Total Expenditures and Other Uses 229,242, ,795, ,361, ,128,629 INCREASE (DECREASE) IN FUND BALANCE $ 2,831,289 $ (10,945,931) $ (5,539,133) $ 504,831 ENDING FUND BALANCE $ 22,312,760 $ 19,481,471 $ 30,427,402 $ 35,966,535 AVAILABLE RESERVES 2 $ 16,637,577 $ 10,489,775 $ 9,110,000 $ 8,800,000 AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO % 5.11% 5.00% 5.00% LONG-TERM OBLIGATIONS N/A $ 271,436,431 $ 246,019,800 $ 253,615,102 K-12 AVERAGE DAILY ATTENDANCE AT P ,781 19,656 19,824 19,823 The General Fund balance has decreased by $16,485,064 over the past two years. The fiscal year budget projects an increase of $2,831,289 (14.53 percent). For a district this size, the State recommends available reserves of at least three percent of total General Fund expenditures, transfers out, and other uses (total outgo). The District has incurred operating deficits in two of the past three years but anticipates incurring an operating surplus during the fiscal year. Total long-term obligations have increased by $17,821,329 over the past two years. Average daily attendance has decreased by 167 over the past two years. Growth of 125 ADA is anticipated during fiscal year Budget 2016 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all unassigned fund balances contained within the General Fund. 3 On behalf payments of $4,419,047, $4,181,629, and $4,157,888, have been excluded from the calculation of available reserves for the fiscal years ending June 30, 2015, 2014, and Excludes Charter School ADA. 5 General Fund amounts do not include activity related to the consolidation of the Fund 17, Special Reserve Fund for Other Than Capital Outlay Projects, and Fund 20, Special Reserve Fund for Postemployment Benefits as required by GASB Statement No. 54. See accompanying note to supplementary information. 97

217 HEMET UNIFIED SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2015 Name of Charter School College Prep High (#1564) Western Center Academy (#1144) Included in Audit Report Yes Yes See accompanying note to supplementary information. 98

218 HEMET UNIFIED SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET JUNE 30, 2015 Charter Child Deferred Schools Development Cafeteria Maintenance Fund Fund Fund Fund ASSETS Deposits and investments $ 967,701 $ 55,352 $ 4,305,863 $ 1,287,990 Receivables 226, ,644 1,195,715 1,266 Due from other funds 118, ,656 9,313 - Stores inventories ,879 - Total Assets $ 1,312,652 $ 335,652 $ 5,941,770 $ 1,289,256 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 122,370 $ 12,214 $ 114,216 $ 833,344 Due to other funds 86, ,438 23,645 12,118 Unearned revenue ,382 - Total Liabilities 209, , , ,462 Fund Balances: Nonspendable ,369 - Restricted 78,781-5,327,158 - Committed ,794 Assigned 1,024, Total Fund Balances 1,103,525-5,761, ,794 Total Liabilities and Fund Balances $ 1,312,652 $ 335,652 $ 5,941,770 $ 1,289,256 See accompanying note to supplementary information. 99

219 County Special Reserve Capital Projects Debt Service Capital School Fund for for Blended for Blended Non-Major Facilities Facilities Capital Outlay Component Units Component Units Governmental Fund Fund Projects Fund Fund Funds $ 2,497,933 $ 5,129,879 $ 668,723 $ 5,021,257 $ 4,445,558 $ 24,380,256 2,197 2, ,585,232-2, , , ,879 $ 2,500,130 $ 5,134,686 $ 1,393,789 $ 5,021,257 $ 4,445,558 $ 27,374,750 $ 947 $ 147,600 $ 214,840 $ - $ - $ 1,445, , , , , , ,159, ,369 2,499,183 4,987,086 44,293 5,021,257 4,445,558 22,403, , ,353, ,024,744 2,499,183 4,987, ,638 5,021,257 4,445,558 25,215,568 $ 2,500,130 $ 5,134,686 $ 1,393,789 $ 5,021,257 $ 4,445,558 $ 27,374,750 99

220 HEMET UNIFIED SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2015 Charter Child Deferred Schools Development Cafeteria Maintenance Fund Fund Fund Fund REVENUES Local Control Funding Formula $ 3,983,207 $ - $ - $ 1,500,000 Federal sources 1, ,099 10,547,501 - Other State sources 639,976 1,518, ,308 - Other local sources 372, ,986 4,978 Total Revenues 4,996,671 1,717,634 12,307,795 1,504,978 EXPENDITURES Current Instruction 3,308,770 1,091, Instruction-related activities: Supervision of instruction 3, , School site administration 680, , Pupil services: Food services ,266 11,150,515 - All other pupil services 177,926 2, Administration: Data processing 2, All other administration 175,106 76, ,944 - Plant services 733,920 13, ,160 1,528,533 Facility acquisition and construction ,584 Ancillary services 13, Community services 1, Debt service Principal Interest and other Total Expenditures 5,097,044 1,717,710 11,972,619 1,908,117 Excess (Deficiency) of Revenues Over Expenditures (100,373) (76) 335,176 (403,139) OTHER FINANCING SOURCES (USES) Transfers in 100,000-28,591 - Other sources Transfers out (317,755) - (368,435) - Net Financing Sources (Uses) (217,755) - (339,844) - NET CHANGE IN FUND BALANCES (318,128) (76) (4,668) (403,139) Fund Balances - Beginning 1,421, ,766, ,933 Fund Balances - Ending $ 1,103,525 $ - $ 5,761,527 $ 443,794 See accompanying note to supplementary information. 100

221 County Special Reserve Capital Projects Debt Service Capital School Fund for for Blended For Blended Non-Major Facilities Facilities Capital Outlay Component Units Component Units Governmental Fund Fund Projects Fund Fund Funds $ - $ - $ - $ - $ - $ 5,483, ,746, ,990, ,832 2,752 1, ,212 66,101 1,980, ,832 2,752 1, ,212 66,101 21,201, ,400, , , ,363, , ,640 30, , ,507, , ,048 86, ,501, , , ,475,000 1,475, ,245,656-2,359,251 3,604, , ,048 1,332,214-3,834,251 26,927,313 (184,478) (473,296) (1,330,920) 199,212 (3,768,150) (5,726,044) - 5,460, ,505-3,834,218 10,417, ,245, ,245, (233,417) - - (919,607) - 5,460,382 2,006,744-3,834,218 10,743,745 (184,478) 4,987, , ,212 66,068 5,017,701 2,683, ,814 4,822,045 4,379,490 20,197,867 $ 2,499,183 $ 4,987,086 $ 953,638 $ 5,021,257 $ 4,445,558 $ 25,215,

222 HEMET UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2015 NOTE 1 - PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of Federal awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. The following schedule provides reconciliation between revenues reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances and in Business-Type Activities, and the related expenditures reported on the Schedule of Expenditures of Federal Awards. The reconciling amounts consist primarily of (Medi-Cal Billing Option and Medi-Cal Administrative Activities) funds that in the previous period were recorded as revenues but were unspent. These unspent balances have been expended in the current period. CFDA Number Amount Description Total Federal Revenues From the Statement of Revenues, Expenditures and Changes in Fund Balances: $ 26,080,970 Medi-Cal Billing Option ,205 Medi-Cal Administrative Activities Program ,965 Total Schedule of Expenditures of Federal Awards $ 26,556,140 Local Education Agency Organization Structure This schedule provides information about the District's boundaries and schools operated, members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. 101

223 HEMET UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2015 Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. The District neither met nor exceeded its target funding. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through Districts must maintain their instructional minutes at the requirements, as required by Education Code Section Reconciliation of Annual Financial and Budget Report With Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Annual Financial and Budget Report Unaudited Actuals to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Schedule of Charter Schools This schedule lists all charter schools chartered by the District, and displays information for each charter school on whether or not the charter school is included in the District audit. Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance The Non-Major Governmental Funds Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balances Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. 102

224 INDEPENDENT AUDITOR'S REPORTS 103

225 INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Governing Board Hemet Unified School District Hemet, California We have audited, in accordance with the 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, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Hemet Unified School District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise Hemet Unified School District's basic financial statements, and have issued our report thereon dated December 11, Emphasis of Matter - Change in Accounting Principles As discussed in Notes 1 and 16 to the financial statements, the District adopted new accounting guidance, GASB Statement No. 68, Accounting and Financial Reporting for Pensions, and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date. Our opinion is not modified with respect to this matter. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Hemet Unified School District's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Hemet Unified School District's internal control. Accordingly, we do not express an opinion on the effectiveness of Hemet Unified School District's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 104

226 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Hemet Unified School District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of Hemet Unified School District in a separate letter dated December 11, Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Rancho Cucamonga, California December 11,

227 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A-133 Governing Board Hemet Unified School District Hemet, California Report on Compliance for Each Major Federal Program We have audited Hemet Unified School District's compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of Hemet Unified School District's (the District) major Federal programs for the year ended June 30, Hemet Unified School District's major Federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its Federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of Hemet Unified School District's major Federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major Federal program occurred. An audit includes examining, on a test basis, evidence about Hemet Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major Federal program. However, our audit does not provide a legal determination of Hemet Unified School District's compliance. 106

228 Opinion on Each Major Federal Program In our opinion, Hemet Unified School District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major Federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of Hemet Unified School District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Hemet Unified School District's internal control over compliance with the types of requirements that could have a direct and material effect on each major Federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major Federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Hemet Unified School District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. Rancho Cucamonga, California December 11,

229 INDEPENDENT AUDITOR'S REPORT ON STATE COMPLIANCE Governing Board Hemet Unified School District Hemet, California Report on State Compliance We have audited Hemet Unified School District's compliance with the types of compliance requirements as identified in the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, that could have a direct and material effect on each of the Hemet Unified School District's State government programs as noted below for the year ended June 30, Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its State's programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance of each of the Hemet Unified School District's State programs based on our audit of the types of compliance requirements referred to above. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting. These standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the applicable government programs noted below. An audit includes examining, on a test basis, evidence about Hemet Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. Our audit does not provide a legal determination of Hemet Unified School District's compliance with those requirements. Unmodified Opinion In our opinion, Hemet Unified School District complied, in all material respects, with the compliance requirements referred to above that are applicable to the government programs noted below that were audited for the year ended June 30,

230 Other Matters In connection with the audit referred to above, we selected and tested transactions and records to determine the Hemet Unified School District's compliance with the State laws and regulations applicable to the following items: Procedures Performed Attendance Accounting: Attendance Reporting Yes Teacher Certification and Misassignments Yes Kindergarten Continuance Yes Independent Study Yes Continuation Education Yes Instructional Time Yes Instructional Materials Yes Ratios of Administrative Employees to Teachers Yes Classroom Teacher Salaries Yes Early Retirement Incentive No, see below Gann Limit Calculation Yes School Accountability Report Card Yes Juvenile Court Schools No, see below Middle or Early College High Schools No, see below K-3 Grade Span Adjustment Yes Transportation Maintenance of Effort Yes Regional Occupational Centers or Programs Maintenance of Effort No, see below Adult Education Maintenance of Effort Yes California Clean Energy Jobs Act Yes After School Education and Safety Program: General Requirements Yes After School Yes Before School No, see below Proper Expenditure of Education Protection Account Funds Yes Common Core Implementation Funds Yes Unduplicated Local Control Funding Formula Pupil Counts Yes Local Control Accountability Plan Yes Charter Schools: Attendance Yes Mode of Instruction Yes Non Classroom-Based Instruction/Independent Study No, see below Determination of Funding for Non Classroom-Based Instruction No, see below Annual Instruction Minutes Classroom-Based Yes Charter School Facility Grant Program Yes The District does not offer an Early Retirement Incentive Program; therefore, we did not perform procedures related to the Early Retirement Incentive Program. The District does not have any Juvenile Court Schools; therefore, we did not perform any procedures related to Juvenile Court Schools. The District does not have a Middle or Early College High School Program; therefore, we did not perform procedures related to the Middle or Early College High School Program. 109

231 The District does not have a Regional Occupational Center or Program; therefore, we did not perform procedures related to the Regional Occupational Centers or Programs Maintenance of Effort. The District does not offer a Before School Education and Safety Program; therefore, we did not perform any procedures related to the Before School Education and Safety Program. The District does not have any non-classroom based Charter Schools; therefore, we did not perform any procedures for non-classroom based Charter School Programs. Rancho Cucamonga, California December 11,

