OFFICIAL STATEMENT DATED December 8, 2009

Transcription

1 OFFICIAL STATEMENT DATED December 8, 2009 NEW ISSUE - Book-Entry-Only Ratings: MOODY S: A2 S&P: A See ("OTHER INFORMATION - Ratings" herein) In the opinion of Bond Counsel (defined below), under existing statutes, regulations, published rulings and court decisions, assuming continuous compliance by the Corporation (defined below) after the date of initial delivery of the Bonds (defined below) with certain covenants contained in the Trust Agreement (defined below) and subject to the matters described in FEDERAL TAX CREDIT AND TAX MATTERS herein, the Bonds are qualified school construction bonds within the meaning of section 54F of the Code (defined below). Subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS Subsequent Separation of Tax Credit herein, owners of the Bonds as of the applicable credit allowance date (defined in Section 54A of the Code) are entitled, subject to the limitations of Code Section 54A, to a federal income tax credit for such taxable year. The amount of the tax credit will be treated as interest for or as part of a Bond, in accordance with each recipient s tax status. Interest on the Bonds is not excludable from gross income under section 103 of the Code for federal income tax purposes. See FEDERAL TAX CREDIT AND TAX MATTERS herein for a discussion of Bond Counsel s opinion and FEDERAL TAX CREDIT AND TAX MATTERS herein for a discussion regarding the effect of holding the Bonds for purposes of federal income taxation. $15,400,000 BROWNSVILLE INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Cameron County, Texas) PUBLIC FACILITY CORPORATION SCHOOL FACILITY LEASE REVENUE QUALIFIED SCHOOL CONSTRUCTION BONDS, SERIES 2009 (TAX CREDIT BONDS) Dated: December 1, 2009 Tax Credit Rate: 5.97% Interest Rate : 1.48% Price: 80% Due: June 15, as shown on page ii Interest Accrues from Date of Delivery FEDERAL TAX CREDIT The Brownsville Independent School District Public Facility Corporation (the Corporation ) is issuing its $15,400,000 Brownsville Independent School District Public Facility Corporation School Facility Lease Revenue Qualified School Construction Bonds, Series 2009 (Tax Credit Bonds) (the Bonds ) as Qualified School Construction Bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code ). The Bonds will bear interest to be paid by the Corporation and together with the amount of tax credit, will be treated as interest for federal income tax purposes. Subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS - Subsequent Separation of Tax Credit herein, United States taxpayers who own Bonds on the Credit Allowance Dates in each calendar quarter will be entitled to a credit against such taxpayer s federal income tax liability equal to the product of the outstanding principal amount of such Bond on such date multiplied by 5.97% (divided by four) thereafter until maturity or earlier redemption (with the first and last credits with respect to a Bond prorated accordingly). See FEDERAL TAX CREDIT AND TAX MATTERS herein. Interest on the Bonds will accrue from their date of initial delivery to the initial purchaser thereof named below (the Underwriter ), and will be payable, to the extent the Bonds bear a supplemental interest rate, on March 15, June 15, September 15, and December 15, commencing March 15, 2010, until maturity or prior redemption, and will be calculated on the basis of a 360-day year of twelve 30-day months. REGISTRATION The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC, pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $40,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. Principal or premium, if any, and interest on the Bonds will be payable by Wells Fargo Bank, N.A., Houston, Texas (the Trustee ) to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see "THE BONDS - Book-Entry-Only System"). AUTHORITY FOR ISSUANCE The Bonds are being issued pursuant to a resolution adopted by the Board of Directors of the Corporation under the authority of and in conformity with the laws of the State of Texas (the State ), particularly Chapter 303, as amended, Texas Local Government Code, Section , as amended, Texas Local Government Code, and a Trust Agreement Relating to Brownsville Independent School District School Facility Project, dated as of December 1, 2009 (the Trust Agreement ), by and between the Corporation and the Trustee, to finance the construction, equipment, and improvement of school facilities consisting of an elementary school and related school facilities (the Project ); and to pay for professional fees and services along with the costs of issuing the Bonds. The principal of and interest on the Bonds are payable from lease payments (the Lease Payments ) to be made by the Brownsville Independent School District (the District ) to the Corporation pursuant the Lease (defined herein). Under the Lease, so long as any Bonds remain outstanding, the Lease Payments equal an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of (i) interest to become due on the Bonds on the next Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits then due on the Bonds, and (iii) the principal portion of the Bond Payment, either pursuant to a special mandatory sinking fund redemption or upon maturity of the Bonds. As additional security for the Bonds, the Corporation will grant to the Trustee for the benefit of the registered owners of the Bonds (i) a first mortgage lien on the real property portion of the Project and will assign and pledge the Corporation s interest in the leases, rents, and certain other benefits from the Project, pursuant to the Mortgage (defined herein) and (ii) a first priority purchase money security interest in the personal property portion of the Project, pursuant to the Security Agreement (defined herein). The obligation of the District to make Lease Payments is a current expense, payable solely from funds annually appropriated by the District for such use from (1) any lawfully available funds appropriated by the Texas Legislature, which under current law is limited to the basic allotment portion of Tier One Funds and Chapter 46 Funds as described herein; (2) any unintended surplus maintenance tax revenues ; and (3) upon receipt of an approving opinion of a nationally recognized bond counsel firm, any other fund hereafter determined to be available with respect to any payment obligation or permitted under the Lease as a result of a final, nonappealable judgment of a court of competent jurisdiction, legislation hereafter enacted, or other changes in State law. Remedies available upon a failure of the District to appropriate or pay Lease Payments are limited to termination of the District s leasehold interest, the right to take possession and control of the Project, and the right to sell or lease the Project upon foreclosure under the Mortgage and the Security Agreement. THE LEASE AND THE OBLIGATIONS OF THE DISTRICT THEREUNDER DO NOT CONSTITUTE A PLEDGE, A LIABILITY, OR A CHARGE UPON THE FUNDS OF THE DISTRICT AND DO NOT CONSTITUTE A DEBT OR GENERAL OBLIGATION OF THE STATE OF TEXAS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE, THE DISTRICT, OR ANY OTHER POLITICAL SUBDIVISION OF THE STATE HAS BEEN PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE BONDS. The Corporation s obligation with respect to the payment of the principal of and interest on the Bonds is a special, limited, and non-recourse obligation payable solely from the Lease Payments payable by the District pursuant to the Lease, and from proceeds from the sale or other lease of the Project. The Corporation has no authority to levy taxes. The Bonds do not constitute an obligation, either, special, general, or moral, of the District, the State, or any other political subdivision thereof. THE PURCHASE OF THE BONDS INCLUDES A DEGREE OF RISK. SEE RISK FACTORS LEGALITY... The Bonds are offered for delivery when, as and if issued and received by the Underwriter and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by Fulbright & Jaworski L.L.P., San Antonio, Texas, Bond Counsel (see Appendix C, "Form of Bond Counsel's Opinion"). Certain legal matters will be passed upon for the Underwriter by their counsel, Vinson & Elkins LLP, Houston, Texas. DELIVERY... It is expected that the Bonds will be tendered for initial delivery to the Underwriter through the service of DTC on or about December 22, J.P. MORGAN

2 CUSIP Prefix No. (1) : $15,400,000 BROWNSVILLE INDEPENDENT SCHOOL DISTRICT PUBLIC FACILITY CORPORATION SCHOOL FACILITY LEASE REVENUE QUALIFIED SCHOOL CONSTRUCTION BONDS, SERIES 2009 (TAX CREDIT BONDS) AT INITIAL DELIVERY Principal CUSIP Amount Maturity Suffix No. $ 15,400,000 June 15, 2025 AA9 Interest will accrue from the date of initial delivery AS AND AFTER PRINCIPAL IS STRIPPED FROM THE ASSOCIATED TAX CREDIT (IF AT ALL) Stated Maturity Principal Amount ($) BONDS Interest Rate (%) CUSIP Suffix (1) June 15, 2025 $15,400, % AB7 Tax Credit Allowance Date CUSIP Suffix No. (1) Tax Credit Amount Tax Credit Allowance Date CUSIP Suffix No. (1) STRIPPED TAX CREDIT Tax Credit Amount Tax Credit Allowance Date CUSIP Suffix No. (1) Tax Credit Amount Tax Credit Allowance Date CUSIP Suffix No. (1) Tax Credit Amount 3/15/2010 (2) AC5 209,064 6/15/2010 AD3 229,845 9/15/2010 AE1 229,845 12/15/2010 AF8 229,845 3/15/2011 AG6 229,845 6/15/2011 AH4 229,845 9/15/2011 AJ0 229,845 12/15/2011 AK7 229,845 3/15/2012 AL5 229,845 6/15/2012 AM3 229,845 9/15/2012 AN1 229,845 12/15/2012 AP6 229,845 3/15/2013 AQ4 229,845 6/15/2013 AR2 229,845 9/15/2013 AS0 229,845 12/15/2013 AT8 229,845 3/15/2014 AU5 229,845 6/15/2014 AV3 229,845 9/15/2014 AW1 229,845 12/15/2014 AX9 229,845 3/15/2015 AY7 229,845 6/15/2015 AZ4 229,845 9/15/2015 BA8 229,845 12/15/2015 BB6 229,845 3/15/2016 BC4 229,845 6/15/2016 BD2 229,845 9/15/2016 BE0 229,845 12/15/2016 BF7 229,845 3/15/2017 BG5 229,845 6/15/2017 BH3 229,845 9/15/2017 BJ9 229,845 12/15/2017 BK6 229,845 3/15/2018 BL4 229,845 6/15/2018 BM2 229,845 9/15/2018 BN0 229,845 12/15/2018 BP5 229,845 3/15/2019 BQ3 229,845 6/15/2019 BR1 229,845 9/15/2019 BS9 229,845 12/15/2019 BT7 229,845 3/15/2020 BU4 229,845 6/15/2020 BV2 229,845 9/15/2020 BW0 229,845 12/15/2020 BX8 229,845 3/15/2021 BY6 229,845 6/15/2021 BZ3 229,845 9/15/2021 CA7 229,845 12/15/2021 CB5 229,845 3/15/2022 CC3 229,845 6/15/2022 CD1 229,845 9/15/2022 CE9 229,845 12/15/2022 CF6 229,845 3/15/2023 CG4 229,845 6/15/2023 CH2 229,845 9/15/2023 CJ8 229,845 12/15/2023 CK5 229,845 3/15/2024 CL3 229,845 6/15/2024 CM1 229,845 9/15/2024 CN9 229,845 12/15/2024 CP4 229,845 3/15/2025 CQ2 229,845 6/15/2025 CR0 229,845 REDEMPTION... The Bonds are not subject to optional redemption prior to maturity. The Bonds are subject to special mandatory redemption prior to maturity as described herin. See THE BONDS- Mandatory Redemption Due to Casualty Loss and THE BONDS Special Mandatory Redemption.. (1) (2) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor s CUSIP Service Bureau, a Division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, the Financial Advisor, nor the Underwriter are responsible for the selection or correctness of the CUSIP numbers set forth herein. Credit amount for partial tax credit period calculated on the basis of the actual number of days elapsed (as opposed to the 30/360 conventional method used to calculate credit amounts for the entire credit periods). ii

3 USE OF INFORMATION This Official Statement is not to be used in connection with an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances create any implication that there has been no change in the affairs of the Corporation or the District or other matter described herein since the date hereof. See OTHER INFORMATION Continuing Disclosure of Information for a description of the District s undertaking to provide certain information on a continuing basis. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE SECURITIES HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPT SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. The information set forth herein has been obtained from the Corporation or the District and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Corporation, the District, the Financial Advisor or the Underwriter. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. THE UNDERWRITER WILL PROVIDE THE FOLLOWING SENTENCE FOR INCLUSION IN THIS OFFICIAL STATEMENT. THE UNDERWRITER HAS REVIEWED THE INFORMATION IN THIS OFFICIAL STATEMENT IN ACCORDANCE WITH THEIR RESPONSIBILITIES TO INVESTORS UNDER THE FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITER DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. NONE OF THE CORPORATION, THE DISTRICT, THE UNDERWRITER, NOR THE FINANCIAL ADVISOR MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY-ONLY SYSTEM. The agreements of the Corporation and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION WITH RESPECT TO THE BONDS. iii

