Dated: Date of Delivery

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY RATINGS: INSURED RATINGS: S&P AA+ (stable outlook) Moody s Aa3 (negative outlook) UNDERLYING RATINGS: S&P A- Moody s A3 (See RATINGS herein.) In the opinion of Fulbright & Jaworski L.L.P., Special Counsel, interest with respect to the Certificates is exempt from personal income taxes of the State of California. Interest with respect to the Certificates will not be excludable from gross income for federal tax purposes under existing law. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of the interest with respect to the Certificates. See GENERAL TAX MATTERS herein. $53,080,000 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT (San Bernardino County, California) TAXABLE CERTIFICATES OF PARTICIPATION 2011 SERIES A (DIRECT SUBSIDY QUALIFIED SCHOOL CONSTRUCTION BONDS) Dated: Date of Delivery Maturing: February 1, as shown on inside cover. This cover page contains certain information for reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The captioned Certificates represent undivided interest in certain Lease Payments (described below) that the San Bernardino City Unified School District (the District ) has elected to treat as Qualified School Construction Bonds pursuant to allocations granted directly by the United States Department of the Treasury to the District, and are payable from the general fund of the District and other legally available sources, all as more fully described herein. The Lease Payments are comprised of a principal component (the Principal Component ), and an interest component (the Interest Component ) evidenced by and associated with each Certificate. Such lease obligations of the District will be designated as Qualified School Construction Bonds with a direct subsidy (the Direct Subsidy ) to be paid to the District by the United States Department of the Treasury (the Treasury ), representing 100% of the lower of the Interest Component of the Certificates or the tax credit rate announced by Treasury on the date of sale of the Certificates. See SECURITY AND SOURCES OF PAYMENT herein. Interest with respect to the Certificates is payable semiannually on each February 1 and August 1, commencing August 1, The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of March 1, 2011 (the Trust Agreement ), by and among the District, the San Bernardino Schools Financing Corporation (the Corporation ) and U.S. Bank National Association, as trustee (the Trustee ), to finance the construction and improvement of various school facilities of the District and to pay a portion of the costs of delivery of the Certificates. Prior to the date of delivery of the Certificates, the District expects to issue its Taxable General Obligation Bonds, 2004 Series E, whose proceeds will be used to fund capitalized interest with respect to the Certificates and to pay the premiums for certificate insurance and a reserve surety bond for the Certificates. See the caption PLAN OF FINANCE herein. The District will lease certain property (the Leased Property ) from the Corporation pursuant to a Lease Agreement, dated as of March 1, 2011 (the Lease ). The Certificates evidence proportionate interests in lease payments (the Lease Payments ) to be made by the District as lessee under the Lease for the use and possession of the Leased Property. The District s obligation to make Lease Payments is subject to abatement in the event of substantial interference with its use and possession of all or part of the Leased Property. See RISK FACTORS Abatement herein. The scheduled payment of principal and interest with respect to the Certificates when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Certificates by Assured Guaranty Municipal Corp.. MATURITY SCHEDULE ON INSIDE COVER The Certificates will be delivered in book-entry form only, in denominations of $5,000 and integral multiples thereof. The Certificates will be initially registered in the name of a nominee of The Depository Trust Company ( DTC ). Purchasers will not receive certificates representing their interests in the Certificates. Payments with respect to the Certificates will be made by the Trustee to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Certificates. See APPENDIX E: BOOK-ENTRY ONLY SYSTEM herein. The Certificates are subject to prepayment prior to maturity as described herein. See THE CERTIFICATES Prepayment herein. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION 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 CORPORATION, THE COUNTY OF SAN BERNARDINO, THE STATE OF CALIFORNIA, OR ANY OTHER POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF THE CONSTITUTION OF THE STATE OF CALIFORNIA. The Certificates will be offered when, as and if executed and delivered and received by the Underwriters, subject to approval of validity by Fulbright & Jaworski L.L.P., Los Angeles, California, Special Counsel. Certain matters will be passed upon for the District by Atkinson, Andelson, Loya, Ruud & Romo, Cerritos, California, and for the Underwriters by Orrick Herrington & Sutcliffe LLP, Irvine, California. Fieldman, Rolapp & Associates, Irvine, California, serves as Financial Advisor to the District, and Fulbright & Jaworski L.L.P., Los Angeles, California, serves as Disclosure Counsel to the District in connection with the execution and delivery of the Certificates. The Certificates, in book-entry form, will be available, for delivery through the facilities of DTC in New York, New York, on or about March 24, Cabrera Capital Markets, LLC Dated: March 3, 2011 Siebert Brandford Shank & Co., L.L.C.

2 MATURITY SCHEDULE $53,080,000 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT (San Bernardino County, California) TAXABLE CERTIFICATES OF PARTICIPATION 2011 SERIES A (DIRECT SUBSIDY QUALIFIED SCHOOL CONSTRUCTION BONDS) $18,065,000 Serial Certificates Maturity Date (February 1) Principal Amount Interest Rate Yield CUSIP No. (1) (796714) 2022 $5,865, % 8.053% DE ,015, DF ,185, DG5 $22,105, % Term Certificates due February 1, 2021 Yield 7.853% CUSIP (1) : DD2 $12,910, % Term Certificates due February 1, 2026 Yield 8.403% CUSIP (1) : DH3 (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the Underwriters, the Financial Advisor nor the District is responsible for the selection or correctness of the CUSIP numbers set forth herein.

3 No dealer, broker, salesperson or other person has been authorized by the District or the Underwriters to give any information or to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriters. 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 purchasers 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 a representation of facts. The information set forth herein has been obtained from official sources that are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriters. The information and expression of opinions herein are subject to change without notice, and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Certificates referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. The Certificates have not been registered under the Securities Act of 1933, in reliance upon an exemption contained in such Act. The Certificates have not been registered under the securities laws of any state. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. 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 CERTIFICATE INSURANCE and in Appendix H SPECIMEN MUNICIPAL BOND INSURANCE POLICY. IN CONNECTION WITH THIS INITIAL OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE CERTIFICATES TO CERTAIN SECURITIES DEALERS, DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE INSIDE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking 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 (the Exchange Act ), and Section 27A of the United States Securities Act of 1933, as amended (the Securities Act ). Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE 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. THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.

4 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT (San Bernardino County, California) BOARD OF EDUCATION Name Position Term Ending Danny Tillman President 2013 Dr. Barbara Flores Vice President 2013 Louise Ayala Member 2011 Teresa Parra Craig Member 2011 Judi Penman Member 2013 Lynda Savage Member 2011 Dr. Elsa Valdez Member 2011 District Administrators Arturo Delgado, Ed.D., Superintendent Mohammad Z. Islam, Chief Business and Financial Officer Dr. Howard Vollkommer, Assistant Superintendent, Human Resources Certificated/Student Services Mel Albiso, Associate Superintendent of Administrative Services John Peukert, Assistant Superintendent, Facilities Operations Yolanda Ortega, Assistant Superintendent, Human Resources Classified & Employee Relations Special and Disclosure Counsel Fulbright & Jaworski L.L.P. Los Angeles, California Trustee U.S. Bank National Association Los Angeles, California Financial Advisor Fieldman, Rolapp & Associates Irvine, California

5 TABLE OF CONTENTS INTRODUCTION... 1 Page The District... 1 Purpose of the Certificates... 2 Security and Sources of Payment for the Certificates... 2 Description of the Certificates... 2 Tax Matters... 3 Offering and Delivery of the Certificates... 3 Risk Factors... 3 Continuing Disclosure... 3 Professionals Involved in the Offering... 3 Defined Terms... 4 Other Information... 4 PLAN OF FINANCE... 4 The Project... 4 Leased Property... 5 Substitution or Release... 5 THE CERTIFICATES... 5 Authority for Issuance... 5 General... 6 Registration, Transfer and Exchange of Certificates... 6 Prepayment... 6 Selection of Certificates for Prepayment Notice of Prepayment Rescission of Notice of Prepayment Defeasance Trustee Estimated Sources and Uses of Funds SECURITY AND SOURCES OF PAYMENT General Subsidy Payments Lease Payments Additional Payments Reserve Fund Additional Certificates Insurance by the District INFORMATION CONCERNING CERTIFICATE INSURANCE CERTIFICATE INSURANCE The Insurance Policy Assured Guaranty Municipal Corp RISK FACTORS General Considerations Security for the Certificates Abatement i

6 TABLE OF CONTENTS (continued) Page Other Limitations on Liability Constitutional School Funding Guarantee; State of California Finances Application of Constitutional and Statutory Provisions No Acceleration Upon Default Self-Insurance Limited Recourse on Default Economic Conditions in California Effect of Foreclosures on ADA Future State Budgets Investment of District s General Fund No Liability by the Corporation to the Owners No Earthquake Insurance No Flood Insurance Hazardous Substances CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS DISTRICT INFORMATION THE CORPORATION GENERAL TAX MATTERS LEGAL MATTERS Counsel Legality for Investment in California Continuing Disclosure Litigation Enforceability of Remedies Legal Opinion RATINGS UNDERWRITING MISCELLANEOUS Financial Advisor Additional Information ii

7 TABLE OF CONTENTS (continued) Page APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT... A-1 APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... B-1 APPENDIX C FORM OF OPINION OF SPECIAL COUNSEL... C-1 APPENDIX D SELECTED INFORMATION FROM AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM... E-1 APPENDIX F SAN BERNARDINO COUNTY TREASURY POOL... F-1 APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT... G-1 APPENDIX H SPECIMEN MUNICIPAL BOND INSURANCE POLICY... H-1 iii

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9 $53,080,000 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT (San Bernardino County, California) TAXABLE CERTIFICATES OF PARTICIPATION 2011 SERIES A (DIRECT SUBSIDY QUALIFIED SCHOOL CONSTRUCTION BONDS) INTRODUCTION This Introduction is not a summary of this 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, including the cover page, the inside cover and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Certificates to potential investors is made only by means of the entire Official Statement. This Official Statement, which includes the cover, inside cover and appendices hereto, is provided to furnish information in connection with the sale of Taxable Certificates of Participation, 2011 Series A (Direct Subsidy Qualified School Construction Bonds) (the Certificates ) of the San Bernardino City Unified School District (the District ), in the aggregate principal amount of $53,080,000. The execution and delivery of the Certificates was authorized by a resolution adopted on January 18, 2011 (the District Resolution ), by the Board of Education (the Board of Education ) of the District. The Lease Payments described below have been designated by the District as qualified school construction bonds pursuant to Section 54F of the Internal Revenue Code of 1986, as amended (the Code ). The District received allocations to make this designation sufficient for the Principal Component (as defined below) of the Lease Payments from the United States Department of the Treasury pursuant to the Code. The District has also elected to make the Lease Payments eligible for payment of a direct subsidy from the federal government. See Security and Sources of Payment for the Certificates below. The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of March 1, 2011 (the Trust Agreement ), by and among the District, the San Bernardino Schools Financing Corporation (the Corporation ) and U.S. Bank National Association, as trustee (the Trustee ). The District will lease certain property (the Leased Property ) from the Corporation pursuant to a Lease Agreement, dated as of March 1, 2011 (the Lease ), between the District and the Corporation. The Certificates evidence proportionate interests in lease payments (the Lease Payments ) to be made by the District as lessee under the Lease for the use and possession of the Leased Property. The Corporation s rights under the Lease, including the right to receive Lease Payments, have been assigned to the Trustee pursuant to an Assignment Agreement, dated as of March 1, 2011, by and between the Corporation and the Trustee. See APPENDIX B: SUMMARY OF PRINCIPAL LEGAL DOCUMENTS. The District The District is a unified school district organized under the laws of the State of California (the State ). The District was formed on July 1, 1964, and encompasses an area of approximately 160 square miles in San Bernardino County (the County ). The District currently operates 44 elementary schools, ten middle schools and five high schools, one middle college high school, one alternate school and eleven charter schools. In addition, the District maintains two continuation high schools, an adult education school and three special schools. Enrollment, exclusive of the adult school population, currently stands at approximately 51,315 students. The District has a assessed valuation of $10,969,794,701. 1

10 The District is governed by a seven-member Board of Education nominated by geographic areas and elected by voters throughout the entire District to serve alternating four-year terms. Arturo Delgado, Ed.D., serves as Superintendent to the District. See APPENDIX A: FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT. Purpose of the Certificates The District intends to use the proceeds from the sale of the Certificates to construct and improve various school facilities of the District and to pay a portion of costs of delivery associated therewith, in compliance with the American Recovery and Reinvestment Tax Act of 2009, as amended by the Hiring Incentives to Restore Employment Act of 2011 (collectively, the Recovery Act ). The Certificates are executed and delivered pursuant to certain provisions of the Education Code and other applicable law and pursuant to the Trust Agreement. See THE CERTIFICATES Authority for Issuance. Security and Sources of Payment for the Certificates The principal, interest and prepayment price (except with respect to extraordinary mandatory prepayment from unexpended proceeds of the Certificates) of the Certificates are payable from the general fund of the District and other legally available sources, to pay the Lease Payments of the Certificates. The Certificates are executed and delivered on a parity with one another and are equally secured by the Lease Payments. See SECURITY AND SOURCES OF PAYMENT. Additionally, the District has irrevocably elected, pursuant to section 6431(f)(3)(B) of the Code, to make the Lease Payments eligible for payment of a direct subsidy (the Direct Subsidy ) from the United States Department of the Treasury (the Treasury ) equal to 100% of the lesser of the Interest Component with respect to the Lease Payments or the tax credit rate published by Treasury on the date of sale of the Certificates. The District has retained the services of U.S. Bank National Association as filing agent (in such capacity, the Filing Agent ) to assist the District in submitting claims for each Direct Subsidy payment. Additionally, the District expects, prior to the date of delivery of the Certificates, to issue $5,477, aggregate principal amount of its Taxable General Obligation Bonds, 2004 Series E (the Taxable General Obligation Bonds ), the net proceeds of which will, on the date of delivery of the Certificates, be deposited with the Trustee to fund capitalized interest, pay the premium of a reserve surety bond to meet the Reserve Requirement of the Certificates, and pay the premium for certificate insurance. See PLAN OF FINANCE. The obligation of the District to make Lease Payments does not constitute an obligation 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 County of San Bernardino, the State of California, or any other political subdivision thereof within the meaning of the Constitution of the State of California. Description of the Certificates Payment. The Certificates represent interest and principal components (the Interest Components and Principal Components ) and mature on the dates as shown on the inside cover hereof. Principal evidenced by the Certificates is payable when due upon surrender of the Certificates at the office of the Trustee. Principal and Interest Components and premium, if any, with respect to the Certificates will be paid to Cede & Co., or such other nominee of DTC (as defined herein) who will credit the accounts of Direct Participants (as defined herein) upon receipt of funds. Disbursement of such payments to beneficial owners of the Certificates will be the responsibility of Direct and Indirect Participants (as defined herein). See APPENDIX E BOOK-ENTRY ONLY SYSTEM. 2

11 Denomination, Registration and Transfer of Certificates. The Certificates will be executed and delivered in fully registered form only, in denominations of $5,000 or any integral multiple thereof; initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository of the Certificates. Owners will not receive physical certificates representing their ownership interests in the Certificates except in the event that use of the book-entry system for the Certificates is discontinued. Purchases of the Certificates under the DTC system must be made by or through a DTC Participant, and ownership interests in Certificates, or any transfer thereof will be recorded as entries on the books of said participants. See THE CERTIFICATES General, Registration, Transfer and Exchange of Certificates and APPENDIX E BOOK-ENTRY ONLY SYSTEM. Prepayment. The Certificates are subject to prepayment prior to their stated maturity date as described under THE CERTIFICATES Prepayment herein. Tax Matters In the opinion of Fulbright & Jaworski L.L.P., Special Counsel to the District, interest with respect to the Certificates is exempt from personal income taxes of the State of California. Interest with respect to the Certificates will not be excludable from gross income for federal tax purposes under existing law. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of the interest with respect to the Certificates. A copy of the proposed form of opinion of Special Counsel is set forth in APPENDIX C hereto. See GENERAL TAX MATTERS herein. Offering and Delivery of the Certificates The Certificates are offered when, as and if executed and delivered, subject to approval as to their validity by Special Counsel. It is anticipated that the Certificates in book-entry form will be available for delivery through the facilities of DTC in New York, New York, on or about March 24, Risk Factors There are certain risk factors associated with investing in and owning the Certificates. See RISK FACTORS herein. Continuing Disclosure The District has covenanted for the benefit of the Owners (including beneficial owners of the Certificates) to provide certain financial information and operating data relating to the District (the Annual Report ) by a date not later than nine months following the end of the District s fiscal year (which ends June 30), commencing with the report for the Fiscal Year (which is due no later than March 31, 2012), and to provide notices of the occurrence of certain enumerated events. See LEGAL MATTERS Continuing Disclosure and APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT. During the past five years, the District has not failed to comply, in all material respects, with any previous undertaking under Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the Rule ), to provide annual reports or notices of material events. Professionals Involved in the Offering Fulbright & Jaworski L.L.P., Los Angeles, California, is acting as Special Counsel and Disclosure Counsel to the District with respect to the Certificates. Fieldman, Rolapp & Associates, 3

12 Irvine, California, is acting as Financial Advisor to the District with respect to the Certificates. Orrick Herrington & Sutcliffe LLP, Irvine, California is acting as counsel to the Underwriters with respect to the Certificates, and the District will be represented by its general counsel, Atkinson, Andelson, Loya, Ruud & Romo, Cerritos, California. U.S. Bank National Association will act as the Trustee, registrar, transfer agent, authentication agent, paying agent and Filing Agent with respect to the Certificates. The Financial Advisor and all counsel except District general counsel will receive compensation contingent upon the sale and delivery of the Certificates. Defined Terms Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Definitions. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of documents referred to herein and information concerning the Certificates are available from the San Bernardino City Unified School District, 777 North F Street, San Bernardino, California 92410, Attention: Mohammad Z. Islam, Chief Business and Financial Officer. The District may impose a charge for copying, handling and mailing such requested documents. The Project PLAN OF FINANCE The District intends to use the net proceeds from the sale of the Certificates to construct and improve various school facilities of the District, including, but not limited to heating, ventilation and air conditioning ( HVAC ), site abatement for new school sites and improvements to three existing elementary schools (collectively, the Projects ). Because the Lease Payments are designated as qualified school construction bonds under Section 54F of the Code ( Section 54F ), their proceeds may be applied only for qualified expenditures under the Recovery Act, and to payment of costs of issuance not in excess of 2% of the issue price of the Certificates. Internal Revenue Service ( IRS ) Notice , released April 3, 2009, which specified the allocations for Qualified School Construction Bonds, also provided that bond proceeds may be expended for costs of acquisition of equipment to be used in such portion or portions of the public school facility that is being constructed, rehabilitated or repaired with the proceeds of the related Qualified School Construction Bonds. The District expects to expend the proceeds of the sale of the Certificates for the Projects within three years following their date of delivery and expects that a binding commitment with a third party to spend at least 10 percent of available Certificate proceeds will be incurred within the six-month period beginning on the date of delivery of the Certificates. The District s current plans are to complete the HVAC installations, the site abatements and the improvements to designated school facilities within 18 months from the date of closing. The District has covenanted to provide notice of its final expenditure of the proceeds of the Certificates from the Project Fund as a Notice of Material Event under its Continuing Disclosure Agreement. See APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT. 4

13 The District will, on or before the date of delivery of the Certificates, cause the net proceeds of sale of the Taxable General Obligation Bonds to be used to pay the premium of a reserve surety bond to meet the Reserve Requirement of the Certificates, pay the premium for certificate insurance and to be deposited with the Trustee in order to fund capitalized interest. Leased Property The District plans to lease certain real property, including land and improvements, from the Corporation (the Leased Property ). The Leased Property is more particularly described in Exhibit B to the Lease, and currently consists of those parcels of real property commonly known as Juanita Blakely Jones Elementary School ( Jones ), located at 700 North F Street, San Bernardino, California, Bing Wong Elementary School ( Bing Wong ), located at 1250 East 9th Street, San Bernardino, California, and Rodriguez Preparatory School ( Rodriguez ), located at 1985 Guthrie Street, San Bernardino, California. Jones was completed in 2006, Bing Wong in 2008 and Rodriguez in The District has determined that the Lease Payments do not exceed the fair rental value of the Leased Property. A CLTA policy of title insurance respecting the Leased Property will be delivered on the date of delivery of the Certificates. The District has covenanted in the Lease to provide maintenance and insurance on the Leased Property throughout the term of the Lease. See APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Lease Agreement. Substitution or Release The Lease provides that, upon compliance with certain conditions specified therein, the District may substitute alternate real property and improvements, add additional real property or release real property for all or any portion of the Leased Property if, among other things, the substituted or remaining real property has an annual fair rental value at least equal to the maximum annual Lease Payments attributable to the Leased Property prior to such substitution, addition or removal, and has a useful life equal to or greater than the maximum remaining term of the Lease as it may be extended pursuant to the Lease. See APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Lease Agreement Substitution of Property; Release of Leased Property. Authority for Issuance THE CERTIFICATES The Certificates are executed and delivered pursuant to a resolution adopted by the Board of Education of the District on January 18, 2011, applicable provisions of the Education Code and other applicable law, and pursuant to the Trust Agreement and the Lease. The District has irrevocably elected to treat the Lease Payments evidenced and represented by the Certificates as Qualified School Construction Bonds under Section 54F of the Code. An issuer of Qualified School Construction Bonds must receive an allocation of the national qualified school construction bond limitation for the calendar year. The total amount of qualified school construction bonds authorized nationally in both calendar year 2009 and 2010 was limited under the Recovery Act to $11 billion per year, and the United States Department of the Treasury allocated a portion of such limit to the District in the amount of $27,790,000 in calendar 2009 and $25,294,000 in calendar year 2010 (collectively, the Allocations ). The Principal Component of the Lease Payments will be deducted from the Allocations. 5

14 Pursuant to the portions of the Recovery Act adopted in 2010, the District has made an irrevocable election pursuant to section 6431(f)(3)(B) of the Code to receive a direct subsidy (the Direct Subsidy ) from the federal government for each interest payment made as a part of the Lease Payments. Upon an Accountable Event of Loss of Qualified School Construction Bond Status, as defined below, the District would no longer be entitled to receive the Direct Subsidy and would thereafter be required to pay the Interest Component of the Lease Payments from amounts available in its general fund and other lawfully available moneys. General The interest evidenced by the Certificates is payable on February 1 and August 1 of each year, beginning on August 1, The Certificates will be initially registered in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository of the Certificates. The principal of the Certificates is payable in lawful money of the United States of America. Principal is payable when due upon surrender of the Certificates at the office of the Trustee. Principal and Interest Components and prepayment premium, if any, with respect to the Certificates will be paid to Cede & Co., or such other nominee of DTC (as defined herein) who will credit Direct Participants (as defined herein) accounts upon receipt of funds. Disbursement of such payments to beneficial owners of the Certificates will be the responsibility of Direct and Indirect Participants (as defined herein). For information about the securities depository and DTC s book-entry system, see APPENDIX E BOOK-ENTRY ONLY SYSTEM. Registration, Transfer and Exchange of Certificates The Certificates will be executed and delivered in book-entry only form, initially registered in the name Cede & Co., as nominee of DTC. Purchases of the Certificates, under the DTC system must be made by or through a DTC participant, and ownership interest in the Certificates, or any transfer thereof will be recorded as entries on the books of said participants. Registered ownership of the Certificates, or any portion thereof, may not thereafter be transferred, except as provided in the Trust Agreement: (i) to any successor of Cede & Co., as nominee of DTC, or its nominee, or to any designated substitute depository, (ii) to any substitute depository not objected to by the District upon (1) the resignation of DTC or its successor from its function as depository, or (2) because DTC or its successor is no longer able to carry out its function as depository; or (iii) to any person as provided in the Trust Agreement upon (1) the resignation of DTC or its successor from its function as depository, or (2) a determination by the District to remove DTC or its successor from its function as depository. In the event the District elects to terminate the book-entry system, any Certificate may be exchanged for a like aggregate principal amount of Certificates of other authorized denominations of the same series, maturity and principal amount upon presentation and surrender at the principal corporate trust office of the Trustee, together with a request for exchange signed by the Owner or by a person legally empowered to do so in a form satisfactory to the Trustee. For so long as the Certificates are immobilized with DTC, transfer and exchange of Certificates will be governed by the rules and procedures of DTC. See APPENDIX E - BOOK-ENTRY ONLY SYSTEM herein. Prepayment The following are definitions of certain terms used in this Official Statement. All capitalized terms not defined below or elsewhere in the Official Statement have the meanings set forth in the Lease or the Trust Agreement. See also APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS. 6

15 The term Accountable Event of Loss of Qualified School Construction Bond Status means (a) any act or any failure to act on the part of the District, which act or failure to act is a breach of a covenant or agreement of the District contained in the Resolution, the Trust Agreement, the Lease, the Tax Certificate regarding the Certificates or in the Certificates and which act or failure to act causes the Certificates to lose their status, or fail to qualify, as Qualified School Construction Bonds, or (b) the making by the District of any representation contained in the Resolution, the Trust Agreement, the Lease, said Tax Certificate or the Certificates, which representation was untrue when made and the untruth of which representation at such time causes the Certificates to lose their status, or fail to qualify, as Qualified School Construction Bonds under the Code. The term Comparable Treasury Issue means the U.S. Treasury security or securities selected by the Designated Investment Banker which has an actual or interpolated maturity comparable to the remaining average life, as of the prepayment date, of the Certificates to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to the remaining average life, as of the prepayment date, of the Certificates to be prepaid. The term Comparable Treasury Price means (a) if the Designated Investment Banker receives at least four Reference Treasury Dealer Quotations, the average of such quotations for the date on which such Certificates are to be prepaid, after excluding the highest and the lowest Reference Treasury Dealer Quotations, or (b) if the Designated Investment Banker obtains fewer than four Reference Treasury Dealer Quotations, the average of all such quotations. The term Date of Loss of Qualified School Construction Bond Status means the date specified in a Determination of Loss of Qualified School Construction Bond Status as the date from and after which the Certificates lost their status, or failed to qualify, as Qualified School Construction Bonds as a result of an Accountable Event of Loss of Qualified School Construction Bond Status, which date could be as early as the initial date of delivery of the Certificates. The term Determination of Loss of Qualified School Construction Bond Status means (a) a final determination by the IRS (after the District has exhausted all administrative appeal remedies) determining that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred and specifying the Date of Loss of Qualified School Construction Bond Status, or (b) a nonappealable holding by a court of competent jurisdiction holding that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred and specifying the Date of Loss of Qualified School Construction Bond Status. The term Extension Period Expiration Date means the date of termination of any period of time agreed to in writing by the Internal Revenue Service that extends the date by which the District must expend all of the net proceeds of sale of the Certificates for Qualified Purposes. The term Extraordinary Event means (a) a Determination of Loss of Qualified School Construction Bond Status; (b) the occurrence of a material adverse change under Section 54F or 6431 of the Code; (c) the publication by the IRS or the United States Treasury of any guidance with respect to such sections; or (d) any other determination by the IRS or the United States Treasury, which determination is not the result of a failure of the District to satisfy certain requirements of the Trust Agreement, if as a result of an event as described in (b), (c), or (d) of this definition, the Direct Subsidy payments expected to be received with respect to the Certificates are eliminated or reduced, as reasonably determined by the Superintendent of the District or his designee, which determination shall be conclusive. The term Reference Treasury Dealer means the original underwriter of the Certificates, their successors and other firms, as specified by the District from time to time, that are primary U.S. 7

16 government securities dealers in the City of New York, New York; provided, however, that if any such firm ceases to be such a primary treasury dealer, the District will substitute another primary treasury dealer for such firm. The term Reference Treasury Dealer Quotations means with respect to each Reference Treasury Dealer, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount), quoted in writing to the Designated Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding the date on which the Certificates are to be redeemed. The term Treasury Rate means, for the purpose of determining the Make-Whole Prepayment Price, with respect to any prepayment date for a particular 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 inflationindexed 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 the Certificates 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 term Unexpended Proceeds Prepayment Date means any Business Day determined by the District for the prepayment of Certificates pursuant to the Trust Agreement that falls within ninety (90) days after March 24, 2014; provided that if an Extension Period Expiration Date has been established, any Business Day determined by the District that falls within ninety (90) days after the Extension Period Expiration Date. Optional Prepayment. The Certificates are subject to prepayment, at the option of the District, prior to their maturity date, in whole or in part and by lot, on the date designated by the District, at 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 Certificates set forth on the inside cover page hereof (but not less than 100% of the principal amount of the 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 Certificates to be prepaid to the maturity date of such Certificates, not including any portion of those payments of interest accrued and unpaid as of the date on which the Certificates are to be prepaid, discounted to the date on which the Certificates are to be prepaid on a semiannual basis, assuming a 360-day year containing twelve 30 day months, at the Treasury Rate, plus 70 basis points, plus in each case accrued interest with respect to the Certificates to be prepaid to the prepayment date. Mandatory Sinking Fund Prepayment. The Certificates maturing on February 1, 2021, shall be subject to mandatory sinking fund prepayment, in part by lot on February 1 in each of the years and in the respective principal amounts as set forth in the following schedule, from moneys within the Lease Payment Fund of the District, at a prepayment price equal to the principal amount thereof, together with accrued interest to the date fixed for prepayment, without premium. 8