232 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 111

233 HEMET UNIFIED SCHOOL DISTRICT SUMMARY OF AUDITOR'S RESULTS FOR THE YEAR ENDED JUNE 30, 2015 FINANCIAL STATEMENTS Type of auditor's report issued: Internal control over financial reporting: Material weakness identified? Significant deficiency identified? Noncompliance material to financial statements noted? FEDERAL AWARDS Internal control over major Federal programs: Material weakness identified? Significant deficiency identified? Type of auditor's report issued on compliance for major Federal programs: Any audit findings disclosed that are required to be reported in accordance with Section.510(a) of OMB Circular A-133? Identification of major Federal programs: CFDA Numbers Name of Federal Program or Cluster Unmodified No None reported No No None reported Unmodified No and Child Nutrition Cluster Title II, Part A, Improving Teacher Quality Local Grants Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? $ 796,684 Yes STATE AWARDS Type of auditor's report issued on compliance for programs: Unmodified 112

234 HEMET UNIFIED SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2015 None reported. 113

235 HEMET UNIFIED SCHOOL DISTRICT FEDERAL AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2015 None reported. 114

236 HEMET UNIFIED SCHOOL DISTRICT STATE AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2015 None reported. 115

237 HEMET UNIFIED SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2015 There were no audit findings reported in the prior year's schedule of financial statement findings. 116

238 Governing Board Hemet Unified School District Hemet, California In planning and performing our audit of the basic financial statements of Hemet Unified School District (the District) for the year ending June 30, 2015, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements and not to provide assurance on the internal control structure. However, during our audit we noted matters that are an opportunity for strengthening internal controls and operating efficiency. The following items represent conditions noted by our audit that we consider important enough to bring to your attention. This letter does not affect our report dated December 11, 2015, on the financial statements of Hemet Unified School District. ASSOCIATED STUDENT BODY (ASB) Rancho Viejo Middle School - Stale Dated Checks Observation In reviewing the sites outstanding check listing for the December 2014 reconciliation, we noted that numerous checks were over 12 months old making the probability of them clearing the account quite low. Recommendation Outstanding checks over 12 months old should be credited back to the appropriate account and taken off the subsequent bank reconciliation's. Although the chances are low, the check may clear on a subsequent bank statement. In this case, the amount should be charged against the appropriate account and described as "outstanding check written off-cleared". Rancho Viejo Middle School - Timely Deposits Observation Deposits are not being made timely by the site bookkeeper. This results in large cash balances being maintained at the site which severely decreases the safeguarding of the asset. 117

239 Governing Board Hemet Unified School District Recommendation At a minimum, deposits should be made weekly to minimize the amount of cash held at the site. During weeks of high cash activity there may be a need to make more than one deposit. The District should establish guidelines for this procedure, including the maximum cash on hand that should be maintained at the site. The ultimate responsibility however, will reside with the site bookkeeper to make the deposits timely. Rancho Viejo Middle School - Uncleared Deposits Observation In reviewing the bank reconciliation's outstanding items listing for October, November, and December 2014, auditor noted several uncleared deposits totaling $1, Recommendation Outstanding items should be investigated and credited/debited back to the appropriate account and taken off the subsequent bank reconciliation's. The review of the bank reconciliation should be performed by an individual independent of ASB accounting responsibilities to ensure accuracy and accountability of the reconciliation as a whole. Rancho Viejo Middle School - Inventory Observation The controls and procedures for the student store physical inventory count and P.E. clothes are not in place. Recommendation At least semi-annually, students should take a physical inventory of all items in the student store and compare the physical number remaining to the calculated number remaining. Two students should count the inventory and record their counts on separate inventory forms. The students should then compare the two counts and recount any that do not agree. Rancho Viejo Middle School - Pre-numbered Receipts Observation It appears that the site does not provide adequate controls over cash receipts. Although cash count forms are maintained as backup documentation for deposits, pre-numbered receipts are not used by the ASB Bookkeeper to account for cash collections and therefore, there is no reconciliation between issued receipts and bank deposits. Recommendation Pre-numbered receipts should be issued for all cash collections by teacher, advisors, and the site bookkeeper that would include a specific description of the source of the funds. 118

240 Governing Board Hemet Unified School District Helen Hunt Jackson - Timely Deposits Observation Deposits are not being made timely by the site bookkeeper. Auditor noted that cash collected was being held for over 130 days. Recommendation At a minimum, deposits should be made weekly to minimize the amount of cash held at the site. During weeks of high cash activity there may be a need to make more than one deposit. The District should establish guidelines for this procedure, including the maximum cash on hand that should be maintained at the site. The ultimate responsibility however, will reside with the site bookkeeper to make the deposits timely. Helen Hunt Jackson - Uncleared Deposits Observation In reviewing the bank reconciliation's outstanding items listing for September, October, and November 2014, auditor noted that several uncleared deposits totaling $ Recommendation Outstanding items should be investigated and credited/debited back to the appropriate account and taken off the subsequent bank reconciliation's. The review of the bank reconciliation should be performed by an individual independent of ASB accounting responsibilities to ensure accuracy and accountability of the reconciliation as a whole. Helen Hunt Jackson - Disbursements Missing Invoice Observation Student body disbursements are not adequately supported by proper documentation. Recommendation All disbursements should be accompanied by invoices and signed receiving documentation. This reduces the risk of unauthorized spending, and items being paid for and not received. Helen Hunt Jackson - Revenue Potentials Observation The revenue potential forms are not completed at the site. 119

241 Governing Board Hemet Unified School District Recommendation Revenue earned in the Student Body fund is subject to greater risk of loss due to the nature of the fundraising events and decentralization of the cash collection procedures. Increased internal control procedures over these activities will assist the District in decreasing the risk of potential losses of the student body funds. One important internal control feature is the Revenue Potential Form. The revenue potential form is important because it shows whether or not all the monies that should have been raised and turned in actually were based on the price of the item and number sold. The form is also used to document overages and shortages or losses of merchandise. A secondary tool that the form accomplishes is to allow the bookkeeper to compare the advisors log of the deposits made for the fundraiser to the financial records of the appropriate account to ensure that all entries were correctly posted. The site administrator should ensure that these forms are completed and turned in to the bookkeeper at the conclusion of the fundraiser. Helen Hunt Jackson - Bank Reconciliations Observation Through bank statement reconciliation testing, auditor noted that bank reconciliations and financial statements are not being reviewed or prepared on a timely basis. The bank reconciliation for the months of September 2014 through November 2014 was not completed until April 14, Recommendation Monthly bank reconciliation's must be done in order to ensure that the cash balances reported on the books are accurate and that the financial institution has not made a mistake. Reconciling the cash accounts, the balances of the student body accounts should be totaled and compared to this reconciled cash amount to ensure that the two amounts are equal. The ASB Bookkeeper should prepare the bank reconciliations on a monthly basis and have them reviewed and signed by the appropriate personnel. SITE CASH COLLECTIONS Helen Hunt Jackson - Library Observation Deposits are not being made timely by the office manager. This results in large cash balances being maintained at the site which severely decreases the safeguarding of the asset. Auditor noted that monies collected on September 17, 2014 have not been deposited. Recommendation At a minimum, deposits should be made monthly to minimize the amount of cash held at the site. During months of high cash activity there may be a need to make more than one deposit. The District should establish guidelines for this procedure including the maximum cash on hand that should be maintained at the site. The ultimate responsibility, however, will reside with the office manager to make the deposits timely. 120

242 Governing Board Hemet Unified School District Helen Hunt Jackson Petty Cash Reimbursement Authorization Observation In reviewing the petty cash reimbursements, auditor noted that the reimbursements did not have evidence of proper approvals from the site administrator indicated by signature on the "Report of Income and Abatement Form". Recommendation All petty cash reimbursements to the site staff and teachers should be approved by the site administrator to ensure that they are proper. In addition the site administrator should sign the "Report of Income and Abatement Form" to indicate that the petty cash reimbursement has been approved. We will review the status of the current year comments during our next audit engagement. Rancho Cucamonga, California December 11,

243 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the Disclosure Certificate ), dated September, 2016, is executed and delivered by the Hemet Unified School District (the Issuer ) in connection with the execution and delivery of the $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series A (Tax Exempt) and the $ Hemet Unified School District 2016 Refunding Certificates of Participation, Series B (Federally Taxable) (collectively, the Certificates ). The Certificates are being executed and delivered pursuant to a Trust Agreement dated as of September 1, 2016 by and among the Issuer, Hemet Unified School District School Facilities Corporation and U.S. Bank National Association (the Trust Agreement ). The Issuer covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being entered into for the benefit of the Owners and Beneficial Owners of the Certificates and in order to assist the Participating Underwriter in complying with the Rule. SECTION 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. Beneficial Owner shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of the Certificates (including persons holding Certificates through nominees, depositories or other intermediaries). Disclosure Representative shall mean either of the Superintendent or the Assistant Superintendent, Business Services of the Issuer, or either of their designees, or such other officer or employee as the Issuer shall designate in writing from time to time. Dissemination Agent shall mean, initially, Dale Scott & Company, Inc., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Issuer and there has been filed with the then current Dissemination Agent a written acceptance of such designation. EMMA shall mean the Electronic Municipal Market Access system of the MSRB. Listed Events shall mean any of the events listed in Section 5 of this Disclosure Certificate. MSRB shall mean the Municipal Securities Rulemaking Board and any successor entity designated under the Rule as the repository for filings made pursuant to the Rule. Official Statement shall mean the Official Statement for the Certificates dated, Participating Underwriter shall mean Morgan Stanley & Co. LLC as the original purchaser of the Certificates. Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. E-1

244 SECTION 3. Provision of Annual Reports. (a) The Issuer shall, or shall cause the Dissemination Agent upon written direction to, not later than April 1 after the end of the Issuer s fiscal year, commencing with the report for the fiscal year ending June 30, 2016, provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report shall be provided to the MSRB in an electronic format as prescribed by the MSRB and shall be accompanied by identifying information as prescribed by the MSRB. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the Issuer may be submitted separately from and later than the balance of the Annual Report if they are not available by the date required above for the filing of the Annual Report. The Annual Report shall be provided at least annually notwithstanding any fiscal year longer than 12 calendar months. The Issuer s fiscal year is currently effective from July 1 to the immediately succeeding June 30 of the following year. The Issuer will promptly notify the MSRB and the Dissemination Agent of a change in the fiscal year dates. The Issuer shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Dissemination Agent may conclusively rely upon such certification of the Issuer and shall have no duty or obligation to review such Annual Report. (b) If the Dissemination Agent is other than the Issuer, not later than fifteen (15) days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the Issuer shall provide the Annual Report to the Dissemination Agent. If by fifteen (15) days prior to such date the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Issuer to determine if the Issuer is in compliance with subsection (a). (c) If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Dissemination Agent shall send a notice to such effect to the MSRB, in the form required by the MSRB. (d) The Dissemination Agent shall: (i) confirm the electronic filing requirements of the MSRB for the Annual Reports; and (ii) promptly after receipt of the Annual Report, file a report with the Issuer certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided the MSRB. The Dissemination Agent s duties under this clause (ii) shall exist only if the Issuer provides the Annual Report to the Dissemination Agent for filing. (e) Notwithstanding any other provision of this Disclosure Certificate, all filings shall be made in accordance with the MSRB s EMMA system or in another manner approved under the Rule. SECTION 4. reference the following: Content of Annual Reports. The Issuer s Annual Report shall contain or include by (a) 1. The audited financial statements of the Issuer for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. E-2

245 2. Average daily attendance, enrollment and English learners/low-income percentage of enrollment of the Issuer for the last completed fiscal year in the event that such data affects the revenues received by the Issuer from the State, which may be in the form of an update to Table The adopted budget of the Issuer for the current fiscal year and, if available, the First Interim Report for the current fiscal year. (b) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Issuer or related public entities, which have been submitted to the MSRB or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The Issuer shall clearly identify each such other document so included by reference. SECTION 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates in a timely manner not more than ten (10) business days after the event: (1) principal and interest payment delinquencies; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determinations of taxability or of the Notice of Proposed Issue (IRS Form TEB); (6) tender offers; (7) defeasances; (8) ratings changes; and (9) bankruptcy, insolvency, receivership or similar proceedings. Note: for the purposes of the event identified in subparagraph (9), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. E-3