4 TABLE OF CONTENTS OFFICIAL STATEMENT SUMMARY... v DISTRICT OFFICIALS, STAFF AND CONSULTANTS Elected Officials... vii Appointed Officials... vii Consultants and Advisors... viii INTRODUCTION... 1 PLAN OF FINANCING..2 RISK FACTORS... 3 Nonappropriation 3 Continues State Appropriation of Tier 1 Allocation...4 District's Future Level of Tier 1 Allocation...4 Possible Future Changes to the Texas Public School... Finance System.. 4 Changes in Demographic and Economic Conditions...4 Completion/Construction Risks...4 Damage or Destruction Risk. 5 Power of Eminent Domain...5 Remedies...5 Inability to Liquidate, or Delay in Liquidating, a Project...6 Constitutionality of the Lease Obligation...6 Transferability of Bonds upon a Termination Event...6 No-Recourse Obligation...6 THE BONDS... 6 Description of the Bonds... 6 Authority for Issuance and Purpose... 7 Mandatory Redemption... 8 Special Mandatory Redemption... 8 Notice of Redemption... 9 Book-Entry-Only System Trustee Record Date for Interest Payment Mutilated, Destroyed, Lost, or Stolen Bonds Sources and Uses DEBT SERVICE REQUIREMENT OF THE CORPORATION SECURITY FOR THE BONDS Trust Estate Lease Payments Mortgage and Security Agreement Remedies Additional Obligations THE PROJECT Site Project Necessity Design and Construction The Construction Contractor FEDERAL TAX CREDIT AND TAX MATTERS General Internal Revenue Service Circular 230 Notice...17 Federal Tax Credit...17 Amount of Credit...18 Limitation and Carryover of The Credit...18 Credit Amount Included in Income and Deemed Interest...18 Passive Activity Rules Allocation of Tax Credits by S Corporations, Partnerships, RICs, and REIT's...18 Subsequent Separation of Tax Credit...18 Certain Investor Considerations Regarding the Bonds...18 Interest on the Bond...19 Disposition of Bonds and Market Discount...19 Backup Withholding...19 Withholding on Payment to Nonresident Alien Individuals and Foreign Corporations...19 STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS CURRENT PUBLIC SCHOOL FINANCE SYSTEM FINANCIAL AND OPERATING INFORMATION FOR THE DISTRICT 25 Taxable Assessed Valuations by Category...28 Tax Rate, Levy and Collection History...29 Ten Largest Taxpayers...29 General Fund Revenues Current Investments.. 33 OTHER INFORMATION Ratings...34 Litigation...34 Registration and Qualification of Bonds for Sale...35 Legal Investments and Eligibility to Secure Public Funds In Texas...35 Legal Matters...35 Authenticity of Financial Data and Other Information...36 Continuing Disclosure of Information...36 Underwriting...37 Financial Advisor...37 Forward Looking Statements...37 APPENDICES Selected Provisions of the Financing Documents A General Information Regarding the District...B Excerpts From Brownsville Independent School District Annual Financial and Compliance Report...C Form of Bond Counsel Opinion...D Redemption Values... E The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement. THE CORPORATION THE DISTRICT iv

5 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE DISTRICT... THE CORPORATION THE BONDS. FEDERAL TAX CREDIT. CREDIT ALLOWANCE DATES. SUPPLEMENTAL COUPON.. AUTHORITY FOR ISSUANCE. The Brownsville Independent School District (the District ) is a political subdivision of the State of Texas located in Cameron County, Texas. The District is governed by a seven-member Board of Trustees (the "Board") who serve staggered three-year terms with elections being held in November of each year. Policymaking and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools who is the chief administrative officer of the District. Support services are supplied by consultants and advisors. The Brownsville Independent School District Public Facility Corporation (the Corporation ) is a non-profit public corporation and instrumentality of the District, formed on behalf of the District pursuant to the Public Facility Corporation Act and a resolution of the Board of the District. The Corporation was formed for the purpose of acquiring, constructing, and financing school facilities for the District. The Corporation currently has no assets other than its interest in the Project and its rights under the Lease, which will be assigned to the Trustee for the benefit of the registered owners of the Bonds upon the initial delivery of the Bonds. The Corporation is governed by a seven-member board of directors. All of the current Board of Directors of the Corporation (the Board of Directors ) are members of the Board of Trustees of the District. Each director serves as a member of the Board of Directors of the Corporation for the term not to exceed six years and a director shall not hold an office for a term greater than three years. Any director may be removed from office by the Board of Trustees for cause or at any time without cause. The Board of Directors serve without compensation. The Corporation is issuing its $15,400,000 Brownsville Independent School District Public Facility Corporation School Facility Lease Revenue Qualified School Construction Bonds, Series 2009 (Tax Credit Bonds) (the Bonds ). The Bonds are Qualified School Construction Bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code ). See THE BONDS- Description of the Bonds and THE BONDS-Mandatory Sinking Fund Deposits. Subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS Subsequent Separation of Tax Credit herein, a taxpayer owning a Bond on a credit allowance date will be entitled to a credit against such taxpayer s federal income tax liability. The credit shall be equal to the product of the outstanding principal amount of the Bond on such date multiplied by 5.97% divided by four, with the first and last credits with respect to a Bond prorated accordingly to the days the Bonds are outstanding during such quarters. The amount of the allowable credit is included in the gross income of the recipient thereof as interest income. See FEDERAL TAX CREDIT AND TAX MATTERS. Each March 15, June 15, September 15, and December 15, beginning March 15, 2010, as well as the last day on which a Bond is outstanding are Credit Allowance Dates. See FEDERAL TAX CREDIT AND TAX MATTERS. The Bonds bear interest at a rate of 1.48% per annum. Such interest shall be payable on each March 15, June 15, September 15, and December 15, commencing March 15, 2010, calculated based on the basis of a 360- day year and twelve 30-day months. The Bonds are being issued pursuant to a resolution adopted by the Board of Directors under the authority of and in conformity with the laws of the State of Texas (the State ), particularly Chapter 303, as amended, Texas Local Government Code, Section , as amended, Texas Local Government Code, and a Trust Agreement Relating to Brownsville Independent School District School Facility Project, dated as of December 1, 2009 (the Trust Agreement ), by and between the Corporation and the Trustee, to finance the construction, equipment, and improvement of school facilities consisting of an elementary school and related facilities (the Project ); and to pay for professional fees and services along with the costs of issuing the Bonds. The principal of and interest on the Bonds are payable from lease payments (the Lease Payments ) to be made by the District to the Corporation pursuant the Lease (defined herein). v

6 Under the Lease, so long as the Bonds are outstanding, the Lease Payments will equal an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of (i) interest to become due on the Bonds on the next Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits then due on the Bonds, and (iii) the principal portion of the Bond Payment, either pursuant to a special mandatory sinking fund redemption or upon maturity of the Bonds. As additional security for the Bonds, the Corporation will grant to the Trustee for the benefit of the registered owners of the Bonds (i) a first mortgage lien on the real property portion of the Project and will assign and pledge the Corporation s interest in the leases, rents, and certain other benefits from the Project, pursuant to the Mortgage (defined herein) and (ii) a first priority purchase money security interest in the personal property portion of the Project, pursuant to the Security Agreement (defined herein). In addition, the Bonds are being issued as qualified school construction bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code ). As such, and subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS-Subsequent Separation of Tax Credit herein, a taxpayer owning a bond on a credit allowance date will be entitled to a credit against such taxpayer s federal income tax liability equal to the product of the outstanding principal amount of such Bond on such date multiplied by 5.97% divided by four, with the first and last credits with respect to a Bond prorated accordingly to the days the Bonds are outstanding during such quarters. See FEDERAL TAX CREDIT AND TAX MATTERS. SECURITY FOR THE BONDS... REDEMPTION... USE OF PROCEEDS.. RATINGS.. BOOK-ENTRY-ONLY SYSTEM... The Corporation s obligation with respect to the payment of the principal of and interest on the Bonds is a special, limited, and non-recourse obligation payable solely from the Lease Payments payable by the District pursuant to the Lease, and from proceeds from the sale or other lease of the Project. The Corporation has no authority to levy taxes. The Bonds do not constitute an obligation, either special, general, or moral, of the District, the State, or any other political subdivision thereof. As additional security for the Bonds, the Corporation will grant to the Trustee for the benefit of the registered owners of the Bonds (i) a first mortgage lien on the real property relating to the Project and will assign and pledge the Corporation s interest in the leases, rents, and certain other benefits from the Project, pursuant to the Mortgage, and (ii) a first priority purchase money security interest in the personal property portion of the Project, pursuant to the Security Agreement. The Bonds are not subject to optional redemption prior to maturity. The Bonds are subject to mandatory redemption prior to maturity as described herein. See THE BONDS Mandatory Redemption. Proceeds from the sale of the Bonds will be used for the use, purchase or other acquisition of real property or an improvement to real property for public school purposes, to-wit: the construction, equipment, and improvement of school facilities consisting of an elementary school and related facilities (the Project ); and to pay professional fees and services along with costs of issuing the Bonds. The Corporation does not have any outstanding debt obligations, nor has it ever received a rating on debt issued by the Corporation. The Corporation has received contract ratings on the Bonds from Moody's Investors Service, Inc. ("Moody's") and Standard and Poor s Rating Services, a Division of the McGraw-Hill Companies, Inc. ( S&P ). Moody's has assigned an initial A2 rating and S&P has assigned an initial A rating to the Bonds. (See OTHER INFORMATION Ratings ). The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC, pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $40,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. Principal or Premium, if any, and interest on the Bonds will be payable by the Trustee/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see "THE BONDS - Book- Entry-Only System"). vi

7 CORPORATION APPOINTED OFFICIALS Board of Directors Position Term Expires Rolando Aguilar President 11/17/2012 Ruben Cortez, Jr. Vice President 11/17/2010 Joe Colunga Secretary 11/17/2012 Rick Zayas Director 11/17/2010 Dr. Enrique Escobedo, Jr. Director 11/17/2010 Minerva M. Pena Director 11/17/2012 Caty Presas-Garcia Director 11/17/2012 DISTRICT OFFICIALS, STAFF AND CONSULTANTS DISTRICT ELECTED OFFICIALS Board of Trustees Length of Service Term Expires Occupation Rolando Aguilar President 5 Years November 2012 Retired Educator Ruben Cortez, Jr. Vice President 2 Years November 2010 Self Employed Joe Colunga Secretary 13 Years November 2012 College Professor Rick Zayas Assistant Secretary 1 Year November 2010 Attorney Dr. Enrique Escobedo, Jr. Member 5 Years November 2010 Medical Catalina Presas-Garcia Member 1 Year November 2012 Real Estate Agent Minerva M. Pena Member 1 Year November 2012 Retired Law Enforcement SELECTED ADMINISTRATIVE STAFF Length of Service With the District Length of Service At Current Position Name Position Mr. Brett Springston (1) Interim Superintendent of Schools 5 Years 9 Month Mr. Tony Fuller Budget and Financial Services 26 Years 16 Years Ms. Rosario Pena Purchasing Administrator 23 Years 9 Years Mr. Robert Ruiz (2) Interim Chief Financial Officer 26 Years 1 Year (1) Replaced Mr. Hector Gonzales, former Superintendent of Schools, who was placed on administrative leave with pay on January 6, See OTHER INFORMATION- Litigation herein. (2) Replaced Mr. Tony Juarez former Chief Financial Officer, who was reassigned to the role of Grant Administrator in November See OTHER INFORMATION- Litigation herein. vii

8 CONSULTANTS AND ADVISORS Certified Public Accountants... Patillo, Brown & Hill L.L.P. Brownsville, Texas Bond Counsel...Fulbright & Jaworski L.L.P. San Antonio, Texas Financial Advisor...Estrada Hinojosa & Company, Inc. Dallas, Texas For additional information regarding the Corporation or the District, please contact: Mr. Robert Ruiz Mr. Noe Hinojosa, Jr. Interim Chief Financial Officer Mr. Larry Jordan Brownsville Independent School District or Estrada Hinojosa & Company, Inc Price Road 1717 Main Street, Suite 4760 Brownsville, Texas Dallas, Texas (956) (214) Telephone (956) (214) Fax The remainder of the page intentionally left blank. viii