17 Mandatory Sinking Fund Payment Date (February 1) Mandatory Sinking Fund Payment 2018 $5,330, ,460, ,590, (1) 5,725,000 (1) Maturity. The Certificates maturing on February 1, 2026, shall be subject to mandatory sinking fund prepayment, in part by lot on February 1 in each of the years and in the respective principal amounts as set forth in the following schedule, from moneys within the Lease Payment Fund of the District, at a prepayment price equal to the principal amount thereof, together with accrued interest to the date fixed for prepayment, without premium. Mandatory Sinking Fund Payment Date (February 1) Mandatory Sinking Fund Payment 2025 $6,360, (1) 6,550,000 (1) Final maturity. Extraordinary Optional Prepayment Following Extraordinary Event. Upon the occurrence of an Extraordinary Event, the Certificates are subject to prepayment prior to their maturity at the option of the District, in whole or in part and by lot, on the date designated by the District, at a prepayment price equal to 100% of the principal amount of the Certificates to be prepaid, together with accrued interest thereon to the prepayment date, without premium. Extraordinary Mandatory Prepayment from Unexpended Proceeds of the Certificates. The Certificates are subject to extraordinary mandatory prepayment prior to their maturity, in whole or in part, on any Unexpended Proceeds Redemption Date (as defined above) in authorized denominations, at a prepayment price equal to the greater of: (A) the principal amount of the Certificates to be prepaid, or (B) the sum of the present values of the remaining scheduled payments of principal and interest with respect to the Certificates to be prepaid (exclusive of interest accrued to the date fixed for prepayment) discounted to the date of prepayment on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 100 basis points plus accrued interest with respect to the Certificates to be prepaid to the Unexpended Proceeds Redemption Date, in a total amount equal to the unexpended proceeds of the sale of the Certificates remaining in the Project Fund held by the Trustee pursuant to the Trust Agreement on the third anniversary of the date of delivery of the Certificates, or any applicable Extension Period Expiration Date (as defined above), plus such amount as shall be necessary to permit the Certificates to be redeemed in authorized denominations. The extraordinary mandatory prepayment of the Certificates from unexpended proceeds need not take place if the District provides to the Trustee an opinion of Bond Counsel to the effect that, under thencurrent federal tax law, such prepayment is not necessary to preserve the status of the Certificates as Qualified School Construction Bonds. 9

18 Prepayment from Net Insurance Proceeds. The Certificates are subject to prepayment, on any Interest Payment Date, in whole or in part in Authorized Denominations, from Net Insurance Proceeds deposited in the Prepayment Fund and credited towards the prepayment of Lease Payments made by the District pursuant to the Lease, at a prepayment price equal to the principal amount of the Certificates to be prepaid, together with accrued interest to the date fixed for prepayment, without premium. To the extent that Net Insurance Proceeds are in excess of the principal and interest with respect to Certificates then to be prepaid, any excess amount shall, immediately following the prepayment date in question, be transferred by the Trustee to the Lease Payment Fund as a credit against the next Lease Payment due from the District. Selection of Certificates for Prepayment Whenever provision is made in the Trust Agreement for the prepayment of Certificates and fewer than all Outstanding Certificates are called for prepayment, the District shall designate the maturities of the Certificates to be called for prepayment or, in the absence of such direction, the Trustee shall select Certificates for prepayment from the Outstanding Certificates not previously called for prepayment by lot, in any manner which the Trustee shall in its sole discretion deem appropriate and fair. In the event of a prepayment of Certificates (other than prepayment by mandatory sinking fund payments) maturing on February 1, 2021 or February 1, 2026, the Trustee shall treat such prepayment as reducing, on a pro rata basis (as nearly as practicable), each remaining mandatory sinking fund payment in the appropriate schedule set forth in the Trust Agreement, in integral multiples of $5,000, as shall be designated pursuant to a written request submitted by the District to the Trustee, and shall annotate its records accordingly. Notice of Prepayment Notice of prepayment of the Certificates will be mailed postage prepaid not less than thirty (30) nor more than sixty (60) days prior to the prepayment date (i) by first class mail to the respective Owners of Certificates at the addresses appearing on the registration books of the Trustee, and (ii) as may be further required in accordance with the Continuing Disclosure Agreement. See APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT herein. Each such notice of prepayment will be dated and will state: (i) the prepayment date, (ii) the prepayment price, (iii) if less than all Certificates are to be prepaid, the identification (and, in the case of partial prepayment, the respective Principal Components) of the Certificates to be prepaid, (iv) that on the prepayment date, the prepayment price will become due and payable with respect to each such Certificate or portion thereof called for prepayment, and that interest with respect to such Certificates will cease to accrue from and after the prepayment date, (v) the place where such Certificates are to be surrendered for payment of the prepayment price, and (vi) whether the District has deposited, or caused the deposit of, an amount of money sufficient to pay the prepayment price of all the Certificates or portions of Certificates which are to be prepaid on the prepayment date and, if not, that such notice of prepayment is revocable. The actual receipt by any Owner of any Certificate of notice of such prepayment will not be a condition precedent to prepayment, and failure to receive such notice, or any defect in the notice given, will not affect the validity of the proceedings for the prepayment of such Certificates. When notice of prepayment has been given, substantially as described above, and when the amount necessary for the payment of Principal Component, Interest Component and prepayment premium, if any, is set aside for such purpose, the Certificates designated for prepayment will become due and payable on the date fixed for prepayment thereof, and upon presentation and surrender of said 10

19 Certificates, at the place specified in the notice of prepayment, such Certificates will be prepaid and paid at the prepayment price thereof out of the money provided therefor. Rescission of Notice of Prepayment Upon notice from the District that the District has cured the conditions that caused the Certificates to be subject to extraordinary mandatory prepayment, the District may rescind any such prepayment and notice thereof on any date prior to the date fixed for prepayment by causing written notice of the rescission to be given to the Owners of the Certificates, so called for prepayment. Notice of rescission will be given in the same manner in which notice of prepayment was originally given. Defeasance The Trust Agreement provides for the defeasance of the Certificates upon satisfaction of certain terms, set forth under SUMMARY OF PRINCIPAL LEGAL DOCUMENTS TRUST AGREEMENT Defeasance in APPENDIX B. Trustee U.S. Bank National Association has been appointed as Trustee for the Certificates under the Trust Agreement. The Trustee may resign or be removed or replaced by the District as provided in the Trust Agreement. For so long as U.S. Bank National Association is Trustee, its principal corporate trust office shall be 533 West Fifth Street, 24 th Floor., Los Angeles, California 90071, or such other address as the Trustee may designate. See APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS TRUST AGREEMENT for a summary of the rights, duties and obligations of the Trustee. [Remainder of this page intentionally left blank.] 11

20 Estimated Sources and Uses of Funds The net proceeds of the Certificates and certain proceeds of the Taxable General Obligation Bonds are expected to be applied as follows: Sources of Funds Uses of Funds Estimated Sources and Uses of Funds Principal Amount $53,080, Net Original Issue Discount (599,154.05) Proceeds of Taxable General Obligation Bonds 5,477, Total Sources $57,958, Deposit to Project Fund $51,976, Deposit to Lease Payment Fund as Capitalized Interest (1) 4,665, Costs of Delivery (2) 1,315, Total Uses $57,958, (1) Capitalized through August 1, (2) Costs of Delivery include Underwriters discount, premiums for municipal bond insurance and a reserve fund surety bond, legal fees, rating agency fees, Financial Advisor fees, printing fees, and other costs of delivery. See PLAN OF FINANCE. General SECURITY AND SOURCES OF PAYMENT The District will cause the Certificates to be executed and delivered, with each Certificate evidencing proportionate interests of the registered owners thereof (the Owners ) in the Lease Payments to be made by the District pursuant to the Lease (see PLAN OF FINANCE Leased Property herein). The Leased Property consists of certain real property owned by the District and used to support its public education activities. The District intends to apply the net proceeds of the sale of the Certificates to (i) improve various school facilities of the District, and (ii) pay certain costs of delivery of the Certificates. The Certificates are being executed and delivered pursuant to the Trust Agreement. Pursuant to the Lease, the District will lease the Leased Property from the Corporation. The District is required under the Lease to pay Lease Payments for the use and possession of the Leased Property and to pay any taxes and assessments and the cost of maintenance and repair of the Leased Property. See APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE Maintenance, Utilities, Taxes and Assessments. Pursuant to an Assignment Agreement, dated as of March 1, 2011 (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, including (1) the right to receive and collect all of the Lease Payments and prepayments from the District under the Lease, (2) the right to receive and collect any proceeds of any insurance maintained thereunder, of any condemnation award rendered with respect to all or a portion of the Leased Property, or of any lease or sale of the Leased Property in the event of a default by the District under the Lease, and (3) the right to 12

21 exercise such rights and remedies conferred on the Corporation pursuant to the Lease as may be necessary or convenient: (i) to enforce payment of the Lease Payments, additional payments, prepayments and any other amounts required to be deposited in the Lease Payment Fund established under the Trust Agreement or (ii) otherwise to protect the interests of the Owners of the Certificates in the event of a default by the District under the Lease. 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 Lease Payments are designed, in both time and amount, to pay, when due, the principal and interest with respect to the Certificates. The District has covenanted under the Lease to make Lease Payments and Additional Payments (as defined below) for the use of the Leased Property and to take such action each year as may be necessary to include all Lease Payments and Additional Payments in its annual budgets (but, with respect to Additional Payments, only to the extent the amounts of such Additional Payments are known to the District at the time its annual budget is proposed) and to appropriate annually an amount necessary to make such Lease Payments and Additional Payments. See PLAN OF FINANCE Leased Property for a description of the real property and improvements thereon that is the subject matter of the Lease. The amounts payable to the Trustee are to be used to make the payments of principal and interest with respect to the Certificates. Under California law, even though the Lease becomes effective as of the date of the Certificates, 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 or the Reserve Fund) must be subject to abatement in whole or in part if the District does not have substantial use and possession of the Leased Property. See RISK FACTORS Abatement herein. The obligation of the District to make Lease Payments does not constitute an obligation 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 Corporation, the County of San Bernardino, the State of California or any other political subdivision within the meaning of the Constitution of the State of California. Subsidy Payments As Qualified School Construction Bonds, the Lease Payments due from the District are qualified to receive Subsidy Payments to be paid to the District by the Treasury, representing 100% of the lower of the Interest Component of the Certificates or the tax credit rate announced by Treasury on the date of sale of the Certificates. Pursuant to the terms of the Lease, all Subsidy Payments received with respect to the Certificates shall be deposited, when received, into the Lease Payment Fund and applied as a credit against the Lease Payment due from the District. Subsidy Payments means refundable tax credit payments from the Treasury to or upon the order of the Trustee or the District pursuant to Section 6431 of the Code with respect to the Lease Payments. Interest payments with respect to the Certificates will be funded by deposits by the District into the Lease Payment Fund as set forth above. Insofar as permitted by the Internal Revenue Service, the District will take all reasonably necessary steps to cause the Subsidy Payments to be made directly to the Trustee on behalf of the District as a credit against Lease Payments. In the event the District nonetheless receives any Subsidy Payment from the Treasury, it shall transfer the funds received to the Trustee for deposit in the Lease Payment Fund. The Lease Payments shall be payable from amounts available from any lawfully available moneys of the District to the extent Subsidy Payments are not received. 13

22 Under certain circumstances, the Treasury is entitled, pursuant to the Recovery Act, to effect an offset against Direct Subsidy payments otherwise due an issuer of Qualified School Construction Bonds, without notice or action by a court of competent jurisdiction. In the event the Treasury were to effect such an offset in the case of the Lease Payments, the District would remain obligated to make payment of the Interest Component from any lawful available moneys. Lease Payments Subject to the provisions of the Lease regarding abatement in the event of substantial interference with the use of any portion of the Leased Property (see RISK FACTORS Abatement herein) and prepayment of Lease Payments (see the provisions under THE CERTIFICATES Prepayment herein), the District agrees to pay to the Corporation, its successors and assigns, as annual rental for the use of the Leased Property, the Lease Payments (denominated into components of principal and interest) to be due and payable on each Payment Date which are sufficient in both time and amount to pay when due the principal and interest represented by the Certificates. Pursuant to the Lease, the District will deposit each Lease Payment with the Trustee no later than the 15th day of the calendar month preceding each Payment Date (the Lease Deposit Date ). Any amount held in the Lease Payment Fund on any Lease Payment Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to the Lease and other amounts required for payment of past due principal or interest with respect to any Certificates not presented for payment) shall be credited towards the Lease Payment then due and payable. No Lease Payment need be made on any Lease Payment Date if the amounts then held in the Lease Payment Fund are at least equal to the Lease Payment then required to be paid. Additional Payments The District shall pay such amounts ( Additional Payments ) as shall be required for the payment of all administrative costs relating to the Leased Property or the Certificates, including without limitation all expenses, compensation and indemnification of the Trustee payable by the District under the Trust Agreement, fees of auditors, accountants, attorneys or engineers, and all other necessary administrative costs of the Corporation or charges required to be paid in order to maintain its existence or to comply with the terms of the Certificates or of the Trust Agreement or to defend the Corporation and its officers and directors. All such Additional Payments to be paid shall be paid when due directly by the District to the respective parties to whom such Additional Payments are owing. Reserve Fund The Trust Agreement requires the establishment of a Reserve Fund in an amount equal to the Reserve Requirement, initially being $5,308,000. If the District reduces the amount of Certificates Outstanding through optional or mandatory prepayment, cash within the Reserve Fund may, at the direction of the District, be withdrawn from the Reserve Fund and applied to the funding of certain additional capital projects of the District for which proceeds of its general obligation bonds issued under the authorization of March 2, 2004, may be applied. The District will obtain a Surety Bond to fund the Reserve Fund in an amount sufficient to meet the Reserve Requirement pursuant to a commitment that has been issued by Assured Guaranty Municipal Corp. ( AGM or the Insurer ) to the District. In the event the District were to cause Additional Certificates to be executed and delivered under the Trust Agreement, the District, as condition to such delivery, is obligated to increase the balance in the 14

23 Reserve Fund to at least ten percent (10%) of the Principal Component of the Certificates then Outstanding, plus the Principal Component of the Additional Certificates. Additional Certificates Subsequent to the execution and delivery of the Certificates, the Trustee shall, upon written request of an Authorized Representative of the District with the prior written consent of the Insurer, 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, which may take the form of a Supplemental Trust Agreement, provided that the District shall certify that there shall have been compliance with all of the following conditions, which are hereby made conditions: (i) The parties to the Trust Agreement shall, with the prior written consent of the Insurer, have executed a Supplemental Trust 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 initially established under the Trust Agreement for the Certificates, respectively, as shall be necessary or appropriate, which Supplemental Trust Agreement shall require that, upon the delivery of any Additional Certificates, a reserve requirement with respect to such Additional Certificates equal to no less than 10% of the Principal Component of the Additional Certificates shall be deposited into the Reserve Fund, or a Surety Bond or a similar instrument in a similar amount shall be deposited with the Trustee, such that all amounts in or credited to the Reserve Fund shall be available in the event of shortfalls in the payment of any Lease Payments or Certificates executed and delivered under the Trust Agreement; (ii) The principal and interest with respect to the Additional Certificates shall be payable only on Interest Payment Dates; (iii) No defaults or Events of Default shall exist under the Trust Agreement or under the Lease or the Site Lease and be then continuing; (iv) There shall have been delivered an opinion of Special Counsel respecting the due authorization by the District of the Supplemental Trust Agreement and the associated Site Lease Supplement and Lease Supplement, if necessary, and that the execution and delivery of the foregoing supplements do not, in and of themselves, adversely affect the exclusion from gross income of the Interest Component of the Certificates for federal income tax purposes, nor cause the Lease Payments evidenced by the Certificates originally delivered hereunder to fail to qualify as Qualified School Construction Bonds under the Recovery Act; (v) The Lease and the Site Lease shall have been amended by the parties thereto if necessary in order to (i) increase or adjust the Lease Payments due and payable on each Lease Payment 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; (ii) if appropriate, amend the definition of Leased Property to provide that the Lease Payments, following the date of delivery of the Additional Certificates, will represent the fair rental value of the Leased Property; and (iii) make such other revisions to the Lease as may be necessary or advisable in order to provide for the execution and delivery of such Additional Certificates; (vi) There shall have been delivered to the Trustee a counterpart of the amendments described in the foregoing paragraph; and 15

24 (vii) The rating on the Certificates shall have been confirmed by each of the Rating Agencies, taking into account the additional obligations of the District represented by the Additional Certificates. Insurance by the District Pursuant to the Lease, the District will obtain one or more title policies insuring (a) the fee interest of the District in the Leased Property, (b) the Corporation s ground leasehold estate in the Leased Property under the Site Lease, and (c) the District s leasehold estate under the Lease in the Leased Property, subject only to Permitted Encumbrances. The Lease requires that the District maintain rental interruption insurance to insure against loss, total or partial, of rental income from any portion of the Leased Property in an amount not less than the maximum remaining scheduled Lease Payments in any 24-month period. The District is obligated to obtain a standard comprehensive general public liability and property damage insurance policy, theft insurance, insurance against fire and lightning, including extended coverage and vandalism and malicious mischief insurance, against losses occurring at or on the Leased Property by theft, and workers compensation insurance. The District may also maintain such insurance (except rental interruption and title insurance) through a program of self-insurance under certain conditions. See APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE AGREEMENT Insurance. The proceeds of any rental interruption insurance will be deposited in the Lease Payment Fund to be credited towards the payment of the Lease Payments. The Lease requires the District promptly to remit to the Trustee the Net Proceeds of any insurance award (other than rental interruption insurance) either to replace or repair the Leased Property or to prepay the Certificates, for deposit by the Trustee into the Net Proceeds Fund. The amount of Lease Payments and Additional Payments due under the Lease may be reduced during any period in which material damage or destruction to all or part of the Leased Property substantially interferes with the District s use and possession thereof. See RISK FACTORS Abatement herein. The District is not purchasing earthquake insurance to cover casualties or other losses with respect to any portion of the Leased Property. As a result, rental interruption insurance will not be available in the event of earthquake damage to the Leased Property that interferes with the District s substantial use and possession of the Leased Property. Neither the Trust Agreement nor the Lease requires the District to obtain earthquake insurance with respect to the Leased Property. See RISK FACTORS No Earthquake Insurance and No Flood Insurance. INFORMATION CONCERNING CERTIFICATE INSURANCE The following information appearing under the heading CERTIFICATE INSURANCE and the specimen of the Insurance Policy attached as Appendix H hereto have been furnished by the Insurer for use in this Official Statement. No representation is made by the District as to the accuracy, completeness or adequacy of such information, nor as to the absence of material adverse changes in such information subsequent to the date of this Official Statement. The District has not made any independent investigation of the Insurer or the Insurance Policy, and reference is made to the information set forth below under the heading CERTIFICATE INSURANCE and in Appendix H hereto for a description thereof. 16

25 CERTIFICATE INSURANCE The Insurance Policy Concurrently with the execution and delivery of the Certificates, Assured Guaranty Municipal Corp. ( AGM or the Insurer ) will issue its Municipal Bond Insurance Policy for the Certificates. The Insurance Policy guarantees the scheduled payment of principal and interest with respect to the Certificates when due as set forth in the form of the Insurance Policy included as Appendix H to this Official Statement. The Insurance 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 a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. ( Holdings ). Holdings is 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. No shareholder of AGL, Holdings or AGM is liable for the obligations of AGM. AGM s financial strength is rated AA+ (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) and Aa3 (negative outlook) by Moody s Investors Service, Inc. ( Moody s ). 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. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by AGM. AGM does not guarantee the market price of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings. On January 24, 2011, S&P published a Request for Comment: Bond Insurance Criteria (the Bond Insurance RFC ) in which it requested comments on its proposed changes to its bond insurance ratings criteria. In the Bond Insurance RFC, S&P notes that it could lower its financial strength ratings on existing investment-grade bond insurers (including AGM) by one or more rating categories if the proposed bond insurance ratings criteria are adopted, unless those bond insurers (including AGM) raise additional capital or reduce risk. Reference is made to the Bond Insurance RFC, a copy of which is available at for the complete text of S&P s comments. On October 25, 2010, S&P published a Research Update in which it downgraded AGM s counterparty credit and financial strength rating from AAA (negative outlook) to AA+ (stable outlook). Reference is made to the Research Update, a copy of which is available at for the complete text of S&P s comments. In a press release dated February 24, 2010, Fitch announced that, at the request of AGL, it had withdrawn the AA (Negative Outlook) insurer financial strength rating of AGM at the then current rating level. Reference is made to the press release, a copy of which is available at for the complete text of Fitch s comments. 17

26 On December 18, 2009, Moody s issued a press release stating that it had affirmed the Aa3 insurance financial strength rating of AGM, with a negative outlook. Reference is made to the press release, a copy of which is available at for the complete text of Moody s comments. There can be no assurance as to any further ratings action that Moody s or S&P may take with respect to AGM. 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, 2010, which was filed by AGL with the Securities and Exchange Commission (the SEC ) on March 1, Capitalization of AGM. At December 31, 2010, AGM s consolidated policyholders surplus and contingency reserves were approximately $2,578,146,678 and its total net unearned premium reserve was approximately $2,298,456,380, in each case, in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference. Portions of the following document filed by AGL with the SEC that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (which was filed by AGL with the SEC on March 1, 2011). All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, 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.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Any information regarding AGM included herein under the caption CERTIFICATE 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. 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 CERTIFICATE INSURANCE. RISK FACTORS The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating any purchase of the Certificates. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an 18

27 investment in the Certificates. The order which the following risk factors are presented is not indicative of the relative importance of such risk factors. General Considerations Security for the Certificates The obligation of the District to make the Lease Payments or to make Additional Payments does not constitute an obligation of the District 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 under the Lease constitutes a debt of the District, the State, or any of their respective political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction. The obligation of the District to make Lease Payments and Additional Payments is in consideration of the right of the District to the use and possession of the Leased Property. 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 and Additional Payments from any source of legally available funds and the District covenants in the Lease that, for so long as the Leased Property is available for its use, it will make the necessary annual appropriations within its budgets for Lease Payments and Additional Payments. The District is currently liable and may become liable on other obligations payable from general revenues, such as employee salaries and benefits and repayment of tax and revenue anticipation notes, some of which may have a priority over the Lease Payments and Additional Payments. Furthermore, the District has reserved the right to cause the Trustee to execute and deliver Additional Certificates in accordance with the Trust Agreement. All Additional Certificates and similar general fund obligations of the District would be parity obligations with the Certificates offered hereunder. The District has the capacity to enter into other obligations which may constitute additional charges against its revenues. To the extent that additional obligations are incurred by the District, the funds available to make Lease Payments and Additional 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 Additional Payments and other payments due under the Lease. Abatement The current annual fair rental value of the Leased Property has been determined by the District to be at least equal to the annual Lease Payments. During any period in which, by reason of condemnation, title defect, damage or destruction, there is substantial interference with the use and possession of any portion of the Leased Property, the obligation of the District to pay Lease Payments will be abated to the extent that the fair rental value of the remaining portion of the Leased Property is insufficient, provided, however, that Lease Payments for which the District is not yet liable under the Lease, in the event of such abatement, or a portion of such Lease Payments, as applicable, shall be paid from the proceeds of rental interruption insurance and no abatement of Lease Payments shall occur so long as rental interruption insurance is sufficient to pay Lease Payments. The amount of any such abatement is determined by the District such that the resulting Lease Payments represent fair rental value for the use and possession of the portion of the Leased Property not damaged, destroyed, or taken. Such abatement will commence with such damage, destruction or taking and end with the substantial completion of the replacement or repair. During abatement, available moneys on deposit in the Lease Payment Fund, the Reserve Fund and any other legally available sources of money, including without limitation proceeds of rental interruption insurance, will be applied to pay the Lease Payments. In the event fair rental value at the time of any cessation of such abatement is greater than the fair rental value represented by the Lease 19

28 Payments, the Lease Payments will be increased to reflect such incremental value so that all amounts abated will, to the extent permissible by law, be recouped during the remaining term of the Lease. Notwithstanding the foregoing, the resulting payments made under the Lease may not be sufficient to pay the remaining principal and interest with respect to the Certificates. Other Limitations on Liability Although the District covenants to budget and appropriate annually to provide for Lease Payments, the District has not pledged its full faith and credit to such payments. In the event that the District s revenue sources are less than its total obligations in any year, the District could choose to fund other District services before paying its Lease Payments. 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 of California and its governmental bodies in the interest of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. Constitutional School Funding Guarantee; State of California Finances The K-12 school funding guarantee provided under Proposition 98 (see discussion under CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS ) is subject to suspension by the State Legislature, with the Governor s concurrence, for a one-year period, and any corresponding reduction for that year will not be paid in subsequent years. Also, under the third test of Proposition 111, amending Proposition 98, cost of living adjustments may be limited in times of economic downturn. See the caption Application of Constitutional and Statutory Provisions. Application of Constitutional and Statutory Provisions The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. One major reason is that the Proposition 98 minimums described in CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS are dependent on State General Fund revenues. In the early 1990 s, 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 those years, the State considered the amounts appropriated above the minimum as a loan to K-14 districts, and deducted the value of these loans from the next year s estimated Proposition 98 minimums. In addition, a substantial portion of each annual budget of the District is composed of moneys apportioned to the District by the State of California. Currently, there have been a number of adverse effects on the budgets of school and community college districts caused by the general economic downturns in the State of California and the State s own budget difficulties. See the caption, State Funding of Education in APPENDIX A. Continued adverse economic conditions and reduced revenues at the State level could have future, unpredictable, negative effects upon the amount by which and the 20

29 way in which the District receives money from the State. See also Economic Conditions in California below. No Acceleration Upon Default In the event of a default, there is no available remedy of acceleration of the total Additional Payments due over the term of the Lease or any acceleration of the Lease Payments. The District will only be liable for Additional Payments and Lease Payments on an annual basis, and the Trustee would be required to seek a separate judgment in each fiscal year for such fiscal year s Lease Payments and Additional Payments. THE TRUSTEE MAY NOT DECLARE THE CERTIFICATES TO BE DUE AND PAYABLE AND ACCELERATE PAYMENT OF THE CERTIFICATES. Self-Insurance The District may self-insure for all insurance with the exception of rental interruption and title insurance. Should the District self-insure, no assurance can be given that such self-insurance at the time of any casualty or loss will be adequate to cover any claims that may arise. For a discussion of (i) the insurance requirements for the Leased Property, and (ii) the conditions under which the District is permitted to self-insure, see APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Insurance by the District. For a general description of the District s insurance and risk management programs, see APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT Insurance and APPENDIX D SELECTED INFORMATION FROM AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, Limited Recourse on Default The enforcement of any remedies provided in the Lease and Trust Agreement could prove both expensive and time-consuming. Although the Lease provides that if the District defaults, the Trustee may repossess the Leased Property and relet it, portions of the Leased Property may not be easily leased to third parties, and even if relet, could be of little value to others. Additionally, the Trustee may have limited ability to relet the Leased Property to provide a source of rental payments sufficient to pay the principal represented by the Certificates. The Trustee is not empowered to sell the Leased Property for the benefit of the Owners. In addition, due to the essential government functions of the Leased Property, it is not certain whether a court would permit the exercise of the remedies of repossession and re-letting with respect thereto. Economic Conditions in California In the early 1990s, an economic recession and a State budget imbalance resulted in K-12 school districts receiving no increase in per-student funding from the State. Per-student spending was essentially frozen during this period, with no cost-of-living adjustments. In the late 1990s and early 2000s, increasing State revenues improved the funding for K-12 school districts. However, the State economy has since deteriorated and the State is experiencing severe budget shortfalls. Recent years have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporate taxes, making it increasingly difficult for the State to meets its Proposition 98 funding mandate, which normally comprises approximately 45% of all State general fund revenues, while providing for other fixed State costs, priority programs and services. Because education funding constitutes a substantial part of the State s general fund expenditures, it is at the core of annual budget negotiations and adjustments. See APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT State Assistance herein. Decreases in State revenues and budget shortfalls may significantly affect appropriations made by the State to school districts, and the timing of payment to school districts by the 21

30 State may depend upon the ability of the State to access the credit markets with respect to its own cash flow borrowings. In the event that State monies are not available to meet obligations in a timely manner, school funding along with certain other services, are given priority under the State Constitution. Effect of Foreclosures on ADA Foreclosure rates have increased in the County as a result of the current economic downturn and related housing market crisis. The relatively high percentage of home mortgages which have been the subject of foreclosure actions within the County has resulted in a high percentage of vacancies in singlefamily homes within the District, while at the same time shrinking loan markets have made it difficult for new homebuyers to purchase within the District, even with resulting home prices. The consequence of these conditions has been to reduce the number of families with school age children within the District, which has the similar effect upon average daily attendance ( ADA ). Inasmuch as ADA comprises the largest source of District General Fund moneys for its unrestricted General Fund expenditures and to meet its General Fund budget, a significant decrease in ADA resulting from foreclosure could therefore negatively impact the District s budget. The District is not able to predict the number of foreclosures which will occur within the District during the term of the Certificates. See APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT State Funding of Education for more information on the calculation of revenue limit funding and ADA. Future State Budgets Historically, approximately 85% of the District s annual general fund revenues have consisted of payments from the State. While the California Constitution contains certain minimum funding requirements for public education ( Proposition 98 ), State funding can be affected by a number of factors including poor performance of the California economy. The State has in past years experienced budgetary difficulties and has balanced its budget by requiring local political subdivisions to fund certain costs theretofore borne by the State. The State budget for fiscal year was once again adopted long after the statutory June 30 deadline. No prediction can be made as to whether the State will take further measures to resolve its current projected budget deficit for the fiscal year which would, in turn, adversely affect the cash flows for the District that have been projected for those fiscal years. Further State actions taken to address its budgetary difficulties could have the effect of reducing K-14 support and the District is unable to predict the nature, extent or effect of such reductions. See APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT State Assistance. In addition, the District cannot predict the effect that the general economic conditions within the State and the State s budgetary problems may have in the future on the District budget or operations or on its ability to make payments of principal and interest with respect to the Certificates. Investment of District s General Fund While net Certificate proceeds, Lease Payments and any Additional Payments paid to the Trustee pursuant to the Lease will be entirely held in trust by the Trustee pursuant to the Trust Agreement, the District s general operating fund is held and invested by the Auditor-Controller/Treasurer/Tax Collector of the County. See APPENDIX F SAN BERNARDINO COUNTY TREASURY POOL. For a description of the District s general fund, see APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT. Investment losses within the County Treasury Pool could reduce the amount available to the District to make its Lease Payments. 22