246 (b) Pursuant to the provisions of this Section 5, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) unless described in paragraph 5(a)(5), notices or determinations by the Internal Revenue Service with respect to the tax status of the Certificates or other material events affecting the tax status of the Certificates; (2) the consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; (3) appointment of a successor or additional trustee or the change of the name of a trustee; (4) nonpayment related defaults; (5) modifications to the rights of Owners of the Certificates; (6) notices of prepayment; and (7) release, substitution or sale of property securing repayment of the Certificates. (c) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event described in subsection (b), the Issuer shall as soon as possible determine if such event would be material under applicable federal securities laws. (d) If the Issuer determines that knowledge of the occurrence of a Listed Event under Section 5(b) would be material under applicable federal securities laws, the Issuer shall file a notice of such occurrence with EMMA in a timely manner not more than ten (10) business days after the event. (e) The Issuer hereby agrees that the undertaking set forth in this Disclosure Certificate is the responsibility of the Issuer and that the Dissemination Agent shall not be responsible for determining whether the Issuer s instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule. (f) If the Dissemination Agent has been instructed by the Issuer to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the MSRB. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(7) and (b)(6) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Owners of affected Certificates pursuant to the Trust Agreement. In each case of the Listed Event, the Dissemination Agent shall not be obligated to file a notice as required in this subsection (f) prior to the occurrence of such Listed Event. (g) Any of the filings required to be made under this Section 5 shall be made in accordance with the MSRB s EMMA system or in another manner approved under the Rule. SECTION 6. Termination of Reporting Obligations. The obligations of the Issuer and the Dissemination Agent under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of Certificates. If such termination occurs prior to the final maturity of the Certificates, the Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5. E-4

247 SECTION 7. Dissemination Agent. The Issuer may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under the Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be Dale Scott & Company, Inc. The Dissemination Agent may resign by providing thirty days written notice to the Issuer and the Paying Agent. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the Issuer. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the Issuer in a timely manner and in a form suitable for filing. SECTION 8. Amendment. (a) This Disclosure Certificate may be amended, in writing, without the consent of the Owners, if all of the following conditions are satisfied: (1) such amendment is made in connection with a change in circumstances that arises from a change in legal (including regulatory) requirements, a change in law (including rules or regulations) or in interpretations thereof, or a change in the identity, nature or status of the Issuer or the type of business conducted thereby, (2) this Disclosure Certificate as so amended would have complied with the requirements of the Rule as of the date of this Disclosure Certificate, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, (3) there shall have been delivered to the Issuer an opinion of a nationally recognized bond counsel or counsel expert in federal securities laws, addressed to the Issuer, to the same effect as set forth in clause (2) above, (4) the Issuer shall have delivered to the Dissemination Agent (if other than the Issuer) an opinion of nationally recognized bond counsel or counsel expert in federal securities laws, addressed to the Issuer, to the effect that the amendment does not materially impair the interests of the Owners, and (5) the Issuer shall have delivered copies of such opinion and amendment to the MSRB. (b) This Disclosure Certificate may be amended in writing with respect to the Certificates, upon obtaining consent of Owners at least 25% in aggregate principal of the Certificates then outstanding; provided that the conditions set forth in Section 8(a)(1), (2) and (3) have been satisfied; and provided, further, that the Dissemination Agent shall be obligated to enter into any such amendment that modifies or increases its duties or obligations hereunder. (c) To the extent any amendment to this Disclosure Certificate results in a change in the type of financial information or operating data provided pursuant to this Disclosure Certificate, the first Annual Report provided thereafter shall include a narrative explanation of the reasons for the amendment and the impact of the change. (d) If an amendment is made to the basis on which financial statements are prepared, the Annual Report for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Such comparison shall include a quantitative and, to the extent reasonably feasible, qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information. SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Issuer chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the Issuer shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice if occurrence of a Listed Event. E-5

248 The Issuer acknowledges and understands that other state and federal laws, including but not limited to the Securities Act of 1933 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934, may apply to the Issuer, and that under some circumstances compliance with this Disclosure Certificate, without additional disclosures or other action, may not fully discharge all duties and obligations of the Issuer under such laws. SECTION 10. Default. In the event the Issuer fails to comply with any provision in this Disclosure Certificate, the Dissemination Agent may (or shall upon direction of the Owners of 25% in aggregate principal of the Certificates then outstanding or the Participating Underwriter) take all action necessary to cause the Issuer to comply with this Disclosure Certificate. In the event of a failure of the Issuer to comply with any provision of this Disclosure Certificate, any Owner or Beneficial Owner of the Certificates may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Issuer to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the Issuer to comply with this Disclosure Certificate shall be an action to compel performance. SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the Issuer agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Issuer for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it hereunder and shall not be deemed to be acting in any fiduciary capacity for the Issuer, the Certificate Owner s, or any other party. The obligations of the Issuer under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. No person shall have any right to commence any action against the Dissemination Agent hereunder, seeking any remedy other than to compel specific performance of this Disclosure Certificate. The Dissemination Agent shall not be liable under any circumstances for monetary damages to any person for any breach under this Disclosure Certificate. SECTION 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Issuer, the Dissemination Agent, the Participating Underwriter, Owners and Beneficial Owners from time to time of the Certificates, and shall create no rights in any other person or entity. SECTION 13. Notices. Notices should be sent in writing to the following addresses. The following information may be conclusively relied upon until changed in writing. Disclosure Representative: Superintendent Hemet Unified School District 1791 W. Acacia Avenue Hemet, California HEMET UNIFIED SCHOOL DISTRICT By: Superintendent E-6

249 APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY F-1

250 MUNICIPAL BOND INSURANCE POLICY ISSUER: BONDS: $ in aggregate principal amount of Policy No: -N Effective Date: Premium: $ ASSURED GUARANTY MUNICIPAL CORP. ("AGM"), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the "Trustee") or paying agent (the "Paying Agent") (as set forth in the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of the Owners or, at the election of AGM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on which AGM shall have received Notice of Nonpayment, AGM will disburse to or for the benefit of each Owner of a Bond the face amount of principal of and interest on the Bond that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by AGM, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in AGM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by AGM is incomplete, it shall be deemed not to have been received by AGM for purposes of the preceding sentence and AGM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, who may submit an amended Notice of Nonpayment. Upon disbursement in respect of a Bond, AGM shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner's right to receive payments under the Bond, to the extent of any payment by AGM hereunder. Payment by AGM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of AGM under this Policy. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. "Business Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment" means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless AGM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. "Nonpayment" means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. "Nonpayment" shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer which has been recovered from such Owner pursuant to the

251 Page 2 of 2 Policy No. -N United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. "Notice" means telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to AGM which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner" shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. AGM may appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer's Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to AGM pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to AGM and shall not be deemed received until received by both and (b) all payments required to be made by AGM under this Policy may be made directly by AGM or by the Insurer's Fiscal Agent on behalf of AGM. The Insurer's Fiscal Agent is the agent of AGM only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of AGM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, AGM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to AGM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy sets forth in full the undertaking of AGM, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In witness whereof, ASSURED GUARANTY MUNICIPAL CORP. has caused this Policy to be executed on its behalf by its Authorized Officer. ASSURED GUARANTY MUNICIPAL CORP. By Authorized Officer A subsidiary of Assured Guaranty Municipal Holdings Inc Broadway, New York, N.Y (212) Form 500NY (5/90)

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253 APPENDIX G BOOK ENTRY ONLY SYSTEM The information in this section concerning DTC and DTC s book entry only system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, premium, if any, and interest with respect to the Certificates to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Certificates and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Reference made to presented as a link for additional information regarding DTC and is not a part of this Official Statement. 1. The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the Certificates (the Certificates ). The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each maturity of the Certificates in the aggregate principal amount of such maturity, and will be deposited with DTC. 2. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC is rated AA+ by Standard & Poor s. 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 3. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC s records. The ownership interest of each actual purchaser of each Security ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates 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 Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. 4. To facilitate subsequent transfers, all Certificates 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 Certificates 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 Certificates; DTC s records reflect only the identity of the Direct Participants to G-1

254 whose accounts such Certificates 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. 5. 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 Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as prepayments, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates 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. 6. Prepayment notices shall be sent to DTC. If less than all of the Certificates within a maturity are being prepaid, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be prepaid. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Principal, prepayment price and interest payments on the Certificates 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 the Paying Agent, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, prepayment price 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, 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. 9. A Certificate Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant s interest in the Certificates, on DTC s records, to the Trustee. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC s records and followed by a book-entry credit of tendered Certificates to the Trustee s DTC account. 10. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, physical Certificates are required to be printed and delivered. 11. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Certificates will be printed and delivered to DTC. AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE CERTIFICATES, THE TRUSTEE WILL SEND ANY NOTICE OF PREPAYMENT OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OF SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE PREPAYMENT OF THE CERTIFICATES CALLED FOR PREPAYMENT OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. G-2

255 APPENDIX H COUNTY INVESTMENT POLICY H-1

256 COUNTY OF RIVERSIDE OFFICE OF THE TREASURER TAX-COLLECTOR STATEMENT OF INVESTMENT POLICY INTRODUCTION The Treasurer s Statement of Investment Policy is presented annually to the County Investment Oversight Committee for review and to the Board of Supervisors for approval, pursuant to the requirements of Sections 53646(a) and of the California Government Code (the Code Section). This policy will become effective immediately upon approval by the Board of Supervisors. SCOPE The Treasurer s Statement of Investment Policy is limited in scope to only those County, school, special districts and other fund assets actually deposited and residing in the County Treasury. It does not apply to bond funds or other assets belonging to the County of Riverside, or any affiliated public agency the assets of which reside outside of the County Treasury. FIDUCIARY RESPONSIBILITY Section of the Code declares each treasurer, or governing body authorized to make investment decisions on behalf of local agencies, to be a trustee and therefore a fiduciary subject to the prudent investor standard. This standard, as stated in Code Section requires that When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer or the board of supervisors, as applicable, shall act with care, skill, prudence, and diligence under the circumstances then prevailing, specifically including, but not limited to, the general economic conditions and the anticipated needs of the county and other depositors, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the county and the other depositors. PORTFOLIO OBJECTIVES The first and primary objective of the Treasurer s investment of public funds is to safeguard investment principal; second, to maintain sufficient liquidity within the portfolio to meet daily cash flow requirements; and third, to achieve a reasonable rate of return or yield on the portfolio consistent with these objectives. The portfolio shall be actively managed in a manner that is responsive to the public trust and consistent with State law. AUTHORITY Statutory authority for the Treasurer s investment and safekeeping functions are found in Code Sections and et. seq. The Treasurer s authority to make investments is to be renewed annually, pursuant to state law. It was last renewed by the Board of Supervisors on December 17, 2015 by County Ordinance No Code Section effectively requires the legislative body to delegate investment authority of the County on an annual basis.

257 AUTHORIZED INVESTMENTS Investments shall be restricted to those authorized in Code Sections and as amended and as further restricted by this policy statement. All investments shall be governed by the restrictions shown in Schedule I which defines the type of investments authorized, maturity limitations, portfolio diversification, credit quality standards (two of the three nationally recognized ratings shall be used for corporate and municipal securities), and purchase restrictions that apply. STAFF AUTHORIZED TO MAKE INVESTMENTS Only the Treasurer-Tax Collector, Don Kent, Assistant Treasurer-Tax Collector, Jon Christensen, Investment Manager, Giovane Pizano, Assistant Investment Manager, Isela Licea, and Assistant Investment Manager, Merry Gonzalez are authorized to make investments (except in the case of an emergency) and to order the receipt and delivery of investment securities among custodial security clearance accounts. AUTHORIZED BROKER/DEALERS Securities transactions are limited solely to those noted on Schedule II of this policy. DAILY ACCOUNTABILITY AND CONTROL Except for emergencies or previous authorization by the Treasurer-Tax Collector, all investment transactions are to be conducted at the Treasurer-Tax Collector s office (if open and available to conduct business), documented, and reviewed by the Treasurer-Tax Collector. All investment transactions will be entered daily into the Treasurer s internal financial accounting system with copies to be filed on a timely basis. Portfolio income shall be reconciled daily against cash receipts and quarterly, prior to the distribution of earnings among those entities sharing in pooled fund investment income. SECURITY CUSTODY & DELIVERIES All securities except for money market funds registered in the County s name and securities issued by the County or other local agencies shall be deposited for safekeeping with banks contracted to provide the County Treasurer with custodial security clearance services. These third party trust department arrangements provide the County with a perfected interest in, and ownership and control over the securities held by the custodian on the County s behalf, and are intended to protect the County from the bank s own creditors in the event of a bank default and filing for bankruptcy. Securities are NOT to be held in investment firm/broker dealer accounts. All security transactions are to be conducted on a delivery versus payment basis. Confirmation receipts on all investments are to be reviewed immediately for conformity with County transaction documentation. Securities issued by local agencies purchased directly shall be held in the Treasurer s vault. The security holdings shall be reconciled with the custodian holding records daily. The Treasurer s Fiscal Compliance unit will audit purchases daily for compliance, and audit holding records monthly. COMPETITIVE PRICING Investment transactions are to be made at current market value and competitively priced whenever possible. Competitive pricing does not necessarily require submission of bids, but does require adequate comparative analysis. The current technology utilized by the Treasury provides this information. 2