9 OFFICIAL STATEMENT RELATING TO $15,400,000 BROWNSVILLE INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Cameron County, Texas) PUBLIC FACILITY CORPORATION SCHOOL FACILITY LEASE REVENUE QUALIFIED SCHOOL CONSTRUCTION BONDS, SERIES 2009 (TAX CREDIT BONDS) INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $15,400,000 Brownsville Independent School District Public Facility Corporation School Facility Lease Revenue Qualified School Construction Bonds, Series 2009 (Tax Credit Bonds) ( the Bonds ). Capitalized terms used in this Official Statement and not otherwise defined herein, have the meanings assigned to such terms in the APPENDIX A- Selected Provisions of the Financing Documents. The Bonds are being issued pursuant to a resolution adopted on December 8, 2009 (the Resolution ) by the governing body of the Corporation under the authority of and in full conformity with the laws of the State of Texas, particularly the provisions of Chapter 303, Texas Local Government Code (the Public Facility Corporation Act ), Section , as amended, Texas Local Government Code, and a Trust Agreement Relating to the Brownsville Independent School District School Facility Project dated as of December 1, 2009 (the Trust Agreement ) by and between the Corporation and Wells Fargo Bank, National Association, Houston, Texas (the Trustee ) to finance the Project for the benefit and use of the District. The Corporation will lease the Project to the District pursuant to the Lease with an Option to Purchase dated as of December 1, 2009 (the Lease ) by and between the District and the Corporation. Under the Lease, the Lease Payments will equal the amount of (i) interest to become due on the first Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits, and (iii) the principal portion of the Bond Payment, and thereafter, while any Bonds are outstanding under the Trust Agreement, an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of (i) interest to become due on the Bonds on the next Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits then due on the Bonds, and (iii) the principal portion of the Bond Payment, either pursuant to a special mandatory sinking fund redemption or upon maturity of the Bonds. The Corporation will assign its interest in the Lease, the Lease Payments, and the Project to the Trustee for the benefit of the Bondholders pursuant to a Deed of Trust, Security Agreement and Assignment of Rents and Leases, dated as of the date of delivery of the Bonds (the Mortgage ), by and between the Corporation and the Trustee. The Corporation will also grant a first priority purchase money security interest in the personal property portion of the Project pursuant to a Security Agreement dated as of December 1, 2009 (the Security Agreement ) by and between the Corporation and the Trustee. In addition, the Bonds are being issued as Qualified School Construction Bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code ) and the Corporation, on behalf of the District, has so designated the Bonds. The District has received an allocation sufficient for the issuance of the Bonds from the United States Secretary of Treasury (the Secretary ) pursuant to the Code. As such, and subject to the discussion under FEDERAL TAX CREDIT AND TAX MATTERS Subsequent Separation of Tax Credit herein, a taxpayer owning a Bond on a credit allowance date will be entitled to a credit against such taxpayer s federal income tax liability equal to the product of the outstanding principal amount of such Bond on such date multiplied by 5.97% divided by four, with the first and last credits with respect to a Bond prorated accordingly. See FEDERAL TAX CREDIT AND TAX MATTERS herein. THE PURCHASE OF THE BONDS INVOLVES A DEGREE OF RISK. SEE RISK FACTORS. THE CORPORATION S OBLIGATION WITH RESPECT TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS IS A SPECIAL, LIMITED, AND NON-RECOURSE OBLIGATION PAYABLE SOLELY FROM THE LEASE PAYMENTS PAYABLE BY THE DISTRICT PURSUANT TO THE LEASE AND FROM PROCEEDS FROM THE SALE OR OTHER LEASE OF THE PROJECT. THE CORPORATION HAS NO AUTHORITY TO LEVY TAXES. THE BONDS DO NOT CONSTITUTE AN OBLIGATION, EITHER SPECIAL, GENERAL, OR MORAL, OF THE DISTRICT, THE STATE, OR ANY OTHER POLITICAL SUBDIVISION THEREOF. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS IS A CURRENT EXPENSE, PAYABLE SOLELY FROM FUNDS TO BE ANNUALLY APPROPRIATED BY THE DISTRICT FOR SUCH USE FROM (I) ANY LAWFULLY AVAILABLE FUNDS APPROPRIATED BY THE TEXAS LEGISLATURE, WHICH UNDER CURRENT LAW IS LIMITED TO GUARANTEED YIELD PROGRAM TIER ONE FUNDS, (II) ANY UNINTENDED SURPLUS MAINTENANCE TAX REVENUES, AND (III) UPON RECEIPT OF AN APPROVING OPINION OF NATIONALLY RECOGNIZED BOND COUNSEL, 1

10 ANY OTHER FUNDS HEREAFTER DETERMINED TO BE AVAILABLE WITH RESPECT TO ANY PAYMENT OBLIGATED OR PERMITTED UNDER THE LEASE AS A RESULT OF A FINAL, NONAPPEALABLE JUDGMENT OF A COURT OF COMPETENT JURISDICTION, LEGISLATION HEREAFTER ENACTED, OR OTHER CHANGE IN STATE LAW. REMEDIES AVAILABLE UPON A FAILURE OF THE DISTRICT TO APPROPRIATE OR PAY LEASE PAYMENTS ARE LIMITED TO TERMINATION OF THE DISTRICT S LEASEHOLD INTEREST, THE RIGHT TO TAKE POSSESSION AND CONTROL OF THE PROJECT, AND THE RIGHT TO SELL OR LEASE THE PROJECT UPON FORECLOSURE UNDER THE MORTGAGE AND SECURITY AGREEMENT. THE LEASE AND THE OBLIGATIONS OF THE DISTRICT THEREUNDER DO NOT CONSTITUTE A PLEDGE, A LIABILITY, OR A CHARGE UPON THE FUNDS OF THE DISTRICT AND DO NOT CONSTITUTE A DEBT OR GENERAL OBLIGATION OF THE STATE OF TEXAS, THE CORPORATION, THE DISTRICT, OR ANY OTHER POLITICAL SUBDIVISION OF THE STATE OF TEXAS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF TEXAS, THE DISTRICT, OR ANY OTHER POLITICAL SUBDIVISION OF THE STATE OF TEXAS IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE BONDS. THE CORPORATION HAS NO TAXING AUTHORITY. The proceeds from the sale of the Bonds will be deposited into the Project Account created by the Trust Agreement and used, together with the interest earnings thereon, to pay, or reimburse the Corporation for, payment of costs of the Project, including costs (i) related to issuance of the Bonds, and (ii) of construction of the Project. All financial and other information in this Official Statement has been provided by the District from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the District. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. There follows in this Official Statement a description of the Bonds and certain information regarding the District and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the District or the District's financial advisor, Estrada Hinojosa & Company, Inc., Dallas, Texas by electronic mail or upon payment of reasonable copying, handling and delivery charges. This Official Statement speaks only as to its date, and the information contained herein is subject to change. A copy of the Final Official Statement pertaining to the Bonds will be deposited with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system. See CONTINUING DISCLOSURE OF INFORMATION herein for a description of the District s undertaking to provide certain information on a continuing basis. PLAN OF FINANCING The Bonds are designated as qualified school construction bonds under Section 54F of the Code. Proceeds from the Bonds (including investments thereon) will be applied solely to the construction, rehabilitation or repair of a public school facility (including the 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 Bonds), or the acquisition of land on which such a facility is to be constructed with part of the proceeds of the Bonds, and to payment of the costs of issuing the Bonds not in excess of 2% of the issue price of the Bonds. The Corporation reasonably expects that all available proceeds will be spent for such qualified expenditures within three years of the date of issuance of the Bonds, and that a binding commitment with a third party to spend at least 10% of such available project proceeds will be incurred within the six month period beginning on the date of issuance of the Bonds. See FEDERAL TAX CREDIT herein. The Project is being financed pursuant to Section et. seq., Texas Local Government Code, as amended (the Public Property Finance Act ), Chapter 303, Texas Local Government Code, as amended (the Public Facility Corporation Act ) and Section et. seq., Texas Education Code, as amended (the Tier One Act ). Section of the Public Property Finance Act authorizes school districts to acquire real property and improvements by entering into lease purchase contracts provided that a notice of intent to enter into such contract is published at least 60 days prior to execution of the contract. A notice of intention to enter into a lease purchase agreement pursuant to the Public Property Finance Act was published on September 17, The District approved a resolution authorizing the publication on September 15, The Public Property Finance Act imposes a duty upon the District to obtain the approval of its electorate if a valid petition containing the signatures of at least five percent of the registered voters of the District is filed with the Board of Education of the District within sixty (60) days of the date of publication of the notice of intent. No petition was presented within the required time. The Public Facility Corporation Act authorizes the creation and utilization by school districts (and other governmental entities) of public facility corporations to issue bonds to provide for the acquisition, construction, rehabilitation, renovation, repair, equipping, furnishing, and placing in service of public facilities of its governmental sponsor. The Public Facility Corporation Act further authorizes school districts 2

11 (and other governmental entities) to incur obligations in favor of public facility corporations to serve as security for the bonds to be issued by such corporations. The Corporation was formed pursuant to the Public Facility Corporation Act to issue bonds, and to enter into leases, as lessor, with the District, as lessee, in order to finance the acquisition and construction of school facilities. One of the District s primary sources of funds for making the Lease Payments under the Lease, which will in turn be used to make payments of the Cumulative Sinking Fund Deposits, the principal portion of the Bond Payment, and interest on the Bonds, is revenues to be received by the District from biennial legislative appropriations pursuant to the Tier One Act. Texas law provides a two-tiered education finance structure known as the Foundation School Program. For the through school years, the basic allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district s compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 Regular Legislative Session limits, beginning with school year, the annual increases in a district s M&O tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the school year, the revenue increases are limited to the funds the district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two funds. Another of the District s sources of funds for making the Lease Payments under the Lease, which will be used to make payments of principal and interest on the Bonds, is unintended surplus maintenance tax funds. Since these funds are unintended, these funds cannot be budgeted by the District, and, as such, there can be no assurance that such funds, if any, will be available for making the Lease Payments. For more information on unintended surplus maintenance tax funds, see FINANCIAL AND OPERATING INFORMATION FOR THE DISTRICT. To provide funds for the acquisition and construction of the Project, the District and the Corporation will enter into the Lease whereby the Corporation will agree to lease the Project to the District, and the District will agree to pay quarterly Lease Payments consisting of an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of (i) interest to become due on the Bonds on the next Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits then due on the Bonds, and (iii) the principal portion of the Bond Payment, either pursuant to a special mandatory sinking fund redemption or upon maturity of the Bonds.. The District shall make Lease Payments beginning March 1, 2010, and each June 1, September 1, December 1, and March 1 thereafter for so long as the Lease is in effect. The District may terminate the Lease by failing to appropriate money in any fiscal year for this purpose (see RISK FACTORS Nonappropriation ). For a summary of certain provisions of the Lease, see APPENDIX A SELECTED PROVISIONS OF THE FINANCING DOCUMENTS - SUMMARY OF CERTAIN PROVISIONS OF THE LEASE. The Bonds are being issued pursuant to a resolution adopted by the Board of Directors of the Corporation and the Trust Agreement to finance the acquisition and remodeling of the Project. See THE PROJECT. A portion of the proceeds of the Bonds will also be used to pay the costs of issuing the Bonds. For more information on the Trust Agreement, see APPENDIX A Selected Provisions of the Financing Documents - Summary of Certain Provisions of the Trust Agreement. To secure its obligations under the Trust Agreement, the Corporation will grant a first mortgage lien on and first deed of trust lien to the real property portion of the Project and will assign and pledge the Corporation s interest in the leases, rents, issues, profits, revenues, income, receipts, money, rights, and benefits of and from the Project for the use and benefit of the Trustee, on behalf of the registered owners of the Bonds, pursuant to the Mortgage. The Corporation will also grant to the Trustee a first priority security interest in the machinery, equipment, furnishings, or other personal property acquired by the Corporation with the proceeds of the Bonds, and at any time installed or located at the Project site, and in the accounts, documents, chattel paper, instruments, and general intangibles arising in any manner from the Corporation s ownership and operation of the Project pursuant to the Security Agreement. The Trust Agreement, the Lease, the Mortgage, and the Security Agreement, the Assignment of Construction Contract (discussed below), and the Assignment of Architect Contract and Plans and Specifications (discussed below), are collectively referred to herein as the Financing Documents. See RISK FACTORS herein. RISK FACTORS THE PURCHASE OF THE BONDS IS SUBJECT TO CERTAIN RISKS IN ADDITION TO THE TYPICAL RISK INVOLVED IN PURCHASING BONDS OF THIS NATURE. EACH PROSPECTIVE INVESTOR IN THE BONDS IS URGED TO READ THIS OFFICIAL STATEMENT IN ITS ENTIRETY INCLUDING ITS APPENDICES. PARTICULAR ATTENTION SHOULD BE GIVEN TO THE FACTORS DESCRIBED BELOW WHICH, AMONG OTHERS, COULD AFFECT THE PAYMENT OF DEBT SERVICE ON THE BONDS, AND WHICH COULD ALSO AFFECT THE MARKETABILITY OF THE BONDS TO AN EXTENT THAT CANNOT BE DETERMINED. NONAPPROPRIATION... Except to the extent that excess Bond proceeds are legally available, the principal, premium, if any, and interest on the Bonds are payable solely from Lease Payments and other payments paid or payable by the District from and after the date of the Lease, and other income, charges, and funds realized from the lease, sale, transfer, or other disposition of the Project, together with all funds and investments in all accounts established under the Trust Agreement, and all funds deposited with the Trustee pursuant to the Financing 3