31 No Liability by the Corporation to the Owners Except as expressly provided in the Trust Agreement, the Corporation shall not have any obligation or liability to the Owners of the Certificates 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 Earthquake Insurance The District has not purchased earthquake insurance for the Leased Property, nor is it required to do so under the terms of the Lease. It is possible that an earthquake affecting the Leased Property could interfere with the District s ability to use the Leased Property. Depending on its severity, an earthquake could result in abatement under the Lease. See RISK FACTORS Abatement herein. No Flood Insurance The District has not purchased flood insurance for the Leased Property, nor is it required to do so under the terms of the Lease. The Leased Property is not located in a flood plain. It is possible that a flood could interfere with the District s ability to use the Leased Property. Depending on its severity, a flood could result in abatement under the Lease. See RISK FACTORS Abatement herein. Hazardous Substances Owners and operators of real property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws. In addition, California laws impose particular requirements with regard to hazardous substances. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the financial and legal ability of the property owner or operator to develop the affected property or other adjacent property, and the value of the affected property or adjacent property. The District has no actual knowledge of existing hazardous substances on or near the Leased Property. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS The primary source of revenue for the payment of Lease Payments will be the general fund of the District. Amounts available to the District for such payment will vary, dependent in large part upon funding available from the State of California. See APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT State Funding of Education. Article XIIIA of the California Constitution. Article XIIIA of the California Constitution limits the amount of any ad valorem tax on real property, to one percent of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978 and on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-thirds of the voters on such indebtedness. 23

32 Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership have occurred after the 1975 assessment. The full cash value may be increased at a rate not to exceed two percent per year to account for inflation. Article XIIIA has subsequently been amended to permit reduction of the full cash value base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the full cash value base in the event of reconstruction of property damaged or destroyed in a disaster and in other minor or technical ways. Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The one percent property tax is automatically levied by the County and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the two percent annual adjustment are allocated among the various jurisdictions in the taxing area based upon their respective status. Any such allocation made to a local agency continues as part of its allocation in future years. Article XIIIB of the California Constitution. In 1979, an initiative added Article XIIIB to the State Constitution ( Article XIIIB ). Under Article XIIIB, the State and each local governmental entity has an annual appropriations limit and is not permitted to spend certain moneys that are called appropriations subject to limitation (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriations of moneys that are excluded from the definition of appropriations subject to limitation, including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the appropriations limit is to be based on certain expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. However, in the event that a school district s revenues exceed its spending limit, the district may, in any fiscal year, increase its appropriations limit to equal its spending by borrowing appropriations limit from the State, provided the State has sufficient excess appropriations limit in such year. Article XIIIC and Article XIIID of the California Constitution. The so-called Right to Vote on Taxes Act ( Proposition 218 ) was approved by the voters in Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges. Among other things, Article XIIIC establishes that every tax is either a general tax (imposed for general governmental purposes) or a special tax (imposed for specific purposes); prohibits special purpose government agencies such as school districts from levying general taxes; and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote. Article XIIIC also provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. 24

33 Article XIIIC also provides that the initiative power shall not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. The State Constitution and the laws of the State impose a mandatory, statutory duty on a county treasurer-tax collector to levy a property tax sufficient to pay debt service on general obligation bonds coming due in each year. The initiative power cannot be used to reduce or repeal the authority and obligation to levy such taxes which are pledged as security for payment of general obligation bonds or to otherwise interfere with performance of the mandatory, statutory duty of the District and the County with respect to such taxes which are pledged as security for payment of the general obligation bonds. Legislation adopted in 1997 provides that Article XIIIC shall not be construed to mean that any owner or beneficial owner of a municipal security assumes the risk of or consents to any initiative measure which would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution. Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by the District. Developer fees imposed by the District are neither pledged nor available to pay the Certificates. Proposition 62. In 1986, California voters adopted Proposition 62, a statutory initiative which amended the California Government Code by the addition of Sections Proposition 62 requires that (i) any local tax for general governmental purposes (a general tax ) must be approved by a majority vote of the electorate; (ii) any local tax for specific purposes (a special tax ) must be approved by a two-thirds vote of the electorate; (iii) any general tax must be proposed for a vote by two-thirds of the legislative body; and (iv) proceeds of any tax imposed in violation of the vote requirements must be deducted from the local agency s property tax allocation. Provisions applying Proposition 62 retroactively from its effective date to 1985 are unlikely to be of any continuing importance; certain other restrictions were already contained in the Constitution. Most of the provisions of Proposition 62 were affirmed by the 1995 California Supreme Court decision in Santa Clara County Local Transportation Authority v. Guardino, which invalidated a special sales tax for transportation purposes because fewer than two-thirds of the voters voting on the measure had approved the tax. Following the California Supreme Court s decision upholding Proposition 62, several actions were filed challenging taxes imposed by public agencies since the adoption of Proposition 62, which was passed in November On June 4, 2001, the California Supreme Court released its decision in one of these cases, Howard Jarvis Taxpayers Association v. City of La Habra, et al. ( La Habra ). In this case, the court held that public agency s continued imposition and collection of a tax is an ongoing violation, upon which the statute of limitations period begins anew with each collection. The court also held that, unless another statute or constitutional rule provided differently, the statute of limitations for challenges to taxes subject to Proposition 62 is three years. Accordingly, a challenge to a tax subject to Proposition 62 may only be made for those taxes received within three years of the date the action is brought. Although by its terms, Proposition 62 applies to school districts, the District has not experienced any substantive adverse financial impact as a result of the passage of this initiative or the Santa Clara or La Habra decisions and believes that any impact experienced by the District will not adversely affect the ability of the District to make payments with respect to the Certificates. Proposition 98. In 1988, California voters approved Proposition 98, a combined initiative, constitutional amendment and statute called the Classroom Instructional Improvement and Accountability Act (the Accountability Act ). The Accountability Act changed State funding of public education below the university level, and the operation of the State s Appropriations Limit, primarily by 25

34 guaranteeing State funding for K-12 school districts and community college districts (collectively, K-14 districts ). Under Proposition 98 (as modified by Proposition 111, which was enacted on June 5, 1990), K-14 districts are guaranteed the greater of (a) in general, a fixed percent of the State s General Fund (the State General Fund ) revenues ( Test 1 ), (b) the amount appropriated to K-14 schools in the prior year, adjusted for changes in the cost-of-living (measured as in Article XIIIB by reference to State per capita personal income) and enrollment ( Test 2 ), or (c) a third test, which would replace Test 2 in any year when the percentage growth in per capita State General Fund revenues from the prior year plus one-half of one percent is less than the percentage growth in State per capita personal income ( Test 3 ). Under Test 3, schools would receive the amount appropriated in the prior year adjusted for changes in enrollment and per capita State General Fund revenues, plus an additional small adjustment factor. If Test 3 is used in any year, the difference between Test 3 and Test 2 would become a credit to schools which would be the basis of payments in future years when per capita State General Fund revenue growth exceeds per capita personal income growth. Legislation adopted prior to the end of the fiscal year, implementing Proposition 98, determined the K-14 districts funding guarantee under Test 1 to be 40.3% of the State General Fund tax revenues, based on appropriations. However, that percentage has been adjusted to 35% to account for a subsequent redirection of local property taxes whereby a greater proportion of education funding now comes from local property taxes. Proposition 98 permits the State Legislature by a two-thirds vote of both houses, with the Governor s concurrence, to suspend the K-14 districts minimum funding formula for a one-year period. In the fall of 1989, the Legislature and the Governor utilized this provision to avoid having 40.3% of revenues generated by a special supplemental sales tax enacted for earthquake relief go to K-14 districts. Proposition 98 also contains provisions transferring certain State tax revenues in excess of the Article XIIIB limit to K-14 districts. Application of Proposition 98. 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 minimum funding levels under Test 1 and Test 2 are dependent on State General Fund revenues. In past 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 minimum funding levels. The State determined that there were loans to K-14 districts of $1.3 billion during fiscal year , $1.1 billion during fiscal year , $1.3 billion during fiscal year and $787 million during fiscal year These loans have been combined with the K loans into one loan totaling $1.760 billion. The State proposed that repayment of this loan would be from future years Proposition 98 entitlements, and would be conditioned on maintaining current funding levels per pupil for K-12 schools. In 1992, a lawsuit, California Teachers Association et al. v. Gould, was filed, which challenged the validity of the off-budget loans. As part of the negotiations leading to the Budget Act, an agreement was reached to settle this case. The agreement provides that both the State and K-14 districts share in the repayment of prior years emergency loans to schools. Of the total $1.76 billion in loans, the State will repay $935 million, while K-14 districts will repay $825 million. The State share of the repayment will be reflected as expenditures above the current Proposition 98 base calculation. The K-14 districts share of the repayment will count as appropriations that count toward satisfying the Proposition 98 guarantee, and thus are treated as from below the current base. Repayments are spread over the eight-year period of through to mitigate any adverse fiscal impact. In April 1996, a court settlement was reached and $360 million in appropriations from the fiscal year was disbursed to districts in August

35 Substantially increased State General Fund revenues, above initial budget projections, in the fiscal years and thereafter have resulted or will result in retroactive increases in Proposition 98 appropriations from subsequent fiscal years budgets. Because of the State s increasing revenues, perpupil funding at the K-12 level has increased by about 42% from the level in place from through A significant amount of the extra Proposition 98 moneys in the last few years has been allocated to special programs, most particularly an initiative to allow each classroom from grades K-3 to have no more than 20 pupils by the end of the school year. There are also new initiatives to improve reading skills and to upgrade technology in high schools, as well as numerous programs approved by the State Budget Act for Fiscal Year and proposed for Fiscal Year The economy of the State has slowed and the State is experiencing severe budget shortfalls. For a discussion of State funding of the District, see APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT State Funding of Education. See also RISK FACTORS Economic Conditions in California and Future State Budgets. 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 except 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 who will review the use of the bond funds and inform the public about their proper usage. Propositions 1A and 22. Proposition 1A (SCA 4), proposed by the Legislature in connection with the Budget Act and approved by the voters in November 2004, provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, Any change in the allocation of property tax revenues among local governments within a county must be approved by two-thirds of both houses of the State Legislature. Proposition 1A provides, however, that beginning in fiscal year , the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the 27

36 shift is approved by two-thirds of both houses of the State Legislature and certain other conditions are met. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also provides that if the State reduces the Vehicle License Fee rate from 0.65 percent of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State, beginning June 1, 2009, to suspend State mandates affecting cities, counties and special districts, schools or community colleges, excepting mandates relating to employee rights, in any year that the State does not fully reimburse local governments for their costs of compliance with such mandates. Under Proposition 1A, the State no longer has the authority to permanently shift city, county, and special district property tax revenues to schools, or take certain other actions that affect local governments. In addition, Proposition 1A restricts the State s ability to borrow state gasoline sales tax revenues. These provisions in the Constitution, however, do not eliminate the State s authority to temporarily borrow or redirect some city, county, and special district funds or the State s authority to redirect local redevelopment agency revenues. However, Proposition 22, The Local Taxpayer, Public Safety, and Transportation Protection Act, approved by the voters of the State on November 2, 2010, reduces or eliminates the State s authority: (1) to use State fuel tax revenues to pay debt service on state transportation bonds; (2) to borrow or change the distribution of state fuel tax revenues; (3) to direct redevelopment agency property taxes to any other local government; (4) to temporarily shift property taxes from cities, counties, and special districts to schools; (5) and to use vehicle license fee revenues to reimburse local governments for state mandated costs. As a result, 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 the LAO s analysis of Proposition 22 submitted by the LAO on July 15, 2010, the expected reduction in resources available for the State to spend on these other programs as a consequence of the passage of Proposition 22 will be approximately $1 billion in fiscal year , with an estimated immediate fiscal effect equal to approximately 1 percent of the State s total General Fund spending. 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. Future Initiatives. Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID and Propositions 62, 98 and 39, were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time other initiative measures could be adopted, further affecting District revenues or the District s ability to expend revenues. DISTRICT INFORMATION A brief description of the District, together with current information concerning its economy and governmental organization, its major revenue sources, funds and indebtedness is set forth in APPENDIX A hereto. THE CORPORATION The San Bernardino Schools Financing Corporation, a nonprofit public benefit corporation, was incorporated on February 20, 1990 pursuant to the Nonprofit Public Benefit Corporation Law of the State of California (Title 1, Division 2, Part 2 of the California Corporation Code). The Corporation was organized for the primary purpose of providing financial assistance to the by acquiring, constructing, improving and financing various facilities, land and equipment, and by leasing facilities, land and equipment for the use. The Board of Education of the District acts ex officio as the Board of Directors of the Corporation. The Corporation is co-located with the District offices and has no assets or employees. 28

37 GENERAL TAX MATTERS The following is a general summary of the United States federal income tax consequences of the purchase and ownership of the Certificates. The discussion is based upon laws, Treasury Regulations, rulings and decisions now in effect, all of which are subject to change or possibly differing interpretations. No assurances can be given that future changes in the law will not alter the conclusions reached herein. The discussion below does not purport to deal with United States federal income tax consequences applicable to all categories of investors. Further, this summary does not discuss all aspects of United States federal income taxation that may be relevant to a particular investor in the Certificates in light of the investor s particular personal investment circumstances or to certain types of investors subject to special treatment under United States federal income tax laws (including insurance companies, tax exempt organizations, financial institutions, brokers-dealers, and persons who have hedged the risk of owning the Certificates). The summary is therefore limited to certain issues relating to initial investors who will hold the Certificates as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the Code ), and acquire such Certificates for investment and not as a dealer or for resale. Prospective investors should note that no rulings have been or will be sought from the Internal Revenue Service (the IRS ) with respect to any of the U.S. federal income tax consequences discussed below, and no assurance can be given that the Service will not take contrary positions. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CERTIFICATES. Internal Revenue Service Circular 230 Notice. Investors should be aware that: (i) the discussion with respect to United States federal tax matters in this Official Statement was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer; (ii) such discussion was written to support the promotion or marketing (within the meaning of IRS Circular 230) of the transactions or matters addressed by such discussion; and (iii) each taxpayer should seek advice based on his or her particular circumstances from an independent tax advisor. This notice is given solely for purposes of ensuring compliance with IRS Circular 230. Payments of Stated Interest evidenced by the Certificates. The stated interest paid on the Certificates will be included in the gross income, as defined in section 61 of the Code, of the beneficial owners thereof and be subject to U.S. federal income taxation when received or accrued, depending on the tax accounting method applicable to the beneficial owners thereof. Original Issue Discount. If a substantial amount of the Certificates of any stated maturity is purchased at original issuance for a purchase price (the Issue Price ) that is less than their face amount by more than one quarter of one percent times the number of complete years to maturity, the Certificates of such maturity will be treated as being issued with original issue discount. The amount of the original issue discount will equal the excess of the principal amount payable on such Certificates at maturity over its Issue Price, and the amount of the original issue discount on the Certificates will be amortized over the life of the Certificates using the constant yield method provided in the Treasury Regulations. As the original issue discount accrues under the constant yield method, the beneficial owners of the Certificates, regardless of their regular method of accounting, will be required to include such accrued amount in their 29

38 gross income as interest. This can result in taxable income to the beneficial owners of the Certificates that exceeds actual cash distributions to the beneficial owners in a taxable year. The amount of the original issue discount that accrues on the Certificates each taxable year will be reported annually to the IRS and to the beneficial owners (but not by the District). The portion of the original issue discount included in each beneficial owner s gross income while the beneficial owner holds the Certificates will increase the adjusted tax basis of the Certificates in the hands of such beneficial owner. Disposition of Certificates and Market Discount. A beneficial owner of Certificates will generally recognize gain or loss on the redemption, sale or exchange of a Certificate equal to the difference between the redemption or sales price (exclusive of the amount paid for accrued interest) and the beneficial owner s adjusted tax basis in the Certificates. Generally, the beneficial owner s adjusted tax basis in the Certificates will be the beneficial owner s initial cost, increased by the original issue discount previously included in the beneficial owner s income to the date of disposition. Any gain or loss generally will be capital gain or loss and will be long-term or short-term, depending on the beneficial owner s holding period for the Certificates. Under current law, a purchaser of Certificates who did not purchase the Certificates in the initial public offering (a subsequent purchaser ) generally will be required, on the disposition of the Certificates, to recognize as ordinary income a portion of the gain, if any, to the extent of the accrued market discount. Market discount is the amount by which the price paid for the Certificates by a subsequent purchaser is less than the sum of Issue Price and the amount of original issue discount previously accrued on the Certificates. The Code also limits the deductibility of interest incurred by a subsequent purchaser on funds borrowed to acquire Certificates with market discount. As an alternative to the inclusion of market discount in income upon disposition, a subsequent purchaser may elect to include market discount in income currently as it accrues on all market discount instruments acquired by the subsequent purchaser in that taxable year or thereafter, in which case the interest deferral rule will not apply. The re-characterization of gain as ordinary income on a subsequent disposition of Certificates could have a material effect on the market value of the Certificates. Backup Withholding. Under section 3406 of the Code, a beneficial owner of the Certificates who is a United States person, as defined in section 7701(a)(30) of the Code, may, under certain circumstances, be subject to backup withholding on payments of current or accrued interest on the Certificates. This withholding applies if such beneficial owner of Certificates: (i) fails to furnish to payor such beneficial owner s social security number or other taxpayer identification number ( TIN ); (ii) furnishes the payor an incorrect TIN; (iii) fails to report properly interest, dividends, or other reportable payments as defined in the Code; or (iv) under certain circumstances, fails to provide the payor with a certified statement, signed under penalty of perjury, that the TIN provided to the payor is correct and that such beneficial owner is not subject to backup withholding. Backup withholding will not apply, however, with respect to payments made to certain beneficial owners of the Certificates. Beneficial owners of the Certificates should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedures for obtaining such exemption. Withholding on Payments to Nonresident Alien Individuals and Foreign Corporations. Under sections 1441 and 1442 of the Code, nonresident alien individuals and foreign corporations are generally subject to withholding at the rate of 30% on periodic income items arising from sources within the United States, provided such income is not effectively connected with the conduct of a United States trade or business. Assuming the interest received by the beneficial owners of the Certificates is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will be subject 30

39 to 30% withholding, or any lower rate specified in an income tax treaty, unless such income is treated as portfolio interest. Interest will be treated as portfolio interest if: (i) the beneficial owner provides a statement to the payor certifying, under penalties of perjury, that such beneficial owner is not a United States person and providing the name and address of such beneficial owner; (ii) such interest is treated as not effectively connected with the beneficial owner s United States trade or business; (iii) interest payments are not made to a person within a foreign country which the IRS has included on a list of countries having provisions inadequate to prevent United States tax evasion; (iv) interest payable with respect to the Certificates is not deemed contingent interest within the meaning of the portfolio debt provision; (v) such beneficial owner is not a controlled foreign corporation, within the meaning of section 957 of the Code; and (vi) such beneficial owner is not a bank receiving interest with respect to the Certificates pursuant to a loan agreement entered into in the ordinary course of the bank s trade or business. Assuming that payments with respect to the Certificates are treated as portfolio interest within the meaning of sections 871 and 881 of the Code, then no backup withholding under section 1441 and 1442 of the Code and no backup withholding under section 3406 of the Code is required with respect to beneficial owners or intermediaries who have furnished Form W-8 BEN, Form W-8 EXP or Form W-8 IMY, as applicable, provided the payor does not have actual knowledge that such person is a United States person. Reporting of Interest Payments. Subject to certain exceptions, interest payments made to beneficial owners with respect to the Certificates will be reported to the IRS. Such information will be filed each year with the IRS on Form 1099 which will reflect the name, address, and TIN of the beneficial owner. A copy of Form 1099 will be sent to each beneficial owner of a Certificate for U.S. federal income tax purposes. Certain State Income Tax Consequences. In the opinion of Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, interest with respect to the Certificates is exempt from State of California personal income taxes. Counsel LEGAL MATTERS Special Counsel s employment is limited to review of the legal proceedings required for the authorization of the Certificates and to rendering the opinion substantially in the form set forth in APPENDIX C hereto. Special Counsel will receive compensation contingent upon sale and delivery of the Certificates. Fulbright & Jaworski L.L.P. also serves as Disclosure Counsel to the District. Certain legal matters will be passed upon for the Underwriters by their counsel, Orrick Herrington & Sutcliffe, LLP, Los Angeles, California, and for the District by Atkinson, Andelson, Loya, Ruud & Romo, Cerritos, California. Legality for Investment in California Under provisions of the California Financial Code, the Certificates are legal investments for commercial banks in California to the extent that the Certificates, in the informed opinion of the bank, are prudent for the investment of funds of depositors, and, under provisions of the Government Code of the State, are eligible for security for deposits of public moneys in the State. 31

40 Continuing Disclosure The District has covenanted for the benefit of the Owners of the Certificates to provide certain financial information and operating data relating to the District (the Annual Report ) by not later than nine months following the end of the District s fiscal year (currently ending June 30), commencing with the report for the Fiscal Year (which is due no later than March 31, 2012), and to provide notices of the occurrence of certain enumerated events. The District has entered into a Continuing Disclosure Agreement ( Continuing Disclosure Agreement ) for the benefit of the Owners. The Annual Report and each notice of enumerated events will be filed by the District or its Dissemination Agent, if any, with the Electronic Municipal Markets Access system ( EMMA ) of the Municipal Securities Rulemaking Board (the MSRB ), or any other repository then recognized by the Securities and Exchange Commission. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events is set forth below under the caption APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The District has complied in all material respects with all of its obligations under existing continuing disclosure agreements to file annual reports and reports of enumerated events during the past five years. Litigation At the time of delivery of and payment for the Certificates, the District and the Corporation will certify that there is no action, suit, litigation, inquiry or investigation before or by any court, governmental agency, public board or body pending, or to the knowledge of the District or the Corporation threatened, against the District or by Corporation in any material respect (a) restraining or enjoining the sale or delivery of any of the Certificates, (b) questioning or affecting the validity of the Certificates, (c) questioning or affecting the validity of any of the proceedings for the authorization, sale, execution or delivery of the Certificates, (d) questioning or affecting the validity or enforceability of the Lease or Trust Agreement, or (e) contesting the completeness or accuracy of this Official Statement or any amendment or supplement hereto or which would adversely affect the exclusion from gross income for State of California personal income taxation of interest payable with respect to the Certificates, nor to the best of the District s or the Corporation s knowledge, is there any basis therefor. There are a number of lawsuits and claims pending against the District. In the opinion of the District, the aggregate amount of the uninsured liabilities of the District under these lawsuits and claims will not materially affect the finances of the District. Enforceability of Remedies The remedies available to the Trustee or the Owners of the Certificates upon an Event of Default under the Lease are in many respects dependent upon judicial actions which are often subject to discretion and delay, and such remedies may not be readily available or may be limited. For example, acceleration is not available in such instance. The various legal opinions to be delivered concurrently with the Certificates (including Special Counsel s approving opinion) will be qualified, as to the enforceability of the various legal instruments, by limitation imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by general principles of equity applied in the exercise of judicial discretion. Legal Opinion The validity of the Certificates and certain other legal matters are subject to the approving opinion of Fulbright & Jaworski L.L.P., Special Counsel. A copy of the proposed form of Special 32

41 Counsel opinion is contained in APPENDIX C hereto. Special Counsel, as such, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. RATINGS Moody s and S&P are expected to assign their municipal bond ratings of Aa3 (negative outlook) and AA+ (stable outlook), respectively, to the Certificates based upon the issuance of the Insurance Policy. Moody s and S&P also have assigned their respective underlying ratings of A3 and A- to the Certificates. Rating agencies generally base their ratings on their own investigations, studies and assumptions. The ratings reflect only the view of the rating agency furnishing the same, and any explanation of the significance of such ratings should be obtained only from the rating agency providing the same. Such ratings are not a recommendation to buy, sell or hold the Certificates. There is no assurance that any ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the rating agency providing the same, if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of a rating may have an adverse effect on the market price of the Certificates. Neither the District nor the Underwriters have made any independent investigation of the claimspaying ability of the Insurer and no representation is made that any insured rating of the Insured Certificates based upon the purchase of the Insurance Policy will remain higher than the same rating agency s underlying rating of the Certificates described above, which did not take bond insurance into account. The existence of the Insurance Policy will not, of itself, negatively affect such underlying ratings. Without regard to any bond insurance, the Certificates are payable from the general fund of the District and other legally available sources, all as more fully described herein. See SECURITY AND SOURCE OF PAYMENT. However any downward revision or withdrawal of any rating of the Insurer may have an adverse effect on the market price or marketability of the Certificates. UNDERWRITING The Certificates are being purchased by Cabrera Capital Markets, LLC, as Senior Managing Underwriter and Siebert Brandford Shank & Co., L.L.C., as Co-Manager (collectively, the Underwriters ). The Underwriters have agreed, pursuant to the purchase contract for the Certificates, to purchase all of the Certificates if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the purchase contract, the approval of certain legal matters by Special Counsel and certain other conditions. The Certificates will be purchased at a price of $52,171, (representing the aggregate principal amount of the Certificates evidenced by the Certificates of $53,080,000.00, less an original issue discount of $599, less an Underwriters discount of $308,911.84). The initial offering prices stated on the inside cover of this Official Statement may be changed from time to time by the Underwriters. The Underwriters may offer and sell Certificates to certain dealers and others at prices lower than such initial offering prices. Financial Advisor MISCELLANEOUS Fieldman, Rolapp & Associates has been engaged by the District to perform financial advisory services in relation to the sale and delivery of the Certificates. Fieldman, Rolapp & Associates will not participate in the underwriting of the Certificates. Its fees are contingent upon the sale and delivery of the Certificates. 33

42 Additional Information The purpose of this Official Statement is to supply information to prospective buyers of the Certificates. Quotations from and summaries and explanations of the Certificates, the Trust Agreement, the Lease Agreement, the Direct Subsidy and the constitutional provisions, statutes and other documents described herein do not purport to be complete, and reference is made to said documents, constitutional provisions and statutes for full and complete statements of their provisions. 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. 34

43 The delivery of this Official Statement has been duly authorized by the District. SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT By: /s/ Arturo Delgado Ed.D. Superintendent 35

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45 APPENDIX A FINANCIAL AND DEMOGRAPHIC INFORMATION RELATING TO THE DISTRICT District Organization The District is a unified school district organized under the laws of the State of California (the State ). The District was formed on July 1, 1964, and encompasses an area of approximately 160 square miles in San Bernardino County (the County ). The District currently operates 44 elementary schools, ten middle schools, five high schools, one middle college high school, one alternate school and eleven charter schools. In addition, the District maintains an adult school, three special schools, and two continuation high schools. Enrollment, exclusive of the adult school population, currently stands at approximately 51,315 students. Excerpts from the District s audited financial statements for the fiscal year ended June 30, 2010 are included as APPENDIX C. The District is governed by a seven-member Board of Education, each member of which is elected at large 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 offices and the dates their terms expire, are listed below: Name Office Term Expires November Danny Tillman President 2013 Dr. Barbara Flores Vice President 2013 Louis Ayala Member 2011 Teresa Parra Craig Member 2011 Judi Penman Member 2013 Lynda Savage Member 2011 Dr. Elsa Valdez Member 2011 The Superintendent of the District is responsible for administering the affairs of the District in accordance with the policies of the Board. The District also employs a Chief Business and Financial Officer. Brief biographies follow: Arturo Delgado, Ed.D., Superintendent. Dr. Delgado is in his eleventh year as Superintendent of the District. Prior to becoming Superintendent, he served as the District s Assistant Superintendent of Human Resources. He has worked for the District for 13 years. He received his Ph.D. degree from the University of La Verne and his Masters of Arts degree in Administrative Credential from the California State University, Los Angeles. Mohammad Z. Islam, Chief Business and Financial Officer. Mr. Islam has worked for the District since January He was appointed to his current position on August 1, Prior to becoming Chief Business and Financial Officer, he served as Assistant Superintendent of Business and Finance. He received his M.B.A. degree and his Bachelor of Arts degree in Accounting from Woodbury University, Burbank, California. A-1