258 MATURITY LIMITATIONS No investment shall exceed a final maturity date of five years from the date of purchase unless it is authorized by the Board of Supervisors pursuant to Code Section LIQUIDITY The portfolio shall maintain a weighted average days to maturity (WAM) of less than 541 days or 1.5 years. To provide sufficient liquidity to meet daily expenditure requirements, the portfolio shall maintain at least 40% of its total value in securities having maturities 1 year or less. SECURITIES LENDING The Treasurer may engage in securities lending activity limited to 20% of the portfolio s book value on the date of transaction. Instruments involved in a securities lending program are restricted to those securities pursuant to Code Section and by the Treasurer s Statement of Investment Policy. REVERSE REPURCHASE AGREEMENTS The Treasury shall not engage in any form of leverage for the purpose of enhancing portfolio yield. There shall be no entry into reverse repurchase agreements except for temporary and unanticipated cash flow requirements that would cause the Treasurer to sell securities at a principal loss. Any reverse repurchase agreements are restricted pursuant to Code Section and by the Treasurer s Statement of Investment Policy. MITIGATING MARKET & CREDIT RISKS Safety of principal is the primary objective of the portfolio. Each investment transaction shall seek to minimize the County s exposure to market and credit risks by giving careful and ongoing attention to the: (1) credit quality standards issued by the nationally recognized rating agencies on the credit worthiness of each issuer of the security, (2) limiting the concentration of investment in any single firm as noted in Schedule I, (3) by limiting the duration of investment to the time frames noted in Schedule I, and (4) by maintaining the diversification and liquidity standards expressed within this policy. TRADING & EARLY SALE OF SECURITIES All securities are to be purchased with the intent of holding them until maturity. However, in an effort to minimize market and credit risks, securities may be sold prior to maturity either at a profit or loss when economic circumstances, trend in short-term interest rates, or a deterioration in credit-worthiness of the issuer warrants a sale of the securities to either enhance overall portfolio yield or to minimize further erosion and loss of investment principal. Such sales should take into account the short and long term impacts on the portfolio. However, the sale of a security at a loss can only be made after first securing the approval of the Treasurer-Tax Collector. PURCHASE OF WHEN ISSUED SECURITIES When issued (W.I.) purchases of securities and their subsequent sale prior to cash settlement are authorized as long as sufficient cash is available to consummate their acceptance into the Treasurer s portfolio on the settlement date. 3

259 PORTFOLIO REPORTS/AUDITING Portfolio reports required by Code Sections and 27133(e) shall be filed monthly with the Board of Supervisors. The Treasurer shall also prepare and file with the Board of Supervisors, the County Executive Officer, County Auditor-Controller, Superintendent of Schools and the Investment Oversight Committee, the Monthly Treasurer s Pooled Investment Fund reports, including at a minimum, all information required by law. Monthly Treasurer s Pooled Investment Fund reports are to be filed with the County Investment Oversight Committee as required by Code Section Consistent with Board Policy B-21 (County Investment Policy Statement), III A, an outside compliance audit will be conducted annually. Outside audits will be conducted at least biennially by an independent auditing firm selected by the Board of Supervisors, per Board Minute Order No Reports are posted monthly on the Treasurer s website: SPECIFIC INVESTMENTS Specific investments for individual funds may be made in accordance with the Treasurer s Statement of Investment Policy, upon written request and approval of the responsible agency s governing board, and, approval of the Treasurer-Tax Collector. Investments outside of the policy may be made on behalf of such funds with approval of the governing Board and approval of the Treasurer-Tax Collector. All specific investments shall be memorialized by a Memorandum of Understanding. With the purchase of specific investments, the fund will be allocated the earnings and/or loss associated with those investments. The Treasurer-Tax Collector reserves the right to allocate a pro-rata charge for administrative costs to such funds. PERFORMANCE EVALUATION Portfolio performance is monitored daily and evaluated monthly in comparison to the movement of the Treasurer s Institutional Money Market Index (TIMMI), or other suitable index. Over time, the portfolio rate of return should perform in relationship to such an index. Regular meetings are to be conducted with the investment staff to review the portfolio s performance, in keeping with this policy, and, current market conditions. INVESTMENT OVERSIGHT COMMITTEE In accordance with Code Section et seq. of the Code, the Board of Supervisors has established an Investment Oversight Committee. The role of the Committee is advisory in nature. It has no input on day to day operations of the Treasury. QUARTERLY DISTRIBUTION OF INVESTMENT EARNINGS Portfolio income, including gains and losses (if any), will be distributed quarterly in compliance with Sections and of the Code which give the Treasurer broad authority to apportion earnings and losses among those participants sharing in pooled investment income, and, except for specific investments in which the interest income is to be credited directly to the fund from which the investment was made, all investment income is to be distributed pro-rata based upon each participant s average daily cash balance for the calendar quarter. Any subsequent adjustments of reported earnings by the Auditor-Controller will be first reviewed and approved by the Treasurer to assure compliance with Code Sections and QUARTERLY APPORTIONMENT OF ADMINISTRATIVE COSTS Prior to the quarterly apportionment of pooled fund investment income, the County Treasurer is permitted, pursuant to Code Section 27013, to deduct from investment income before the distribution thereof, the actual cost of the investment, audit, deposit, handling and distribution of 4

260 such income. Accordingly, in keeping with Code Sections 27013, 27133(f), and 27135, the Treasury shall deduct from pooled fund investment earnings the actual cost incurred for: retail banking services, wire transfers, custodial safekeeping charges, the pro-rata annual cost of the salaries including fringe benefits for the personnel in the Treasurer-Tax Collector s office engaged in the administration, investment, auditing, cashiering, accounting, reporting, remittance processing and depositing of public funds for investment, together with the related computer and office expenses associated with the performance of these functions. Costs are apportioned based upon average daily ending balances. Prior to gaining reimbursement for these costs, the Treasurer-Tax Collector shall annually prepare a proposed budget revenue estimate per Code Section TREASURY OPERATIONS Treasury operations are to be conducted in the most efficient manner to reduce costs and assure the full investment of funds. The Treasurer will maintain a policy regarding outgoing wires and other electronic transfers. Requests for outgoing transfers which do not arrive on a timely basis may be delayed. The County Treasurer may institute a fee schedule to more equitably allocate costs that would otherwise be spread to all depositors. POLICY CRITERIA FOR AGENCIES SEEKING VOLUNTARY ENTRY Should any agency solicit entry, the agency shall comply with the requirements of Section of the Code and adopt a resolution by the the legislative or governing body of the local agency authorizing the deposit of excess funds into the County treasury for the purpose of investment by the County Treasurer. The resolution shall specify the amount of monies to be invested, the person authorized by the agency to coordinate the transaction, the anticipated time frame for deposits, the agency s willingness to be bound to the statutory 30-day written notice requirement for withdrawals, and acknowledging the Treasurer s ability to deduct pro-rata administrative charges permitted by Code Section Any solicitation for entry into the TPIF must have the County Treasurer s consent before the receipt of funds is authorized. The depositing entity will enter into a depository agreement with the Treasurer. POLICY CRITERIA FOR VOLUNTARY PARTICIPANT WITHDRAWALS With the Treasury being required to maintain a 40% liquidity position at all times during the calendar year, it is anticipated that sufficient funds will be on hand to immediately meet on demand all participant withdrawals for the full dollar amounts requested without having to make any allowance or pro-rata adjustment based on the current market value of the portfolio. In addition, any withdrawal by a local agency for the purpose of investing or depositing those funds outside the Pool shall have the prior written approval of the County Treasurer. The Treasurer s approval of the withdrawal request shall be based on the availability of funds; the circumstances prompting the request; the dollar volume of similar requests; the prevailing condition of the financial markets, and, an assessment of the effect of the proposed withdrawal on the stability and predictability of the investments in the county treasury. POLICY ON RECEIPT OF HONORARIA, GIFTS AND GRATUITIES Neither the Treasurer-Tax Collector nor any member of his staff, shall accept any gift, gratuity or honoraria from financial advisors, brokers, dealers, bankers or other persons or firms conducting business with the County Treasurer which exceeds the limits established by the Fair Political Practices Commission (FPPC) and relevant portions of Code Section IOC members shall be subject to the limits included in the Board of Supervisors Policy B-21. 5

261 ETHICS & CONFLICTS OF INTEREST Officers and staff members involved in the investment process shall refrain from any personal business activity that compromises the security and integrity of the County s investment program or impairs their ability to make impartial and prudent investment decisions. In addition, the County Treasurer-Tax Collector, Assistant Treasurer-Tax Collector,, Investment Manager, and Assistant Investment Manager are required to file annually the applicable financial disclosure statements as mandated by the FPPC and County policy. INVESTMENTS MADE FROM DEBT ISSUANCE PROCEEDS The proceeds of a borrowing may be specifically invested per Schedule I of this policy (with the exception of Collateralized Time Deposits and Local Agency Obligations) as well as competitively bid investments (see County of Riverside Office Of The Treasurer-Tax Collector Policy Governing Competitively Bid Investments, dated March 3, 2011). No pooled fund investments made from the proceeds of a borrowing, the monies of which are deposited in the County Treasury, shall be invested for a period of time exceeding the maturity date of the borrowing. Nor shall any monies deposited with a bank trustee or fiscal agent for the ultimate purpose of retiring the borrowing be invested beyond the maturity date of the borrowing. POLICY ADOPTION & AMENDMENTS This policy statement will become effective following adoption by the Board of Supervisors, and, will remain in force until subsequently amended in writing by the Treasurer-Tax Collector and approved by the Board. Don Kent County of Riverside Treasurer-Tax Collector May 24,

262 SCHEDULE I AUTHORIZED INVESTMENTS DIVERSIFICATION (1) PURCHASE RESTRICTIONS MATURITY CREDIT QUALITY (S&P/MOODY S/FITCH) U.S. Treasury notes, bills, bonds or other certificates of indebtedness Notes, participations, or obligations issued by the agencies of the federal government Bonds, notes, warrants or certificates of indebtedness issued by the state of CA, or local agencies, or, the County of Riverside. Registered treasury notes or bonds of any of the other 49 United States per Government Code Section (d) 100% N/A Maximum 5 years N/A 100% N/A Maximum 5 years N/A 15% maximum See Schedule VI Maximum 4 years Long term AA-, Aa3, AA- or better Local Agency Investment Fund (LAIF) $50 million Maximum $50 million per LAIF Daily Liquidity N/A Commercial Paper (CP) 40% maximum See Schedule VI Maximum 270 days Short term A-1,P-1,F-1 or better Local Agency Obligations (LAO) 2.5% maximum Board of Supervisors approval required. Issued by pool depositors only Maximum 3 years Non-rated, if in the opinion of the Treasurer, considered to be of investment grade or better CalTRUST Short Term Fund (CLTR) 1% maximum Board of Supervisors approval required Daily liquidity NR / Portfolio managed pursuant to California Government Code & Negotiable CD s (NCD S) issued by national or state chartered banks or a licensed branch of a foreign bank 25% maximum See Schedule VI Maximum 1 year Short term A-1,P-1,F-1 or better Collateralized Time Deposits (TCD) 2% maximum See Schedule IV Maximum 1 year N/A Repurchase Agreements (REPO) with 102% collateral restricted to U. S. Treasuries, agencies, agency mortgages, CP, BA s 40% max, 25% in term repo over 7 days. No more than 20% w/one dealer in term repo Repurchase agreements to be on file Maximum 45 days Short Term A-1, P-1, F-1 or better If A-2, P-2, F2 then overnight only Reverse Repurchase Agreements on U. S. Treasury & federal agency securities in portfolio 10% maximum For temporary cash Flow needs only. Max 60 days with prior approval of Board of Supervisors N/A Medium Term Notes (MTNO) or Corporate Notes 20% maximum See Schedule VI Maximum 3 years AA, Aa2, AA minimum if under 1 year Union Bank Government Managed Rate Account (GMRA) 10% N/A Daily Liquidity Fully collateralized Money Market Mutual Funds (MMF) that invest in eligible securities meeting requirements of California Government Code 20% maximum Registered with SEC No NAV adjustments No front end loads See Schedule V Daily liquidity Long Term AAA (2 of 3 nationally recognized rating services) (1) Whichever is greater. 7