12 Documents. The obligation of the District to pay Lease Payments is limited to those funds appropriated by the District from (i) money appropriated biennially by the Legislature of the State that may lawfully be used with respect to any payment obligated or permitted under the Lease, which under current law is limited to the Basic Allotment portion of Tier One Funds, (ii) any unintended surplus maintenance tax funds of the District at the end of each fiscal year after payment of all maintenance and operating expenses of the District for that fiscal year, and (iii) upon receipt of an approving opinion of nationally recognized bond counsel, any other funds hereafter determined to be available with respect to any payment obligated or permitted under the Lease as a result of a final, nonappealable judgment of a court of competent jurisdiction, legislation hereafter enacted, or other change in State law. The funds described in (i), (ii), and (iii) together are referred to as Available Funds. See STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS. If Available Funds sufficient to pay the Lease Payments during the succeeding fiscal year are not appropriated by the District, the Lease will automatically terminate at the end of the fiscal year for which sufficient funds have been appropriated. In such event, the District must immediately, upon expiration of such fiscal year, surrender possession and control of the Project to the Trustee. No assurances may be given that the Trustee will be able to manage or sell the Project in a manner that will produce sufficient revenues therefrom to pay debt service on the Bonds. There can be no assurance that the District will annually appropriate sufficient funds to pay the Lease Payments due in any given fiscal year. Accordingly, the likelihood that there will be sufficient funds to pay the principal of, premium, if any, and interest on the Bonds is dependent upon certain facts which are beyond the control of the registered owners, including (a) the continuing need of the District for the Project, (b) the ability of the District to obtain funds from the State to pay obligations associated with the Lease, (c) the demographic and economic conditions within the service area of the District, (d) the value, if any, of the Project in a sale instituted by the Trustee pursuant to the Trust Agreement, the Security Agreement, Mortgage and the Purchase Money Security interest, and (e) the Lease value, if any, of the Project in the event the Trustee re-leases the Project to a third party or to the District pursuant to an operating lease. THE DISTRICT HAS NO OBLIGATION TO ADOPT OR MAINTAIN A BUDGET TO AVOID A TERMINATION OF THE LEASE OR TO MAKE LEASE PAYMENTS SUBSEQUENT TO THE TERMINATION OF THE LEASE UPON THE OCCURRENCE OF AN EVENT OF NON-APPROPRIATION. IF THE DISTRICT FAILS TO APPROPRIATE SUFFICIENT FUNDS TO MAKE LEASE PAYMENTS, IT IS PROBABLE THAT THERE WILL NOT BE SUFFICIENT FUNDS TO PAY THE PRINCIPAL OF AND INTEREST ON THE BONDS, WHEN DUE. CONTINUED STATE APPROPRIATION OF TIER ONE FUNDS... Since 1989 State funding of education has been challenged on constitutional grounds requiring the State Legislature to enact several funding programs, each of which differed in the manner in which State and local funds have been allocated to school districts. There is no assurance that the Texas Legislature will not change the current system of funding for school districts in Texas and, thereby, adversely affect the District s anticipated Tier One Funds. (See STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS and CURRENT SCHOOL FINANCE SYSTEM. ) DISTRICT S FUTURE LEVEL OF TIER ONE FUNDS... The money which may lawfully be used by the District for the Lease Payments is primarily from the Basic Allotment portion of its Tier One Funds received from the State. Tier One Funds are provided to school districts based on a formula that includes, among other factors, the following primary factors relating to the District: (1) tax rate, (2) average daily attendance, (3) tax collection rate, and (4) assessed valuation of property. A significant decrease in items (1), (2), or (3) or a significant increase in item (4) could have a material adverse affect on the amount of Tier One Funds allocated to the District and, therefore, on its ability to make the Lease Payments. For more information on Tier One Funds, See STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS. The Basic Allotment portion of Tier One Funds is equal to the State-funded portion of Tier One for the District minus amounts attributable to the special allotments received by the District for special education, compensatory education, bilingual education, career and technology, transportation, and the gifted and talented program (the Basic Allotment ). POSSIBLE FUTURE CHANGES TO THE TEXAS PUBLIC SCHOOL FINANCE SYSTEM... The District can make no representation or prediction concerning how or if the Texas public school finance system (the Finance System ) may be changed in the future by the State Legislature or whether the Finance System would be constitutional if legislative changes are enacted. Changes to the Finance System could substantially adversely affect the financial condition of the District. See STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS and CURRENT PUBLIC SCHOOL FINANCE SYSTEM herein. CHANGES IN DEMOGRAPHIC AND ECONOMIC CONDITIONS... Changes in student population and economic, social, or other conditions may reduce the District s ability, need, or willingness to utilize the Project. In such event, the District may elect to terminate the Lease by failing to appropriate funds to make Lease Payments under the Lease. For a description of the remedies of the Trustee in such case, see APPENDIX A Selected Provisions of the Financing Documents Summary of Certain Provisions of the Trust Agreement. COMPLETION/CONSTRUCTION RISKS... The construction of the Project will be subject to risks typically associated with building construction. These risks could have a material adverse effect on the willingness of the District to appropriate money for the Project. The Corporation will enter into a construction contract (the Construction Contract ) wherein the general contractor has agreed to provide the construction of the Project at a stipulated guaranteed maximum sum. Performance under the Construction Contract and payment of obligations thereunder will be supported by payment and performance bonds; however, enforcement of such bonds can take a significant 4

13 amount of time. See THE PROJECT Design and Construction. DAMAGE OR DESTRUCTION RISK... If all or a portion of the Project is damaged, destroyed or condemned and the Net Proceeds are insufficient, in the judgment of the District, to defray the anticipated cost of restoration, repair, modification or improvement following a condemnation or casualty, District will, by written notice to Corporation and Trustee given within ninety (90) days following the date of such condemnation or casualty, elect either to: (1) apply Available Funds in excess of the Lease Payments to such excess costs; (2) exercise its Option to Purchase on the next succeeding Lease Payment date occurring more than thirty (30) days following the date of its written notice to the District of its election to exercise its Option to Purchase; or (3) terminate the Lease without causing an Event of Default under the Lease except to the extent the District has failed to comply with Section 8.6 and Section 8.9 of the Lease. If District exercises its Option to Purchase pursuant to this provision, District will deposit with Trustee, prior to the next succeeding Purchase Option Date for the Option to Purchase, such additional Available Funds, which taken together with the Net Proceeds, will be sufficient to pay the Purchase Option Price that would be due as of such next succeeding Purchase Option Date, together with all sums that may be due or, pursuant to written confirmation from the Trustee, past due under this Lease as of such next succeeding Purchase Option Date, less such amounts other than the Net Proceeds that may be then held by the Trustee and available for payment to the Bondholders pursuant to the Trust Agreement. If there is any balance in the accounts held by the Trustee after paying all sums required for repair, restoration, modification or improvement of the Project or after payment in full of the Purchase Option Price and the payment of the reasonable costs and expenses of Trustee, Trustee will disburse the balance to District. There can be no assurance that the Net Proceeds of an insurance or condemnation award will be sufficient to repair or restore the Project or that, if such Net Proceeds are insufficient for such purpose, the District will appropriate sufficient funds for the repair, replacement, or restoration of the Project, or for the payment of the principal of, premium, if any, and interest on the Bonds necessary in order to exercise its option to purchase under the Lease. POWER OF EMINENT DOMAIN... Pursuant to State law, the District has the power to exercise its rights under the doctrine of eminent domain to condemn and take ownership of property for public use. There is no assurance that the District will not exercise its power of eminent domain in order to take possession of the Project and to terminate its obligations under the Lease. Under the eminent domain process, a State judge appoints a three-member panel of commissioners to arrive at a fair price for the District to purchase the property. The District and the Corporation have agreed in the Lease, to the extent permitted by law, that in the event the District determines to exercise its power of eminent domain to take the Corporation s or the Trustee s interest in the Project or any part thereof, that the damages payable to the Corporation or the Trustee will be an amount which will be sufficient to pay the principal of, premium, if any, and accrued interest on all outstanding Bonds to the earliest date for which notice of redemption can be given pursuant to the Trust Agreement. Any condemnation proceeds are to be deposited with the Trustee and distributed to the registered owners of the Bonds in accordance with the provisions of the Trust Agreement. There is no precedential law in the State to indicate (i) whether or not the courts would prevent the District s condemnation of the Project as an equitable abuse of its eminent domain power, or (ii) whether or not the courts would uphold the validity of the agreement of the District and the Corporation under the Lease to establish, in advance, the damages to be paid to the Corporation or the Trustee in the event that the District determines to exercise its power of eminent domain to acquire title to the Project. If the agreement of the District and the Corporation is not upheld, there is no assurance that the fair price arrived at by the panel of commissioners will be sufficient to pay the principal of, redemption premium, if any, and interest on the Bonds then outstanding. REMEDIES... If an Event of Default occurs under the Financing Documents, the practical realization of any rights upon any default will depend on the exercise of various remedies specified in the Trust Agreement, the Mortgage, the Security Agreement, and the Lease. The enforcement of any remedies granted to the Trustee under the Financing Documents may be affected by various matters including: (i) federal bankruptcy laws; (ii) rights of third parties in cash, securities, and instruments not in possession of the Trustee, including accounts and general intangibles converted for cash; (iii) rights arising in favor of the United States of America or any agency thereof; (iv) present or future prohibitions against assignments in any federal statutes or regulations; (v) constructive trusts, equitable liens, or other rights imposed or conferred by any state or federal court in the exercise of its equitable jurisdiction; (vi) the necessity for judicial action with respect to certain remedies, which is often subject to judicial discretion and delay; (vii) claims that might obtain priority if continuation statements are not filed in accordance with applicable laws; (viii) rights to proceeds of any collateral may be impaired if appropriate action is not taken to continue the perfection of a security interest therein as required by the Texas Business and Commerce Code; (ix) statutory liens; and (x) any rights of parties secured by encumbrances permitted by the Lease. The various legal opinions to be delivered concurrently with the issuance of the Bonds will be qualified as to the enforceability of the remedies provided under the Bond documents as a result of limitations imposed by bankruptcy, reorganization, insolvency, fraudulent conveyance, or other similar laws affecting the rights of creditors generally and by general principles of equity and public policy considerations. If any of such limitations are imposed they may adversely affect the ability of the Trustee and the Bondholders to enforce their claims and rights against the Corporation, the District, and the Project. Consequently, in the event of a default, it is uncertain that the Trustee could successfully obtain an adequate remedy at law or in equity on behalf of the owners of the Bonds. 5