46 Population The population of the City of San Bernardino, the County and the State is set forth in the following tables. POPULATION OF THE CITY OF SAN BERNARDINO, THE COUNTY AND STATE Calendar Year* City of San Bernardino San Bernardino County State ,147 1,989,949 37,087, ,999 2,021,744 37,463, ,156 2,043,974 37,871, ,159 2,057,271 38,255, ,800 2,073,149 38,648,090 *Figures as of January of the year indicated. Source: California State Department of Finance. The following presents the number of building permits issued and the building permit valuations for the years 2008, 2009 and 2010: CITY OF SAN BERNARDINO Building Permits and Construction Valuation Building Permits: Single Family Multi-Family Total Building Permit Valuation Residential: Single Family 3,928,031 1,278,552 1,485,851 Multi Family 0 12,689,169 7,968,129 Alterations/Additions 3,297,834 2,992,526 3,986,911 Total Residential 7,225,865 16,960,247 13,440,891 Non-Residential: New Commercial 6,011, ,264,079 New Industrial 10,775, Other 4,570,631 3,855,030 2,811,189 Alterations/Additions 25,772,604 26,499,342 29,191,492 Total Non-Residential 47,129,388 30,354,372 35,266,760 Source: Construction Industry Research Board. A-2

47 Developer Fees The District receives developer fees per square foot pursuant to Government Code Section Current developer fees are $2.97 per square foot for domestic housing and $0.47 per square foot for commercial or industrial development. Fiscal Year Developer Fees Collected $7,715, ,328, ,460, , ,167,681 Source: The District. District Enrollment The table below sets forth the K-12 enrollment for Average Daily Attendance ( ADA ) for the District for the Fiscal Years through and projections for the Fiscal Years and SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT Enrollment and Average Daily Attendance Fiscal Years through Fiscal Year Enrollment ADA Base Revenue Limit Deficit Factor Funded Amount ,899 53,134 $5, % $5, ,630 51,950 5, , ,539 50,881 5, , ,199 49,333 6, , ,564 48,425 6, , (1) 51,315 47,567 6, , (1) 50,545 46,897 6, , (1) Projected. Source: The District. State Funding of Education The State Constitution requires that from all State revenues there will first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education. As discussed below, school districts in the State receive a significant portion of their funding from State appropriations. Annual State apportionments of basic and equalization aid to school districts for general purposes are computed up to a revenue limit (as described below) per unit of average daily attendance ( ADA ). Generally, such apportionments will amount to the difference between the District s revenue limit and the District s local property tax allocation. Revenue limit calculations are adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among all of the same type of California school districts (i.e., unified, high school or elementary). State A-3

48 law also provides for State support of specific school-related programs, including summer school, adult education, deferred maintenance of facilities, pupil transportation, portable classrooms and other capital outlays and various categorical aids. The State revenue limit is calculated three times a year for each school district. The first calculation is performed for the February 20th First Principal Apportionment, the second calculation for the June 25th Second Principal Apportionment, and the final calculation for the end of the year Annual Principal Apportionment. Calculations are reviewed by the County Office of Education and submitted to the State Department of Education to review the calculations for accuracy, calculate the amount of State aid owed to such school district and notify the State Controller of the amount, who then distributes the State aid. The calculation of the amount of State aid a school district is entitled to receive each year is a five step process. First, the prior year State revenue limit per ADA is established, with recalculations as are necessary for adjustments for equalization or other factors. Second, the adjusted prior year State revenue limit per ADA is inflated according to formulas based on the implicit price deflator for government goods and services and the statewide average State revenue limit per ADA for the school districts. Third, the current year s State revenue limit per ADA for each school district is multiplied by such school district s ADA for either the current or prior fiscal year. Fourth, revenue limit add-ons are calculated for each school district if such school district qualifies for the add-ons. Add-ons include the necessary small school district adjustments, meals for needy pupils and small school district transportation, and are added to the State revenue limit for each qualifying school district. Finally, local property tax revenues are deducted from the State revenue limit to arrive at the amount of state aid based on the State revenue limit each school district is entitled to for the current year. See District Growth for the District s ADA record. State Assistance The District s principal funding formulas and revenue sources are derived from the budget of the State of California. The following information concerning the State of California s budgets has been obtained from publicly available information which the District believes to be reliable; however, the State has not entered into any contractual commitment with the District, the Underwriters, Disclosure Counsel nor the owners of the Certificates to provide State budget information to the District or the owners of the Certificates. Although they believe the State sources of information listed above are reliable, none of the District, Disclosure Counsel nor the Underwriters assume any responsibility for the accuracy of the State budget information set forth or referred to herein. Additional information regarding State budgets is available at various State-maintained websites including which website is not incorporated herein by reference. Final Budget. The 2010 Budget Act was signed by Governor Schwarzenegger on October 8, 2010 and closed an estimated budget gap of $19.3 billion by a combination of expenditure reductions, federal funds and other measures. The 2010 Budget Act holds General Fund spending essentially flat compared to the prior year ($86.6 billion in fiscal year compared to $86.3 billion in fiscal year ). In order to create a prudent reserve for economic uncertainties, the Governor exercised his line-item veto authority to reduce General Fund spending by an additional $963 million, raising the reserve level from $375 million to $1.3 billion. The 2010 Budget Act also makes a number of reductions in health and human services programs, but does not eliminate CalWORKs, community mental health programs, Adult Day Health care, or reductions proposed to the In Home Supportive Services program. A-4

49 The 2010 Budget Act includes: (i) savings of over $1.1 billion for corrections, from reduced inmate medical care costs ($820 million), cuts from inmate and parole population savings ($200 million), and delayed local assistance payments ($50 million); (ii) reduced spending for state employees by $1.5 billion, including $547.7 million in savings through a five percent reduction to departmental personnel costs and by pre-funding other post employment benefit costs, as well as $2.5 billion in revenue measures, comprising $1.4 billion from the Legislative Analyst s revenue forecast, which was $1.4 billion higher than the Governor s May Revision; (iii) the extension of the Net Operating Loss corporate tax benefit suspension for an additional two years, which results in increased tax revenue of about $1.2 billion in fiscal year and revisions to recent corporate tax law changes related to penalties assessed when a corporation underpays their tax liability by more than $1 million; and (iv) various changes to State pension laws for new State employees including those in bargaining units that do not currently have a Memorandum of Understanding with the State, as well as employees of the California State University, the judicial branch of government, and the Legislature. As it relates to K-14 Education, the 2010 Budget Act includes the following: Department of Education A decrease of $2.6 million and 22.0 positions associated with administering categorical programs. School districts have recently been granted flexibility to shift funds among and away from approximately 40 categorical programs, resulting in less workload for departmental administration and oversight. Proposition 98 A suspension of the Proposition 98 Guarantee by $4.1 billion. Even with the suspension, the Proposition 98 Guarantee funding level for K-14 education remains the same as fiscal year in an effort to protect education; and with assumed federal funding increases, it improves year over year. The 2010 Budget Act reduces the Proposition 98 Guarantee from the estimated minimum funding level of $53.8 billion down to a level of $49.5 billion. In addition, a repayment of $300 million in settle-up payments related to fiscal year is provided to pay for mandated costs. The actions necessary to reduce the level of appropriations in fiscal year to match the desired appropriations level include (i) a decrease of $1.7 billion, in Proposition 98 General Fund in fiscal year to reflect a deferral of revenue limit apportionments for K-12 school districts, county offices of education and charter schools, to be repaid in fiscal year ; (ii) a decrease of $700 million in unallocated ending balances as of June 30, 2010 from a variety of K-12 categorical programs. Of these unallocated funds, approximately $360 million are as a result of program savings; the balance of $340 million is attributable to Special Education, all of which will be repaid with one-time fiscal year savings from the Class Size Reduction program. Class Size Reduction Program Savings A reduction of $550 million to reflect projected savings in the K-3 Class Size Reduction program in fiscal year A reduction of $340 million to reflect projected savings in the K-3 Class Size Reduction program in fiscal year Since the penalties for exceeding class size limits were significantly reduced in fiscal year , program savings due to schools increasing class sizes are anticipated. A complete copy of the 2010 Budget Act is posted by the California Department of Finance website at This website is not incorporated herein by reference and neither the District nor the Underwriters make any representation as to the accuracy of the information provided therein. Legislative Analyst s Office Overview of 2010 Budget Act. The Legislative Analyst s Office ( LAO ) Overview of the 2010 Budget Act (the 2010 LAO Overview ) released October 8, 2010, acknowledges the 2010 Budget Act s attempt to address one of the most vexing State budget shortfalls in California s history, the product of a continuing structural imbalance between State revenues and A-5

50 expenditures and a slow recovery from a severe recession that began in 2007 and ended in The 2010 LAO Overview notes that in May 2010, the Administration estimated that there would be a gap of $17.9 billion between General Fund resources and expenditures in fiscal year under then-existing laws and policies. To address this projected gap, the Legislature opted for a package of budget actions (prior to vetoes) including $6.8 billion of expenditure-related measures, $5.4 billion of new federal funding (most of it not yet approved by Congress), $3.3 billion of revenue actions, $2.7 billion of largely one-time loans, transfers, and funding shifts. The LAO also notes that the 2010 Budget Act does not include the Governor s proposed elimination of the CalWORKs and subsidized childcare, and it does not include reductions in social services grant levels. The LAO believes that if all of the assumptions are met in the 2010 Budget Act and accompanying legislation, the State would be left with a $364 million General Fund reserve at the end of fiscal year , however, the LAO also notes that two-thirds of the 2010 Budget Act measures are one-time or temporary in nature, such that California will continue to face sizable annual budget problems in fiscal year and beyond. As the 2010 Budget Act relates to K-14 education, the 2010 LAO Overview states that ongoing Proposition 98 funding is slightly higher in fiscal year ($49.7 billion) than the revised fiscal year level ($49.5 billion) and that to fund at this level the State Legislature suspended the Proposition 98 minimum guarantee for fiscal year The LAO reports that the State is ending fiscal year with a settle-up obligation to the effect that the State appropriated less in fiscal year than the revised estimate of the minimum guarantee for that year. The LAO estimates that the fiscal year settle-up obligation is $1.8 billion. In addition, the 2010 Budget Act spends $242 million in fiscal year using one-time Proposition 98 funds available from prior years and increases Proposition 98 funding for community colleges, and provides $300 million as a payment to begin to meet the State s outstanding fiscal year Proposition 98 settle-up obligation. On top of State funding, related budget bills provide K-12 education with $1.5 billion in special one-time federal funding, $1.2 billion of which is from recent federal grants provided specifically to help retain K-12 jobs, and $272 million from the last round of federal stabilization funding from the 2009 stimulus package. The LAO recognizes that, though the State is providing slightly more ongoing funding in fiscal year than fiscal year , the large reliance on one-time measures in fiscal year resulted in the need for fiscal year reductions, and that under the 2010 Budget Act and accompanying legislation, the reductions are largely treated as deferrals of payments rather than cuts, specifically deferring $1.9 billion in additional K-14 payments ($1.7 billion for K-12 education and $189 million for community colleges). The LAO also recognizes that virtually all other K-12 reductions are technical adjustments designed to align appropriations with anticipated program costs, such as for the K-3 Class Size Reduction program. A complete copy of the 2010 LAO Overview is posted by the Office of the Legislative Analyst at This website is not incorporated herein by reference and neither the District nor the Underwriters make any representation as to the accuracy of the information provided therein. LAO s November 2010 Report. On November 10, 2010, the LAO released its report entitled The Final Budget: California s Fiscal Outlook (the LAO s November 2010 Report ) in which the LAO recognizes that the State s budget challenges include a $6 billion projected deficit for fiscal year and a $19 billion gap between projected revenues and spending in fiscal year The LAO s November 2010 Report assumes that the State will be unable to secure around $3.5 billion of budgeted federal funding in fiscal year and projects higher than budgeted costs in prisons and other programs, and that the passage of Proposition 22 will prevent the State from achieving approximately $800 million of budgeted measures in fiscal year The LAO s November 2010 Report states that the temporary nature of most of the State Legislature s 2010 budget-balancing actions and the extremely slow economic recovery will contribute to the $19 billion projected operating deficit in A-6

51 fiscal year and that actions taken by the State Legislature during the fiscal year budget process to reduce Proposition 98 education spending are a major contributor to the decline. Accordingly, the LAO projects annual budget problems of about $20 billion each year through fiscal year In fiscal year , when the State must repay its 2010 borrowing of local property tax revenues and the full effect of Propositions 22 and 26 hit the State s bottom line, the LAO s November 2010 Report forecast shows the State s operating deficit will grow to $22.4 billion and that, because the LAO s methodology generally assumes no cost-of-living adjustments, these projections likely understate the magnitude of the State s fiscal problems during that forecast period. The LAO s November 2010 Report also states that additional savings from Proposition 98 will be very difficult in light of the LAO forecast that State General Fund revenues and transfers will decline by over $8 billion in fiscal year due to the expiration of the temporary tax increases adopted in Because the Proposition 98 minimum school funding guarantee is affected by this drop, the LAO s budget forecast already reflects a $2 billion fall in the minimum guarantee between fiscal year and fiscal year , a reduction that would come at the same time that school districts exhaust the billions of dollars of one-time federal money they have received through the stimulus program and other legislation. For these reasons, the LAO believes it may be very difficult for the State to achieve substantial additional budget reductions in Proposition 98 in fiscal year so that, if the Legislature funds schools at our projected minimum guarantee in fiscal year , it would mean billions of dollars in programmatic cuts to education but would not contribute a single dollar to closing the State s $25 billion budget problem. For fiscal year , the LAO projects the Proposition 98 minimum guarantee will be about $2 billion lower than the fiscal year spending level due to the expiration of tax increases that temporarily raised tax revenues in fiscal year and fiscal year The LAO s November 2010 Report also projects that local property tax revenues are likely to modestly grow and that the State will have an outstanding maintenance factor obligation of $9.5 billion at the end of fiscal year and $4 billion in new maintenance factor in fiscal year The LAO also predicts that the minimum guarantee will fall $5.2 billion short of fully funding baseline K-14 costs in fiscal year so that, if the State funded at the minimum guarantee level in fiscal year , school and community college districts would face significant programmatic reductions due to the decline in Proposition 98 funding in fiscal year coupled with the cost of backfilling for the loss of one-time fiscal year budget measures. These reductions would occur at the same time as school districts exhaust onetime revenues from the federal ARRA of 2009 and the Education Jobs and Medicaid Assistance Act of While the minimum guarantee funding level in subsequent years could be sufficient to cover growth and COLA, funding would be insufficient to restore reductions made in fiscal year through fiscal year The LAO believes that given the potentially sizeable drop in the minimum guarantee in fiscal year , the State Legislature should eliminate the $1.8 billion in K-14 payments deferred until July 2011 as part of the Final Budget as such deferrals translate into K-14 cuts almost double the level otherwise needed in fiscal year The LAO also states that, given that most K-14 districts have been cautious in increasing fiscal year program support as a result of the deferrals and some districts have been unable to access cash sufficient to support new spending paid for by the new deferrals, many districts would not be significantly impacted in fiscal year if the new deferral payments were eliminated. The LAO s November 2010 Report projects that the State Legislature and Governor Brown will be tempted to continue patching over the State s budget problems with temporary fixes and that unless plans are put in place to begin tackling California s ongoing budget problem, it will continue to be difficult for the state to address fundamental public sector goals, such as rebuilding aging infrastructure, addressing massive retirement liabilities, maintaining service levels of high-priority government programs, and improving the State s tax system. Accordingly, the LAO believes that the State will face A-7

52 the basic choice to either begin to address today s huge, frustrating budget problems now or defer the State s budgetary and policy problems into the future. Accordingly, the LAO s November 2010 Report recommends that the State Legislature initiate a multiyear approach to solving the State s recurring structural budget deficit. In fiscal year , the LAO believes that such an approach might involve $10 billion of permanent revenue and expenditure actions and $15 billion of temporary budget measures and another few billion of permanent actions each year could be initiated in the next following fiscal years, along with other temporary budget measures, until the structural deficit is eliminated. The LAO believes that, barring another sharp economic decline, such an approach could fix the State s near-term budget problems by the end of our forecast period in fiscal year and give the State flexibility to begin building reserves needed to address the next economic downturn and addressing long-term fiscal liabilities. A complete copy of the LAO s November 2010 Report is posted by the Office of the Legislative Analyst at This website is not incorporated herein by reference and neither the District nor the Underwriters make any representation as to the accuracy of the information provided therein. Proposed Budget. Governor Edmund G. Brown Jr. released his proposed fiscal year State budget (the Proposed Budget ) on January 10, The Proposed Budget projects that the State will face a budget gap of $25.4 billion in fiscal year as a result of a shortfall of $8.2 billion attributable to fiscal year and a shortfall of $17.2 billion attributable to fiscal year The Governor believes that the 2010 Budget Act relied in part on unrealistic assumptions, including the receipt of $3.6 billion in federal funds and $1.7 billion in reductions that were not achieved, and that a reasonable reserve of $1 billion, $26.4 billion in cuts, taxes and other budget measures will be necessary to close the fiscal year budget gap. The Proposed Budget recognizes that fiscal year revenues are $3.1 billion lower than were projected at the time of the 2010 Budget Act, in part due to the recently enacted federal tax relief, unemployment insurance reauthorization, and the Job Creation Act of 2010, as well as the passage of Proposition 22, which created an additional budget shortfall of $1.6 billion. The Proposed Budget also anticipates that other workload adjustments including population and caseload changes will add $2.1 billion to the budget gap. The Proposed Budget includes $26.4 billion in spending cuts, revenues and other measures and reduces spending by $12.5 billion, including substantial cuts to most major programs, such as $1.7 billion to Medi-Cal, $1.5 billion to California s welfare-to-work program, $1 billion to the University of California and California State University, $750 million to the Department of Developmental Services and $580 million to State operations and employee compensation. The Proposed Budget calls for an accelerated timeline to restore balance to the State s finances and assumes that all necessary statutory changes to implement budget measures will be adopted by the State Legislature and signed by the Governor by March of 2011 to allow certain ballot measures to be placed before the voters at a special election to be called for June The Proposed Budget includes some one-time savings and borrowing, including $1.8 billion in borrowing from special funds, $1.7 billion in property tax shifts, $1.0 billion from the Proposition 10 reserve to fund children s programs, and $0.9 billion from Proposition 63 moneys to fund community mental health services. $8.2 billion of the budget gap is expected to be one-time in nature. The Proposed Budget projects the State will have sufficient cash to repay the entire $10 billion of State Revenue Anticipation Notes as scheduled in May and June 2011 but that, absent corrective action, it will once again face substantial challenges in meeting all General Fund cash needs beginning in July of 2011 so that, in addition to budget measures, the State will need to obtain external financing early in the fiscal year. In addition, the Proposed Budget plan includes $2.2 billion in new inter-year deferrals from to , $2.1 billion of which will derive from K-12 revenue limit A-8

53 payments and $129 million from California Community Colleges ( CCCs ) apportionment payments. See the sub-caption ABX8 5 and ABX8 14 below. The Proposed Budget recognizes that school funding has been disproportionately reduced since fiscal year and maintains Proposition 98 funding for K-12 programs at the same level for fiscal year as is in effect for fiscal year In an effort to maintain funding for schools, fund public safety services at the local level and to balance the budget, the Proposed Budget anticipates that current tax rates will be continued for another five years and also proposes to apply the single sales factor income allocation rules uniformly to certain corporate taxpayers and to eliminate an ineffective tax expenditure program. These proposals are expected to generate savings of $12 billion. The Governor proposes to place a ballot measure before the voters in a special election to be held in June of 2011 calling for a constitutional measure to extend the four temporary tax increases adopted in February In the event the voters do not approve the extension of these tax increases, further reductions in spending could be made which may adversely impact K-12 education. As it relates to K-12 education, the Proposed Budget maintains Proposition 98 programmatic funding for schools at the same level in fiscal year as in effect in fiscal year and also extends flexibility reforms adopted in 2009 to assist school districts to maintain their core services. Total funding for K-12 education is projected to be $63.8 billion in fiscal year , $59.5 billion of which is State, federal and local property tax funding accounted for in the Proposed Budget. Total per-pupil expenditures from all sources are projected to be $11,154 in fiscal year and $10,703 in fiscal year , including funds provided for prior year settle-up obligations. K-12 Proposition 98 per-pupil expenditures in the Proposed Budget are $7,344 in , down slightly from $7,358 per-pupil provided in fiscal year In addition, the Proposed Budget includes $2.2 billion in new inter-year deferrals from fiscal year to , $2.1 billion of which will derive from K-12 revenue limit payments and $129 million from CCC apportionment payments. Although the administration has not yet determined from which months K-12 revenue limit payments would be deferred, it has indicated that deferrals likely would not be repaid until September or October of This intra-year deferral plan included in the Proposed Budget would delay $2.5 billion in K-12 payments and $200 million in CCC apportionments beginning in July 2011, reflecting the same magnitude as the intra-year deferrals. Major workload adjustments for K-12 education included in the Proposed Budget include the following: Cost-of-Living Adjustment Increases The Proposed Budget does not provide a costof-living-adjustment ( COLA ) for any K-14 program in fiscal year The projected COLA for is 1.67 percent, which would have provided an increase of $964.5 million overall, to the extent Proposition 98 resources were sufficient to provide that adjustment. Property Tax A decrease of $47.9 million for school district and county office of education revenue limits is made in fiscal year as a result of higher offsets of property tax revenues. An increase of $155.7 million for school district and county office of education revenue limits in fiscal year as a result of reduced offsets of local property tax revenues. Average Daily Attendance An increase of $81.4 million in fiscal year for school district and county office of education revenue limits is made as a result of an increase in projected ADA and an increase of $357.5 million in for school district and county office of education revenue limits as a result of continued projected growth in ADA for fiscal year A-9

54 Unemployment Insurance An increase of $351.8 million in fiscal year is made to fully fund the additional costs of unemployment insurance for local school districts and county offices of education. K-14 Mandates Funding Ongoing funding of $89.9 million is provided for K-14 mandates to provide level funding relative to fiscal year , for reimbursement of state-mandated local costs. Current law suspends for three additional years those programs that were suspended during the fiscal year. The significant non-general Fund workload adjustments are as follows: School Facilities Program Funding Adjustments The workload budget includes a $316 million decrease in fiscal year actual expenditures, a $2.07 billion increase in fiscal year estimated expenditures and a $1.97 billion decrease in fiscal year estimated expenditures for school facilities. These amounts are largely attributable to the anticipated allocation of remaining funds from the 1998, 2002, and 2004 bonds. Child Nutrition Program An increase of $36.1 million in fiscal year to the State Department of Education ( SDE ) local assistance from federal funds to reflect growth of nutrition programs at schools and other participating agencies and an increase of $12.0 million in fiscal year to the SDE local assistance from federal funds for the Fresh Fruit and Vegetable Program, which provides an additional free fresh fruit or vegetable snack to students during the school day. The significant other General Fund policy issues relating to K-12 are as follows: Extension of Flexibility for K-12 School Districts The Proposed Budget proposes legislation to extend various flexibility options for school districts for two additional years. Specifically, it extends authority in the following areas: Categorical flexibility For fiscal years through , local educational agencies were given broad flexibility to spend funds for approximately 40 K-12 categorical programs for any educational purpose. Under categorical flexibility, a district s allocation for each program is based on its share of total program funding either in fiscal year or , with the earlier year being used for certain participation-driven programs. Routine Maintenance Contributions Local educational agencies were proposed to reduce the amount that districts must deposit into a restricted routine maintenance account for the through fiscal years, from 3 percent of General Fund expenditures to 1 percent. Deferred Maintenance Program Matching Requirement The requirement that districts set aside one-half of 1 percent of their revenue limit funding for deferred maintenance was suspended for the to fiscal years. A complete copy of the Proposed Budget is posted by the California Department of Finance website at This website is not incorporated herein by reference and neither the District nor the Underwriters make any representation as to the accuracy of the information provided therein. LAO Overview of Proposed Budget. The LAO released its Budget: Overview of the Governor s Budget on January 12, 2011 (the Budget Overview ) in which the LAO agreed that the $25.4 billion State budget shortfall estimated in the Proposed Budget was a A-10

55 reasonable estimate. In the Budget Overview LAO, the LAO concurs with the Governor that major reasons for the current State budget shortfall include the inability of the State to achieve certain previous budget measures, the expiration of various one-time and temporary budget measures approved in recent years, and the failure of the State to obtain significant additional federal funding for key programs. Generally, the Budget Overview recognizes that the Proposed Budget includes proposals impacting nearly every area of the fiscal year State budget and that the Proposed Budget is a good starting point for legislative deliberations, recognizing that the focus on multiyear and ongoing measures are necessary to make substantial improvements in the State s budgetary situation. The Budget Overview supports the extension of the four temporary tax increases adopted in February 2009 to voters in a June 2011 special election and to the restructuring of the state-local relationship in the delivery of services by shifting funding and responsibility to local governments for those services. The Budget Overview responds favorably to the Proposed Budget proposals to realign state and local program responsibilities and to the proposed changes in local economic development efforts. Nonetheless, the LAO believes there are significant risks in the Proposed Budget, especially in the context of the realignment and redevelopment proposals which involve many legal, financial, and policy issues. The Budget Overview concludes that the State Legislature will have to make difficult decisions on both its spending and tax commitments, but that the proposed Budget also presents an opportunity to reorder state and local government functions to improve the delivery of public services. The Budget Overview recognizes that, while the Proposed Budget includes revenue proposals resulting in a $2 billion increase in the Proposition 98 minimum funding guarantee for schools above its current-law level, the Proposed Budget would result in a small programmatic funding decline for K-12 schools and significant reductions for California Community Colleges ( CCCs ) and child care programs. The Budget Overview also suggests that $128 million of the anticipated Proposition 98 savings included in the Proposed Budget cannot be realized and that the assumed $74 million in savings due to the sunset of the Special Disabilities Adjustment program could violate federal maintenance-of-effort requirements. In addition, the Budget Overview recommends that the State Legislature could consider a different combination of policy changes to realize child care savings. With respect to CCC funding, the Budget Overview supports the Proposed Budget proposal to increase CCC fees. In addition, the LAO indicates in its Budget Overview, that the proposed deferrals included in the Proposed Budget could be problematic if they are not paid until the fall of 2012 (all existing deferrals are paid by August) and that the intra-year deferrals may defer already-deferred payments until even later in the next fiscal year. Consequently, the inter-year and intra-year deferrals could result in school districts and CCCs facing significant cash flow difficulties in the summer and fall of See the sub-caption -- Proposed Budget above. A complete copy of the LAO s Budget Overview is posted by the Office of the Legislative Analyst at This website is not incorporated herein by reference and neither the District nor the Underwriters make any representation as to the accuracy of the information provided therein. ABX8 5 and ABX8 14. On March 1, 2010, Governor Schwarzenegger signed into law ABX8 5, effective immediately, which included several measures meant to allow the State to effectively manage its cash resources in the fiscal year and fiscal year For fiscal year , ABX8 5 authorized the deferral of General Fund payments to be made to trial court operations, the California University system, the University of California system, and CCCs in March 2010 to no sooner than April 15, 2010, but no later than May 1, Prior to such deferrals, the State Controller, Treasurer, and Director of Finance are required to review the actual cash situation to determine if the deferrals are in-fact A-11

56 necessary. Further, if such deferrals are implemented, the Controller, Treasurer and Director of Finance, after April 1, are required to review daily the actual cash receipts and disbursements to determine when all or a portion of the deferrals can be paid, and to make such payments as soon as feasible. To address the cash management issues in fiscal year , ABX8 5 authorized specific deferrals to K-12 apportionments, Supplemental Security Income/State Supplementary Payments, local government social services and transportation payments and trial court operations. These deferrals are allowed only in July 2010 for no more than 60 days, October 2010 for no more than 90 days, and March 2011 for no more than 60 days. Prior to the implementation of such deferrals, the Controller, Treasurer and Director of Finance must review the actual cash receipts and disbursements to determine if they are in-fact necessary. Further, if such deferrals are implemented, the Controller, Treasurer and Director of Finance, after July 1, 2010, are required to conduct a daily review of the actual cash receipts and disbursements to determine when all or a portion of the deferrals can be paid, and to make such payments as soon as feasible. In addition, such deferrals may be moved forward or backward one month from the dates specified if all three of the Controller, Treasurer and Director of Finance determine that a move is necessary. ABX8 5 limited the K-12 deferrals to $2.5 billion at any given time during the fiscal year and sets a maximum of three K-12 deferrals during that fiscal year. ABX8 5 provided a hardship exemption for county offices of education, local education agencies and charter schools. ABX8 5 further authorized the deferral of $200 million from July 2010 to October 2010 and $100 million from March 2011 to May 2011 for CCCs. ABX8 5 also provided for a hardship exemption for CCCs. On March 22, 2010, Governor Schwarzenegger signed into law, effective immediately, ABX8 14 which amended the cash management provisions for fiscal year and fiscal year enacted into law pursuant to ABX8 5. With regard to the fiscal year cash management issues, ABX8 14 provides a hardship exemption process for the current year deferrals for CCCs and makes them the first entity to have deferrals paid as soon as funds are available. As to the fiscal year cash issues, ABX8 14 clarifies the hardship exemption process for school districts, county offices of education and charter schools and provides certain other changes pertaining to those provisions. In addition, ABX8 14 requires the State Controller, State Treasurer, and Director of Finance to jointly provide a written declaration of the intended payment deferrals for fiscal year no later than March 31, 2010 as well as requiring approval by the Director of Finance for hardship exemptions; and states the intent of the legislature that July 2010 deferrals shall first be made from the advance principal apportionment payment. The legislation also delayed the date by which hardship exemption requests must be submitted (including with respect to fiscal year CCC deferrals) and provides a second hardship waiver opportunity for the March 2011 deferral for those districts that did not receive an initial hardship waiver in June Future State Budgets. Under State law, the State Legislature is required to adopt its budget by June 15 of each year for the upcoming fiscal year, with approval by the Governor to occur on June 30. The State Budget for the fiscal year was not adopted in a timely fashion. The events leading to the inability of the State Legislature to pass a budget in a timely fashion are not unique, and the District cannot predict what circumstances may cause a similar failure in future years. In each year where the State budget lags adoption of the District s budget, it will be necessary for the District s staff to review the consequences of the changes, if any, at the State level from the proposals in the Governor s May Revision for that year, and determine whether the District s budget will have to be revised. In addition, the District cannot predict the effect that the general economic conditions within the State and the State s budgetary problems may have in the future on the District budget or operations or on its ability to make payments of principal of and interest on the Certificates. A-12