263 AUTHORIZED BROKER/DEALERS SCHEDULE II The Treasurer is authorized to conduct investment security transactions with the broker/dealers which are designated by the Federal Reserve Bank as primary government dealers. Security transactions with firms, other than those appearing on this list, are prohibited. 1. Other authorized firms: Union Bank Piper Jaffray & Co. SunTrust Bank Stifel Nicolaus FTN Financial InCapital Raymond James & Associates, Inc. 2. Direct purchases from major commercial paper issuers, money market mutual funds, banker s acceptance issuers, negotiable CD issuers, or savings and loan are authorized. 3. Incidental purchases of less than $10 million may be made with other firms if in the opinion of the Treasurer, such transactions are deemed advantageous. To ensure compliance with the County Treasurer s investment guidelines, each newly authorized primary government dealer and other authorized firms (as listed above in section 1, 2 and 3) will be supplied a complete copy of this Investment Policy document approved by the Board of Supervisors. 8

264 POLICY CRITERIA FOR SELECTION OF BROKER/DEALERS SCHEDULE III 1. The County Treasurer has elected to limit security transactions as mentioned in Schedule II. Accordingly, the financial institution must confirm that they are a member of the Financial Industry Regulatory Authority (FINRA), registered with the Securities & Exchange Commission (SEC), and possess all other required licenses. The Treasurer is prohibited from the selection of any broker, brokerage, dealer, or securities firm that has, within any consecutive 48-month period following January 1, 1996, made a political contribution in an amount exceeding the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board, to the local treasurer, any member of the governing board of the local agency, or any candidate for those offices. 2. The County Treasurer s intent is to enter into long-term relationships. Therefore, the integrity of the firm and the personnel assigned to our account is of primary importance. 3. The firm must specify the types of securities it specializes in and will be made available for our account. 4. It is important that the firm provide related services that will enhance the account relationship which could include: (a) An active secondary market for its securities. (b) Internal credit research analysis on commercial paper, banker s acceptances and other securities it offers for sale. (c) Be willing to trade securities for our portfolio. (d) Be capable of providing market analysis, economic projections, and newsletters. (e) Provide market education on new investment products, security spread relationships, graphs, etc. 5. The firm must be willing to provide us annual financial statements. 6. The County Treasurer is prohibited from the establishment of a broker/dealer account for the purpose of holding the County s securities. All securities must be subject to delivery at the County s custodial bank. 7. Without exception, all transactions are to be conducted on a delivery versus payment (DVP) basis. 8. The broker/dealer must have been in operation for more than 5 years, and, if requested, the firm must be willing to provide us a list of local government clients or other reference, particularly those client relationships established within the State of California. 9

265 POLICY CRITERIA FOR COLLATERALIZED TIME DEPOSITS SCHEDULE IV Before the Treasury can place a time deposit with a local bank or savings and loan, the following criteria must be met: 1. The bank must provide us with an executed copy of the "Contract for Deposit of Moneys." 2. The interest rate on the Time Certificate of Deposit must be competitive with rates offered by other banks and savings and loans residing in Riverside County, as well as exceed that of U.S. Treasury Securities. 3. Investments less than the FDIC insurance limit will be sufficient without requiring any collateral to be pledged with the Federal Reserve to secure the public fund deposit. 4. Investments exceeding the FDIC insurance limit shall be fully collateralized by U.S. Treasury and Federal Agency securities having maturities five years or less. The County Treasury must receive written confirmation that these securities have been pledged in repayment of the time deposit. The securities pledged as collateral must have a current market value greater than the dollar amount of the deposit in keeping with the ratio requirements specified in Code Section Additionally, a statement of the collateral shall be provided on a monthly basis. A collateral waiver for the portion insured by the FDIC will be granted. 5. The County Treasurer must be given a current audited financial statement for the financial year just ended as well as the most recent quarterly statement of financial condition. The financial reports must both include a statement of financial condition as well as an income statement depicting current and prior year operations. 6. The County Treasurer will not place a public fund deposit for more than 10% of the present paid-in capital and surplus of the bank. 7. The County Treasurer must receive a certificate of deposit which specifically expresses the terms governing the transaction, deposit amount, issue date, maturity date, name of depositor, interest rate, interest payment terms (monthly, quarterly, etc). 8. All time certificates must have a maturity date not exceeding one year from the date of the deposit, with interest payments based upon the stated interest rate. 9. The County Treasurer must receive a letter from an officer of the bank at the time the initial deposit is made, that there is no known pending financial disclosure or public announcement of an adverse financial event involving the bank or savings and loan, nor is there any knowledge that a conflict of interest situation exists between any County official and an officer or employee of the bank. 10. Time deposits will only be made with banks and savings and loans having branch office locations within Riverside County. 10

266 POLICY CRITERIA FOR ENTERING INTO A MONEY MARKET FUND SCHEDULE V Shares of beneficial interest issued by diversified management companies, also known as mutual funds, invest in the securities and obligations authorized by Code Sections (10). Approved mutual funds will be registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et. seq.) and shall meet the following criteria: 1. The fund must have a AAA ratings from two of the nationally recognized rating services: Moody s, Fitch, Standard & Poor s. 2. The fund s prospectus cannot allow hedging strategies, options or futures. 3. The fund must provide a current prospectus before participation in the fund and provide copies of their portfolio reports and shall provide at least at month-end, a complete listing of securities within the fund s portfolio. 11

267 POLICY CRITERIA CORPORATE AND MUNICIPAL SECURITIES SCHEDULE VI Corporate Criteria. Money market securities will be first restricted by short-term ratings and then further restricted by long term credit ratings. The long term credit ratings, including the outlook of the parent company will be used. Money market securities consist of negotiable certificates of deposit (NCDs), bankers acceptances, and commercial paper. Medium term securities will be restricted by the long term ratings of the legal issuer. Concentration limit restrictions will make no distinction between medium term notes and money market securities. No short term negative credit watch or long-term negative outlook by 2 of 3 nationally recognized rating services except for entities participating in government guaranteed programs. Municipal Criteria. Minimum of A or A2 or A, underlying credit rating for selecting insured municipal securities and a maximum of 5% exposure to any one insurer (direct purchases and indirect commitments). Liquidity Provider Restrictions. Maximum of 5% exposure to any one institution (direct purchases and indirect commitments). Category Short-Term Ratings Long-Term Restrictions Ratings 1 A-1+/P-1/F-1+ (SP-1+/MIG1/F-1+) AAA/Aaa/AAA Corp. Maximum of 5% per issuer with no more than 2% greater than 1 year final maturity and no more than 1% greater than 2 year final maturity. 2 A-1+/P-1/F-1+ (SP-1+/MIG1/F-1) AA+/Aa1/AA+, AA/Aa2/AA Muni. Maximum of 5% per issuer with no more than 2% greater than 13 month final maturity. Corp. Maximum of 4% per issuer with no more than 1% greater than 1 year final maturity. No more than 13 month final maturity. 3 A-1+/P-1/F-1+ (SP-1+/MIG1/F-1) Muni. Maximum of 5% per issuer with no more than 1% greater than 13 month final maturity. For the State of California debt only maximum of 2% greater than 13 month final maturity. AA-/Aa3/AA- Corp. Maximum of 3% per issuer with no more than 1.5% greater than 90 days. No more than 270 days final maturity. 4 A-1/P-1/F-1 (SP-1/MIG1/F-1) A/A2/A or better. Muni. Maximum of 5% per issuer. No more than 13 month final maturity. For the State of California Debt only, maximum of 2% greater than 13 month final maturity. Corp. No Asset Backed programs. Maximum of 2% per issuer with no more than 1% greater than 7 days. No more than 45 days maximum maturity. Muni. For the State of California Debt only, maximum of 3% with no more than 2% greater than 1 year final maturity. 12

268 Short-Term Scale S&P A-1+, A-1 Moody s P-1 Fitch F-1+, F-1 Rating Agency Comparison Table Long-Term Scale S&P AAA, AA+, AA, AA-, A+, A Moody s Aaa, Aa1, Aa2, Aa3, A1, A2 Fitch AAA, AA+, AA, AA-, A+, A 13

269 APPENDIX I COUNTY OF RIVERSIDE POOLED INVESTMENT FUND MONTHLY REPORT I-1

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271 August 2016 County of Riverside Treasurer s Pooled Investment Fund Capital Markets Team Don Kent Treasurer-Tax Collector Jon Christensen Asst. Treasurer-Tax Collector Giovane Pizano Investment Manager Isela Licea Asst. Investment Manager Investment Objectives The primary objective of the treasurer shall be to safeguard the principal of the funds under the treasurer's control, meet the liquidity needs of the depositor, and achieve a return on the funds under his or her control. COUNTY OF RIVERSIDE TREASURER S POOLED INVESTMENT FUND IS CURRENTLY RATED: Aaa-bf BY MOODY S INVESTOR S SERVICE AND AAA/V1 BY FITCH RATINGS Month End Market Value ($)* Month End Book Value ($) Paper Gain or Loss ($) Paper Gain or Loss (%) Book Yield (%) Yrs to Maturity Modified Duration August 5,998,412, ,992,647, ,764, July 6,110,619, ,102,082, ,536, June 6,514,396, ,504,638, ,757, May 6,945,949, ,940,509, ,439, April 7,336,685, ,329,824, ,861, March 6,319,190, ,312,840, ,350, The Treasurer's Pooled Investment Fund is comprised of the County, Schools, Special Districts, and other Discretionary Depositors.

272 Current Market Data Economic Indicators Release Date Indicator Consensus Actual 08/05/2016 Non-Farm Payrolls M/M change: Counts the number of paid employees working parttime 180, ,000 or full-time in the nation's business and government establishments. 08/05/2016 Employment Situation: Measures the number of unemployed as a percentage of the 4.8% 4.9% labor force. 08/25/2016 Durable Goods Orders - M/M change: Reflects the new orders placed with domestic 3.4% 4.4% manufacturers for immediate and future delivery of factory hard goods. 08/26/2016 Real Gross Domestic Product - Q/Q change: The broadest measure of aggregate 1.1% 1.1% economic activity and encompasses every sector of the economy. GDP is the country's most comprehensive economic scorecard. 08/30/2016 Consumer Confidence: Measures consumer attitudes on present economic conditions and expectations of future conditions. 08/04/2016 Factory Orders M/M change: Represents the dollar level of new orders for both durable -1.9% -1.5% and nondurable goods. 08/16/2016 Consumer Price Index - M/M change: The Consumer Price Index is a measure of the 0.0% 0.0% average price level of a fixed basket of goods and services purchased by consumers. 08/16/2016 CPI Ex Food and Energy - M/M change: CPI Ex Food and Energy excludes food and energy. 0.2% 0.1% Stock Indices Value Value Change Dow Jones (DJIA) $ 18, $ (32.06) S&P 500 Index $ 2, $ 2.52 NASDAQ (NDX) $ 4, $ (391.08) Commodities Change Nymex Crude $ $ 3.10 Gold (USD/OZ) $ 1, $ (42.03) US Treasury Curve (M/M) Fed Funds Target Rate Current Fed Funds Rate: 0.25% % Probability for FOMC Dates: Fed Move 09/21/ /02/2016 Stay at 0.25%-0.50% 78.0% 73.0% Increase to 0.75% 22.0% 25.6% Increase to 1.00% 0.0% 1.4% Increase to 1.25% 0.0% 0.0% FOMC Meeting Schedule Release % Risk Assessment 15-Jun % Growth 27-Jul % Growth COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 2