14 INABILITY TO LIQUIDATE OR DELAY IN LIQUIDATING THE PROJECT... An Event of Default or an Event of Nonappropriation gives the Trustee the right to terminate the Lease and thereafter to sell, lease, sublease, or otherwise dispose of the Project. The Project is intended to be used as an elementary school facility. There can be no assurance of the value of the Project for any other use. Accordingly, a potential purchaser of the Bonds should not anticipate that the sale or re-lease of the Project could be accomplished rapidly, on favorable terms or at all. Furthermore, any delay in the ability of the Trustee to obtain possession of the Project may result in delays in the payment of debt service on the Bonds. There is no assurance that the Trustee will be able to sell or lease the Project after a termination of the Lease for an amount equal to the aggregate principal amount of the Bonds then outstanding plus accrued interest thereon. If the Project is sold or leased by the Trustee for an amount less than the aggregate principal amount of and accrued interest on the Bonds, such partial payment would be the only remedy of the registered owners of the Bonds; upon such a partial payment, no registered owner will have any further claim for payment upon the Corporation, the Trustee, or the District. CONSTITUTIONALITY OF THE LEASE OBLIGATION... In City-County Solid Waste Control Board v. Capital City Leasing, 813 S.W.2d 705 (Tex. Civ. App. 1991, writ den.), a Texas appellate court ruled that an equipment lease which required a governmental unit to pursue annual appropriations creates an unconstitutional debt, thus rendering the lease void and unenforceable. The Texas Supreme Court declined, without comment, to hear the case on appeal. Although the Lease and the Trust Agreement acknowledge that the Lease Payments and certain other financial obligations of the District and the Corporation are payable from funds that must be appropriated by the Texas Legislature and by the District, there is no explicit covenant in the Lease requiring the District to seek an appropriation. Accordingly, Bond Counsel believes the facts of such case are distinguishable from the language contained in the Lease. However, there can be no guarantee that another court would not apply reasoning similar to that of the appellate court in the Capital City Leasing case to the Lease. OTHER OBLIGATIONS OF THE DISTRICT... The obligation of the District to make Lease Payments will be satisfied from the funds of the District which are appropriated for such use. To the extent the Basic Allotment and surplus maintenance tax revenues are used by the District to make the Lease Payments, the District may enter into other obligations which may constitute additional charges against such funds from which the Lease Payments may be appropriated and, therefore, such funds available for appropriation for Lease Payments may be decreased. TRANSFERABILITY OF BONDS UPON A TERMINATION EVENT... Bond Counsel has rendered no opinion with respect to the applicability or inapplicability of the registration requirements of the Securities Act of 1933, as amended, to any Bond subsequent to a termination of the Lease by reason of an Event of Default or an Event of Nonappropriation thereunder or due to an Event of Default under the Trust Agreement. If the Lease is terminated by reason of an Event of Default or an Event of Nonappropriation, there is no assurance that the Bonds may be transferred by a holder thereof without compliance with the registration provisions of the Securities Act of 1933, as amended, or the availability of an exemption therefrom. NON-RECOURSE OBLIGATION... The payment of principal, premium, if any, and interest on the Bonds is without recourse to the Corporation and the ability of the Corporation to pay debt service on the Bonds is completely dependent upon the receipt of Lease Payments from the District. The only obligation of the Corporation is to provide the District with continued quiet enjoyment of the Project, provided the District is not in default under the Lease. The District s ability to perform its obligations under the Lease and its capability to appropriate money for the Lease may be adversely affected by the financial condition of the District. See FINANCIAL AND OPERATING INFORMATION FOR THE DISTRICT. RESALE OF THE BONDS... There may not be a secondary market for the Bonds, and the Underwriter has not committed to maintain such a market. In the secondary market for securities similar to the Bonds, the difference between the bid and asked price may be greater than the difference between the bid and asked price for more traditional types of municipal securities. THE BONDS DESCRIPTION OF THE BONDS The Bonds will be issued to mature on June 15, 2025 in the principal amounts of $15,400,000. The Bonds will be dated as of December 1, 2009 and will bear interest, to the extent the Bonds bear a supplemental interest rate, at the rates per annum shown on the inside cover page hereof from the date of delivery thereof, computed on the basis of a 360-day year consisting of twelve 30- day months, payable on March 15, 2010, and semiannually thereafter on June 15, September 15, December 15, and March 15 of each year (each, a Bond Payment Date ), in the amount shown on the inside cover page hereof, unless earlier called for redemption. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC, pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $40,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. 6

15 Principal or premium, if any, and interest on the Bonds will be payable by the Trustee to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see "THE BONDS - Book- Entry-Only System"). AUTHORITY FOR ISSUANCE AND PURPOSE.... The Corporation is a public special purpose corporation, the creation of which was sponsored by the District pursuant to the Public Facility Corporation Act, Chapter 303, Texas Government Code, as amended (the Public Facility Corporation Act ). The Public Facility Corporation Act authorizes the creation and utilization by school districts (and other governmental sponsors) of public facility corporations to issue bonds to provide for the acquisition, construction, rehabilitation, renovation, repair, equipping, furnishing, and placing in service of public facilities of its governmental sponsor and further authorizes the governmental sponsor to incur obligations (such as a lease purchase contract) in favor of the corporation to serve as security for the bonds to be issued by the corporation. The Bonds are being issued and the Project is being financed pursuant to the Public Facility Corporation Act and the Public Property Finance Act, Subchapter A, Chapter 271, Texas Local Government Code (the Public Property Finance Act ), Subchapter B, Chapter 41, Texas Education Code, as amended (the Tier One Act ), and Chapter 46, as amended, Texas Education Code (the Chapter 46 ). In addition, the Bonds are being issued as qualified school construction bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code ). As such, and subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS-Subsequent Separation of Tax Credit herein, a taxpayer owning a Bond on a credit allowance date will be entitled to a credit against such taxpayer s federal income tax liability equal to the product of the outstanding principal amount of such Bond on such date multiplied by 5.97% divided by four, with the first and last credits with respect to a Bond prorated accordingly. See FEDERAL TAX CREDIT AND TAX MATTERS. CUMULATIVE SINKING FUND DEPOSITS The Corporation shall make cumulative sinking fund deposits with the Trustee/Registrar for the benefit of bondholders for the Bonds on June 15, in each of the years and the respective amounts set forth below. Fiscal Year Total Ended Series 2009 Bonds (QSCBs) (1) Debt Service 30-Jun Principal Total Requirements 2010 $ - $ 109,528 $ 109, ,120,000 (2) 227,920 1,347, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,000,000 (2) 227,920 1,227, ,040,000 (2) 227,920 1,267, ,040,000 (2) 227,920 1,267, ,040,000 (2) 227,920 1,267, ,040,000 (2) 227,920 1,267, ,040,000 (2) 227,920 1,267, ,040,000 (2) 227,920 1,267, ,040,000 (2) (3) 227,920 1,267,920 $ 15,400,000 $ 3,528,328 $ 18,928,328 (1) Assumes discount term bond planned sinking fund payments. (2) Any interest earnings from the investment of prior deposits will be applied as a credit against a subsequent year s mandatory sinking fund amount. Such deposits and any interest earned thereon shall be used to pay the principal of the Bonds upon maturity and are pledged to pay the debt service requirements on the Bonds. (3) Represents final maturity date of the Bonds at which time the Cumulative Sinking Fund Deposits (as defined in the Order and set forth above) will be used to repay Bonds. 7

16 NO OPTIONAL REDEMPTION The Bonds shall not be subject to redemption prior to maturity at the option of the Corporation. MANDATORY REDEMPTION DUE TO CASUALTY LOSS OR CONDEMNATION... To the extent of a casualty loss or condemnation of the Project and if the Net Proceeds of insurance or condemnation are not sufficient to repair and restore the Project, the Bonds are subject to mandatory redemption prior to their respective stated maturities, in whole but not in part, upon payment by the District to the Corporation at a redemption price of 100% of the Outstanding principal amount of the Bonds, plus accrued interest to the date of redemption. To the extent the tax credits are stripped from the principal, the redemption value will be allocated according to the table of redemption values in Appendix E. SPECIAL MANDATORY REDEMPTION To the extent that 100% of the Available Project Proceeds are not expended for Qualified Purposes by the close of the 3-year period beginning on the date of delivery of the Bonds (or if an extension of such expenditure period has been received by the District from the Secretary of the Treasury, by the close of the extended period), the Corporation shall redeem such Nonqualified Bonds in authorization denominations (rounded up to the next highest authorized denomination) within 90 days after the end of such period, at a redemption price equal to the principal amount of and accrued interest on, if any, such Nonqualified Bonds, payable only from such unexpended proceeds of sale of the Bonds held by the Corporation. See FEDERAL TAX CREDIT AND TAX MATTERS herein. To the extent the tax credits are stripped from the principal, the redemption value will be allocated according to the table of redemption values in Appendix E. In addition, upon a Determination of a Loss of Qualified School Construction Bond Status, the Bonds are subject to special mandatory redemption prior to their maturity date, in whole, on the date designated by the Corporation, which date shall be a date on or prior to the August 15 following the next succeeding February 1 after a Determination of Loss of Qualified School Construction Bond Status, at a redemption price equal to the sum of (a) principal amount of the Bonds, together with (b) the Redemption Premium, plus (c) interest (calculated at the Treasury Rate, plus the supplemental coupon rate, if any) on the amount described in (a) from the date on which the Determination of a Loss of Qualified School Construction Bond Status occurs until the redemption date, and (d) accrued but unpaid interest on the Bonds from the last interest payment date to the Date of Loss of Qualified School Construction Bond Status. In addition, in the event that any Tax Credits that have been claimed by a Bondholder with respect to Tax Credit Allowance Dates occurring on or prior to the Tax Credit Conversion Date are determined to be ineligible as Tax Credits as a result of a Determination of Loss of Qualified School Construction Bond Status, the Corporation will pay to the Trustee for distribution to the respective Bondholders (as of the applicable Tax Credit Allowance Dates for such disallowed Tax Credits) of the Bonds or Tax Credit Certificates, as appropriate, an amount equal to the ineligible Tax Credits, plus interest thereon from the Tax Credit Allowance Date to the date of payment, compounded quarterly at the rates equal to the large corporate underpayment rates determined by the Internal Revenue Service. The moneys required to be paid by the Board pursuant to the preceding sentence shall be paid to the Trustee and deposited into a special account held by the Trustee. Such moneys shall be distributed by the Trustee to the Bondholders entitled thereto as verified in a statement of claim signed by the Bondholder and filed with the Trustee. The term Redemption Premium means, as calculated by the Corporation (or, at the Corporation s option, by its Financial Advisor) the greater of (x) zero and (y) an amount calculated as (a) the sum of the present values of the remaining scheduled payments of principal of, interest on and tax credits related to the Bonds called for redemption (exclusive of interest accrued to the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year, consisting of 12 months of 30 days each) at a rate per annum equal to the Treasury Rate minus (b) the principal amount of the Bonds called for redemption. 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 Corporation, which act or failure to act is a breach of a covenant or agreement of the Corporation contained in the Trust Agreement, the Tax Certificate, or the Bonds and which act or failure to act causes the Bonds to lose their status, or fail to qualify, as Qualified School Construction Bonds, or (b) the making by the Corporation of any representation contained in the Trust Agreement, the Tax Certificate, or the Bonds, which representation was untrue when made and the untruth of which representation at such time causes the Bonds 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 redemption date, of the Bonds to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt services of comparable maturity to the remaining average life, as of the redemption date, of the Bonds to be redeemed. The term Comparable Treasury Price means (a) if the Designated Investment Bank receives at least four Reference Treasury Dealer Quotations, the average of such quotations for the date on which such Bonds are to be redeemed, after excluding the highest and the lowest Reference Treasury Dealer Quotations, or (b) if the Designated Investment Banker obtains fewer that four Reference Treasury Dealer Quotations, the average of such quotations. The term Date of Loss of Qualified School Construction Bond Status means the date specified in a Determination of a Loss of Qualified School Construction Bond Status as the date from and after which the Bonds 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 (defined below), which date could be as early as the date of issuance of the Bonds. 8