57 Significant Accounting Policies and Audited Financial Statements The California State Department of Education imposes by law uniform financial reporting and budgeting requirements for K-12 school districts. Financial transactions are accounted for in accordance with the California School Accounting Manual. Vavrinek, Trine, Day & Co., LLP Rancho Cucamonga, California, serve as independent auditors to the District and excerpts of their report for the Fiscal Year Ended June 30, 2010, are attached hereto as APPENDIX C. The District s auditors have not approved the inclusion of such excerpts herewith. California Assembly Bill 1200 ( A.B ), effective January 1, 1992, tightened the budget development process and interim financial reporting for school districts, enhancing the authority of the county schools superintendents offices and establishing guidelines for emergency State aid apportionments. Many provisions affect District operations directly, while others create a foundation from which outside authorities (primarily state and county school officials) may impose actions on the District. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the county office of education as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The county office of education reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that will be unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years. Each certification is based on then-current projections. The District currently holds a positive certification from the San Bernardino County Office of Education for its budget submissions. Independently audited financial reports are prepared annually in conformity with generally accepted accounting principles for educational institutions. The annual audit report is generally available about six months after the June 30 close of each fiscal year. For the District s most recent available audited financial statements, see APPENDIX C. A-13

58 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT GENERAL FUND Audited Financial Results for Fiscal Years through Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year REVENUES Revenue limit sources $285,769,463 $305,463,596 $302,421,871 $290,546,746 $247,236,493 Federal sources 65,849,808 58,978,424 53,708,011 81,201,016 77,137,369 Other State sources 120,616, ,624, ,959, ,676, ,645,621 Other local sources 5,739,720 10,554,859 10,851,476 14,280,713 9,955,832 Total Revenues 477,975, ,621, ,941, ,705, ,975,315 EXPENDITURES Current Instruction 293,471, ,321, ,140, ,228, ,712,665 Instruction-related activities: Supervision of instruction 30,248,352 32,657,971 34,693,706 31,267,915 24,310,017 Instructional library, media, and technology 2,892,382 3,271,316 3,758,246 3,477,581 2,936,236 School site administration 36,006,797 38,051,848 41,137,619 46,452,067 46,828,309 Pupil services: Home-to-school transportation 13,144,766 16,264,850 17,097,854 17,807,109 17,700,329 Food services (155,199) 222, , ,280 (34) All other pupil services 28,148,336 30,398,217 32,721,428 32,639,335 32,711,663 General administration: Data processing 7,267,808 5,965,313 7,217,173 6,531,411 4,542,041 All other general administration 15,838,928 15,234,994 15,089,419 15,287,485 15,665,133 Plant services 45,399,229 45,678,629 47,595,470 49,964,742 48,251,469 Facility acquisition and construction 1,842,350 2,835,869 2,528,153 5,316,027 4,395,658 Ancillary services 129, , ,109 Community services 1,211,897 1,348,114 1,513,080 1,577,332 1,729,093 Other outgo 450, , , ,381 77,154 Enterprise services 96,018 (122,402) (67,492) (40) - Debt service Principal 208, ,142 42,587 44,269 - Interest and other 22,106 20, ,430 1,748 - Total Expenditures 476,222, ,907, ,068, ,737, ,021,842 Excess (Deficiency) of Revenues Over Expenditures 1,752,562 31,714,639 (3,127,502) (5,032,438) (25,046,527) Other Financing Sources (Uses): Transfers in ,547,210 10,286,392 Other sources Transfers out (2,884,945) (3,088,604) (2,952,018) (371,809) - Other uses Net Financing Sources (Uses) (2,884,945) (3,088,604) (2,952,018) 12,175,401 10,286,392 NET CHANGE IN FUND BALANCES (1,132,383) 28,626,035 (6,079,520) 7,142,963 (14,760,135) Fund Balance Beginning 52,302,068 51,169,685 79,795,720 73,716,200 80,859,163 Fund Balance Ending $51,169,685 $79,795,720 $73,716,200 $80,859,163 $66,099,028 Source: The District. A-14

59 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF FUND BALANCES for Fiscal Years through Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year ASSETS Deposits and investments $ 73,658,289 $102,465,729 $ 89,746,154 $ 55,450,837 $ 25,116,383 Receivables 44,342,572 48,257,820 46,196,295 83,530,064 90,208,334 Due from other funds 2,206,091 2,492,849 2,147,156 4,037,587 2,160,521 Prepaid expenditures 2,940 11,018 43,141 78,803 79,757 Stores inventories 498, , , , ,864 Total Assets $120,708,812 $153,871,414 $138,691,354 $143,608,749 $118,044,859 LIABILITIES AND FUND BALANCES LIABILITIES Accounts payable $ 56,436,969 $ 62,429,439 $ 58,578,133 $ 45,200,740 $ 50,315,537 Due to other funds 3,845,538 4,274,389 3,684,815 4,926, ,142 Deferred revenue 9,256,620 7,371,866 2,712,206 12,622,239 1,172,152 Total Liabilities $ 69,539,127 $ 74,075,694 $ 64,975,154 $ 62,749,586 $ 51,945,831 FUND BALANCES Reserved $ 28,945,942 $ 45,357,270 $ 46,451,069 $ 42,809,156 $ 27,892,235 Unreserved: Designated 18,346,205 23,074,882 23,796,840 38,050,007 38,206,793 Undesignated, reported in: General Fund 3,877,538 11,363,568 3,468, Total Fund Balance $ 51,169,685 $ 79,795,720 $ 73,716,200 $ 80,859,163 $ 66,099,028 Source: The District. District Budgets Total Liabilities and Fund Balances $120,708,812 $153,871,414 $138,691,354 $143,608,749 $118,044,859 State law requires school districts to maintain a balanced budget in each fiscal year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. Under current law, a school district governing board must file with the county superintendent of schools a tentative budget by July 1 in each fiscal year and an adopted budget by September 8 of each fiscal year. After approval of the adopted budget, the school district s administration may submit budget revisions for governing board approval. School districts in California must also conduct a review of their budgets according to certain standards and criteria established by the State Department of Education. A written explanation must be provided for any element in the budget that does not meet the established standards and criteria. The district superintendent or designee must certify that such a review has been conducted and the certification, together with the budget review checklist and a written narrative, must accompany the budget when it is submitted to the governing board for approval. The balanced budget requirement makes appropriations reductions necessary to offset any revenue shortfalls. Furthermore, the offices of the county superintendent of schools are required to review district budgets, complete the budget review checklist and conduct an analysis of any budget item that does not meet the established standards. A copy of the completed checklist, together with any comments or A-15

60 recommendations, must be provided to the district and its governing board by November 1. By November 30, every district must have an adopted and approved budget, or the county superintendent of schools will impose one. Presented on the following page is the District s Adopted Budget for Fiscal Year and projections based upon the District s First Interim Report. San Bernardino City Unified School District General Fund Adopted Budget Fiscal Year and First Interim Projections Budget First Interim Projections REVENUES Revenue Limit Sources $244,639, $254,173, Federal Revenues 57,592, ,816, Other State Revenues 123,579, ,430, Other Local Revenues 8,704, ,454, TOTAL REVENUES 434,516, ,875, EXPENDITURES Current Expenditures Certificated Salaries 229,897, ,910, Classified Salaries 66,272, ,182, Employee Benefits 88,154, ,993, Books and Supplies 27,105, ,808, Services and Other Operating Expenditures 65,319, ,857, Capital Outlay 5,398, ,182, Other Outgo 62, , Transfers of Indirect/Direct Support Costs (1,012,826.00) (1,230,662.00) TOTAL EXPENDITURES 481,197, ,765, Excess (Deficiency) of Revenues (46,680,844.15) (14,890,715.33) Operating Transfers In 2, , Operating Transfers Out Other Sources TOTAL OTHER FINANCING SOURCES (USES) 2, , Net Change in Fund Balances (46,678,391.15) (14,215,114.15) Fund Balances at Beginning of Year (1) 67,129, ,129, Audit Adjustment Fund Balances at End of Year $20,451, ,914, (1) Unaudited. Source: The District. A-16

61 Assessed Valuation As required by State law, the District utilizes the services of the County for the assessment and collection of taxes for District purposes. District taxes are collected at the same time and on the same tax rolls as are County, City and other special district taxes. California law exempts $7,000 of the full cash value of an owner-occupied dwelling, but this exemption does not result in any loss of revenue to local entities, since an amount equivalent to the taxes which would have been payable on such exempt values is paid by the State. The law provides, among other things, for accelerated recognition and taxation of increases in real property assessed valuation upon change in ownership of property or completion of new construction. Additionally, each K-12 school district is to receive, on a timely basis and in proportion to its average daily attendance ( ADA ), allocations of revenue from such accelerated taxation remaining after allocations to each redevelopment agency in the county and, in accordance with various apportionment factors, to the county, the county superintendent of schools, each community college district, each city and each special district within the county. In fiscal year , the District s total net secured and unsecured assessed valuation after accounting for the redevelopment increment is $6,507,570,139. Shown in the following table is the net assessed valuation of property in the District over the past five fiscal years. San Bernardino Unified School District Assessed Valuations Fiscal Years through Assessed Valuations Year Local Secured Utility Unsecured Total Before Rdv. Increment Total After Rdv. Increment $ 9,958,325,184 $31,112,692 $580,666,253 $10,570,104,129 $7,047,010, ,708,943,040 2,851, ,837,365 12,306,632,118 7,885,876, ,402,470,426 2,817, ,879,071 13,098,166,985 8,034,815, ,992,933,556 1,817, ,252,537 11,749,003,356 6,822,727, ,182,936,731 1,816, ,041,167 10,969,794,701 6,507,570,139 Source: California Municipal Statistics, Inc. Tax Rates, Levies, Collections and Delinquencies Taxes are levied for each fiscal year on taxable real and personal property as of the preceding February 1. Real property which changes ownership or is newly constructed is revalued at the time the change occurs or the construction is completed. The current year property tax rate is applied to the reassessed value, and the taxes are then adjusted by a proration factor that reflects the portion of the remaining tax year for which taxes are due. The annual tax rate is based on the amount necessary to pay all obligations payable from ad valorem taxes and the assessed value of taxable property in a given year. Economic and other factors beyond the District s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property A-17

62 caused by natural or manmade disaster, such as earthquake, flood, toxic dumping, etc., could cause a reduction in the assessed value of taxable property within the District. For assessment and collection purposes, property is classified either as secured or unsecured and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing real property the taxes on which are a lien sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the unsecured roll. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year, and become delinquent on December 10 and April 10, respectively. A penalty of ten percent attaches immediately to all delinquent payments. Properties on the secured roll with respect to which taxes are delinquent become tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of a penalty of 1.5% per month to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then may be sold at public auction by the County Treasurer and Tax Collector. Property taxes on the unsecured roll are due as of the February 1 lien dates and become delinquent on August 31. A ten percent penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The County has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a judgment in the office of the County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder s office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. The County levies and collects all property taxes for property falling within its taxing boundaries. The Board of Supervisors of the County has adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. This alternative method is used for distribution of the ad valorem property tax revenues. Under the Teeter Plan, each entity levying property taxes in the County may draw on the amount of uncollected secured taxes credited to its fund, in the same manner as if the amount credited had been collected. The District participates in the Teeter Plan, and thus receives 100% of secured property taxes levied in exchange for foregoing any interest and penalties collected on delinquent taxes. The Teeter Plan is to remain in effect unless the Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the Board of Supervisors shall receive a petition for its discontinuance joined in by resolutions adopted by two thirds of the participating revenue districts in the County, in which event the Board of Supervisors is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. In the event that the Teeter Plan were terminated, receipt of revenue of ad valorem taxes in the District would depend upon the collections of the ad valorem property taxes and delinquency rates experienced with respect to the parcels within the District. So long as the Teeter Plan remains in effect, the District s receipt of revenues with respect to the levy of ad valorem property taxes will not be dependent upon actual collections of the ad valorem property taxes by the County. Secured Tax Charges and Delinquencies are not currently available for the District. A-18

63 The following table sets forth the largest local secured taxpayers within the District for fiscal year SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT Largest Local Secured Taxpayers Property Owner Primary Land Use Assessed Valuation % of Total (1) 1. Stater Bros. Markets Industrial $ 272,679, % 2. LIT Industrial LP Industrial 115,393, SP4 Cajon Industrial 98,737, SP4 Gateway South LP Industrial 97,012, SP4 Gateway North LP Industrial 61,862, Westgate No. 1 LP Industrial 59,980, Prologis LP Industrial 52,343, SP4 Interchange LP Industrial 52,162, WM Inland Investors IV LLC Shopping Center 51,910, HW LIT Interchange LP Industrial 51,290, TEC Parc Land LP Industrial 49,295, Pera Castlepark Inc. Apartments 44,169, Industrial Parkway LLC Industrial 43,860, VTSD LLC Apartments 33,475, Pine Mountain Development LLC Shopping Center 29,524, HW/Northgate 11 LP Industrial 29,385, Universe at Acacia LLC Apartments 28,916, Macy's California Reality Department Store 28,490, Mountainside Apartment Investors LLC Apartments 26,965, Victoria Development Company Industrial 25,749, $1,253,207, % (1) Local Secured Assessed Valuation: $10,182,936,731. Source: California Municipal Statistics, Inc. Certain Existing Obligations below: A schedule of the District s changes in long-term debt for the year ended June 30, 2010 is shown Balance July 1, 2009 Additions Deductions Balance June 30, 2010 Due in One Year General obligation bonds $165,619,235 $ 1,816,046 $ 3,745,000 $163,690,281 $ 3,964,275 Premium on issuance 8,676, ,403 8,240,156 - Child care facilities revolving fund 971, , , ,250 Accumulated vacation net 1,670, ,107 1,552,887 - Claims liability 11,468,524 1,597,678 2,915,495 10,150,707 2,915,495 SELF assessment 3,750, ,357 3,483, ,747 Supplemental early retirement plan 4,506,090 13,805, ,218 17,410,072 3,662,258 Other postemployment benefits 3,672,752 3,606,265 1,563,432 5,715,585 - Source: The District. $200,336,518 $20,825,189 $10,340,262 $210,821,445 $11,134,025 A-19

64 Payments on the general obligation bonds are made from the Bond Interest and Sinking Fund with ad valorem property tax revenues. Capital lease obligations are paid from the District s General Fund. The Child Care Facilities Revolving Fund payments are made by the Child Development Fund. Accumulated vacation will be paid by the fund for which the employee worked. Supplemental early retirement plan payments will be paid from the General Fund. Claims liability and SELF assessments are paid by the Internal Service Fund. See APPENDIX C hereto. Retirement Systems The District participates in the State of California Teachers Retirement System ( STRS ) which provides retirement benefits to certificated personnel. The District contributed $20,903,267 to STRS in fiscal year , $20,142,562 in and estimates a contribution of $19,103,826 in fiscal year The District also participates in the State of California Public Employees Retirement System ( PERS ) which provides retirement benefits to classified personnel. The District contributed $7,778,407 in fiscal year , $7,787,604 in and estimates a contribution of $7,496,438 in fiscal year Both PERS and STRS are operated on a statewide basis and, based on available information, STRS and PERS both have unfunded liabilities. PERS may issue certain pension obligation bonds to reach funded status. (Additional funding of STRS by the State and the inclusion of adjustments to such State contributions based on consumer price changes were provided for in 1979 Statutes, Chapter 282.) The amounts of the pension/award benefit obligation (PERS) or actuarially accrued liability (STRS) will vary from time to time depending upon actuarial assumptions, rates of return on investments, salary scales, and levels of contribution. The District is unable to predict what the amount of unfunded liabilities will be in the future or the amount of the contributions which the District may be required to make. The District also contributes to the Public Agency Retirement System (PARS), which is a defined contribution pension plan. A defined contribution pension plan provides pension benefits in return for services rendered, provides an individual account for each participant, and specifies how contributions to the individual s account are to be determined instead of specifying the amount of benefits the individual is to receive. Under a defined contribution pension plan, the benefits a participant will receive depend solely on the amount contributed to the participant s account, the returns earned on investments of those contributions, and forfeitures of other participants benefits that may be allocated to such participant s account. As established by Federal law, all public sector employees who are not members of their employee s existing retirement system (STRS or PERS) must be covered by Social Security or an alternative plan. The District has elected to use PARS as its alternative plan. Contribution made by the District and an employee vest immediately. The District contributes one percent of an employee s gross earnings. An employee is required to contribute 6.5 percent of his or her gross earnings to the pension plan. During the fiscal year, the District s required and actual contributions amounted to $43,343.96, which amounted to one percent of its current-year covered payroll. Employee contributions amounted to $281, Post Employment Benefits In June 2004, the Governmental Accounting Standards Board ( GASB ) issued Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The pronouncement requires public agency employers providing healthcare benefits to retirees A-20

65 to recognize and account for the costs for providing these benefits on an accrual basis and provide footnote disclosure on the progress toward funding the benefits. The implementation date for this pronouncement is staggered in three phases based upon the entity s annual revenues, similar to the implementation for GASB Statement No. 34 and 35. GASB Statement No. 45 ( GASB 45 ) became effective for the District for the fiscal year ending June 30, Employees who are eligible to receive retiree employment benefits other than pensions ( Health & Welfare Benefits ) while in retirement must meet specific criteria, i.e., age and years with the District. The District provides Health & Welfare Benefits to qualified eligible certificated employees who retire from the District after attaining age 55 with at least ten years of service to the District. On June 30, 2010, 343 retirees met these qualifications. The District pays the medical premiums incurred by qualified retirees through age 65. Expenditures for post-employment healthcare benefits are recognized as the premiums are paid. During the year ended June 30, 2010, expenditures of $1,219,253 were recognized for post-employment healthcare benefits. The District is in the process of determining the impact the implementation of GASB 45 will have on its statement of net assets and activities. The District s annual 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 $3,550,054 Interest on net OPEB obligation 284,639 Adjustment to annual required contribution (228,428) Annual OPEB cost (expense) 3,606,265 Contributions made (1,563,432) Increase in net OPEB obligation 2,042,833 Net OPEB obligation, beginning of year 3,672,752 Net OPEB obligation, end of year $5,715,585 The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for 2008, 2009 and 2010 were as follows: Year Ended June 30, Annual Required Contribution Percentage Contributed Net OPEB Obligation 2008 $3,038, % $1,662, ,550, ,672, ,550, ,715,585 A-21

66 A schedule of funding progress as of the most recent actuarial valuation is as follows: Actuarial Valuation Date Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) - Unprojected Unit Credit (b) Unfunded AAL (UAAL) (b a) Funded Ratio (a / b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll ([b a] / c) August 1, 2009 $1,014,630 $34,233,825 $33,219, % $333,483, % 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, investment returns, 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. 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 actual 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 August 1, 2009, actuarial valuation, the entry age normal actuarial method was used. The actuarial assumptions included a 7.75 percent investment rate of return (net of administrative expenses), based on the plan being funded in an irrevocable employee benefit trust invested in a long-term fixed income portfolio. Healthcare cost trend rates reflected an ultimate rate of four percent. The UAAL is being amortized at a level dollar method. The remaining amortization period at June 30, 2010, was 27 years. The actuarial value of assets was $1,014,630. Insurance The District maintains insurance or self-insurance in such amounts and with such retentions and other terms providing coverages for property damage, fire and theft, general public liability and worker s compensation as are adequate, customary and comparable with such insurance maintained by similarly situated elementary school districts. In addition, based upon prior claims experience, the District believes that the recorded liabilities for self-insured claims are adequate. A-22

67 Collective Bargaining District employees are represented by four separate collective bargaining units shown below, together with their current number of members and the dates upon which their current contracts are set to expire. The District has had no work stoppages among its employees during the past five years. Collective Bargaining Unit Number of Members Date of Current Contract Expiration San Bernardino Teachers Association 3,047 June 30, 2008* Classified School Employees Association 2,097 June 30, 2013 Police Officers Association 18 June 30, 2012 Communication Workers of America 958 June 30, 2009* * The District is operating under the expired contracts during negotiations, however, the District advises that in connection with such negotiations there are no open compensation issues and the District does not anticipate any labor disputes. Direct and Overlapping Debt Set forth below is a direct and overlapping debt report (the Debt Report ) prepared by California Municipal Statistics Inc. and dated December 1, The Debt Report is included for general information purposes only. The District has not reviewed the Debt Report for completeness or accuracy and makes no representations in connection therewith. The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. The first column in the table identifies each public agency that has outstanding debt as of the date of the report and whose territory overlaps the District in whole or in part. Column 2 shows the percentage of each overlapping agency s assessed value located within the boundaries of the District. This percentage, multiplied by the total outstanding debt of each overlapping agency (which is not shown in the table) produces the amount shown in column 3, which is the apportionment of each overlapping agency s outstanding debt to taxable property in the District. A-23

68 SAN BERNARDINO CITY UNIFIED SCHOOL DISTRICT DIRECT AND OVERLAPPING BONDED INDEBTEDNESS Assessed Valuation: $10,969,794,701 Redevelopment Incremental Valuation: 4,462,224,562 Adjusted Assessed Valuation: $ 6,507,570,139 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 12/1/10 San Bernardino Community College District % $ 75,760,339 San Bernardino City Unified School District ,853,228 (2) City of Redlands ,305 City of Highlands Community Facilities District No ,066,050 City of San Bernardino 1915 Act Bonds ,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $228,866,922 OVERLAPPING GENERAL FUND DEBT: (3) San Bernardino County General Fund Obligations 5.756% $ 39,758,994 San Bernardino County Pension Obligations ,637,627 San Bernardino County Flood Control District General Fund Obligations ,418,516 City of Colton General Fund and Pension Obligations ,777 City of Redlands Certificates of Participation and Pension Obligations ,936 City of San Bernardino General Fund Obligations ,954,720 TOTAL OVERLAPPING GENERAL FUND DEBT $100,808,570 COMBINED TOTAL DEBT $329,675,492 (4) (1) (2) (3) (4) Based on ratios. Excludes general obligation bonds to be sold. Excludes Certificates to be sold. Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to Assessed Valuation: Direct Debt ($151,853,228) % Total Direct and Overlapping Tax and Assessment Debt % Ratios to Adjusted Assessed Valuation: Combined Total Debt % STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/10: $0 Source: California Municipal Statistics, Inc. A-24

69 APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

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71 SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of the provisions of the Site Lease, the Lease, the Trust Agreement, the Assignment Agreement and the Agency Agreement. This summary is not intended to be definitive and is qualified in its entirety by reference to the Site Lease, the Lease, the Trust Agreement, the Assignment Agreement and the Agency Agreement for the complete terms thereof. Copies of the Site Lease, the Lease, the Trust Agreement, the Assignment Agreement and the Agency Agreement are available upon request from the District. DEFINITIONS The following are definitions of certain terms used in this Summary of Principal Legal Documents. All capitalized terms not defined below or elsewhere in the Official Statement have the meanings set forth in the Lease or the Trust Agreement. Accountable Event of Loss of Qualified School Construction Bonds Status means (a) any act or any failure to act on the part of the District, which act or failure to act is a breach of a covenant or agreement of the District contained in the Trust Agreement or in the Lease, the Tax Certificate or the Certificates and which act or failure to act causes the Lease Payments to lose their status, or fail to qualify, as Qualified School Construction Bonds, or (b) the making by the District of any representation contained in the Trust Agreement, in the Lease, the Tax Certificate or the Certificates, which representation was untrue when made and the untruth of which representation at such time causes the Lease Payments to lose their status, or fail to qualify, as Qualified School Construction Bonds. Additional Certificates means those additional certificates of participation executed and delivered in accordance with the Trust Agreement. Additional Payments means those payments due as provided in the Lease. Assignment Agreement means the Assignment Agreement, dated as of March 1, 2011, by and between the Corporation and the Trustee, entered into in connection with the Lease, and any duly authorized and executed amendments or supplements thereto. Authorized Denominations means, $5,000 or any integral multiple thereof. Authorized Representative means the person or persons designated in a certification provided by the District at or following the Closing Date to represent the District in connection with the Trust Agreement and with the Lease. Business Day means any day (other than a Saturday or Sunday) on which the Trustee or banks and trust companies generally in New York, New York, or Los Angeles, California are not authorized or required to remain closed and on which the New York Stock Exchange is not closed. Certificates means $53,080,000 aggregate principal amount of the District s Taxable Certificates of Participation, 2011 Series A (Direct Subsidy Qualified School Construction Bonds), executed and delivered pursuant to the Trust Agreement; following the execution and delivery of Additional Certificates, if any, under the Trust Agreement hereof, the term Certificates shall also refer to any Additional Certificates then Outstanding, except where the context requires otherwise. Certificate Proceeds means the proceeds of sale of the Certificates to the Original Purchaser. B-1

72 Closing Date means the date of delivery of the Certificates. Comparable Treasury Issue means the U.S. Treasury security or securities selected by the Designated Investment Banker which has an actual or interpolated maturity comparable to the remaining average life, as of the prepayment date, of the Certificates to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to the remaining average life, as of the prepayment date, of the Certificates to be prepaid. Comparable Treasury Price means (a) if the Designated Investment Banker receives at least four Reference Treasury Dealer Quotations, the average of such quotations for the date on which such Certificates are to be prepaid, after excluding the highest and the lowest Reference Treasury Dealer Quotations, or (b) if the Designated Investment Banker obtains fewer than four Reference Treasury Dealer Quotations, the average of all such quotations. Computation Date has the meaning set forth in the Lease. Corporation Representative means the Chairman, Secretary, and/or Treasurer of the Corporation, or any other person authorized by the Board of Directors of the Corporation to act on behalf of the Corporation under or with respect to the Lease, as evidenced by a certificate of the Corporation. Date of Loss of Qualified School Construction Bond Status means the date specified in a Determination of Loss of Qualified School Construction Bond Status as the date from and after which the Lease Payments lost their status, or failed to qualify, as Qualified School Construction Bonds as a result of an Accountable Event of Loss of Qualified School Construction Bond Status, which date could be as early as the initial date of delivery of the 2011 Series A Certificates. Delivery Costs means all items of expense directly or indirectly payable by or reimbursable to the District, relating to delivery of the Certificates, including but not limited to filing and recording costs relating to the sale of the Certificates, settlement costs, printing costs, reproduction and binding costs, financing discounts, charges and expenses, initial fees and charges of the Trustee (including the first annual fees and counsel fees), legal fees and charges, financing and other professional consultant fees, rating agencies fees for credit ratings, fees for the Trustee s execution, transportation and safekeeping of Certificates and other charges, expenses and fees in connection with the foregoing, of which not to exceed 2% of the aggregate principal amount of the Certificates may be paid from proceeds of sale of the Certificates. Delivery Costs Fund means the fund by that name established pursuant to the Trust Agreement. Depository Trust Company or DTC means The Depository Trust Company, New York, New York, as initial securities depository for the Certificates. Designated Investment Banker means one of the Reference Treasury Dealers designated by the District. Determination of Loss of Qualified School Construction Bond Status means (a) a final determination by the Service (after the District has exhausted all administrative appeal remedies) determining that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred and specifying the Date of Loss of Qualified School Construction Bond Status, or (b) a non-appealable holding by a court of competent jurisdiction holding that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred and specifying the Date of Loss of Qualified School Construction Bond Status. B-2

73 Event of Default means an event of default pursuant to Trust Agreement. Excess Earnings means earnings in excess of amounts used to pay the annual Interest Component of the Lease Payments. Excess Earnings Account means the Excess Earnings Account established within the Lease Payment Fund pursuant to the Trust Agreement. Extension Period Expiration Date means the date of termination of any period of time agreed to in writing by the Internal Revenue Service that extends the date by which the District must expend all of the net proceeds of sale of the Certificates for Qualified Purposes. Extraordinary Event means (a) a Determination of Loss of Qualified School Construction Bond Status; (b) the occurrence of a material adverse change under Section 54F or 6431 of the Code; (c) the publication by the IRS or the United States Treasury of any guidance with respect to such sections; or (d) any other determination by the IRS or the United States Treasury, which determination is not the result of a failure of the District to satisfy certain requirements of the Trust Agreement, if as a result of an event as described in (b), (c), or (d) of this sentence, the Direct Subsidy payments expected to be received with respect to the Certificates are eliminated or reduced, as reasonably determined by the Superintendent of the District or his designee, which determination shall be conclusive. Fair Market Value shall have the meaning ascribed to such term in, and shall be calculated in accordance with, the Tax Certificate. Federal Securities means: (1) Cash (insured at all times by the Federal Deposit Insurance Corporation), (2) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including: U.S. Treasury obligations All direct or fully guaranteed obligations Farmers Home Administration General Services Administration Guaranteed Title XI financing Government National Mortgage Association State and Local Government Series Fiscal Year means the fiscal year of the District, presently commencing July 1 of each calendar year and ending June 30 of the following calendar year. Gross Proceeds shall have the meaning ascribed to such term in the Lease. Independent Counsel means an attorney duly admitted to practice law before the highest court of the state in which such attorney maintains an office and who is not a regular employee of the Corporation or the District. Information Services means Financial Information, Inc. s Daily Called Special Service. 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Mergent/FIS, Inc., B-3