273 TIMMI The Treasurer s Institutional Money Market Index (TIMMI) is compiled and reported by the Riverside County Treasurer s Capital Markets division. It is a composite index derived from four AAA rated prime institutional money market funds. Similar to the Treasurer s Office, prime money market funds invest in a diversified portfolio of U.S. dollar denominated money market instruments including U.S. Treasuries, government agencies, commercial paper, certificates of deposits, repurchase agreements, etc. TIMMI is currently comprised of the four multi billion dollar funds listed below. AAA Rated Prime Institutional Money-Market Funds Fund Symbol 7 Day Yield Fidelity Prime Institutional MMF FIPXX 0.42% Federated Prime Obligations Fund POIXX 0.31% Wells Fargo Advantage Heritage WFJXX 0.42% JP Morgan CJPXX 0.39% 1.00% 0.50% 0.50% Pool Yield TIMMI 0.43% 0.46% 0.50% 0.11% 0.12% 0.12% 0.14% 0.55% 0.22% 0.62% 0.36% 0.66% 0.65% 0.65% 0.67% 0.69% 0.72% 0.73% 0.40% 0.42% 0.42% 0.41% 0.42% 0.40% 0.39% 0.00% Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Cash Flows Month Monthly Receipts Monthly Disbursements Difference Required Matured Investments Balance Actual Investments Maturing Available to Invest > 1 Year 09/ / , (200.00) , /2016 1, , (135.00) /2016 1, /2016 2, , , , /2017 1, , (630.00) / , (390.00) /2017 1, , /2017 1, , / , (650.00) /2017 1, , (450.00) /2017 1, , (193.89) /2017 1, , (182.11) TOTALS 14, , (541.00) , , , % 66.58% 97.38% * All values reported in millions ($). The Pooled Investment Fund cash flow requirements are based upon a 12 month historical cash flow model. Based upon projected cash receipts and maturing investments, there are sufficient funds to meet future cash flow disbursements over the next 12 months. COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 3

274 Asset Allocation Assets (000's) Scheduled Par Scheduled Book Scheduled Market Mkt/ Sch Book Yield WAL (Yr) Mat (Yr) MMKT 490, , , % 0.38% CALTRUST FND 54, , , % 0.76% DDA/PASSBK 70, , , % 0.34% LOCAL AGCY OBLIG % 1.22% US TREAS BILLS 125, , , % 0.46% US TREAS BONDS 305, , , % 0.88% FHLMC DISC NOTES 225, , , % 0.45% FHLMC BONDS 911, , , % 1.18% FNMA DISC NOTES 180, , , % 0.55% FNMA BONDS 402, , , % 1.13% FHLB DISC NOTES 709, , , % 0.52% FHLB BONDS 467, , , % 0.78% FFCB DISC NOTES 557, , , % 0.55% FFCB BONDS 497, , , % 0.70% FMAC DISC NOTES 115, , , % 0.63% FARMER MAC 58, , , % 0.72% MUNI ZER0 CPNS 50, , , % 0.50% MUNI BONDS 279, , , % 0.90% COMM PAPER 500, , , % 0.63% Totals (000's): 5,998, ,992, ,998, % 0.73% COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 4

275 Maturity Distribution Scheduled Par (000's) 0-1 Mos 1-3 Mos 3-12 Mos 1-2 Yr 2-3 Yr >3 Yr Totals (000's) MMKT 490, , CALTRUST FND 54, , DDA/PASSBK 70, , LOCAL AGCY OBLIG US TREAS BILLS 25, , , US TREAS BONDS , , , , , FHLMC DISC NOTES 50, , , , FHLMC BONDS - 14, , , , , , FNMA DISC NOTES 25, , , , FNMA BONDS 20, , , , , , FHLB DISC NOTES 75, , , , FHLB BONDS 10, , , , , , , FFCB DISC NOTES 50, , , , FFCB BONDS 10, , , , , , , FMAC DISC NOTES - 50, , , FARMER MAC , , , , MUNI ZER0 CPNS 50, , MUNI BONDS - 75, , , , , , COMM PAPER 230, , , , Totals (000's): 1,159, , ,084, , , , ,998, % 19.32% 12.43% 34.76% 8.88% 8.51% 16.10% Cumulative % 19.32% 31.76% 66.51% 75.39% 83.90% % COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 5

276 Credit Quality Moody (000's) Par Book Market MKT/Book Yield Aaa 4,776, ,770, ,775, % 0.76% Aa1 47, , , % 0.88% Aa2 402, , , % 0.57% Aa3 328, , , % 0.83% NR 444, , , % 0.53% Totals (000's): 5,998, ,992, ,998, % 0.73% MOODY S S & P S&P (000's) Par Book Market MKT/Book Yield AAA 410, , % 0.47% AA+ 4,362, ,356, % 0.79% AA 427, , , % 0.62% AA- 353, , , % 0.76% NR 444, , , % 0.53% Totals (000's): 5,998, ,998, % 0.73% COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 6

277 Month End Portfolio Holdings CUSIP Description Maturity Date Coupon Yield To Maturity Par Value Book Value Market Price Market Value Unrealized Gain/Loss Modified Duration Years To Maturity Fund: 1 POOL FUND MMKT WFJXX CALTRUST HERITAGE 09/01/ ,000, ,000, ,000, FIPXX FIDELITY PRIME 09/01/ ,000, ,000, ,000, POIXX FEDERATED PRIME 09/01/ ,000, ,000, ,000, CJPXX JP MORGAN PRIME 09/01/ ,000, ,000, ,000, FRGXX FIDELITY GOV 09/01/ ,000, ,000, ,000, WFFXX WELLS FARGO GOV 09/01/ ,000, ,000, ,000, GOFXX FEDERATED GOV 09/01/ ,000, ,000, ,000, CASH BANK OF THE WEST 09/01/ ,000, ,000, ,000, FGTXX GOLDMAN SACHS GOV 09/01/ ,000, ,000, ,000, ,000, ,000, ,000, CALTRUST FND CLTR CALTRUST SHT TERM 09/01/ ,000, ,000, ,000, ,000, ,000, ,000, DDA/PASSBK CASH UB MANAGED RATE 09/01/ ,000, ,000, ,000, ,000, ,000, ,000, LOCAL AGCY OBLIG LAO US DIST COURTHOUSE 06/15/ , , , , , , US TREAS BILLS HE2 U.S. TREASURY BILL 09/15/ ,000, ,923, ,998, , JT7 U.S. TREASURY BILL 05/25/ ,000, ,761, ,839, , JT7 U.S. TREASURY BILL 05/25/ ,000, ,828, ,839, , ,000, ,512, ,677, , US TREAS BONDS TB6 U.S. TREASURY BOND 06/30/ ,000, ,971, ,004, , WH9 U.S. TREASURY BOND 05/15/ ,000, ,077, ,050, , SC5 U.S. TREASURY BOND 01/31/ ,000, ,129, ,047, , B74 U.S. TREASURY BOND 02/15/ ,000, ,008, ,008, A91 U.S. TREASURY BOND 01/15/ ,000, ,095, ,032, , TS9 U.S. TREASURY BOND 09/30/ ,000, ,981, ,991, , H94 U.S. TREASURY BOND 02/15/ ,000, ,017, ,034, , UJ7 U.S. TREASURY BOND 01/31/ ,000, ,936, ,045, , A91 U.S. TREASURY BOND 01/15/ ,000, ,027, ,032, , B74 U.S. TREASURY BOND 02/15/ ,000, ,978, ,010, , WW6 U.S. TREASURY BOND 07/31/ ,000, ,192, ,504, , B74 U.S. TREASURY BOND 02/15/ ,000, ,964, ,010, , WL0 U.S. TREASURY BOND 05/31/ ,000, ,110, ,411, , F62 U.S. TREASURY BOND 10/31/ ,000, ,028, ,416, , B74 U.S. TREASURY BOND 02/15/ ,000, ,003, ,004, , ,000, ,523, ,602, ,078, FHLMC DISC NOTES M26 FHLMC DISC NOTE 10/26/ ,000, ,901, ,988, , L92 FHLMC DISC NOTE 10/25/ ,000, ,901, ,988, , M75 FHLMC DISC NOTE 10/31/ ,000, ,900, ,987, , F73 FHLMC DISC NOTE 09/13/ ,000, ,916, ,997, , H48 FHLMC DISC NOTE 09/26/ ,000, ,912, ,995, , L35 FHLMC DISC NOTE 10/19/ ,000, ,873, ,990, , L35 FHLMC DISC NOTE 10/19/ ,000, ,920, ,990, , AE1 FHLMC DISC NOTE 01/05/ ,000, ,885, ,965, , BZ3 FHLMC DISC NOTE 02/17/ ,000, ,920, ,948, , ,000, ,132, ,851, , FHLMC BONDS 3134G3S50 FHLMC 4Yr 11/01/ ,000, ,991, ,003, , G3S50 FHLMC 4Yr 11/01/ ,625, ,629, ,626, , G5WA9 FHLMC 2YrNc1YrE 12/30/ ,000, ,000, ,031, , G7AE1 FHLMC 3YrNc1.5YrE 06/22/ ,000, ,986, ,007, , G66M0 FHLMC 3YrNc6MoE 06/22/ ,000, ,993, ,151, , EADU0 FHLMC 1.5Yr 01/27/ ,000, ,973, ,000, , EADU0 FHLMC 1.5Yr 01/27/ ,000, ,980, ,000, , G7V24 FHLMC 2YrNc6MoB 10/27/ ,000, ,000, ,993, , EADU0 FHLMC 1.25Yr 01/27/ ,000, ,015, ,000, , G72T7 FHLMC 3YrNc6MoB 10/29/ ,000, ,000, ,001, , G72T7 FHLMC 3YrNc6MoB 10/29/ ,000, ,000, ,003, , G73L3 FHLMC 2YrNc6MoE 11/16/ ,000, ,000, ,996, , G7S77 FHLMC 5YrNc6MoB 10/29/ ,000, ,000, ,004, , EADX4 FHLMC 2Yr 12/15/ ,000, ,979, ,049, , G8LG2 FHLMC 13MoNc6MoE 03/09/ ,000, ,000, ,000, G8LG2 FHLMC 13MoNc6MoE 03/09/ ,000, ,000, ,000, G8L49 FHLMC 1.5YrNc3Mob 08/25/ ,000, ,000, ,002, , G8KU2 FHLMC 5YrNc6MoB 02/26/ ,000, ,000, ,002, , G8L31 FHLMC 5YrNc6MoB 02/26/ ,000, ,000, ,004, , G8L64 FHLMC 2.5YrNc1YrE 08/24/ ,000, ,000, ,999, G8QE2 FHLMC 3YrNc1YrE 03/29/ ,000, ,000, ,015, , G8QB8 FHLMC 3YrNc1YrE 03/29/ ,000, ,000, ,004, , G8QQ5 FHLMC 5YrNc6MoB 03/30/ ,000, ,000, ,001, , G3FV2 FHLMC 5YrNc6MoB 03/30/ ,000, ,000, ,003, , G8TG4 FHLMC 3.5YrNc6MoE 10/11/ ,000, ,000, ,016, , G8T82 FHLMC 3YrNc6MoE 04/12/ ,000, ,000, ,009, , G8TU3 FHLMC 2YrNc6MoB 10/04/ ,000, ,000, ,000, G8VG1 FHLMC 5YrNc6MoB 04/14/ ,000, ,000, ,008, , G8V97 FHLMC 2.25YrNc6MoB 06/29/ ,850, ,850, ,850, G8WC9 FHLMC 1.5YrNc6MoB 10/13/ ,000, ,000, ,001, , G8VB2 FHLMC 5YrNc6MoB 04/21/ ,835, ,835, ,836, , G8WC9 FHLMC 1.5YrNc6MoB 10/13/ ,000, ,000, ,000, G8X20 FHLMC 4YrNc6MoB 07/28/ ,000, ,000, ,000, G8YS2 FHLMC 1.5YrNc3MoB 10/27/ ,000, ,000, ,002, , G8X61 FHLMC 1.5YrNc6MoB 10/27/ ,000, ,000, ,000, G8XU8 FHLMC 5YrNc6MoB 04/28/ ,500, ,500, ,501, , G8XM6 FHLMC 5YrNc6MoB 04/28/ ,000, ,000, ,000, G9AN7 FHLMC 4YrNc6MoB 08/10/ ,000, ,000, ,003, , G9BF3 FHLMC 3.5YrNc3MoB 11/12/ ,425, ,425, ,421, , G8YZ6 FHLMC 5YrNc6MoB 04/28/ ,700, ,700, ,700, G9JX6 FHLMC 5YrNc3MoB 06/09/ ,000, ,000, ,000, G9JW8 FHLMC 5YrNc3MoB 05/25/ ,000, ,000, ,001, , G9MD6 FHLMC 5YrNc3MoB 06/30/ ,000, ,000, ,001, , G9PL5 FHLMC 5YrNc3MoB 06/30/ ,000, ,000, ,003, , COUNTY OF RIVERISIDE TREASURER-TAX COLLECTOR 7