17 The term Designated Investment Banker means one of the Reference Treasury Dealers designated by the Corporation. The term Determination of a Loss of Qualified School Construction Bond Status means (a) a final determination by the Internal Revenue Service ( IRS ) (after the Corporation has exhausted all administrative and judicial 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. The term Reference Treasury Dealer means the original underwriters of the Bonds, 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. 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 Bonds are to be redeemed. The term Treasury Rate means the rate per annum, expressed as a percentage of the principal amount of Bonds to be redeemed, equal to the semiannual equivalent yield to maturity or interpolated maturity of the Comparable Treasury Issue, assuming that the Comparable Treasury Issue is purchased on the redemption date for a price equal to the Comparable Treasury Price, as calculated by the Designated Investment Banker. In the event that the ownership of the tax credit certificates associated with the Bonds to be redeemed has been separated from the ownership of such Bonds and registered separately pursuant to the Trust Agreement, the tax credit certificates related to the redeemed Bonds shall be called for redemption in the same manner as the Bonds. Any premium associated with such redemption shall be allocated to the principal components of the Bonds and the tax credit certificates in the proportions set forth in the Table of Redemption Values for Tax Credits and Principal Components attached to this Official Statement as Appendix E. SELECTION OF BONDS TO BE MANDATORILY REDEEMED Redemption of the Bonds will be effected in $40,000 increments, so that any Bond redeemed in part will have a remaining principal amount of $40,000 or an integral multiple thereof. The Trustee will effect each redemption of the Bonds by redeeming pro rata from each person who is the Owner of a Bond to be redeemed on a redemption date, an amount of such Bonds determined by multiplying the principal amount of the Bonds to be redeemed on said redemption date by a fraction, the numerator of which is the principal amount of the Bonds owned by such Owner and the denominator of which is the principal amount of all the Bonds outstanding immediately prior to the date of redemption, and then rounding the product down to the next lower integral multiple of $40,000. The Trustee will apply, to the extent possible, any remaining amount of proceeds to redeem such Bonds in Authorized Denominations and will select, by lot, the units to be redeemed from all such Owners, which selection will be conclusive. The Bonds and the Tax Credit Certificates related to the Bonds called for redemption will also be called for redemption. In the event of an extraordinary mandatory redemption of Bonds from unexpended bond proceeds and in the event that the tax credits have been separated from the Bonds, the amount of unexpended bond proceeds shall be allocated, as nearly as reasonably possible, pro rata between (i) Bonds and (ii) an amount of (a) principal and (b) Tax Credit Certificates, based upon the relative principal amounts of the outstanding Bonds and the outstanding principal components. Any redemption shall be allocated to the Bonds, principal component and the Tax Credit component in the proportions and values set forth in Appendix E. NOTICE OF REDEMPTION... Not less than 30 days prior to a redemption date for the Bonds, the Corporation shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Bonds to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Trustee at the close of business on a day not later than the fifth day preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. Such notice shall set forth the following: (i) the maturities of the Bonds to be redeemed; (ii) the CUSIP number, if any, of the Bonds to be redeemed; (iii) the date of such notice; (iv) the issue date of the Bonds; (v) the interest rate of the Bonds to be redeemed; (vi) the redemption date; (vii) the place or places where amounts due upon such redemption will be payable; (viii) if less than all of the Bonds of any maturity are to be redeemed, the letters and numbers or other distinguishing marks of such Bonds so to be redeemed; (ix) in the case of a Bond to be redeemed in part only, also the portion of the principal amount to be redeemed; and (x) a statement that on the redemption date there shall become due and payable upon each Bond to be redeemed the amount of the principal thereon (or of the specified portion of the principal in the case of a Bond to be redeemed in part only), together with interest accrued to the redemption date, and that from and after the redemption date interest thereon shall cease to accrue and be payable. If a Bond is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given or waived as provided in the Trust Agreement, such Bonds (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the redemption date designated in such notice, interest on said Bonds (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the 9

18 redemption date designated in such notice, interest on said Bonds (or principal amount thereof to be redeemed) called for redemption shall cease to accrue and such Bonds shall not be deemed to be Outstanding. The Trustee and the Corporation, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Trust Agreement or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised or any such notice. Redemption of portions of the Bonds by the Corporation will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Trust Agreement and will not be conducted by the Corporation or the Trustee. Neither the Corporation nor the Trustee will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. See THE BONDS- Book-Entry-Only System herein. BOOK-ENTRY-ONLY SYSTEM... This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District, the Corporation, and the Underwriter believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. The District, the Corporation, and the Underwriter cannot and do not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for the Bonds, in the aggregate principal amount, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at and Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of the Bonds ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interest in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the bookentry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts 10

19 such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, redemption, and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or the Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC (nor its nominee), the Trustee or the Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Corporation, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Corporation. Under such circumstances, in the event that a successor depository is not obtained, securities certificates representing each maturity of the Bonds are required to be printed and delivered. The Corporation may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, securities certificates representing each maturity of the Bonds will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the District believes to be reliable, but the District and the Corporation takes no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement.... In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Trust Agreement will be given only to DTC. Effect of Termination of Book-Entry-Only System... In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the District, the following provisions will be applicable to the Bonds. The Bonds may be exchanged for an equal aggregate principal amount or of the Bonds in authorized denominations and of the same maturity upon surrender thereof at the principal office for payment of the Trustee. The transfer of any Bond may be registered on the registration books relating to the Bonds maintained by the Trustee for such purpose only upon the surrender of such Bond to the Trustee with a duly executed assignment in form satisfactory to the Trustee. For every exchange or transfer of registration of Bonds, the Trustee and the Corporation may make a charge sufficient to reimburse them for any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer. The District will pay the fee, if any, charged by the Trustee for the transfer or exchange. The Trustee will not be required to transfer or exchange any Bond after its selection for redemption. The District and the Trustee may treat the person in whose name a Bond is registered as the absolute owner thereof for all purposes, whether such Bond is overdue or not, including for the purpose of receiving payment of, or on account of, the principal or of, and interest on, such Bond. TRUSTEE... The initial Trustee is Wells Fargo Bank, N.A., Houston, Texas. In the Trust Agreement, the Corporation retains the right to replace the Trustee. The Corporation covenants to maintain and provide a Trustee at all times until the Bonds are duly paid and any successor Trustee shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Trustee for the Bonds. Upon any change in the Trustee for the Bonds, the Corporation agrees to 11

20 promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Trustee/Registrar. Principal of or interest on the Bonds will be payable to the registered owner at maturity or prior redemption upon presentation at the corporate trust office of the Trustee. Interest on the Bonds will be payable by check, dated as of the Bond Payment Date, and mailed by the Trustee to registered owners as shown on the Security Register of the Trustee on the Record Date, or by such other method, acceptable to the Trustee, requested by, and at the risk and expense of, the registered owner. If the date for any payment due on any Bond is a Saturday, Sunday, legal holiday, or day on which banking institutions in the city in which the designated corporate trust office of the Trustee is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a day. The payment on such date shall have the same force and effect as if made on the original date payment was due. TRANSFER, EXCHANGE AND REGISTRATION... In the event the Book-Entry-Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Trustee only upon presentation and surrender to the Trustee and such transfer or exchange will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Trustee/Registrar. New Bonds will be delivered by the Trustee, in lieu of the Bonds being transferred or exchanged, at the designated office of the Trustee, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Trustee. New Bonds registered and delivered in an exchange or transfer will be in any integral multiple of $40,000 for any one maturity and for a like aggregate principal amount as the Bonds surrendered for exchange or transfer. See THE BONDS- Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. The Trustee will not be required to transfer or exchange any Bond (i) after the notice calling such Bond for redemption has been given as provided in the Trust Agreement or (ii) during a period beginning at the opening of business on the first day of the month (whether or not a Business Day) next preceding either any Bond Payment Date or any date of selection of Bonds to be redeemed and ending at the close of business on the Bond Payment Date or day on which the applicable notice of redemption is given. RECORD DATE FOR INTEREST PAYMENT... The record date ("Record Date") for determining the person entitled to receive the interest payable on the Bonds on any interest payment date means the close of business on the last business day of the preceding month of such interest payment date. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Trustee, if and when funds for the payment of such interest have been received from the Corporation. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which must be 15 days after the Special Record Date) will be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each holder of a Bond appearing on the registration books of the Trustee at the close of business on the last business day next preceding the date of mailing of such notice. MUTILATED, DESTROYED, LOST, OR STOLEN BONDS... Upon discontinuation of the Book-Entry-Only System the Corporation has agreed to replace mutilated, destroyed, lost, or stolen Bonds upon surrender of the mutilated Bonds to the Trustee, or receipt of satisfactory evidence of such destruction, loss, or theft, and receipt by the Corporation and Trustee of security or indemnity as may be required by either of them to hold them harmless. The Corporation and the Trustee may require payment of taxes, governmental charges, and other expenses in connection with any such replacement. DEFEASANCE OF BONDS... The Trust Agreement provides that the Bonds may be discharged, defeased or refunded in any manner now or hereafter permitted by law as long as the Corporation obtains an opinion of Bond Counsel that such discharge, defeasance or refunding (i) does not cause the associated tax credits to terminate prior to the stated maturities of the Bonds except for any termination associated with a special mandatory redemption of the Bonds and (ii) does not cause the Bonds to cease being Qualified School Construction Bonds except in connection with a special mandatory redemption of the Bonds. Upon any discharge, defeasance or refunding of all or a portion of the Bonds, such Bonds will no longer be regarded to be outstanding or unpaid; provided, however, the Corporation will remain obligated for all payments, including the contribution of additional money or securities to any defeasance escrow or trust account, if necessary to provide sufficient amounts to satisfy the payment obligations. The Corporation will covenant that no deposit of moneys or government securities will be made under the Trust Agreement and no use made of any such deposit which would cause the Bonds to be treated as arbitrage bonds within the meaning of Section 148 of the Code, or regulations adopted pursuant thereto, as modified by Section 54A(d)(4) of the Code. Any moneys deposited with the Trustee, or an authorized escrow agent, and all income from government securities held in trust by the Trustee, or an authorized escrow agent, pursuant to Trust Agreement which is not required for the payment of the Bonds, or any principal amount(s) thereof, or interest thereon with respect to which such moneys have been so deposited will be remitted to the Corporation or deposited as directed by the Corporation. Furthermore, any money held by the Trustee for the payment of the principal of and interest on the 12

21 Bonds and remaining unclaimed for a period of three (3) years after the stated maturity, or applicable redemption date, of the Bonds such moneys were deposited and are held in trust to pay will upon the request of the Corporation be remitted to the Corporation against a written receipt therefor. Notwithstanding the above and foregoing, any remittance of funds from the Trustee to the Corporation will be subject to any applicable unclaimed property laws of the State of Texas. In such event, all administrative expenses and amounts due or to become due hereunder will be paid or provided for, then and in either such event, the right, title, and interest of the Trustee and the Corporation under the Trust Agreement will thereupon cease, terminate, and become void, and the Trustee will assign and transfer to the Corporation or the District, upon the order of the District, all property (in excess of the amounts required for the foregoing) then held by the Trustee (including the Lease and all payments thereunder and all balances in any fund or account created under the Trust Agreement) and will execute such documents as may be reasonably required by the District or the Corporation in this regard. AMENDMENTS... The Corporation and the Trustee, without the consent of the Bondholders, may amend the Trust Agreement, the Lease or other instruments evidencing the existence of a lien on the Trust Estate (1)to cure any ambiguity, inconsistency, formal defect, or omission in this Trust Agreement or the Lease, (2) to grant to or confer upon the Trustee for the benefit of the owners of the Bonds any additional rights, remedies, powers, or authority that may lawfully be granted to or conferred upon the Bondholders or the Trustee or either of them under the Trust Agreement or the Lease, (3) to subject additional revenues to the lien and pledge of the Trust Agreement, (4) to add to the covenants and agreements contained in the Trust Agreement other covenants and agreements thereafter to be observed for the protection of the Bondholders or to surrender or limit any right, power, or authority herein reserved to or conferred upon the Corporation, or (5) to evidence any succession by the District, the Trustee, or the Corporation and the assumption by such successor of the requirements, covenants, and agreements of the District, the Trustee, or the Corporation in the Financing Documents and the Bonds. With the prior approval of Bondholders owning not less than a majority in (1) aggregate principal amount of the Bonds then Outstanding and (2) a majority of the owners of the Tax Credit Certificates then Outstanding in the event that the ownership of the Tax Credit Certificates associated with the Bonds has been separated from the ownership of the Bonds, will have the right, from time to time, anything contained in the Trust Agreement to the contrary notwithstanding, to amend any of the terms or provisions contained in this Trust Agreement; provided, however, that nothing in the Trust Agreement will permit or be construed as permitting: (1) without the consent of each Bondholder so affected, an extension of maturity of the principal of or the interest on any Bond, a reduction in the principal amount of any Bond or a reduction in the rate of interest thereon; (2) without the consent of all of the Bondholders, a privilege or priority of any Bond over any other Bond or a reduction in the aggregate principal amount of the Bonds required for consent to an amendment; or (3) without the consent of all of the Bondholders, creation of any prior or parity liens on the Trust Estate; or (4) an amendment approved solely by the majority of the Bondholders of the Bonds which shall have a material or substantive impact on the ownership of the Tax Credit Certificates or an amendment approved solely by a majority of the holders of the Tax Credit Certificates which shall a material or substantive impact on the Bondholders of the Bonds. SOURCES AND USES OF PROCEEDS... The proceeds from the sale of the Bonds will be applied approximately as follows: Sources: Par Amount $ 15,400, Original Issue Discount (3,080,000.00) District Contribution 261, Total Sources of Funds $ 12,581, Uses: Construction Contract $ 11,213, Architect Fees 874, Miscellaneous Costs 132, Costs of Issuance (1) 209, Underwriter's Discount 151, Total Uses of Funds $ 12,581, (1) Cost of Issuance limited to 2% of Principal Amount of the Bonds. $193,087 of the Cost of Issuance is to be paid from proceeds of the Bonds. $167, 987 of the Cost of Issuance is to be paid from the District Contribution. 13