74 Center Drive, Suite 150, Charlotte, North Carolina 28217, Attention: Municipal News Reports; and Kenny S&P, 55 Water Street, 45th Floor, New York, New York 10041, Attention: Notification Department; or, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds as the District may designate in a request of the District delivered to the Trustee. Insurer means Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.), a New York stock insurance company, or any successor thereto or assignee thereof. Insurance Consultant means an individual or firm retained by the District as an independent contractor, experienced in the field of risk management. Interest Component means the portion of the Lease Payments, designated as interest with respect to the Certificates, which shall be determined by applying the rate of interest applicable to the respective Certificates. Interest Payment Date means each February 1 and August 1 commencing August 1, 2011, or if any such day is not a Business Day, the Next Succeeding Business Day. Lease Deposit Date means the 15th day immediately preceding each Lease Payment Date or, if such day is not a Business Day, then the next succeeding Business Day. Lease Payment means the total amount of any Lease Payment due under the Lease, which shall include the Principal Component and the Interest Component. Lease. Lease Payment Date means each date upon which Lease Payments are due, as set forth in the Lease Payment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Lease Supplement means a lease supplement substantially in the Lease. Leased Property means that certain real or personal property which is or will become the subject of the Lease, and, in the case of real property only, comprising those parcels described in the Site Lease and the Lease, as it may be modified from time to time. Make-Whole Prepayment Price means the amount equal to the greater of the following: 1. the initial offering price of the Certificates set forth in the Official Statement (but not less than 100% of the principal amount of the 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 Certificates to be prepaid to the maturity date of such Certificates, not including any portion of those payments of interest accrued and unpaid as of the date on which the Certificates are to be prepaid, discounted to the date on which the Certificates are to be prepaid on a semiannual basis, assuming a 360-day year containing twelve 30-day months, at the Treasury Rate, plus 70 basis points, plus in each case accrued interest with respect to the Certificates to be prepaid to the prepayment date. B-4

75 Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns. Net Insurance Proceeds means any net proceeds of insurance or condemnation proceeds paid with respect to the affected portion of Leased Property remaining after payment therefrom of any expenses (including attorneys fees) incurred in the collection thereof. Net Insurance Proceeds Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Original Purchasers means Cabrera Capital Markets, Inc. and Siebert Brandford Shank & Co., L.L.C., as the original purchasers of the Certificates. Outstanding when used as of any particular time with respect to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except: (i) cancellation; Certificates theretofore canceled by the Trustee or surrendered to the Trustee for (ii) Certificates for the payment or prepayment of which funds or Federal Securities in the necessary amount shall have theretofore been deposited with the Trustee (whether upon or prior to the maturity or prepayment date of such Certificates) in accordance with the Trust Agreement; provided that, if such Certificates are to be prepaid prior to maturity, notice of such prepayment shall have been given as provided in the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (iii) Certificates in lieu of or in exchange for which other Certificates shall 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 of the Trustee. Payment Date means any Interest Payment Date or Principal Payment Date. Permitted Encumbrances means, with respect to the Leased Property, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent; (ii) the Trust Agreement; (iii) the Lease; (iv) the Assignment Agreement; and (v) the Site Lease. Permitted Investments means any of the following, except to the extent not permitted by the laws of the State as an investment for the moneys to be invested therein at the time of investment: (1) Federal Securities; (2) Bonds, debentures, notes, participation certificates or other evidences of indebtedness issued, or the principal of and interest on which are unconditionally guaranteed, by the Federal Intermediate Credit Bank, the Federal Home Loan Bank System, the Government National Mortgage Association or any other agency or instrumentality of or corporation wholly owned by the United States of America when such obligations are backed by the full faith and credit of the United States for the full and timely payment of principal and interest; B-5

76 (3) Obligations of any state of the United States or any political subdivision thereof, which at the time of investment are rated Aa3 or higher by Moody s and AA or higher by S&P; or which are rated by Moody s VMIG 1 or better and by S&P A-1+ or better with respect to commercial paper, or VMIG 1 and SP-1, respectively, with respect to municipal notes; (4) Bank time deposits evidenced by certificates of deposit, deposit accounts, and bankers acceptances, issued by any bank, trust company or national banking association insured by the Federal Deposit Insurance Corporation (including the Trustee); provided that (a) such bank, trust company or national banking association be rated Aa3 or better by Moody s and AA- or better by S&P; and (b) the aggregate of such bank time deposits and bankers acceptances issued by any bank, trust company or banking association does not exceed at any one time 10% of the aggregate of the capital stock, surplus and undivided profits of such bank, trust company or banking association and that such capital stock, surplus and undivided profits shall not be less than $15,000,000; (5) Corporate commercial paper rated P-1 or better by Moody s and A-1+ or better by S&P at the time of investment; (6) Taxable government money market portfolios restricted to obligations that are rated AAAm or AAAm-G by S&P and P-1 by Moody s (including funds for which the Trustee or an affiliate provides investment advice or similar services); (7) Deposits with the Local Agency Investment Fund of the State, as may otherwise be permitted by law; and (8) The Treasury Pool of the County. Policy means the insurance policy issued by the Insurer on the Closing Date guaranteeing the scheduled payment of principal of and interest components of the Lease Payments when due. Prepayment means any payment made by the District pursuant to the Lease, as a prepayment of Lease Payments. Prepayment Date means the date on which any Prepayment of Certificates occurs. Prepayment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Prepayment Price means the amount due and payable from the District upon optional prepayment of the Certificates, expressed as a percentage of Principal Component thereof. Principal Component means the portion of the Lease Payments designated as principal represented by the Certificates. Principal Office means the corporate trust office of the Trustee in Los Angeles, California, or the principal corporate trust office of any successor Trustee. Principal Payment Date means February 1 of the years indicated in the Trust Agreement to and including February 1, 2026, the maturity date of the Certificates. B-6

77 Project means collectively, those certain capital projects consisting of the acquisition, construction and/or improvement of certain facilities of the District described in the Lease, as it may be amended from time to time, to be financed by the District with the proceeds of the Certificates. Project Costs means, with respect to any Component, the contract price paid or to be paid therefor upon acquisition, construction or improvement (if any), thereof, in accordance with a purchase order or contract therefor, together with all related costs of the Project. Project Costs include the administrative, engineering, legal, financial and other costs incurred by the District and the Corporation in connection with the acquisition, construction or improvement of the respective component of the Project; including all applicable sales taxes and other charges resulting from such acquisition, construction or improvement of the Project, and Delivery Costs not paid from the Delivery Costs Account. Project Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Qualified Arbitrage Rebate Calculation Service means a nationally recognized accounting firm or Special Counsel fully qualified to perform the computations for the 2011 Series A Certificates necessary to comply with Section 148 of the Code. Rating Agency means Moody s and S&P, or whichever of such institutions then rates the Certificates, and any successors thereto, or if either such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the District. Rating Category means: (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier, and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier. Rebate Amount has the meaning set forth in the Lease. Rebate Consultant means an individual or firm, including a law firm, accounting firm or financial advisory firm experienced in the calculation of rebate pursuant to Section 148 of the Code. Record Date means the fifteenth day of the calendar month prior to each Interest Payment Date, whether or not such day is a Business day. Reference Treasury Dealer means the original underwriters of the Certificates, their successors and other firms, as specified by the District from time to time, that are primary U.S. government securities dealers in the City of New York, New York; provided, however, that if any such firm ceases to be such a primary treasury dealer, the District will substitute another primary treasury dealer for such firm. Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third Business Day preceding the date on which such Certificates are to be prepaid. Registrar means the Trustee. B-7

78 Related Documents means the Lease, the Assignment Agreement, the Site Lease and any document or instrument related thereto. Removal means the release of all or a portion of the Leased Property from the leasehold of the Lease and of the Site Lease as provided in the Lease. Requisition means the form of requisition from the Delivery Costs Fund, the Project Fund and the Net Insurance Proceeds Fund, as further described in the Trust Agreement. Reserve Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Lease. Reserve Replenishment Rent means Reserve Replenishment Rent payable pursuant to the Reserve Requirement means $5,308,000, or, upon the prepayment of any Certificates, 10% of the Principal Component of all Certificates then Outstanding, as provided in the Trust Agreement. Responsible Officer means any Vice President, Assistant Vice President, Trust Officer or officer of the Trustee within its corporate trust department having regular responsibility for the obligations of the Trustee under the Trust Agreement. S&P means Standard & Poor s, a Division of the McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns. Securities Act means the Securities Act of 1933, as amended, and any successor thereto. Securities Depository means The Depository Trust Company, 55 Water Street, New York, New York 10041, Fax (212) or 7320; or, in accordance with then-current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the District may designate in a certificate of the Lessor delivered to the Trustee. Service means the Internal Revenue Service of the United States of America. Site Lease means the Site Lease, dated as of March 1, 2011, by and between the Corporation, as lessee thereunder, and the Lessee, as lessor thereunder, and any duly authorized and executed amendments or supplements thereto. Special Counsel means an attorney or firm of attorneys of nationally recognized standing in matters pertaining to the tax status under federal laws and regulations of interest on obligations issued by or executed on behalf of states and their political subdivisions, as designated by the Lessee. State means the State of California. Substitution means the release of all or a portion of the Leased Property from the leasehold of the Lease and of the Site Lease, and the lease of substituted real property and buildings and other improvements under the Lease and under the Site Lease as provided in the Lease. Supplemental Lease Agreement means any lease agreement duly authorized and entered into by and between the District and the Corporation, supplementing, modifying or amending the Lease; but only B-8

79 if and to the extent that such Supplemental Lease Agreement is specifically authorized the Trust Agreement. Surety Bond means that certain reserve surety bond provided by the Insurer to satisfy the Reserve Requirement and delivered on the Closing Date to the Trustee for credit to the Reserve Fund. Supplemental Trust Agreement means each trust agreement duly authorized and entered into among the Corporation, the District and the Trustee, supplementing, modifying or amending the Trust Agreement in accordance with the terms of the Trust Agreement. Tax Certificate means that certain Tax Certificate delivered by the District on the Closing Date with respect to the Certificates. Taxable General Obligation Bonds means $5,477, aggregate principal amount of the District s Taxable General Obligation Bonds, 2004 Series E. Term means the time during which the Lease is in effect, as provided therein. Treasury Rate means, with respect to any prepayment date for a particular 2011 Series A 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 the Series A Certificates 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. Unexpended Proceeds Prepayment Date means any Business Day determined by the District for the prepayment of Certificates pursuant to the Trust Agreement that falls within ninety (90) days after March 24, 2014; provided that if an Extension Period Expiration Date has been established, any Business Day determined by the District that falls within ninety (90) days after the Extension Period Expiration Date. Written Order means a written instruction from the District, directing the Trustee to take action the Trust Agreement. Yield shall have the meaning ascribed to such term in the Lease. Lease of Leased Property THE LEASE AGREEMENT The Corporation agrees to lease the Leased Property to the District and the District agrees to lease the Leased Property from the Corporation upon the terms and conditions set forth in the Lease. There shall be no merger of interest of the Corporation and the District as the Leased Property caused by simultaneous delivery of the Site Lease and the Lease. B-9

80 Term of Agreement The Term of the Lease shall mean the duration of Lease Payments due from the District under the Lease, which Term shall commence on the date the Lease, and shall continue until the date the last Certificate is paid in full, unless earlier terminated in accordance with the following paragraph. The District represents, warrants and covenants that the useful life of the Leased Property is at least equal to the Term of the Lease. If by February 1, 2026, the Lease Payments shall not be fully paid, or if the Lease Payments shall have been abated at any time and for any reason, then said Term of the Lease shall be extended until the date that is ten (10) days after all Lease Payments shall be fully paid, except that the Term of the Lease shall in no event be extended beyond the term of the Site Lease. If all Lease Payments and all Additional Payments shall be fully paid, the Term of the Lease shall end ten (10) days thereafter or ten (10) days after written notice by the District to the Corporation, whichever is earlier; following the termination of the Lease as aforesaid, the District shall have no further obligation of repayment as to the Certificates or expenses and costs, except that the obligation of the District to pay rebatable arbitrage in accordance with the requirements of the Tax Certificate shall continue following the termination of the Lease. If, however, all Lease Payments and all Additional Payments shall not have been fully paid, the Term of the Lease and the Site Lease shall be extended until such payments are made in full, but shall in no event it extend beyond February 1, Lease. The District holds fee title to and has possession of the Leased Property as of the date of the The leasing of the Leased Property by the District to the Corporation pursuant to the Site Lease shall not effect or result in a merger of the District s leasehold estate in the Leased Property as lessee under the Lease and its fee estate in the Leased Property as lessor under the Site Lease, and the Corporation shall continue to have a leasehold estate in the Leased Property pursuant to the Site Lease throughout the term thereof and the Term of the Lease. The Lease shall constitute a sublease with respect to the Leased Property. The leasehold interest in the Leased Property granted by the District to the Corporation pursuant to the Site Lease is and shall be independent of the Lease; the Lease shall not constitute an assignment or surrender of the leasehold interest in the Leased Property granted to the Corporation under the Site Lease. The Term of the Lease will end upon the earliest of any of the following events: (a) a default by the District and the Corporation s subsequent election to terminate the Lease under the Lease; (b) the payment by the District of all remaining Lease Payments required under the Lease and any Additional Payments required under the Lease; (c) the deposit of moneys or Federal Securities with the Trustee in amounts sufficient to pay all of the Lease Payments as the same shall become due, as provided by the Lease; or (d) upon the exercise by the District of its option to purchase the entire interest of the Corporation in the Leased Property as provided in the Lease. Lease Payments Subject to the provisions of the Lease, the District agrees to pay to the Corporation, its successors and assigns, as rental for the use and possession of the Leased Property, the Lease Payments computed in accordance with the further provisions of the Lease, to be due and payable in the amounts and on the Lease Payment Dates set forth in the Lease, during the Term of the Lease. Each Lease Payment shall be deposited with the Trustee no later than the Lease Deposit Date immediately preceding such Lease Payment Date as set forth in the Lease. Lease Payments shall be paid from any source of legally available funds of the District, and so long as the Leased Property, or a sufficient portion of the Leased Property, is available for the District s B-10

81 use, the District covenants to take such action as may be necessary to include all Lease Payments due under the Lease in its budgets and to make the necessary appropriations for all such Lease Payments, which covenants of the District shall be deemed to be, and shall be, ministerial duties imposed by law, and it shall be the duty of each and every public official of the District to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the District to carry out and perform the covenants made by the District under the Lease. During the Term of the Lease, the District will furnish to the Trustee, within 30 days of the beginning of each Fiscal Year, a certificate of the Authorized Representative to the effect that the Lease Payments due in that Fiscal Year have been included in the budget approved by the Board of Trustees for such Fiscal Year. The obligation of the District to make Lease Payments does not constitute an obligation 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 County of San Bernardino, the State of California, or any political subdivision thereof within the meaning of the Constitution of the State of California. During the Term of the Lease, the District will furnish to the Trustee, no later than 20 days following the adoption of the budget for its then-current Fiscal Year, and, in any event, no later than September 30 of any year, a certificate of the District to the effect that the Lease Payments due in that Fiscal Year have been included in the budget approved by the District for such Fiscal Year. The Trustee will be provided only the certification provided for in the Trust Agreement. The covenants on the part of the District contained in the Lease shall be deemed to be and shall be construed to be duties imposed by law and it shall be the duty of each and every public official of the District to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the District to carry out and perform the covenants and agreements in the Lease agreed to be carried out and performed by the District. During the Term of the Lease, the District covenants and agrees to comply with all Regulations promulgated under the Recovery Act or the Tax Code with respect to applications for payment of each Direct Subsidy, in connection with each Interest Payment Date. To that end, the District has retained U.S. Bank National Association as its filing agent for semiannual claims for the Direct Subsidy and shall use its best efforts to insure that each claim for and payment of Direct Subsidy is accomplished in a timely fashion. The District shall cause each payment of Direct Subsidy to be deposited into the Lease Payment Fund established with the Trustee promptly following the District s receipt thereof or, to the extent permitted under the foregoing Regulations, to cause the Direct Subsidy to be deposited directly by Treasury into the Lease Payment Fund. Interests in the Leased Property During the term of the Lease, the Corporation shall hold a leasehold interest in the Leased Property and any and all additions which comprise repairs, replacements or modifications thereto. The District shall take any and all actions reasonably required, including but not limited to executing and filing any and all documents, reasonably required to maintain and evidence the Corporation s interest in the Leased Property at all times during the Term of the Lease. Maintenance, Utilities, Taxes and Assessments Throughout the Term of the Lease, as part of the consideration for the rental of the Leased Property, all repair and maintenance of such Leased Property shall be the responsibility of the District, and the District shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Leased Property resulting from ordinary wear and tear or want of care on the part of B-11

82 the District or any sublessee thereof. In exchange for the Lease Payments provided in the Lease, the Corporation agrees to provide only the Leased Property, as more specifically in the Lease. The Corporation shall have no responsibility for making improvements and additions to the Leased Property other than as set forth in the Lease. The District shall also pay or cause to be paid any and all sales taxes or other taxes, levies, charges, withholdings, assessments and governmental charges of any nature whatsoever, together with any additions to taxes, penalties, fines or interest thereon charged against the Leased Property, as Additional Payments under the Lease, including, without limitation, penalties, fines or interest arising out of any delay or failure by the District to pay any of the foregoing or failure to file or furnish to the Corporation or the Trustee for filing in a timely manner any returns, levied or imposed against the Corporation or the Leased Property, the rentals and other payments required under the Lease or any parts thereof or interests in the District or the Corporation or the Trustee therein by any governmental authority. Insurance Comprehensive General Liability. The District shall maintain or cause 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. Said policy or policies shall provide for indemnification of the District against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the use or operation of the Leased Property. Said policy or policies shall 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 $500,000 (subject to a deductible clause of not to exceed $50,000) 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 in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the District. Said policies may be maintained in the form of insurance through a joint exercise of powers authority created for such purpose in the form of self-insurance by the District. The Net Insurance Proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid, including, where appropriate, the application of Net Insurance Proceeds with respect to the prepayment of the Lease Payments. Workers Compensation. The District shall also maintain workers compensation insurance issued by a responsible carrier authorized under the laws of the State of California to insure against liability for compensation under the Workers Compensation Insurance and Safety Act now in force in California, or any act enacted as an amendment or supplement thereto or in lieu thereof. Workers compensation insurance may, to the extent provided by law, be maintained in the form of self-insurance. Property Insurance. The District shall maintain or cause to be maintained, throughout the term of the Lease Agreement in accordance with the Lease, insurance against loss or damage to any or all of the Leased Property by fire and lighting, with extended coverage and vandalism and malicious mischief insurance, and against losses occurring at or on the Leased Property by theft. Said extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. B-12

83 Such insurance shall be in an amount equal to the total Lease Payments remaining unpaid or, if less, 100% of the replacement cost of the Leased Property (or, if under separate policies, in an aggregate amount equal to 100% of the replacement cost of the Leased Property). Such insurance may be maintained as part of or in conjunction with any other fire and extended coverage insurance carried or required to be carried by the District, and may be maintained in whole or in part in the form of insurance maintained through a joint exercise of powers authority created for such purpose. The Net Insurance Proceeds of each policy or coverage shall be applied as provided in the Lease. Rental Interruption and Title Insurance. The District shall maintain or cause to be maintained rental interruption or loss of use insurance in an amount not less than the maximum remaining scheduled Lease Payments in any twenty-four-month period, to insure against loss of use of the Leased Property caused by perils covered by the insurance required in the Lease, which does not cover loss of rental in the event of an earthquake. Such insurance may be maintained as part of or in conjunction with any other rental interruption insurance carried by the District and may be maintained in whole or in part, through a joint exercise of powers authority created for such purpose. Such insurance shall be in place as of the Closing Date. The Net Insurance Proceeds of such insurance shall be paid to the Trustee and deposited in the Lease Payment Fund, and shall be credited toward the payment of the Lease Payments in the order in which such Lease Payments come due and payable. The District shall deliver to the Corporation, on the Closing Date, a CLTA policy of title insurance evidencing its ownership of each parcel comprising the Leased Property, in form and substance satisfactory to the Corporation and the Insurer. Said policy or policies shall insure (a) the fee interest of the District in the Leased Property, (b) the Corporation s ground leasehold estate in Leased Property under the Site Lease, and (c) the District s leasehold estate under the Lease in the Leased Property. Such title insurance shall provide coverage in an amount no less than the total Principal Component of the Lease Payments due under the Lease and each policy of title insurance obtained under the Lease shall provide that all proceeds thereunder shall be payable to the Trustee. General Insurance Provisions Form of Policies. All policies of insurance obtained under the requirements of the Lease and any statements of self-insurance shall be in forms certified by an insurance agent, broker or consultant to the District to comply with the provisions of the Lease. All policies shall provide that the Trustee shall be given 30 days prior written notice of each expiration, any intended cancellation thereof or reduction of the coverage provided thereby. All policies of insurance required by the Lease shall provide that all proceeds thereunder shall be payable to the Trustee and the Corporation, with the Trustee as a loss payee, pursuant to a lender s loss payable endorsement substantially in accordance with the form approved by the Insurance Services Office and the California Banker s Association. All insurance policies delivered under the Lease must be provided by commercial insurers rated no less than A by A.M. Best Company, Fitch, Moody s or S&P, unless waived by the Insurer. Payment of Premiums. The District shall pay or cause to be paid when due the premiums for all insurance policies required by the Lease to be delivered by the District. Evidence of Insurance. The District will deliver to the Corporation, the Trustee in the month of February in each year a certificate to the effect that the requirements of the Lease have been satisfied. The Trustee may conclusively rely upon any certificates received from the District. Upon request, the District shall provide a schedule, in such detail as the Corporation or Trustee may reasonably request, setting forth any insurance policies then in force described in the Lease, listing the names of the insurers which have issued the policies, the policy limits thereof and the hazards and risks covered thereby, or the certificate of an Insurance Consultant providing similar information. B-13

84 Self-Insurance Requirements. If the District chooses to self-insure for certain risks described in the Lease (except title insurance described in the Lease) for which self-insurance is permitted, it must on at least an annual basis in the month of July provide (i) evidence to the Trustee and the Corporation to the effect that the District has segregated amounts meeting such requirements in a special insurance reserve dedicated to the Leased Property; or (ii) a certificate of an Insurance Consultant to the Trustee, the Insurer and the Corporation to the effect that the District s general insurance reserves are adequate to provide the required amount of coverage. Any self-insurance provided to satisfy the requirements of the Lease shall be comprised of moneys held in a separate trust fund maintained by an independent trustee; in the event any such self-insurance is, subsequent to the date hereof, discontinued, the actuarial soundness of the related claim reserve fund must be maintained, as evidenced by the annual filings required above. The Trustee may conclusively rely upon such certificate. No self-insurance shall be permitted for the rental interruption insurance coverage required under the Lease. Tax Covenants Definitions. When used in the Lease, the following terms have the following meanings: Available Project Proceeds means the sale proceeds from the Certificates less the Delivery Costs financed with such proceeds, plus any investment earnings on such amounts. For purposes of the Lease, the District acknowledges that the Corporation intends to syndicate the beneficial ownership of the Lease through delivery of certificates of participation, and agrees that should such syndication occur in connection with the execution and delivery of the Lease it will treat all proceeds of such syndication as sale proceeds of the Lease (within the meaning of said Section (b)). Computation Date has the meaning set forth in Section (b) of the Regulations. Expenditure Period means the three (3) year period beginning on the Closing Date, plus any extension of such period granted by the Secretary of the Treasury. Investment has the meaning set forth in Section (b) of the Regulations. Gross Proceeds means any proceeds as defined in Section (b) of the Regulations (referring to sales, investment and transferred proceeds), and any replacement proceeds as defined in Section (c) of the Regulations, of the Certificates. Nonqualified Portion means the portion of the outstanding Principal Component of the Lease Payments represented by the Certificates in an amount that, if the remainder of Principal Component of the Lease Payments were represented by Certificates executed and delivered on the last day of the Expenditure Period, all of the Available Project Proceeds of the Certificates would have been used for Qualified Purposes within the Expenditure Period. Permitted Sinking Fund Yield means the permitted sinking fund yield published by the Bureau of Public Debt at for the calendar month in which there is first a binding, written contract to purchase the Certificates. Qualified Sinking Fund means a fund expected to be used to pay the Principal Component of the Lease Payments represented by the Certificates, provided that (i) such fund is funded at a rate not more rapid than equal annual installments, (ii) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to pay the Principal Component of the Lease Payments represented by the Certificates, and (iii) the Yield on such fund is not greater than the Permitted Sinking Fund Yield. B-14

85 Qualified Purposes means the construction, rehabilitation, or repair of public school facilities (including expenditures for the acquisition of equipment to be used in a portion of a public school facility being constructed, rehabilitated, or repaired with the proceeds of the Certificates) or for the acquisition of land on which such a facility is to be constructed with any portion of the proceeds of the Certificates. Rebate Amount has the meaning set forth in Section (b) of the Regulations. Regulations means any proposed, temporary or final Regulations which are applicable to the portion of the Lease represented by the Certificates. Any reference to a specific Regulation shall also mean, as appropriate, any proposed, temporary or final Income Tax Regulation designed to supplement, amend or replace the specific Regulation referenced. Yield of (1) any Investment has the meaning set forth in Section of the Regulations and of (2) the Certificates or the Lease represented by the Certificates has the meaning set forth in Section of the Regulations. Lease as Obligation of District; Not to Cause Change in Status. The District represents and warrants that it intends that for federal income tax purposes and for California personal income tax purposes, the Lease is to be treated as an obligation of the District, that the Lease Payments are intended to be treated as the payment of such obligation. The District covenants that it shall not use, and shall not permit the use of, and shall not omit to use Gross Proceeds or any other amounts (or any property the acquisition, construction or improvement of which is to be financed directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the Lease Payments to fail to be Qualified School Construction Bonds under the Recovery Act. Designation and Irrevocable Election. The Lease Payments are hereby designated as qualified school construction bonds pursuant to Section 54F of the Tax Code. The District hereby irrevocably elects pursuant to Section 6431(f)(3)(B) of the Tax Code to have Section 6431(f) of the Tax Code apply to the Certificates, such that the Interest Component of the Certificates qualifies for payment of the Direct Subsidy from the Treasury. Use for Qualified Purposes. All of the Available Project Proceeds of the Certificates shall be used only for Qualified Purposes. Jurisdiction. All of the public school facilities to be financed with the Available Project Proceeds of the Certificates shall be located within the jurisdiction of the District. Costs of Delivery. Delivery Costs financed with proceeds of the Certificates shall not exceed two percent (2%) of the proceeds of the Certificates. Binding Commitment. The District will incur a binding commitment with one or more third parties to spend at least ten percent (10%) of the Available Project Proceeds of the Certificates within six (6) months of the Closing Date. Use within Three Years. The District anticipates that all of the Available Project Proceeds of the Certificates will be expended for Qualified Purposes within three years of the Closing Date. Prepayment of Nonqualified Certificates. If less than one hundred percent (100%) of the Available Project Proceeds of the Certificates are expended for Qualified Purposes within the Expenditure Period, the District shall prepay the Nonqualified Portion of the Lease within ninety (90) days after the end of the Expenditure Period in accordance with the Lease. B-15

86 Reimbursement. Any reimbursement of proceeds of the 2011 Series A Certificates for capital expenditures for Qualified Purposes incurred prior to the Closing Date will be undertaken strictly in accordance with Section 54A(d)(2)(D) of the Tax Code, i.e., the expenditures to be reimbursed shall only be incurred after the Secretary of the Treasury has made an allocation of bond limitation with respect to the issue, prior to the payment of the original expenditure the District shall have declared its intent to reimburse such expenditure, with proceeds of the Lease, not later than sixty (60) days after payment of the original expenditure the District shall have adopted an official intent to reimburse the original expenditure with such proceeds, and the reimbursement shall be made not later than eighteen (18) months after the date the original expenditure is paid. Not to Invest at Higher Yield. Except to the extent permitted by Section 148 of the Tax Code and the Regulations and rulings thereunder, as modified by Sections 54A(d)(4)(B) and (C) of the Tax Code, the District shall not at any time prior to the termination of the Lease directly or indirectly invest Gross Proceeds in any Investment (or use Gross Proceeds to replace money so invested), if as a result of such Investment, the Yield from the Closing Date of all Investments acquired with Gross Proceeds (or with money replaced thereby), whether then held or previously disposed of, exceeds the Yield of the Certificates. These restrictions on Yield of Investments shall not apply to the Investment of Available Project Proceeds during the Expenditure Period or with respect to a Qualified Sinking Fund. Rebate of Arbitrage Profits. Except to the extent otherwise provided in Section 148(f) of the Tax Code and the Regulations and rulings thereunder, as modified by Sections 54A(d)(4)(B) and (C) of the Tax Code: (1) The District shall account for all Gross Proceeds (including all receipts, expenditures and investments thereof) on its books of account separately and apart from all other funds (and receipts, expenditures and investments thereof) and shall retain all records of accounting for at least six (6) years after the day on which the Lease is terminated. (2) Not less frequently than each Computation Date, the District shall calculate the Rebate Amount in accordance with rules set forth in Section 148(f) of the Tax Code and the Regulations and rulings thereunder, as modified by Sections 54A(d)(4)(B) and (C) of the Tax Code. The District shall maintain such calculations with its official transcript of proceedings relating to the execution and delivery of the Lease until six (6) years after the final Computation Date. (3) As additional consideration for the entering into the Lease, the District shall pay to the United States the amount that when added to the future value of previous rebate payments made for the Lease equals (i) in the case of a Final Computation Date as defined in Section (e)(2) of the Regulations, one hundred percent (100%) of the Rebate Amount on such date; and (ii) in the case of any other Computation Date, ninety percent (90%) of the Rebate Amount on such date. In all cases, the rebate payments shall be made at the times, in the installments, to the place, and in the manner as is or may be required by Section 148(f) of the Tax Code and the Regulations and rulings thereunder, and shall be accompanied by Form 8038-T or such other forms and information as is or may be required by Section 148(f) of the Tax Code and the Regulations and rulings thereunder. (4) The District shall exercise reasonable diligence to assure that no errors are made in the calculations and payments required by paragraphs (2) and (3), and if an error is made, to discover and promptly correct such error within a reasonable amount of B-16