278 Month End Portfolio Holdings CUSIP Description Maturity Date Coupon Yield To Maturity Par Value Book Value Market Price Market Value Unrealized Gain/Loss Modified Duration Years To Maturity 3134G9PL5 FHLMC 5YrNc3MoB 06/30/ ,000, ,000, ,003, , G9NU7 FHLMC 5YrNc3MoB 06/16/ ,000, ,997, ,000, , G9PC5 FHLMC 3YrNc3MoB 06/20/ ,000, ,000, ,000, G9QP5 FHLMC 3YrNc3MoB 06/14/ ,500, ,500, ,500, G9MD6 FHLMC 5YrNc3MoB 06/30/ ,390, ,390, ,390, G9UM7 FHLMC 5YrNc3MoB 06/30/ ,000, ,000, ,976, , G9VA2 FHLMC 5YrNc6MoB 06/30/ ,000, ,000, ,973, , G9UX3 FHLMC 5YrNc3MoB 06/30/ ,000, ,000, ,964, , G9UH8 FHLMC 3.5YrNc3MoB 12/30/ ,000, ,000, ,997, , G9XA0 FHLMC 5YrNc6MoB 07/13/ ,000, ,000, ,998, , G9C70 FHLMC 2YrNc6MoE 07/20/ ,000, ,000, ,971, , G9M38 FHLMC 1.25YrNc3MoB 10/27/ ,000, ,000, ,978, , G9Q75 FHLMC 3YrNc3MoB 07/26/ ,000, ,000, ,982, , G9Q67 FHLMC 2YrNc3MoB 07/27/ ,000, ,000, ,979, , G9S40 FHLMC 4YrNc6MoB 07/27/ ,000, ,000, ,968, , G9R66 FHLMC 5YrNc3MoB 08/10/ ,000, ,000, ,986, , G9S57 FHLMC 4YrNc6MoB 08/10/ ,000, ,000, ,959, , G9T23 FHLMC 5YrNc3MoB 08/10/ ,000, ,000, ,992, , G9U47 FHLMC 5YrNc3MoB 08/25/ ,000, ,000, ,940, , G95W3 FHLMC 5YrNc3MoB 08/25/ ,000, ,000, ,949, , G96A0 FHLMC 5YrNc3MoB 08/25/ ,000, ,000, ,000, GABZ6 FHLMC 3.5YrNc1YrE 02/25/ ,000, ,000, ,954, , GAEG5 FHLMC 5YrNc6MoB 08/24/ ,000, ,000, ,971, , ,825, ,745, ,708, , FNMA DISC NOTES G90 FNMA DISC NOTE 09/23/ ,000, ,927, ,996, , K38 FNMA DISC NOTE 10/11/ ,000, ,862, ,991, , K46 FNMA DISC NOTE 10/12/ ,000, ,871, ,991, , M28 FNMA DISC NOTE 10/26/ ,217, ,088, ,205, , AS2 FNMA DISC NOTE 01/17/ ,000, ,946, ,977, , BA0 FNMA DISC NOTE 01/25/ ,000, ,944, ,975, , BA0 FNMA DISC NOTE 01/25/ ,000, ,907, ,959, , FM0 FNMA DISC NOTE 05/12/ ,000, ,876, ,908, , ,217, ,425, ,005, , FNMA BONDS 3136G14F3 FNMA 3.5YrNc6MoB 12/27/ ,000, ,006, ,003, , EESQ4 FNMA 1.25Yr 09/06/ ,255, ,265, ,256, , G2SX6 FNMA 3YrNc1YrE 11/28/ ,000, ,000, ,004, , G2SX6 FNMA 3YrNc1YrE 11/28/ ,000, ,000, ,004, , G2SX6 FNMA 3YrNc1YrE 11/28/ ,000, ,000, ,004, , G2XR3 FNMA 4YrNc6MoB 02/19/ ,000, ,000, ,002, , G2YT8 FNMA 5YrNc6MoB 02/26/ ,000, ,000, ,994, , G2ZB6 FNMA 4YrNC6MoB 03/09/ ,000, ,000, ,002, , G3BX2 FNMA 4YrNc6MoB 03/09/ ,000, ,000, ,005, , G3EH4 FNMA 4YrNc6MoB 03/30/ ,000, ,000, ,002, , G3EE1 FNMA 3YrNc6MoB 03/29/ ,000, ,000, ,002, , G3DV4 FNMA 5YrNc6MoB 03/30/ ,000, ,000, ,989, , G3EM3 FNMA 3.75YrNc6MoB 12/30/ ,000, ,000, ,001, , G3EM3 FNMA 3.75YrNc6MoB 12/30/ ,000, ,000, ,001, , G3HL2 FNMA 4YrNc6MoB 04/07/ ,000, ,000, ,003, , G3PB5 FNMA 5YrNc6MoB 06/09/ ,000, ,000, ,008, , G3RL1 FNMA 3.5YrNc6MoB 12/16/ ,000, ,000, ,977, , G3SG1 FNMA 4.25YrNc6MoB 09/09/ ,000, ,000, ,000, G3TG0 FNMA 4YrNc6MoB 06/30/ ,000, ,000, ,981, , G3WC5 FNMA 4YrNc6MoE 07/13/ ,000, ,000, ,983, , G9B55 FNMA 2YrNc6MoE 07/20/ ,000, ,000, ,927, , G3SY2 FNMA 3.25YrNc6MoB 09/30/ ,500, ,500, ,476, , G3XE0 FNMA 2YrNc6MoE 07/27/ ,000, ,000, ,956, , G3XT7 FNMA 5YrNc6MoB 07/27/ ,000, ,000, ,941, , G0M26 FNMA 3YrNc6MoE 07/26/ ,000, ,000, ,927, , G0M26 FNMA 3YrNc6MoE 07/26/ ,000, ,000, ,927, , G3XS9 FNMA 2.5YrNc6MoE 01/25/ ,500, ,495, ,454, , G3ZW8 FNMA 5YrNc6MoB 07/27/ ,000, ,000, ,936, , G3A62 FNMA 3YrNc1YrE 07/26/ ,000, ,000, ,968, , G3P25 FNMA 3.5YrNc1YrE 07/26/ ,000, ,000, ,935, , G3Y74 FNMA 4YrNc6MoB 11/24/ ,000, ,000, ,959, , ,255, ,267, ,638, , FHLB DISC NOTES E88 FHLB DISC NOTE 09/06/ ,000, ,886, ,999, , F79 FHLB DISC NOTE 09/13/ ,000, ,898, ,997, , L56 FHLB DISC NOTE 10/21/ ,783, ,658, ,773, , J34 FHLB DISC NOTE 10/03/ ,000, ,870, ,994, , BB1 FHLB DISC NOTE 01/26/ ,000, ,872, ,964, , BB1 FHLB DISC NOTE 01/26/ ,000, ,901, ,974, , AE1 FHLB DISC NOTE 01/05/ ,000, ,964, ,991, , AK2 FHLB DISC NOTE 01/10/ ,000, ,920, ,980, , AK2 FHLB DISC NOTE 01/10/ ,000, ,920, ,980, , K40 FHLB DISC NOTE 10/12/ ,000, ,941, ,992, , BQ8 FHLB DISC NOTE 02/08/ ,000, ,904, ,963, , BK1 FHLB DISC NOTE 02/03/ ,000, ,976, ,991, , F87 FHLB DISC NOTE 09/14/ ,000, ,954, ,997, , AE6 FHLB DISC NOTE 01/05/ ,000, ,980, ,993, , AJ5 FHLB DISC NOTE 01/09/ ,000, ,899, ,968, , AS5 FHLB DISC NOTE 01/17/ ,000, ,898, ,966, , AS5 FHLB DISC NOTE 01/17/ ,000, ,898, ,966, , BZ8 FHLB DISC NOTE 02/17/ ,000, ,882, ,951, , AV8 FHLB DISC NOTE 01/20/ ,000, ,939, ,979, , AU0 FHLB DISC NOTE 01/19/ ,000, ,901, ,965, , BX3 FHLB DISC NOTE 02/15/ ,000, ,889, ,952, , CD6 FHLB DISC NOTE 02/21/ ,000, ,833, ,931, , CD6 FHLB DISC NOTE 02/21/ ,000, ,883, ,950, , AK2 FHLB DISC NOTE 01/10/ ,000, ,933, ,968, , K40 FHLB DISC NOTE 10/12/ ,000, ,968, ,992, , K40 FHLB DISC NOTE 10/12/ ,000, ,968, ,992, , BH8 FHLB DISC NOTE 02/01/ ,000, ,919, ,956, , J34 FHLB DISC NOTE 10/03/ ,000, ,971, ,994, , HM1 FHLB DISC NOTE 06/29/ ,000, ,860, ,887, , GX8 FHLB DISC NOTE 06/15/ ,000, ,868, ,892, , AM8 FHLB DISC NOTE 01/12/ ,000, ,944, ,967, , AL0 FHLB DISC NOTE 01/11/ ,000, ,944, ,967, , COUNTY OF RIVERISIDE TREASURER-TAX COLLECTOR 8