22 DEBT SERVICE REQUIREMENTS OF THE CORPORATION Fiscal Fiscal Year Year Ended Series 2009 Lease Revenue Bonds (QSCBs) (1) Ended 31-Aug Principal Interest Total 31-Aug 2010 $ - $ 109,528 $ 109, , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,400,000 (2) (3) 227,920 15,627, $ 15,400,000 $ 3,528,328 $ 18,928,328 (1) Assumes discount term bond planned sinking fund payments. (2) Any interest earnings from the investment of prior deposits will be applied as a credit against a subsequent year s mandatory sinking fund amount. Such deposits and any interest thereon shall be used to pay the principal of the Bonds upon maturity and are pledged to pay the debt service requirements on the Bonds. (3) Represents final maturity date of the Bonds at which time the Cumulative Sinking Fund Deposits (as defined in the Order and set forth above) will be used to repay Bonds. SECURITY FOR THE BONDS Payments of principal and interest with respect to the Bonds are payable only from the Lease Payments to be paid by the District under the Lease, from certain money held by the Trustee under the Trust Agreement, and from amounts received by the Trustee from the sale or other transfer of the Corporation s interest in the Project after termination of the Lease following an Event of Default or Event of Nonappropriation by the District. TRUST ESTATE... All payments to be made by the Trustee under the Trust Agreement to the registered owners may be made only from the income and proceeds from the Trust Estate and only to the extent that the Trustee has received income or proceeds from the Trust Estate. The Trust Estate consists of all right, title, and interest of the Corporation in the Project and in and under the Financing Documents, excluding amounts held in the Rebate Fund, but including without limitation, all right, title, and interest of the Corporation in and to all Lease Payments and other payments paid or payable by the District from and after the date of the Trust Agreement and other income, charges, and funds realized from the lease, sale, transfer, or other disposition of the Project. LEASE PAYMENTS... The District is required to pay to the Trustee, for the account of the Corporation, the Lease Payments from Available Funds on March 1, 2010, and each June 1, September 1, December 1, and March 1 thereafter for so long as the Lease is in effect. Under the Lease, so long as any Bonds remain outstanding an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of (i) interest to become due on the Bonds on the next Bond Payment Date, (ii) the Cumulative Sinking Fund Deposits then due on the Bonds, and (iii) the principal portion of the Bond Payment, either pursuant to a special mandatory sinking fund redemption or upon maturity of the Bonds. THE OBLIGATIONS OF THE DISTRICT UNDER THE LEASE, INCLUDING ITS OBLIGATION TO PAY THE LEASE PAYMENTS, CONSTITUTE A CURRENT EXPENSE OF THE DISTRICT IN EACH FISCAL YEAR, AND DO NOT CONSTITUTE AN INDEBTEDNESS OF THE DISTRICT WITHIN THE MEANING OF THE LAWS OF THE STATE. NOTHING 14

23 IN THE LEASE IS TO CONSTITUTE A PLEDGE BY THE DISTRICT OF ANY TAXES OR OTHER MONEY, OTHER THAN AVAILABLE FUNDS FOR THE CURRENT FISCAL YEAR, TO THE PAYMENT OF LEASE PAYMENTS DUE THEREUNDER. MORTGAGE AND SECURITY AGREEMENT... To secure its obligations under the Trust Agreement, the Corporation will grant a first mortgage lien on and first deed of trust title to the real property portion of the Project and will assign and pledge the Corporation s interest in the leases, rents, issues, profits, revenues, income, receipts, money, rights, and benefits of and from the Project for the use and benefit of the Trustee on behalf of the owners of the Bonds, pursuant to the Mortgage. Additionally, the Corporation will grant to the Trustee a first priority purchase money security interest in the machinery, equipment, furnishings, or other personal property acquired by the Corporation with the proceeds of the Bonds, and installed or located on the Project site, and substitutions or replacements therefor, in any inventory of the Corporation now or hereafter located at the Project, and in the accounts, documents, chattel paper, instruments, and general intangibles arising in any manner from the Corporation s ownership and operation of the Project pursuant to the Security Agreement. REMEDIES... REMEDIES AVAILABLE UPON A FAILURE OF THE DISTRICT TO APPROPRIATE OR PAY LEASE PAYMENTS ARE LIMITED TO TERMINATION OF THE DISTRICT S LEASEHOLD INTEREST, THE RIGHT TO TAKE POSSESSION AND CONTROL OF THE PROJECT, AND THE RIGHT TO SELL OR LEASE THE PROJECT UPON FORECLOSURE UNDER THE MORTGAGE AND SECURITY AGREEMENT. See APPENDIX A Selected Provisions of the Financing Documents. The enforcement by the Trustee of the remedies provided in the Financing Documents is subject to the application of principles of equity and state and federal laws relating to bankruptcy, moratorium, reorganization, and creditors rights generally, and such remedies may require the expenditure of money and considerable time to enforce. ADDITIONAL BONDS... The Corporation has covenanted and agreed that, other than bonds or other obligations issued to refund the Bonds, no other obligations will be issued which are secured by a lien on the Trust Estate. However, no refunding bonds or obligations may have a lien on the Trust Estate prior and superior to that securing the Bonds which will remain Outstanding after the refunding. The Corporation, however, has reserved the right to issue additional bonds or obligations payable from and secured by Lease payments paid from Available Funds received by the Corporation ( Additional Bonds ); provided, however, that no such Additional Bonds may be issued unless and until the following conditions will have all been met: (a) No Event of Default under the Trust Agreement is in existence at the time of issuance of the Additional Bonds; (b) The issuance of the Additional Bonds is permitted by the laws of the State effective at the time of the authorization of such Additional Bonds; and (c) The funds eligible to be Available Funds of the District (other than unintended surplus maintenance tax funds of the District remaining at the end of each Fiscal Year after payment of all maintenance and operating expenses of the District for that Fiscal Year) as estimated by the Texas Education Agency for the District s current or next succeeding Fiscal Year at the time of adoption of the resolution authorizing the issuance of the Additional Bonds, are equal, based upon a certification by the District, to not less than one and one-tenth (1.10) times the maximum annual principal and interest requirements, during any fiscal year prior to the Bonds maturity, of the Bonds, all Additional Bonds, including the proposed Additional Bonds, and the portion of all other contractual obligations at the time outstanding and payable from funds eligible to be Available Funds (other than unintended surplus maintenance tax funds of the District remaining at the end of each Fiscal Year after payment of all maintenance and operating expenses of the District for that Fiscal Year). THE PROJECT The Corporation is issuing the Bonds and the District is entering into the Lease with the Corporation in order to finance the Project, consisting of the acquisition and construction of an elementary school facility and related facilities (the Project ). The Project is expected to occupy approximately 98,000 square feet and will serve the Daniel Breeden campus in the District. The Project includes the following components: SITE... The site of the Project is a parcel containing approximately acres of land presently owned by the District and located at 3955 Dana Avenue in Brownsville, Texas. A Phase I Environmental Site Assessment of the site will be performed by a qualified environmental professional. The land will be sold by the District to the Corporation, for the purpose of facilitating the Project. PROJECT NECESSITY... The Project will be used by the District as an elementary school facility. DESIGN AND CONSTRUCTION... The design of the Project has been completed in accordance with the terms of agreements, entitled Standard Agreement Between Owner and Architect (the Architect Contracts ) between the District and Gignac & Associates, LLP (the Architect ). The Architect has completed the preliminary plans and specifications for the Project. The Architect will manage the design and construction of the Project to ensure that the Construction Contractor (defined below) builds the Project in accordance with the final plans and specifications for the Project (which together with the preliminary plans and specifications constitute the Plans and Specifications ). Pursuant to the Architect Contract, the Architect will be required to provide a professional liability or an errors and omissions insurance policy. The District will assign the Architect Contract to the Corporation and the Corporation s rights under the Architect Contract and in the Plans and Specifications will then be assigned to the Trustee. 15

24 THE CONSTRUCTION CONTRACTOR... The work necessary to complete the Project will be performed in accordance with the terms of an agreement titled Standard Contract Between Owner and Contractor and General Conditions of the Contract for Construction collectively (the Construction Contract ) between the Corporation and D. Wilson Construction (the Construction Contractor ). Pursuant to the Construction Contract, the Construction Contractor will agree to construct the Project for a stipulated maximum guaranteed sum. The Construction Contract will provide that the Project will be completed within a certain number of days after commencement of the work. The Construction Contractor is required to provide a performance bond covering the faithful performance of the contract in the amount of the guaranteed maximum sum of the Construction Contract and a payment bond covering the payment of all obligations arising thereunder, also in the amount of the guaranteed maximum sum of the Construction Contract. The Corporation s rights under the Construction Contract will be assigned to the Trustee. The Construction Contractor was selected by the Corporation, with the assistance of the Architect, upon the conclusion of a request for proposals process initiated by the District and the Architect. The Construction Contractor is required by the terms of the Construction Contract to purchase and maintain certain liability, workers compensation, builder s risk, and contractual liability insurance with the limits of liability stated in the Construction Contract and the Lease. THE CORPORATION The Corporation is a non-profit public corporation and instrumentality of the District, formed on behalf of the District pursuant to the Public Facility Corporation Act and a resolution of the Board of Trustees of the District. The Corporation was formed for the purpose of acquiring, constructing, and financing school facilities for the District. The Corporation currently has no assets other than its interest in the Project and its rights under the Lease, which will be assigned to the Trustee for the benefit of the registered owners of the Bonds upon the initial delivery of the Bonds. Pursuant to the Bylaws of the Corporation, the Corporation is governed by a seven-member Board of Directors. All of the current Board of Directors are members of the Board of Trustees of the District. Each director serves as a member of the Board of Directors of the Corporation for the term not exceed six years and a director shall not hold an office for a term greater than three years. Any director may be removed from office by the Board of Trustees for cause or at any time without cause. The Directors serve without compensation. THE CORPORATION S OBLIGATION WITH RESPECT TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS IS A SPECIAL, LIMITED, AND NON-RECOURSE OBLIGATION PAYABLE SOLELY FROM THE LEASE PAYMENTS PAYABLE BY THE DISTRICT PURSUANT TO THE LEASE, AND FROM PROCEEDS FROM THE SALE OR OTHER LEASE OF THE PROJECT. THE CORPORATION HAS NO AUTHORITY TO LEVY TAXES. THE BONDS DO NOT CONSTITUTE AN OBLIGATION, EITHER SPECIAL, GENERAL, OR MORAL, OF THE DISTRICT, THE STATE, OR ANY OTHER POLITICAL SUBDIVISION THEREOF. THE DISTRICT The District, an independent school district and political subdivision of the State of Texas, comprises approximately 109 square miles within Cameron County, Texas. The District encompasses approximately 100% of the geographic area of the City of Brownsville, Texas (the City ) a portion of the Township of Rancho Viejo and several unincorporated areas in Cameron County. The State of Texas, Cameron County, certain county-wide political entities, the City, and other special districts within the District each have authority to levy ad valorem taxes. The District is governed by a seven-member Board of Trustees (the Board ) who serve staggered three-year terms with elections being held in November of each year. Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools who is the chief administrative officer of the District. Support services are supplied by consultants and advisors. The District operates under the statutory and administrative requirements of the Texas Education Code and the State of Texas, and is accredited by the Texas Education Agency ( TEA ). THE DISTRICT S ONLY OBLIGATION WITH RESPECT TO THE PAYMENT OF THE BONDS IS TO PAY LEASE PAYMENTS TO THE TRUSTEE PURSUANT TO THE LEASE FROM MONEY TO BE APPROPRIATED ANNUALLY FOR THE PAYMENT THEREOF. FOR A DESCRIPTION OF THE DISTRICT S OBLIGATIONS WITH RESPECT TO THE BONDS, SEE THE PLAN OF FINANCING AND SECURITY FOR THE BONDS. THE SOURCE OF FUNDS TO BE APPROPRIATED BY THE DISTRICT FOR LEASE PAYMENTS ARE FUNDS APPROPRIATED BY THE TEXAS LEGISLATURE AND ANY UNINTENDED SURPLUS MAINTENANCE TAX REVENUES. THE DISTRICT HAS NO AUTHORITY TO LEVY TAXES SPECIFICALLY FOR THE PAYMENT OF THE LEASE PAYMENTS. 16