87 time thereafter (and in all events within one hundred eighty (180) days after discovery of the error), including payment to the United States of any additional Rebate Amount owed to it, interest thereon, and any penalty imposed under Section (h) of the Regulations. (5) This subsection shall not apply to the investment of Available Project Proceeds during the Expenditure Period or with respect to a Qualified Sinking Fund. Not to Divert Arbitrage Profits. Except to the extent permitted by Section 148 of the Tax Code and the Regulations and rulings thereunder, the District shall not, at any time prior to final termination of the Lease, enter into any transaction that reduces the amount required to be paid to the United States pursuant to the proceeding subsection because such transaction results in a smaller profit or a larger loss than would have resulted if the transaction had been at arm s length and had the Yield of the Certificates not been relevant to either party. Conflicts of Interest. Pursuant to section 54A(d)(6) of the Tax Code, the District certifies that all applicable State and local laws governing conflicts of interest are satisfied and will continue to be satisfied with respect to the Lease. The District certifies that if the Secretary of the Treasury prescribes additional conflict of interest rules governing appropriate members of Congress, Federal, State, and local officials, and their spouses, such additional rules will be satisfied with respect to the Lease. Davis-Bacon Act. The District shall comply, and take steps to assure that its contractors working on Qualified Purposes shall comply, with subchapter IV of chapter 31 of the title 40 of the United States Code (the Davis-Bacon Act ), with respect to projects financed with the proceeds of the 2011 Series A Certificates. Not to Cause Certificates to Fail to Qualify. The District shall not take any action, or fail to take any action, if such action or failure to take such action would cause the Lease Payments to not be qualified school construction bonds under Section 54F of the Tax Code. Execution of Certifications. The District shall execute and deliver such certifications and representations as are determined by Special Counsel to be required to qualify the Lease Payments as qualified school construction bonds under the Tax Code and Regulations, and the Authorized Representatives, individually or jointly, are hereby authorized and directed to execute such certifications or representations. Accuracy of Tax Certificate. The District represents and warrants the accuracy of the Tax Certificate to be executed on the Closing Date by the District. Elections. The District hereby directs and authorizes the Authorized Representatives, individually or jointly, to make elections permitted or required pursuant to the provisions of the Tax Code or the Regulations, as they deem necessary or appropriate in connection with the Lease Payments, in the Tax Certificate or similar or other appropriate certificate, form, or document. Information Report. The District shall timely file the information required to be filed with the Secretary of the Treasury on Form 8038 or such other form and in such place as the Secretary may prescribe. Defeasance. The District covenants that no deposit of moneys or Federal Securities will be made under the Lease which would cause the Lease Payments to be treated as arbitrage bonds within the meaning of Section 148 of the Tax Code, or regulations adopted pursuant thereto, as modified by B-17

88 Section 54A(d)(4) of the Tax Code. The District will not defease any of the Certificates unless it shall have first received a written opinion of Special Counsel to the effect that such defeasance will not adversely affect the status of any Lease Payment as a Qualified School Construction Bond or the receipt of Direct Subsidies with respect to such Certificate. Written Procedures. The District shall either adopt written procedures of the type referenced in IRS Form or shall elect to treat the Tax Certificate as such written procedures. Such written procedures shall include procedures with respect to timely expenditures of proceeds, correct calculation of Available Project Proceeds, use of Available Project Proceeds only for Qualified Purposes, arbitrage yield restriction and rebate, limitation of financed Delivery Costs to less than 2% of proceeds, proper determination of interest payable on each interest payment date, proper amount of Direct Subsidy reported on Forms 8038-CP, timely filing of Forms 8038-CP, payment of the Direct Subsidies to the proper person, and timely identification of violations of federal tax requirements after issuance and timely correction of such violations through remedial actions or the Tax Exempt Bonds Voluntary Closing Agreement Program. Record Retention. The District shall retain such records as necessary to support the status of the Certificates as Qualified School Construction Bonds for at least three years after termination of the Lease. Survival of Covenants. Notwithstanding any other provision of the Lease, the District s representations and obligations under the covenants and provisions of the Lease shall survive the defeasance and termination of the Lease for as long as such matters are relevant to the designation of the Certificates as qualified school construction bonds for federal income tax purposes. Abatement of Lease Payments in Event of Loss of Use A proportional amount of the Lease Payments shall be abated during any period in which, by reason of condemnation, title defect, damage or destruction, there is substantial interference with the use and possession of the Leased Property; provided, however, that Lease Payments for which the District is not yet liable under the Lease, in the event of such abatement, or a portion of such Lease Payments, as applicable, shall be paid from the proceeds of rental interruption insurance, as provided in the Lease above and no abatement of Lease Payments shall occur so long as rental interruption insurance is sufficient to pay Lease Payments. The amount of such abatement shall be determined by the District, such that the resulting Lease Payments represent fair consideration for the use and possession of the portion of the Leased Property not condemned, damaged or destroyed. Such abatement shall commence on the date of condemnation, title defect, damage or destruction and, with respect to damage to or destruction of Leased Property, shall end with the substantial completion of the replacement or work of repair. There shall be no abatement in Lease Payments as a result of any design defects other than design defects that result in condemnation, damage or destruction with regard to the Leased Property. Except as provided in the Lease, in the event of any such condemnation, damage or destruction, the Lease shall continue in full force and effect and the District waives any right to terminate the Lease by virtue of any such condemnation, damage or destruction, including by virtue of the California Civil Code Sections 1932(1), 1932(2) and 1933(4). In the event that any portion of the Lease Payments shall be abated under the Lease during the Term of the Lease, and shall not be paid in full due to the insufficiency of rental interruption insurance as provided above, then the District shall, following the date upon which the affected portion of the Leased Property shall be returned to its substantial use and possession, pay Lease Payments at an increased level (but not in excess of the fair rental value of the total Leased Property) Owners have been reimbursed in full for amounts abated during the period when the Leased Property was not in substantial use and possession by the District. B-18

89 Disclaimer The Corporation, the Trustee and their assigns make 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 Project or the Leased Property or any component of such Leased Property. The District acknowledges that none of the Trustee, the Corporation or the is a manufacturer of any components of the Leased Property or a dealer therein, and the District is leasing the components of its Leased Property as-is, it is being agreed that all of the aforementioned risks are to be borne by the District. In no event shall the Corporation, the Trustee and their assigns be liable for incidental, indirect, special or consequential damages, in connection with or arising out of the Lease, the Site Lease or the Trust Agreement for the existence, furnishing, functioning or District s use and possession of the Leased Property. In no event shall the Corporation, the Trustee or their assignees be liable for any incidental, indirect, special or consequential damage in connection with or arising out of the Lease or the existence, furnishing, functioning or the District s use of any item or products provided for in the Lease. Assignment and Subleasing by the District The Corporation s rights under the Lease, including the right to receive and enforce payment of Lease Payments to be made by the District under the Lease, have been assigned to the Trustee (excepting only its right to indemnification) pursuant to the Assignment Agreement. Except as provided in the Lease and in the Trust Agreement, the Corporation will not otherwise assign the Lease, its right to receive Lease Payments or its duties and obligations under the Lease to any other person, firm or corporation so as to impair or violate the representations, covenants and warranties contained in the Lease. The District may sublease the Leased Property so long as such sublease does not result in loss of status of the Lease Payments as Qualified School Construction Bonds, with the prior written consent of the Corporation, subject to all of the following conditions: The Lease and the obligation of the District to make Lease Payments under the Lease shall remain obligations of the District; The District shall, within 30 days after the delivery thereof, furnish or cause to be furnished to the Corporation and the Trustee a true and complete copy of such sublease; No sublease by the District shall cause the Leased Property to be used for a purpose other than a governmental or proprietary function authorized under the provisions of the laws of the State; Any sublease of the Leased Property shall explicitly provide that such sublease is subject to all rights of the Corporation under the Lease, including the right to re-enter and re-let the Leased Property or terminate the Lease upon a default by the District; and The District shall deliver an opinion of Special Counsel to the effect that the sublease shall not result in a loss of status of the Lease Payments as Qualified School Construction Bonds. Substitution of Alternate Leased Property and Release of Leased Property The District shall have the right to substitute alternate real property and improvements for the Leased Property (a Substitution ), add additional real property to the Leased Property (an Addition ) or to release real property from the lien thereof (a Release ), but only by providing the Trustee with a supplement to the Lease substantially in the form attached as Exhibit B to the Lease, which exhibit B-19

90 includes the legal description of the property, and requires a form of opinion of Special Counsel to the effect that the substitution, addition or removal of Leased Property does not cause the Lease Payment to fail to qualify as Qualified School Construction Bonds under the Recovery Act or materially adversely affect the Owners of the Certificates be delivered, that the annual fair rental value of the Leased Property be at least equal to the maximum annual Leased Payments attributable to the Leased Property, that the useful life of the Leased Property equal or exceed the maximum remaining term of the Lease, that the Leased Property be essential to the operations of the District and that evidence of title insurance with liability amounts not less than the remaining principal component of the Leased Payments be in place. All costs and expenses incurred in connection with any such substitution or addition will be borne by the District. The District will not alter the Leased Property without first fulfilling all requirements for such changes contained in the Lease and in the form of Lease Supplement set forth in Exhibit B to the Lease. In the event that the District effects a Substitution or Removal pursuant to the terms of the Lease and the Site Lease, all or a designated portion of the Leased Property formerly subjected to the Lease shall be released from the lien thereof upon receipt by the Trustee of the written request of the District to that effect, and satisfaction of the requirements of the Lease. Release of Leased Property Upon the Corporation s receipt of evidence of the payment in full, prepayment or defeasance of all of the Certificates in accordance with the Lease and the Trust Agreement, the Leased Property shall be released in whole from the lien thereof, and the Corporation shall execute any and all appropriate documents, instruments and certificate in order to effect such release of the lien. Amendment The District will not alter, modify or cancel or agree or consent to alter, modify or cancel the Lease except as permitted by the Trust Agreement. Events of Default Defined The following shall be events of default under the Lease and the terms events of default and default shall mean, whenever they are used in the Lease, any one or more of the following events: (i) Failure by the District to pay, or cause to be paid, any Lease Payment required to be paid under the Lease by a Lease Deposit Date or any Additional Payments or any other amounts required to be paid under the Lease, when due; (ii) Failure by the District to observe and perform, or cause to be observed or performed, any covenant, condition or agreement on its part to be observed or performed in the Lease or otherwise with respect to the Lease or in the Trust Agreement, other than as referred to in clause (i) of the Lease, 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 Trustee or the Owners of not less than twenty-five percent (25%) in aggregate principal amount of Certificates then Outstanding; provided, however, if the failure stated in the notice cannot be corrected within the applicable period, the Corporation, the Trustee, or such Owners, as the case may be, shall 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. (iii) The filing of a voluntary petition in bankruptcy by the District, or the failure by the District promptly to institute judicial proceedings to lift any execution, garnishment or B-20

91 attachment of such consequence as will materially impair its ability to carry on its operations, or the filing of a petition by the District under the Federal Bankruptcy Code, or any assignment by the District for the benefit of its creditors, or the application for, or consent to, the appointment of any receiver, trustee, custodian or similar officer by the District or the entry by the District into an agreement of composition with its creditors. The Corporation s failure to perform any of its obligations under the Lease shall not be an event permitting the nonpayment of Lease Payments by the District or the termination of the Lease by the District. Remedies on Default Whenever any event of default referred to in the Lease shall have happened and be continuing, it shall be lawful for the Corporation to exercise any and all remedies available pursuant to law or in equity, or granted pursuant to the Lease; provided, however, that notwithstanding anything in the Lease or in the Trust Agreement to the contrary, there shall be no right under any circumstances 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 Leased Property to the Corporation, if requested to do so by the Corporation, by the Trustee or by the Owners in accordance with the provisions of the Trust Agreement. No Termination: Repossession and Re-Lease on Behalf of District In the event the Corporation does not elect to terminate the Lease in the manner provided for in the Lease, the Corporation with the consent of the District, which consent is irrevocably given, may repossess the Leased Property and re-let 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 the Lease and the District will continue to receive the value of the use of the Leased Property from year to year in the form of credits against its obligation to pay Lease Payments. The obligations of the District to pay Lease Payments shall remain the same as prior to such default whether the Corporation re-lets or not. The District agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions contained in the Lease and shall reimburse the Corporation for any deficiency arising out of the re-letting of the Leased Property, or, in the event the Corporation is unable to re-let the Leased Property, then for the full amount of all Lease Payments to the end of the term of the Lease, but said Lease Payments and/or deficiency shall be payable only at the same time and in the same manner as provided above for the payment of Lease Payments under the Lease, notwithstanding such repossession by the Corporation or any suit, brought by the Corporation for the purpose of effecting such repossession of the Leased Property or the exercise of any other remedy by the Corporation. The District irrevocably appoints the Corporation as the agent and attorney-in-fact of the District to repossess and re-let the Leased Property in the event of a default by the District in the performance of any covenants contained in the Lease to be performed by or on behalf of the District and to remove (any removal to be done with reasonable prudence) all personal property connected to or made a part of the Leased Property, to place such property in storage or other suitable place in the County of San Bernardino, for the account of and at the expense of the District, and the District exempts and agrees to save harmless the Corporation from any costs, loss or damage whatsoever arising or occasioned by any such repossession and re-letting of the Leased Property. The District waives any and all claims for damages caused or which may be caused by the Corporation in repossessing the Leased Property as provided in the Lease and all claims for damages that may result from the destruction of or the injury to the Leased Property and all claims for damage to or loss of any property belonging to the District that may be in or upon the Leased Property. B-21

92 The District agrees that the terms of the Lease constitute full and sufficient notice of the right of the Corporation to re-let its Leased Property in the event of such repossession without effecting a surrender of the Lease, and further agrees that no acts of the Corporation in effecting such re-letting shall constitute a surrender or termination of the Lease irrespective of the term for which such re-letting is made or the terms and conditions of such re-letting or otherwise, but that, on the contrary, in the event of such default by the District the right to terminate the Lease as to the Leased Property shall vest in the Corporation to be effected in the sole and exclusive manner provided for in the Lease. The District further waives the right to any rental obtained by the Corporation in excess of the Lease Payments and conveys and releases such excess to the Corporation as compensation to the Corporation for its services in re-letting the Leased Property. 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 in the Lease on account of default by the District (and notwithstanding any repossession of the Leased Property by the Corporation in any manner whatsoever or the sale or re-letting of the Leased Property), the District nevertheless agrees to pay to the Corporation all costs, losses or damages, but not Lease Payments, 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. Any proceeds of the re-letting or other disposition of the Leased Property or the sale of the Improvements located on the Leased Property by the Corporation shall, after payment of the fees and expenses of the Trustee, be deposited into the Lease Payment Fund and be applied in accordance with the provisions of the Trust Agreement. Any surplus received by the Corporation from such sale or re-letting shall be the absolute property of the Corporation and the District shall have no right thereto, nor shall the District be entitled to any credit in the event of a surplus in the rentals received by the Corporation for the Leased Property. Neither notice to pay rent or to deliver up possession of the Leased Property given pursuant to law nor any proceeding taken by the Corporation to recover possession of the Leased Property shall by itself operate to terminate the Lease, and no termination of the Lease on account of default by the District shall be or become effective by operation of law, or otherwise, unless and until the Corporation shall 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 Leased Property or of the remainder of the term of the Lease or any termination of the Lease shall be valid in any manner or for any purpose whatsoever unless stated or accepted by the Corporation by such written notice. No such termination shall be effected whether by operation of law or acts of the parties to the Lease, except only in the manner expressly provided in the Lease. Funds THE TRUST AGREEMENT Delivery Costs Fund The Trustee shall establish a special trust fund designated as the San Bernardino Unified School District Delivery Costs Fund (the Delivery Costs Fund ) shall keep such funds separate and apart from all other funds and moneys held by it; and shall administer such funds as provided in the Trust Agreement. The Trustee shall close the Delivery Costs Fund on the earlier of the day the last amounts are withdrawn therefrom or the day which is 120 days after the Closing Date. Any balance remaining on deposit in the Delivery Costs Fund on the day which is 120 days after the Closing Date shall be transferred to the Lease Payment Fund and applied as a credit against the next Lease Payment due from the District. On or after the Closing Date, the Trustee shall disburse moneys in the Delivery Costs Fund upon receipt of Requisitions signed by the District, substantially in the form attached to the Trust Agreement, appropriately modified in accordance with this paragraph, solely for payment or reimbursement of Delivery Costs to each person, firm or agency identified in such Requisitions. B-22

93 The Prepayment Fund The Trustee shall establish a special trust fund designated as the San Bernardino City Unified School District 2011 Prepayment Fund (the Prepayment Fund ) shall keep such funds separate and apart from all other fund and moneys held by it; and shall administer such funds as provided in the Trust Agreement. Prior to any prepayment of the Certificates, an amount at least equal to the amount necessary to prepay the Certificates shall be deposited by the District into the Prepayment Fund. As provided in the Trust Agreement, prepayments of the Certificates shall be made from money available therefore, including unexpended proceeds of the Certificates on deposit in the Project Fund and amounts deposited into the Prepayment Fund by the District, which the Trustee is instructed to accept. Any prepayments of the Certificates in advance of their maturity shall be made on the date designated for prepayment and upon presentation and surrender of such Certificates. Upon the Trustee s receipt of each Prepayment of Lease Payments from the District under the Lease, the amounts shall be deposited into the Prepayment Fund and applied to principal, interest, the Prepayment Premium, or the Make-Whole Prepayment Price, as applicable, on the designated Prepayment Date. The Lease Payment Fund. The Trustee shall establish a special fund designated as the San Bernardino City Unified School District 2011 Lease Payment Fund (referenced in the Trust Agreement as the Lease Payment Fund ). All moneys at any time deposited by the Trustee in the Lease Payment Fund shall be held by the Trustee in trust for the benefit of the Owners of the Certificates and the Insurer. So long as any Certificates are Outstanding, neither the District nor the Corporation shall have any legal, equitable or beneficial right, title or interest in the Lease Payment Fund or the moneys deposited therein, except only as provided in the Trust Agreement, and such moneys shall be used and applied by the Trustee solely as set forth in the Trust Agreement. The Trustee shall accept for deposit into the Lease Payment Fund direct payments from the District made under the terms of the Lease Agreement and, to the extent that the District is able to make such arrangements direct deposits of Direct Subsidy from the Treasury, from time to time, during the term of the Certificates. Within the Lease Payment Fund, there is established a special account designated as the San Bernardino City Unified School District Excess Earnings Account, 2011 Series A (the Excess Earnings Account ). The Excess Earnings Account shall be funded and applied in accordance with the provisions of the Trust Agreement. All references in the Trust Agreement and in the Lease to amounts in the Lease Payment Fund are deemed to include amounts in the Excess Earnings Account. (a) All amounts in the Lease Payment Fund and in the Prepayment Fund, if any, shall be used and withdrawn by the Trustee solely for the purpose of paying the amounts described as follows, and in the following order of priority: (i) to Certificate Owners, on each Interest Payment Date or Prepayment Date, as applicable, in amounts representing the Interest Component and the Principal Component (or the Prepayment Price and prepayment amount) of the Certificates then due and owing and payable from the Lease Payment Fund or the Prepayment Fund, respectively; (ii) on each Payment Date, any Excess Earnings, to the Excess Earnings Fund. (b) If on any Interest Payment Date, amounts on deposit in the Lease Payment Fund are insufficient to pay the full amount of principal and interest then due and payable with respect to the Certificates, the Trustee shall apply such amounts to the payment of amounts due with respect to the B-23

94 Certificates, first, to the payment of the Interest Component, and then, to the payment of the Principal Component. The Reserve Fund. The Trustee shall establish a special fund designated as the San Bernardino City Unified School District 2011 Reserve Fund (the Reserve Fund ). All moneys at any time on deposit in the Reserve Fund shall be held by the Trustee in trust for the benefit of the Owners of the Certificates and the Insurer, in pari passu and applied solely as provided in the Trust Agreement. In lieu of cash or Permitted Investments, the Reserve Requirement, or any portion thereof, may be satisfied by the deposit of a Surety Bond with the prior written consent of the Insurer; provided that such Surety Bond or letter of credit shall contain a provision that after such Surety Bond or letter of credit has been drawn down, any moneys available to repay the provider of such Surety Bond or letter of credit must first be used to reinstate such Surety Bond or letter of credit to its original stated amount. Any interest or fees due to the provider of a Surety Bond or letter of credit delivered under the Trust Agreement must be solely payable on a subordinate basis to the obligation of the District to make Lease Payments. Reserve Surety. In the event the District purchases a Surety Bond, any amounts paid by the Insurer in respect of the Surety Bond shall be deposited into the Reserve Fund. The District shall repay from lawfully available funds any draws under a Surety Bond as it may be required to do by the terms of the Surety Bond or of the instrument under which the Surety Bond is issued. All cash and investments in the Reserve Fund shall be transferred to the Lease Payment Fund for payment of the Certificates before any drawing may be made on the Surety Bond. Payment of any costs of drawings made under the Surety Bond ( Policy Costs ) shall be made prior to replenishment of any such cash amounts. Draws on any Surety Bond on which there is available coverage shall be made after applying all available cash and investments in the Reserve Fund. Payment of Policy Costs and reimbursement of amounts with respect to the Surety Bond shall be made prior to replenishment of any cash drawn from the Reserve Fund. Transfers of Excess. So long as the Certificates are Outstanding, the Trustee shall value the amounts on deposit in the Reserve Fund, if any, semiannually on or before the Business Day immediately following each Interest Payment Date in each year and shall transfer any moneys on hand in the Reserve Fund in excess of the Reserve Requirement to the Lease Payment Fund to be applied in accordance with the Trust Agreement; provided, however, that any such moneys representing Excess Earnings shall be transferred by the Trustee to the Excess Earnings Fund to be applied in accordance with the Trust Agreement. Any excess remaining in the Reserve Fund that is attributable to the reduction in the Reserve Requirement due to the prepayment of Certificates shall be transferred to the Lease Payment Fund as a credit against the next Lease Payments due from the District, or, if no such Lease Payments shall subsequently be due, shall, after payment of any amounts then owed to the Trustee, and after making required deposits, if any, to the Excess Earnings Fund, then be released from the lien of the Trust Agreement and remitted by the Trustee to the District. Replenishment of Reserve Fund. In the event that the Trustee shall have withdrawn amounts from the Reserve Fund or drawn amounts under the Surety Bond to remedy a shortfall in the Lease Payment Fund, and the Reserve Fund has not theretofore been replenished to the Reserve Requirement, the Trustee shall apply any delinquent Lease Payments received by the Trustee, first, to replenish the Reserve Fund so that it contains an amount equal to the Reserve Requirement or to reimburse drawings under the Surety Bond, and then, to make deposits into the Lease Payment Fund. Following any partial prepayment of Certificates or the Lease Payments, the Reserve Requirement shall, upon the direction of the District, be reduced to an amount equal to 10% of the Principal Component of the Certificates then Outstanding, and the requirement under the Trust Agreement to effect replenishment of the Reserve Fund shall extend only to the amount of such reduced Reserve Requirement. B-24

95 Application of Reserve Fund in Event of Deficiency in Lease Payment Fund. If on any Lease Payment Date, the moneys available in the Lease Payment Fund do not equal the amount of the Lease Payment then coming due and payable, the Trustee shall withdraw moneys on deposit in the Reserve Fund to make delinquent Lease Payments by transferring on the Lease Payment Date the amount necessary for this purpose to the Lease Payment Fund. Upon receipt by the Trustee of any Lease Payment or portion thereof with respect to which moneys have theretofore been advanced from the Reserve Fund, such Lease Payment shall be applied to the replenishment of the Reserve Fund to the extent of such advance. Transfers to Make All Lease Payments. If on any Lease Payment Date, the moneys on deposit in the Reserve Fund and the Lease Payment Fund (excluding amounts required for payment of past due Interest Component with respect to Certificates not yet presented for payment) are sufficient to pay all of the Outstanding Certificates, including all of the Principal Component and the Interest Component, and premium, if any, the Trustee shall, upon the written direction of the Authorized Representative, transfer all amounts then on hand in the Reserve Fund to the Lease Payment Fund or Prepayment Fund, as applicable, to be applied to the payment of the Lease Payments or Prepayments and such moneys shall be distributed to the Owners of Certificates in accordance with the Trust Agreement; provided, however, that if no written instruction is received by the Trustee, no such transfer shall be made. Any amounts remaining in the Reserve Fund following payment in full of all of the Outstanding Certificates and payment of all obligations of the Lessee to the Insurer, or upon provision for such payments as provided in the Trust Agreement, including payment of the Trustee s fees and expenses, shall be withdrawn by the Trustee and paid to the District. The Net Insurance Proceeds Fund. The Trustee shall establish, when deposit are required be made therein, a special fund designated as the San Bernardino City Unified School District 2011 Net Insurance Proceeds Fund (the Net Insurance Proceeds Fund ). The Trustee shall apply moneys on deposit in the Net Insurance Proceeds Fund as follows: (a) Any Net Insurance Proceeds collected by the District or the Corporation shall be transferred to the Trustee pursuant to the Lease and deposited by the Trustee as provided in Trust Agreement (b) All Net Insurance Proceeds deposited in the Net Insurance Proceeds Fund and not transferred to the Prepayment Fund as provided in the Trust Agreement shall be applied to the prompt replacement or repair of the affected portion of the Leased Property by the District. Amounts held by the Trustee shall be advanced to the District by the Trustee upon receipt of a Requisition signed by an Authorized Representative stating, with respect to each payment to be made, (i) the Requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii) the amount to be paid and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Net Insurance Proceeds Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of the obligation, accompanied by a bill or a statement of account for such obligation. The Trustee may conclusively rely on the Requisition as to the amount of such obligation. (c) If any portion of the Leased Property is taken by condemnation proceedings, the Net Insurance Proceeds therefrom shall be deposited in the Net Insurance Proceeds Fund promptly upon receipt thereof and the District shall certify to the Trustee (with the prior written consent of the Insurer so long as the Policy is in effect and the Insurer is not in default thereunder) (a) as to whether Leased Property has been taken in whole or in part pursuant to such proceedings, (b) as to whether the remaining portion of such Leased Property (if any) is still useful for the purposes originally intended and (c) as to B-25

96 whether it desires that any available Net Insurance Proceeds from such condemnation proceedings be applied for replacement of the Leased Property and, if so, that sufficient funds, together with such Net Insurance Proceeds, have been appropriated to pay the total cost of such replacement. If such certification is to the effect that the Leased Property has been taken in whole pursuant to such condemnation proceedings or has been taken in part to such extent that the remaining portion of the Leased Property is no longer useful for the purposes originally intended, or such certification is to the effect that the Leased Property has been taken in part pursuant to such condemnation proceedings and that the remaining portion of the Leased Property is still useful for the purposes originally intended, the Trustee shall apply such Net Insurance Proceeds necessary for the prepayment of Certificates as provided in the Trust Agreement; provided that, if such certification is also to the effect that the District desires that any available Net Insurance Proceeds be applied for replacement of the Leased Property and if the District further certifies that sufficient funds, together with such Net Insurance Proceeds, have been appropriated or are otherwise available to pay the total cost of such replacement, the Trustee will disburse such Net Insurance Proceeds to the District upon receipt of its Requisition therefor in order for the District to cause the Leased Property to be replaced or improved to at least the same good order, repair, condition and fair market value as it was in prior to the condemnation proceedings, and the Trustee shall transfer any excess Net Insurance Proceeds to the Lease Payment Fund to be credited against the next Lease Payment due. Pledge; Lease Payment Fund In order to secure the respective rights of the Owners to the payments required to be made thereto as provided in the Trust Agreement, the District irrevocably pledges to the Trustee, for the benefit of the Owners, all of its right, title and interest, if any, in and to all amounts on deposit from time to time in the funds and accounts established under the Trust Agreement (other than the Excess Earnings Account). It is the intent of the District and the Corporation that by reason of the assignment by the Corporation pursuant to the Assignment Agreement, the Corporation shall have no right, title or interest in or to the funds and accounts established under the Trust Agreement or the amounts on deposit therein. Nonetheless, should it be determined that, notwithstanding the intent of the parties, the Corporation does have any interest in the funds and accounts established under the Trust Agreement or the amounts on deposit therein, the Corporation irrevocably pledges to the Trustee for the benefit of the Owners all of its right, title and interest in and to all amounts on deposit from time to time in the funds and accounts established under the Trust Agreement (other than the Excess Earnings Account). This pledge shall constitute a first lien on the funds and accounts established under the Trust Agreement in accordance with the terms thereof. All Lease Payments shall be paid directly by the District to the Trustee, and if received by the Corporation at any time, shall be deposited by the Corporation with the Trustee within one Business Day after the receipt thereof. All Lease Payments paid by the District shall be deposited by the Trustee in the Lease Payment Fund, which the Trustee shall maintain until all required Lease Payments are paid in full pursuant to the Lease and until the first date upon which the Certificates are no longer Outstanding. The moneys in the Lease Payment Fund shall be held in trust by the Trustee and shall be disbursed only for the purposes and uses authorized by the Trust Agreement. The District, the Corporation, the Trustee and each of them acknowledges and agree that upon the execution and delivery of the Assignment Agreement, the Corporation shall have no rights (except its rights to indemnification), obligations, or duties under the Site Lease and the Lease, and shall have been released from all of such rights, obligations, and duties, all of which have been assigned to the Trustee pursuant to the Assignment Agreement. Subject to the priority of payment provisions in the Trust Agreement, the parties to such Agreement acknowledge that, to the extent of any payment made by the Insurer pursuant to the Policy, B-26