279 Month End Portfolio Holdings CUSIP Description Maturity Date Yield To Par Book Market Market Unrealized Modified Years To Coupon Maturity Value Value Price Value Gain/Loss Duration Maturity ,783, ,056, ,846, ,789, FHLB BONDS CP4 FHLB 5YrNc3MoB 06/19/ , , , CP4 FHLB 5YrNc3MoB 06/19/ , , , CP4 FHLB 5YrNc3MoB 06/19/ , , , CP4 FHLB 5YrNc3MoB 06/19/ ,500, ,500, ,499, EP2 FHLB 5YrNc3MoB 06/20/ ,719, ,719, ,720, , A6BD8 FHLB 1YrNc7MoE 09/09/ ,000, ,004, ,000, , A6R74 FHLB 1YrNc3MoB 11/25/ ,000, ,000, ,004, , A6V95 FHLB 2Yr 12/01/ ,000, ,000, ,021, , A6VS3 FHLB 1Yr 12/14/ ,370, ,360, ,385, , A6W94 FHLB 3YrNc1YrE 12/28/ ,000, ,000, ,025, , A7BY0 FHLB 1YrNc3MoB 02/17/ ,000, ,000, ,011, , A1NN4 FHLB 1.5Yr 05/24/ ,000, ,046, ,046, A7H57 FHLB 2.5YrNc1YrE 09/28/ ,000, ,000, ,001, , A7GQ2 FHLB 2.5YrNc6MoE 09/28/ ,000, ,000, ,002, , A7PV1 FHLB 5Yr 04/05/ ,000, ,996, ,012, , A7PU3 FHLB 4Yr 04/06/ ,000, ,996, ,997, , A7TT2 FHLB 1YrNc3MoB 04/28/ ,000, ,000, ,999, A7TT2 FHLB 1YrNc3MoB 04/28/ ,000, ,000, ,999, A7TT2 FHLB 1YrNc3MoB 04/28/ ,000, ,000, ,999, A8JR5 FHLB 1YrNc3MoB 06/30/ ,000, ,000, ,001, , A8L35 FHLB 1YrNc7MoE 07/20/ ,000, ,000, ,001, , A8L35 FHLB 1YrNc7MoE 07/20/ ,000, ,000, ,002, , A8L35 FHLB 1YrNc7MoE 07/20/ ,000, ,000, ,001, , A8NF6 FHLB 3Yr 07/01/ ,000, ,000, ,995, , A8PK3 FHLB 2Yr 08/07/ ,000, ,989, ,975, , A8PK3 FHLB 2Yr 08/07/ ,000, ,948, ,877, , A8PK3 FHLB 2Yr 08/07/ ,000, ,979, ,950, , A8NZ2 FHLB 1.5Yr 01/08/ ,000, ,007, ,959, , A8NZ2 FHLB 1.5Yr 01/08/ ,000, ,006, ,972, , A8WS8 FHLB 2YrNc1YrE 11/23/ ,500, ,500, ,487, , A8UH4 FHLB 3YrNc3MoB 08/15/ ,000, ,000, ,971, , A8Y72 FHLB 3yR 08/05/ ,000, ,971, ,932, , A9AE1 FHLB 2Yr 10/01/ ,000, ,993, ,988, , ,339, ,267, ,096, , FFCB DISC NOTES E30 FFCB DISC NOTE 09/01/ ,000, ,888, ,000, , E30 FFCB DISC NOTE 09/01/ ,000, ,889, ,000, , K58 FFCB DISC NOTE 10/13/ ,000, ,890, ,991, , K90 FFCB DISC NOTE 10/17/ ,000, ,950, ,996, , K90 FFCB DISC NOTE 10/17/ ,000, ,877, ,990, , K90 FFCB DISC NOTE 10/17/ ,000, ,926, ,994, , U40 FFCB DISC NOTE 12/23/ ,000, ,874, ,971, , AT5 FFCB DISC NOTE 01/18/ ,000, ,933, ,976, , CE6 FFCB DISC NOTE 02/22/ ,000, ,946, ,978, , AT5 FFCB DISC NOTE 01/18/ ,000, ,895, ,961, , BY3 FFCB DISC NOTE 02/16/ ,000, ,880, ,948, , AM0 FFCB DISC NOTE 01/12/ ,000, ,941, ,977, , AM0 FFCB DISC NOTE 01/12/ ,000, ,960, ,985, , AM0 FFCB DISC NOTE 01/12/ ,000, ,941, ,977, , AM0 FFCB DISC NOTE 01/12/ ,000, ,960, ,985, , BC1 FFCB DISC NOTE 01/27/ ,000, ,918, ,967, , BC1 FFCB DISC NOTE 01/27/ ,000, ,919, ,967, , BV9 FFCB DISC NOTE 02/13/ ,000, ,888, ,949, , BR8 FFCB DISC NOTE 02/09/ ,000, ,893, ,950, , BZ0 FFCB DISC NOTE 02/17/ ,000, ,983, ,989, , FK9 FFCB DISC NOTE 05/10/ ,000, ,864, ,909, , GH5 FFCB DISC NOTE 06/01/ ,000, ,919, ,938, , BW7 FFCB DISC NOTE 02/14/ ,000, ,941, ,959, , GH5 FFCB DISC NOTE 06/01/ ,000, ,866, ,897, , HM3 FFCB DISC NOTE 06/29/ ,000, ,856, ,887, , GB8 FFCB DISC NOTE 05/26/ ,000, ,880, ,903, , HB7 FFCB DISC NOTE 06/19/ ,000, ,872, ,891, , HV3 FFCB DISC NOTE 07/07/ ,000, ,866, ,879, , ,000, ,427, ,826, ,398, FFCB BONDS 3133EDXQ0 FFCB 5Yr 10/10/ ,000, ,000, ,923, , EDXQ0 FFCB 5Yr 10/10/ ,000, ,000, ,872, , EDXQ0 FFCB 5Yr 10/10/ ,000, ,997, ,948, , EEZB9 FFCB 1.25Yr 09/16/ ,000, ,000, ,000, EEZR4 FFCB 2Yr 04/21/ ,000, ,000, ,003, , EEJ43 FFCB 2Yr 05/08/ ,000, ,991, ,000, , EE3Y4 FFCB 1.5Yr 01/13/ ,000, ,000, ,003, , EE6A3 FFCB 1.5Yr 02/06/ ,000, ,000, ,003, , EE6A3 FFCB 1.5Yr 02/06/ ,000, ,000, ,003, , EE6A3 FFCB 1.5Yr 02/06/ ,000, ,989, ,004, , EFHH3 FFCB 3YrNc3MoA 10/15/ ,000, ,000, ,000, EFEM5 FFCB 2Yr 09/25/ ,250, ,371, ,273, , EEN48 FFCB 2Yr 05/22/ ,650, ,669, ,647, , EFJK4 FFCB 1.25Yr 01/13/ ,000, ,994, ,996, , EFKR7 FFCB 1.5 Yr 04/21/ ,000, ,987, ,984, , EFLN5 FFCB 1Yr 11/28/ ,000, ,000, ,998, , EFLM7 FFCB 1.5Yr 03/27/ ,000, ,000, ,997, , EFNK9 FFCB 2Yr 02/09/ ,000, ,000, ,002, , EFNK9 FFCB 2Yr 02/09/ ,000, ,000, ,003, , EFQJ9 FFCB 3Yr 11/23/ ,000, ,006, ,988, , EFE52 FFCB 3Yr 02/25/ ,000, ,000, ,031, , EFE52 FFCB 3Yr 02/25/ ,000, ,000, ,010, , EFM61 FFCB 2.5Yr 09/17/ ,000, ,000, ,006, , EFP84 FFCB 3 Yr 04/04/ ,000, ,000, ,007, , EFT56 FFCB 4Yr 04/01/ ,000, ,000, ,978, , EFV38 FFCB 3YrNc1YrA 03/29/ ,310, ,310, ,310, EF2Z9 FFCB 4Yr 04/13/ ,000, ,000, ,973, , EF5D5 FFCB 4YrNc1YrA 04/27/ ,700, ,700, ,708, , EGCE3 FFCB 5Yr 05/25/ ,000, ,000, ,976, , EGCE3 FFCB5Yr 05/25/ ,000, ,000, ,976, , EGLV5 FFCB 3Yr 07/15/ ,000, ,000, ,998, , EGNY7 FFCB 2.5YrNc3MoA 01/28/ ,000, ,000, ,898, , EGSA4 FFCB 4YrNc1YrA 08/24/ ,000, ,000, ,976, , COUNTY OF RIVERISIDE TREASURER-TAX COLLECTOR 9

280 Month End Portfolio Holdings CUSIP Description Maturity Date Yield To Par Book Market Market Unrealized Modified Years To Coupon Maturity Value Value Price Value Gain/Loss Duration Maturity ,910, ,017, ,507, , FMAC DISC NOTES 31315KK90 FAMCA DISC NOTE 10/17/ ,000, ,937, ,996, , KJ35 FAMCA DISC NOTE 10/03/ ,000, ,918, ,995, , KJ35 FAMCA DISC NOTE 10/03/ ,000, ,864, ,993, , LAT5 FAMCA DISC NOTE 01/18/ ,000, ,884, ,969, , LBA5 FAMCA DISC NOTE 01/25/ ,000, ,923, ,967, , LAC2 FAMCA DISC NOTE 01/03/ ,000, ,931, ,965, , ,000, ,459, ,887, , FARMER MAC 31315P2K4 FAMCA 3Yr 09/05/ ,850, ,850, ,881, , X0CY5 FAMCA 1Yr 02/23/ ,000, ,000, ,986, , X0ED9 FAMCA 3Yr 03/19/ ,000, ,000, ,997, , X0EV9 FAMCA 3Yr 07/26/ ,000, ,000, ,020, , ,850, ,850, ,885, , MUNI ZER0 CPNS 91411SJN1 UC REGENTS 09/22/ ,000, ,936, ,985, , ,000, ,936, ,985, , MUNI BONDS 20772JL34 CONNECTICUT ST 08/01/ ,000, ,613, ,613, DSZ2 WASHINGTON STATE 08/01/ ,885, ,885, ,885, A33 TEXAS ST 10/01/ ,000, ,000, ,000, ZZ5 TEXAS ST 10/01/ ,500, ,500, ,500, CXT2 CALIFORNIA STATE 11/01/ ,960, ,014, ,014, CFD7 CALIFORNIA STATE 11/01/ ,000, ,062, ,062, CFD7 CALIFORNIA STATE 11/01/ ,000, ,020, ,020, HV9 OHIO STATE 05/01/ ,215, ,268, ,268, HW7 OHIO STATE 05/01/ ,535, ,597, ,597, JG2 HAWAII STATE 04/01/ ,990, ,990, ,990, JH0 HAWAII STATE 04/01/ ,055, ,055, ,055, JE7 HAWAII STATE 04/01/ ,890, ,896, ,896, JF4 HAWAII STATE 04/01/ ,925, ,933, ,933, RUK6 RHODE ISLAND STATE 05/01/ ,595, ,607, ,607, RUJ9 RHODE ISLAND STATE 05/01/ ,580, ,580, ,580, RUM2 RHODE ISLAND STATE 05/01/ ,660, ,670, ,670, RUL4 RHODE ISLAND STATE 05/01/ ,625, ,636, ,636, CP79 CALIFORNIA STATE 04/01/ ,290, ,120, ,120, CP61 CALIFORNIA STATE 04/01/ ,245, ,295, ,295, H5 GEORGIA STATE 07/01/ ,110, ,247, ,247, L6 GEORGIA STATE 07/01/ ,825, ,254, ,254, J1 GEORGIA STATE 07/01/ ,345, ,602, ,602, K8 GEORGIA STATE 07/01/ ,580, ,943, ,943, ZS4 ARKANSAS STATE 06/01/ ,810, ,139, ,139, ZT2 ARKANSAS STATE 06/01/ ,470, ,837, ,837, ZR6 ARKANSAS STATE 06/01/ ,015, ,039, ,039, ,105, ,812, ,812, COMM PAPER 89233GLM6 TOYOTA MOTOR CORP 11/21/ ,000, ,660, ,948, , GJT4 TOYOTA MOTOR CORP 09/27/ ,000, ,810, ,985, , GJ13 NESTLE 09/01/ ,000, ,930, ,000, , GJ13 NESTLE 09/01/ ,000, ,953, ,000, , GKC7 NESTLE 10/12/ ,264, ,223, ,257, , GKC7 NESTLE 10/12/ ,000, ,918, ,987, , GJD7 NESTLE 09/13/ ,000, ,974, ,997, , GP65 NESTLE 02/06/ ,000, ,832, ,861, , EJ65 WAL-MART 09/06/ ,000, ,986, ,997, , GN91 NESTLE 01/09/ ,000, ,864, ,886, , GL95 TOYOTA 11/09/ ,000, ,916, ,955, , GPD2 TOYOTA 02/13/ ,000, ,857, ,913, , EJC2 WAL-MART 09/12/ ,000, ,981, ,991, , ,264, ,911, ,782, , Total Fund ,998,848, ,992,647, ,998,412, ,764, Grand Total ,998,848, ,992,647, ,998,412, ,764, COUNTY OF RIVERISIDE TREASURER-TAX COLLECTOR 10

281 Full Compliance The Treasurer s Pooled Investment Fund was in FULL COMPLIANCE with the Treasurer s Statement of Investment Policy. The County s Investment Policy is more restrictive than the California Government Code. This policy is reviewed annually by the County s Investment Oversight Committee and approved by the County Board of Supervisors. GOVERNMENT CODE COUNTY INVESTMENT POLICY Maximum Authorized S&P/ Maximum Investment Category Maturity % Limit Moody's Maturity Authorized % Limit S&P/ Moody's Actual % MUNICIPAL BONDS 5 YEARS NO LIMIT NA 3 YEARS 15% AA-/Aa3/AA- 5.53% (MUNI) U.S. TREASURIES 5 YEARS NO LIMIT NA 5 YEARS 100% NA 7.17% LOCAL AGENCY 5 YEARS NO LIMIT NA 3 YEARS 2.5% INVESTMENT 0.01% OBLIGATIONS (LAO) GRADE FEDERAL AGENCIES 5 YEARS NO LIMIT AAA 5 YEARS 100% NA 68.71% COMMERCIAL PAPER (CP) 270 DAYS 40% A1/P1 270 DAYS 40% A1/P1/F1 8.33% CERTIFICATE & TIME 5 YEARS 30% NA 1 YEAR 25% Combined A1/P1/F1 0.00% DEPOSITS (NCD & TCD) REPURCHASE 1 YEARS NO LIMIT NA 45 DAYS 40% max, 25% in term A1/P1/F1 0.00% AGREEMENTS (REPO) repo over 7 days REVERSE REPOS 92 DAYS 20% NA 60 DAYS 10% NA 0.00% MEDIUM TERM NOTES 5 YEARS 30% A 3 YEARS 20% AA/Aa2/AA 0.00% (MTNO) CALTRUST SHORT TERM FUND MONEY MARKET MUTUAL FUNDS (MMF) LOCAL AGENCY INVESTMENT FUND (LAIF) NA NA NA DAILY 1.0% NA 0.90% LIQUIDITY 60 DAYS (1) 20% AAA/Aaa DAILY 20% AAA by 2 Of % (2) LIQUIDITY RATINGS AGC. NA NA NA DAILY Max $50 million NA 0.00% LIQUIDITY CASH/DEPOSIT ACCOUNT NA NA NA NA NA NA 4.50% 1 Mutual Funds maturity may be interpreted as weighted average maturity not exceeding 60 days. 2 Or must have an investment advisor with not less than 5 years experience and with assets under management of $500,000,000. THIS COMPLETES THE REPORT REQUIREMENTS OF CALIFORNIA GOVERNMENT C0DE COUNTY OF RIVERSIDE TREASURER-TAX COLLECTOR 11

282 County of Riverside Treasurer-Tax Collector Capital Markets 4080 Lemon Street, 4th Floor Riverside, CA (951)