97 the Insurer is fully subrogated to the extent of such payment and any additional interest due on a late Lease Payment, to the rights of the Owners of the Certificates to any moneys paid or payable in respect of the Certificates. Moneys in Funds Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement, to the extent provided in the Trust Agreement, are irrevocably held in trust for the benefit of the Owners, with the exception of moneys held in the Excess Earnings Account, which, with respect to the Excess Earnings Account, are held in trust for rebate to the United States Government, and for the purposes specified in the Trust Agreement, and such moneys, and any income or interest earned thereon, shall be expended only as provided in the Trust Agreement, and shall not be subject to levy or attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee, the District, or any Owner of Certificates, or any of them, other than the lien in favor of Trustee permitted pursuant to the Trust Agreement. Investments. Subject to the Trust Agreement, moneys held by the Trustee under the Trust Agreement, upon Written Order of the District, shall be invested and reinvested by the Trustee in Permitted Investments. The District shall by Written Order filed with the Trustee direct such investment in specific Permitted Investments identified in such Written Order. Such investments, if registerable, shall be registered in the name of the Trustee or its nominee for the benefit of the Owners and held by the Trustee. The Trustee and its affiliates or other interested persons may act as sponsor, advisor, purchaser or agent in the making or disposing of any investment. The Trustee covenants that in the absence of a Written Order of the District directing investments under the Trust Agreement, it shall invest balances pursuant to the most recent prior Written Order of the District. Amounts held in the Excess Earnings Account shall be held uninvested; amounts held in the Project Fund may be invested without regard to Yield. Valuation of Investments. In computing the amount in any fund or account, Permitted Investments shall be valued at the market price thereof. Any Permitted Investment shall be deemed to mature on the earliest date that the issuer thereof may be required to repay the principal thereof at par without penalty. The Trustee shall sell in accordance with its customary practice, or present for prepayment, any Permitted Investment so purchased by the Trustee whenever it shall be necessary in order to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting from such investment or for obtaining the highest price therefor. Trustee s Obligations with Respect to Investment of Moneys in Funds. All moneys held by the Trustee in any of the funds, accounts and subaccounts established pursuant to the Trust Agreement shall be invested pursuant to such agreement. The Trustee shall have no duty or obligation to verify the legality of such investments. Each Written Order of the District respecting such investments shall contain a certification that such investments are Permitted Investments as defined therein. The Trustee may commingle any of the moneys in funds held by it pursuant to the Trust Agreement (other than the moneys in the Excess Earnings Account) and place them into a separate fund or funds for investment purposes only; provided, however, that all funds or accounts held by the Trustee thereunder shall be accounted for separately notwithstanding such commingling by the Trustee. The Trustee may make any investments under the Trust Agreement through its own bond or investment department or trust investment department, or those of its parent or any affiliate. The Trustee or any of its affiliates may act as sponsor, advisor or manager in connection with any investments made by the Trustee under the Trust Agreement. The Trustee shall not be responsible to determine the legality of any investments. B-27

98 The Trustee Appointment of Trustee. U.S. Bank National Association, a national banking association organized and existing under and by virtue of the laws of the United States, is appointed Trustee by the District for the purpose of receiving all moneys required to be deposited with the Trustee under the Trust Agreement and to allocate, use and apply the same as provided in the Trust Agreement. The Trustee is authorized to pay the Certificates when duly presented for payment at maturity, or on prepayment, or on purchase by the Trustee of Certificates prior to maturity and to cancel all Certificates upon payment thereof. The Trustee shall keep accurate records of all funds administered by it and of all Certificates paid and discharged. The Trustee shall be compensated for its services rendered pursuant to the provisions of the Trust Agreement. So long as no Event of Default shall have happened and be continuing, the District (with the Insurer s written consent so long as the Policy is in effect and the Insurer is not in default thereunder) may remove the Trustee initially appointed for good cause, and any successor thereto, and may appoint a successor or successors thereto; provided, that any such successor shall be a bank, national banking association or trust company meeting the requirements set forth in the Trust Agreement. The Trustee may resign by giving prior written notice to the District and the Corporation. Upon receiving such notice of resignation, the District (with the Insurer s written consent so long as the Policy is in effect and the Insurer is not in default thereunder) shall promptly appoint a successor Trustee. Any resignation or removal of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee. Upon such acceptance, the successor Trustee shall mail notice thereof to the Owners at their respective addresses set forth on the Certificate registration books maintained pursuant to the Trust Agreement. 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 proper jurisdiction to seek the immediate appointment of a successor Trustee. Liability of Trustee. The recitals of facts in the Trust Agreement, in the Assignment Agreement and in the Certificates contained shall be taken as statements of the District, and the Trustee assumes no responsibility for the correctness of the same, and makes no representations as to the validity or sufficiency of the Trust Agreement or the Certificates as to the value or condition of the trust estate or any part thereof, as to the title of the District thereto, as to the security afforded thereby or by the Trust Agreement, as to the treatment of the Lease Payments under the Recovery Act, or as to the technical or financial viability of the District or the Insurer, and shall incur no responsibility in respect thereof. The Trustee shall not be accountable for the use or application by the District of the Certificates or the proceeds thereof or of any moneys paid to the District pursuant to the terms of the Trust Agreement. The Trustee shall, however, be responsible for its representations in relation to the execution of the Certificates. The Trustee shall not be liable in connection with the performance of its duties under the Trust Agreement except for its own negligence or willful misconduct. The Trustee may execute any of the trusts or powers under the Trust Agreement or perform any duties under the Trust Agreement either directly or through agents or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent (other than an employee) or attorney appointed with due care. The District shall not be deemed an agent of the Trustee for any purpose, and the Trustee shall not be responsible for the compliance of the District in its duties under the Trust Agreement in connection with the transactions contemplated therein. The Trustee may become the Owner of the Certificates with the same rights it would have if it were not Trustee, and, to the extent permitted by law, may act as depositary for and permit any of their officers or directors to act as a member of, or in any other capacity with B-28

99 respect to, any committee formed to protect the rights of Certificate Owners, whether or not such committee shall represent the Certificate Owners or a majority thereof. No provision of the Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties under the Trust Agreement or thereunder, or in the exercise of its rights or powers, if repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to its satisfaction. In accepting the trusts created, the Trustee acts solely as Trustee for the Owners and the Insurer and not in its individual capacity and all persons, including without limitation the Owners the Insurer, Corporation and District having any claim against the Trustee arising from the Trust Agreement shall look only to the funds and accounts held by the Trustee hereunder for payment except as otherwise provided in the Trust Agreement. Under no circumstances shall the Trustee be liable in its individual capacity for the obligations evidenced by the Certificates. The Trustee makes no representation or warranty, express or implied as to the title, value, design, compliance with specifications or legal requirements, quality, durability, operation, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the Corporation and the District of the Leased Property. In no event shall the Trustee be liable for incidental, indirect, special or consequential damages in connection with or arising from the Lease or the Trust Agreement for the existence, furnishing or use of the Leased Property. The Trustee shall not be responsible for the sufficiency or enforceability of the Lease or the assignment under the Assignment Agreement of its rights to receive Lease Payments. The Trustee shall not be accountable for the use or application by the District or any other party of any funds which the Trustee has released in accordance with the provisions of the Trust Agreement. The Trustee shall have no responsibility with respect to any information, statement, or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Certificates. The Trustee is authorized and directed to execute the Assignment Agreement in its capacity as Trustee. The immunities extended to the Trustee also extend to its directors, officers, employees and agents. The Trustee shall not be liable for any action taken or not taken by it in accordance with the direction of a majority (or other percentage provided for in the Trust Agreement) in aggregate principal amount of Certificates Outstanding relating to the exercise of any right, power or remedy available to the Trustee. The permissive right of the Trustee to do things enumerated in the Trust Agreement shall not be construed as a duty. Compensation of the Trustee. The District shall from time to time on demand, pay to the Trustee reasonable compensation for its services and shall reimburse the Trustee for all its advances (with interest on such advances at the maximum rate allowed by law) and expenditures, including but not limited to advances to and fees and expenses of independent appraisers, accountants, consultants, counsel, agents and attorneys or other experts employed by it in the exercise and performance of its powers and duties under the Trust Agreement and the Trustee shall have a lien therefor on any and all funds at any time held by it under the Trust Agreement, excluding amounts received from payments under the Policy, which lien shall not be prior and superior to the lien of the Owners unless there has occurred an Event of Default, in which event the lien of the Trustee shall be prior and superior to the lien of the Owners. Indemnification of Trustee. To the extent permitted by law, the District shall indemnify and save the Trustee and its officers, employees, agents, successors or assigns harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (i) the actions of any other party, including but not limited to the ownership, operation or use of Leased Property by the District, or (ii) the Trustee s exercise and performance of its powers and duties under the Trust Agreement, under the Lease. No indemnification will be made under the Trust Agreement or B-29

100 elsewhere in the Trust Agreement for negligence or willful misconduct under the Trust Agreement by the Trustee, its officers or employees. The District s obligations under the Trust Agreement shall remain valid and binding notwithstanding the defeasance, maturity and payment of the Certificates or the resignation or removal of the Trustee. Amendments to the Trust Agreement Amendments Permitted. The Trust Agreement and the rights and obligations of the Owners in the Lease and the Site Lease and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement which shall become effective when the written consent of the Insurer (so long as the Policy is in effect and the Insurer is not in default thereunder and the Owners of at least 51% in aggregate principal amount of the Certificates then Outstanding (exclusive of Certificates disqualified as provided in the Trust Agreement), shall have been filed with the Trustee; provided, however, that amendments to the Lease and Site Lease having to do with the Leased Property shall only be effected in accordance with the terms thereof. No such modification or amendment shall (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 the Interest Component, or reducing the amount of Principal Component thereof or reducing any premium payable upon the prepayment thereof, without the express consent of the Owner of such Certificate, or (2) reduce or have the effect of reducing the percentage of Owners required for the affirmative vote or written consent to an amendment or modification of the Trust Agreement or the Lease, or (3) modify any of the rights or obligations of the Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in the Trust Agreement. The Trust Agreement and the rights and obligations of the Owners, the Lease and the Site Lease and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement, without notice to or the consent of any such Owners, but only to the extent permitted by law and with the prior notice to the Insurer (so long as the Policy is in effect and the Insurer is not in default thereunder), and only (1) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement or therein, (2) in regard to matters arising under the Trust Agreement or thereunder, as the parties to the Trust Agreement or thereto may deem necessary or desirable and which shall not adversely affect the interest of the Owners, (3) to satisfy the requirements of the Rating Agencies, (4) with respect to the Lease and the Site Lease, as permitted therein, to permit the Substitution, Addition or Removal of Leased Property in accordance with the Lease or Site Lease; (5) to provide for the delivery of Additional Certificates; or (6) to make any other change which is not adverse to the interests of the Owners of the Certificates as evidenced by an Opinion of counsel to such effect. Any such supplemental agreement with respect to the Trust Agreement shall require the unanimous consent of all parties to the Trust Agreement, but a supplemental agreement with respect to any Lease shall require only the consent of all parties thereto. Any such supplemental agreement shall become effective upon execution and delivery by the parties to the Trust Agreement or thereto as the case may be, with the Insurer s consent so long as the Policy is in effect and the Insurer is not in default thereunder. Procedure for Amendment with Written Consent of Owners. The Trust Agreement or the Lease may be amended by supplemental agreement as provided in the Trust Agreement in the event the consent of the Owners is required pursuant to the Trust Agreement. A copy of such supplemental agreement, together with a request to the Owners for their consent thereto, shall be mailed, by first class mail by the Trustee, at the expense of the District, to each Owner at its address as set forth in the Certificate registration books maintained by the Trustee, and to the Rating Agencies at least ten (10) days prior to the effective date thereof, but failure to receive copies of such supplemental agreement and request so mailed shall not affect the validity of the supplemental agreement when assented to as provided in the Trust Agreement. B-30

101 Such supplemental agreement shall not become effective unless there shall be filed with the Trustee the written consent of the Owners of at least a majority in aggregate principal amount of the Certificates then Outstanding (exclusive of Certificates disqualified as provided in the Trust Agreement), with the written consent of the Insurer (so long as the Policy is then in effect and the Insurer is not in default thereunder and notices shall have been mailed as provided in the Trust Agreement. Each such consent shall be effective only if accompanied by proof of ownership of the Certificates for which such consent is given. Any such consent shall be binding upon the Owner of the Certificate giving such consent and on any subsequent Owner (whether or not such subsequent Owner has notice thereof unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Trustee prior to the date when the notice provided for in the Trust Agreement has been mailed. After the Owners of the required percentage of Certificates and the Insurer shall have filed their consents to such supplemental agreement, the Trustee shall mail a notice to the Certificate Owners in the manner provided in the Trust Agreement for the mailing of such supplemental agreement, stating in substance that such supplemental agreement has been consented to by the Owners of the required percentage of Certificates and will be effective as provided in the Trust Agreement (but failure to mail copies of said notice shall not affect the validity of such supplemental agreement or the consents thereto). A record, consisting of the papers required by the Trust Agreement to be filed with the Trustee, shall be proof of the matters therein stated until the contrary is proved. Such supplemental agreement shall become effective upon the mailing of the notice provided in the Trust Agreement, and such supplemental agreement shall be deemed conclusively binding upon the parties to the Trust Agreement and the Owners of all Certificates at the expiration of 60 days after such mailing, except in the event of a final decree of a court of competent jurisdiction setting aside such consent in a legal action or equitable proceeding for such purpose commenced within such 60-day period. Disqualified Certificates. Certificates known by the Trustee to be owned or held by or for the account of the District or the Corporation or by any person directly or indirectly controlled by, or under direct or indirect common control of, the District or the Corporation (except any Certificates held in any pension or retirement fund) shall not be deemed Outstanding for the purpose of any vote, consent, waiver or other action provided for in the Trust Agreement, and shall not be entitled to vote upon, consent to, or take any other action provided for in the Trust Agreement. District Budgets. The District shall supply to the Trustee, within thirty days of the beginning of each Fiscal Year, a certification that the District has made adequate provision in its proposed annual budget for the payment of Lease Payments due under the Lease in the Fiscal Year covered by such budget. The certification given by the District to the Trustee shall be to the effect that the amounts so proposed to be budgeted are fully adequate for the payment of all Lease Payments due in the ensuing Fiscal Year. If the amounts so proposed to be budgeted are not stated to be adequate for the payment of Lease Payments due under the Lease, the Trustee will notify the District to take such action as may be necessary to cause such annual budget to be amended, corrected or augmented so as to include therein the amounts required to be raised by the District in the ensuing Fiscal Year for the payment of Lease Payments due under the Lease and the District will notify the Trustee of the proceedings then taken or proposed to be taken by the District and the Trustee shall forward a copy of such to the Insurer. The Trustee shall be protected in relying upon any certification or such notice from the District, and the Trustee shall have no further responsibility for the evaluation of such budget data. Limited Liability of the District Except for the payment of Lease Payments, Additional Payments and Prepayments when due in accordance with the Lease and the performance of the other covenants and agreements of the District B-31

102 contained in the Trust Agreement in the Lease and the Site Lease, the District shall 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, none of the District, the Insurer, nor the Corporation shall have any obligation or liability to any of the other parties or to the Certificate 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 shall have no obligation or responsibility for providing information to the Owners concerning the investment character of the Certificates, for the sufficiency of any Lease Payments or other moneys required to be paid to it under the Lease (except as provided in the Trust Agreement), for payments made by the Insurer under the Policy or for the actions or representations of any other party to the Trust Agreement. The Trustee shall have no obligation or liability to any of the other parties or the Owners with respect to the Trust Agreement or the 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 shall be responsible solely for the performance of the duties and obligations expressly imposed upon it under the Trust Agreement. Events of Default Defined The following shall be events of default under the Trust Agreement and the terms Event of Default and default shall mean, whenever they are used in the Trust Agreement, any one or both of the following: (a) An Event of Default shall have occurred under Section 9.1 of the Lease. (b) Failure by the District or the Corporation to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Trust Agreement, the Lease or the Site Lease, other than such failure as may constitute an Event of Default under clause (a) of this Section, for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the District or the Corporation, as appropriate, by the Trustee or the Insurer or to the District or the Corporation, as appropriate, or by the Owners of not less than a majority in aggregate principal amount of the Certificates then Outstanding or if the failure stated in the notice cannot be corrected within such thirty (30) day period, then the District shall fail to institute corrective action within such thirty (30) day period and diligently pursue the same to completion, to the reasonable satisfaction of the Insurer. If an Event of Default shall occur and be continuing, the Trustee shall give notice of such default to the Insurer and the Owners. Such notice shall identify the party in default and shall provide a brief description of such default. The Trustee in its discretion may withhold such notice if it deems it in the best interests of the Owners. Such notice shall be given by registered or certified mail to the Owners within thirty (30) days of such occurrence of default. B-32

103 Remedies If an Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, (a) upon the Insurer s written direction so long as the Policy is in effect and the Insurer is not in default thereunder, the Trustee shall, and (b) if the Policy is no longer in effect or if the Insurer is in default thereunder, the Trustee may exercise any and all remedies available pursuant to law or granted pursuant to the Lease under which such Event of Default has occurred; provided, however, that notwithstanding anything in the Trust Agreement or in the Lease to the contrary, there shall 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, however, that upon the occurrence of an Event of Default described in the Trust Agreement, but with the written consent of the Insurer the Certificates shall continue to be paid in accordance with their terms from Lease Payments made under the Lease. The Insurer shall be deemed to be the Owner of all of the Certificates for purposes of (a) exercising all remedies and directing the Trustee to take actions or for any other purposes following an Event of Default, and (b) granting any consent, direction or approval or taking any action permitted by or required under the Trust Agreement to be granted or taken by the Owners of such Certificates. Anything in the Trust Agreement to the contrary notwithstanding, upon the occurrence and continuance of an Event of Default, the Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Owners or the Trustee for the benefit of the Owners under the Trust Agreement (so long as the Policy is then in effect and the Insurer is not in default thereunder). Application of Funds All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Lease, shall be deposited into the Lease Payment Fund and be applied by the Trustee 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: (i) First, to the payment of the costs and expenses of the Trustee and of the Owners in declaring such Event of Default although the Trustee shall have no claim to amounts paid under the Policy or the Surety Bond or amounts set aside for the payment of premiums upon an optional prepayment including reasonable compensation and disbursements to its or their agents, attorneys and counsel; (ii) Second, to the payment to the Persons entitled thereto, of all amounts representing the Interest Component then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any Interest Component 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; (iii) Third, to the payment to the persons entitled thereto, of the unpaid Principal Component respecting any Certificates which shall have become due, whether at maturity or by call for prepayment, in the order of their due dates, with interest on the overdue Principal Component and Interest Component calculated at a rate equal to the rate paid with respect to the Certificates and, if the amount available shall 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 amount of the Principal Component due on such date to the Persons entitled thereto, without any discrimination or preference; B-33

104 (iv) (v) Fourth, amounts due to the Insurer; and Fifth, to the District. Defeasance (a) The District covenants that no deposit of moneys or Federal Securities will be made under the Lease Agreement which would cause the Certificates to be treated as arbitrage bonds within the meaning of Section 148 of the Tax Code, or regulations adopted pursuant thereto, as modified by Section 54A(d)(4) of the Tax Code. The District will not defease any of the Certificates unless it shall have first received a written opinion of Special Counsel to the effect that such defeasance will not adversely affect the status of the Lease Payments as Qualified School Construction Bonds or the receipt of any Direct Subsidy with respect to the Lease Payments. (b) Defeasance shall be deemed to occur if all Outstanding Certificates are paid and discharged in any one or more of the following ways: (i) by well and truly paying or causing to be paid the Principal Component and Interest Component and prepayment premiums, if any, with respect to all Certificates Outstanding, as and when the same become due and payable; (ii) if prior to maturity and having given notice of prepayment by irrevocably depositing with the Trustee, in trust, at or before maturity, an amount of cash which, together with amounts then on deposit in the Lease Payment Fund is sufficient to pay all Certificates Outstanding, including all Principal Components and Interest Components and prepayment premium, if any; (iii) by irrevocably depositing with the Trustee, in trust, noncallable, nonprepayable Federal Securities in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon and moneys then on deposit in the Lease Payment Fund together with the interest to accrue thereon, be fully sufficient to pay and discharge all Certificates (including all Principal Component and Interest Component represented thereby and prepayment premium, if any) at or before their maturity date and the fees and expenses of the Trustee have been paid in full; or (iv) by irrevocably depositing with the Trustee or an escrow agent, under an escrow deposit and trust agreement (the escrow agreement ), security for the payment of the Lease Payments and providing the report of an independent certified public accountant as more particularly described in the Lease, said security to be held and applied to pay the Lease Payments as the same become due and payable and make a Prepayment in full on any Lease Payment Date, pursuant to the Lease. (c) Notwithstanding that any Certificates shall not have been surrendered for payment, all obligations of the Corporation, the Trustee, and the District with respect to all Outstanding Certificates shall cease and terminate, except the tax covenants set forth in the Lease and only the obligation of the Trustee pursuant to the Trust Agreement and its obligations to pay or cause to be paid, from Lease Payments paid by or on behalf of the District from funds deposited pursuant to paragraphs (ii) through (iv) 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 such paragraphs, the Certificates shall continue to evidence and represent direct and proportionate interests of the Owners thereof in Lease Payments. Provided, however, that the District will remain obligated for all Lease Payments, including the contribution of additional money or securities if necessary to provide sufficient amounts to satisfy the payment obligations of the District. B-34

105 Any funds held by the Trustee, at the time of one of the events described in paragraphs (i) through (iv) above, which are not required for the payment to be made to Owners, as verified by a certified public accountant shall be paid over to the District pursuant to District s written request therefor; provided that the fees and expenses of the Trustee have been fully paid. Notwithstanding anything in the Trust Agreement to the contrary, in the event that the Principal Component and/or Interest Component due with respect to the Certificates shall be paid by the Insurer pursuant to the Insurance Policy, the Certificates shall remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid, and the assignment and pledge of the trust created under the Trust Agreement and all covenants, agreements and other obligations of the District to the Owners shall continue to exist and shall run to the benefit of the Insurer, and the Insurer shall be subrogated to the rights of such Owners. 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 executed and delivered under the Trust Agreement, all of the Corporation s rights under the Lease (excepting only the Corporation s rights to be held harmless from and against all claims, losses and damages arising out of the District s actions in connection with the Leased Property and the right to recover attorneys fees and expenses in the event the Corporation is a non-defaulting party to the Lease after a default), including (1) the right to receive and collect all of the Lease Payments and prepayments 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 lease or sale of the Leased Property in the event of a default by the District under the Lease, and (3) the right to exercise such rights and remedies conferred on the Corporation by the Lease as may be necessary or convenient (i) to enforce payment of the Lease Payments, prepayments and any other amounts required to be deposited in the Lease Payment Fund, the Prepayment Fund or the Net Insurance Proceeds Fund established under the Trust Agreement, or (ii) otherwise to protect the interests of the Corporation in the event of a default by the District under the Lease. The Trustee accepts such assignment subject to the provisions of the Trust Agreement. SITE LEASE Pursuant to the Site Lease, the District leases to the Corporation and the Corporation hires from the District the Leased Property commencing on the date of recordation of the Site Lease and ending as specified in the Site Lease. Pursuant to the Site Lease, the District acknowledges receipt, as and for rental under the Site Lease, the aggregate principal amount of the Certificates and the District covenants that it is the owner in fee of the subject site. The Leased Property will be simultaneously leased back to the District under the Lease, and the title will remain with the District. THE AGENCY AGREEMENT The Agency Agreement provides for the irrevocable appointment by the Corporation of the District as its agent in connection with the acquisition of the Project. The Agency Agreement also provides that the District will cause the acquisition and installation of the Project on or before the Completion Date and otherwise in accordance with the Lease and any applicable requirements of governmental authorities and law. Finally, the Agency Agreement provides that the Corporation makes no express or implied warranty or representation of any kind whatsoever with respect to the Project. B-35

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107 APPENDIX C FORM OF OPINION OF SPECIAL COUNSEL [Closing Date] Board of Trustees San Bernardino City Unified School District 777 North F Street San Bernardino, California Re: $53,080,000 San Bernardino City Unified School District Taxable Certificates of Participation, 2011 Series A (Direct Subsidy Qualified School Construction Bonds) Ladies and Gentlemen: In our role as Special Counsel with respect to the execution and delivery of the captioned Taxable Certificates of Participation, 2011 Series A (Direct Subsidy Qualified School Construction Bonds) (the Certificates ) on behalf of the San Bernardino City Unified School District (the District ), representing and evidencing undivided interests in certain lease payments (the Lease Payments ) for certain property pursuant to a Lease Agreement, dated as of March 1, 2011 (the Lease Agreement ), by and between the District and San Bernardino Schools Financing Corporation (the Corporation ), we have examined certified copies of the proceedings taken in connection therewith. We have also examined supplemental documents furnished to us and have obtained such certificates and documents from public officials as we have deemed necessary for the purposes of this opinion. The Certificates are executed and delivered pursuant to a Trust Agreement, dated as of March 1, 2011 (the Trust Agreement ), by and among the District, the Corporation and U.S. Bank National Association, as trustee (the Trustee ), and pursuant to the authorizing resolutions of the Board of Directors of the Corporation and the Board of Trustees of the District. Proceeds of the Certificates will be applied to finance the construction and improvement of various school facilities and to pay a portion of the costs of delivery of the Certificates. We have examined the proceedings for the execution and delivery of the Certificates, solely to express legal opinions as to the validity of the Trust Agreement, the Lease Agreement and the Site Lease, and for no other purpose. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Trust Agreement and the Lease Agreement, as applicable. The Certificates are executed and delivered as fully registered certificates in denominations of $5,000 or any integral multiple thereof. The Certificates are dated their date of delivery. The interest component of the Certificates is payable semiannually on February 1 and August 1, commencing August 1, The Certificates are subject to prepayment prior to maturity as provided in the Trust Agreement. Based upon the foregoing, we are of the opinion that: 1. The Trust Agreement has been duly and validly authorized, executed and delivered by the District and, assuming such Trust Agreement constitutes the legally valid and binding obligation of the Corporation and the Trustee, constitutes the legally valid and binding obligation of the District, C-1

108 enforceable against the District in accordance with its terms, and the Certificates are entitled to the benefits of the Trust Agreement. 2. The Lease Agreement has been duly and validly authorized, executed and delivered by the District and, assuming such Lease Agreement constitutes the legally valid and binding obligation of the Corporation, constitutes the legally valid and binding obligation of the District, enforceable against the District in accordance with its terms. 3. The Site Lease has been duly and validly authorized, executed and delivered by the District and, assuming such Site Lease constitutes the legally valid and binding obligation of the Corporation, constitutes the legally valid and binding obligation of the District, enforceable against the District in accordance with its terms. In addition, under existing statutes, the portion of Lease Payments due under the Lease Agreement designated and comprising interest with respect to the Certificates is exempt from present State of California personal income taxes. Except as stated in the preceding paragraph, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the Lease Agreement or Certificates. We have not been requested to express, and do not express, any view as to the compliance by any person with federal and state securities laws. With the exception of the opinions expressed above, we have not been requested to express and do not express, any opinion as to any matter affected by any taxing or other law of the State of California. The foregoing opinions are qualified to the extent that the enforceability of the Trust Agreement, the Lease Agreement and the Certificates, respectively, may be limited by any applicable bankruptcy, insolvency, debt adjustment, moratorium, reorganization or other similar laws affecting creditors rights generally or as to the availability of any particular remedy. Our opinions are based on existing law, which is subject to change. We do not undertake to advise you of any subsequent changes in the law or facts which may come to our attention subsequent to the date hereof which may affect the opinions expressed above. Such opinions are further based on our knowledge of facts as of the date hereof. Moreover, our opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. Respectfully submitted, C-2

109 APPENDIX D SELECTED INFORMATION FROM AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2010

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