25 General FEDERAL TAX CREDIT AND TAX MATTERS This section summarizes certain material federal income tax consequences relating to an investment in the Bonds. The summary only addresses such consequences to initial purchasers of the Bonds and is based upon the current provisions of the Code, its legislative history, treasury regulations, administrative pronouncements and judicial decisions, all of which are subject to change, possibly with retroactive effect. This summary does not purport to be a complete discussion of all federal income tax consequences relating to making an investment in the Bonds. The following is a general summary of the United States federal income tax consequences of the purchase and ownership of the Bonds. 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 Bonds 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 Bonds). The summary is therefore limited to certain issues relating to initial investors who will hold the Bonds as capital assets within the meaning of section 1221 of the Code, as amended (the Code ), and acquire such Bonds 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 IRS with respect to any of the U.S. federal income tax consequences discussed below, and no assurance can be given that the IRS 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 BONDS. Internal Revenue Service Circular 230 Notice You should be aware that: (i) the discussion with respect to United States federal tax matters in this Official Statement and the opinion of Bond Counsel 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 not written and the opinion of Bond Counsel was not provided 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. The discussion herein concerning certain tax consequences with respect to an investment in the Bonds is included for general information only. All persons are urged to consult their own tax advisors to determine the specific tax consequences of making an investment in the Bonds, including any state, local or non-u.s. tax consequences. Federal Tax Credit In the opinion of Bond Counsel, under existing law and subject to the discussion below, the Bonds will qualify as Qualified School Construction Bonds under Section 54F of the Code, and subject to the discussion of FEDERAL TAX CREDIT AND TAX MATTERS Subsequent Separation of Tax Credit herein, a taxpayer who owns a Bond on a credit allowance date will qualify for the tax credit allowable with respect to such Bond as a credit against the taxpayer s federal income tax liability subject to the limitations of Section 54A of the Code, assuming compliance by the Corporation and the District with the requirements described below. Such compliance generally will be established at the time of issuance of the Bonds, except that if the Corporation is unable to actually spend 100% of the Available Project Proceeds (as defined below) of the Bonds for a Qualified Purpose (as defined below) within the three-year period beginning on the date of issuance of the Bonds, the Corporation must apply unspent proceeds to redeem a portion of the Bonds in order to preserve the qualification of the Bonds as Qualified School Construction Bonds (see THE BONDS Special Mandatory Redemption herein). Sections 54A and 54F of the Code allow a federal income tax credit to a bondholder who owns a Qualified School Construction Bond on a credit allowance date. The credit allowance dates for the Bonds are March 15, June 15, September 15 and December 15, commencing March 15, 2010, as well as the last date a Bond is outstanding. A Qualified School Construction Bond generally includes a bond issued as part of an issue if 100% of the available project proceeds are to be used for a Qualified Purpose. Available Project Proceeds means the proceeds from the sale of the Bonds, less costs of issuance (to the extent such costs of issuance do not exceed 2 percent of such proceeds), plus any investment earnings on such amount. A Qualified Purpose with respect to any Qualified School Construction Bonds means construction, rehabilitation or repair of a public school facility (including costs of 17

26 acquiring equipment to be used in the portions of the public school facility that are being constructed, rehabilitated, or repaired with proceeds of such bonds), or for the acquisition of land on which such school facility is to be constructed with part of the proceeds of the issue. An issuer of Qualified School Construction Bonds must receive an allocation of the national Qualified School Construction Bond limitation for the calendar year. A Qualified School Construction Bond must be issued by a state or local government within which the financed school facility is located. Qualified School Construction Bonds may not exceed a maximum term which would result in the present value of the obligation to repay the principal on the Bonds being equal to 50% of the face amount of the Bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more which are issued in the same month in which there is a binding, written contract for the sale or exchange of the Bonds. The applicable term is posted by the U.S. Treasury on the same website on which the tax credit rate is posted. See FEDERAL TAX CREDIT AND TAX MATTERS Amount of Credit. Amount of Credit The amount of tax credit with respect to a Qualified School Construction Bond is the applicable qualified tax credit bond rate as posted by the Bureau of Public Debt ( effective for the date of the sale of the Bonds multiplied by the outstanding principal amount of the Bonds owned by a taxpayer on the relevant credit allowance date divided by four. The Credit Allowance Dates are March 15, June 15, September 15 and December 15 of each year the Bonds are outstanding until maturity or earlier redemption of the Bonds and, with respect to a Bond that is redeemed or matures, the last day on which such Bond is outstanding. In the case of the Bonds, the tax credit rate is 5.97%. The tax credit allowed for the first Credit Allowance Date and for any period in which a Bond is redeemed or matures will be a ratable portion of the tax credit otherwise allowed. The total tax credit with respect to the aggregate principal amount of the Bonds is shown on the inside cover page of this Official Statement. Limitation and Carryover of the Credit The allowable tax credit may not exceed the sum of the taxpayer s regular tax liability and alternative minimum tax liability of Section 55 of the Code, less, in general, the taxpayer s other tax credits (except refundable tax credits set forth in subpart C of part IV of the subchapter A of the Code). Any excess may be carried over to the succeeding taxable year, subject to the limitation for such succeeding taxable year. Credit Amount Included in Income as Deemed Interest Section 54A of the Code requires the owner of a Qualified School Construction Bond to include the amount of the allowable tax credit in gross income as interest income. Thus, for example, a cash method taxpayer would take the deemed interest payment into account on the credit allowance date, while an accrual method taxpayer must accrue as interest income the amount of the credit over the accrual period that ends on the credit allowance date. If an accrual method taxpayer sold a Bond before any given credit allowance date, the taxpayer would have to accrue such interest income up to the date of sale but would not qualify for any of the tax credit for such credit allowance date. Because the subsequent purchaser would obtain the full credit for that credit allowance date, presumably the purchase price would reflect the accrued interest amount. It would appear that the receipt of such amount by the taxpayer would constitute a return of capital (tax basis) and not be subject to additional (i.e. double) taxation to the taxpayer. Passive Activity Rules Section 469 of the Code generally provides that a passive activity credit may only be a credit against the federal income tax on passive activity income. The tax credit with respect to a Qualified School Construction Bond is not considered a passive activity credit under Section 469(d) of the Code and, therefore, such credit is not subject to the above limitations with respect to passive activity credits. Allocation of Tax Credits by S Corporations, Partnerships, RICS, and REITS An allocation of the credit by S corporations and partnerships to shareholders and partners, respectively, is treated as a distribution. With respect to tax credit bonds held by regulated investment companies (RICs) and real estate investment trusts (REITs), the credit is allowed to shareholders and beneficiaries of the RIC or REIT, respectively, and the income from the credit is treated as distributed to such shareholders or beneficiaries under procedures to be prescribed by the Secretary. Subsequent Separation of Tax Credit Pursuant to procedures to be prescribed by the Secretary, the ownership of the Bonds and the tax credit attributable to such Bonds may be separated. No such regulations have yet been promulgated. Assuming such procedures are prescribed and in the event of a subsequent separation of the tax credit from the Bonds in compliance with such procedures, the federal income tax credit shall be allocated to the owner of the instrument entitled to the credit and not to the owner of the Bond. Neither the Corporation nor the District make any representation with respect to any subsequent separation of the federal tax credit attributable to the Bonds. Certain Investor Considerations Regarding the Bonds The Bonds are a new product which derive from the recent passage of the American Recovery and Reinvestment Tax Act of 2009 (the Recovery Act ), and there is currently no secondary market for the Bonds. There can be no assurance that a secondary market will develop, or if a 18

27 secondary market does develop, that it will provide Bondholders with liquidity or continue for the full term of the Bonds. The Underwriters are under no obligation to make a secondary market for the Bonds. The mechanics of transfer and registration and the developing nature of the tax treatment of the Bonds may limit liquidity. Likewise, there is currently no secondary market for selling credits, nor is there yet a procedure for separating the credits from the Bonds. The tax credits are not refundable. If an owner of a Bond has gross income tax liability for a given year less than the amount of tax credits to which it is entitled for that year, then the owner would be required to carry forward any excess tax credit to subsequent tax years. The tax credits to which an owner of a Bond is entitled on a particular credit allowance date are not transferable after such credit allowance date; investors should be aware that to the extent that the investor is not a potential taxpayer (either now or in the future) and owns a Bond on a credit allowance date, the tax credit cannot be utilized. Because of the developing nature of practices to implement the qualified school construction bond provision of the Recovery Act, it may be necessary following the date of delivery of the Bonds for the Corporation and the Trustee to make certain adjustments to the mechanisms outlined in the Trust Agreement as additional guidance from the IRS is provided. Interest on the Bonds Any interest paid on the Bonds (including the deemed payments described in FEDERAL TAX CREDIT AND TAX MATTERS Credit Amount Included in Income as Deemed Interest ) will be included in the gross income, as defined in section 61 of the Code, of the beneficial owners thereof (subject to the discussion above in FEDERAL TAX CREDIT AND TAX MATTERS Subsequent Separation of Tax Credit herein) 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. Disposition of Bonds and Market Discount A beneficial owner of Bonds will generally recognize gain or loss on the redemption, sale or exchange of a Bond 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 Bonds. Generally, the beneficial owner s adjusted tax basis in the Bonds 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 Bonds. Under current law, a purchaser of a Bonds who did not purchase the Bonds in the initial public offering (a subsequent purchaser ) generally will be required, on the disposition of the Bonds, 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 Bonds by a subsequent purchaser is less than the sum of Issue Price and the amount of original issue discount previously accrued on the Bonds. The Code also limits the deductibility of interest incurred by a subsequent purchaser on funds borrowed to acquire a Bond 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 recharacterization of gain as ordinary income on a subsequent disposition of a Bond could have a material effect on the market value of the Bonds. Backup Withholding Under section 3406 of the Code, a beneficial owner of the Bonds who is a United States person, as defined in section 7701(a)(3) of the Code, may, under certain circumstances, be subject to backup withholding on payments of current or accrued interest on the Bonds. This withholding applies if such beneficial owner of Bonds: (i) fails to furnish to the 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 Bonds. Beneficial owners of the Bonds 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 Bonds is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will be subject 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 Bonds is not deemed contingent 19

28 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 on the Bonds pursuant to a loan agreement entered into in the ordinary course of the bank s trade or business. Assuming payments on the Bonds 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 Bonds 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 Bonds for U.S. federal income tax purposes. To date, the IRS has not issued any rulings or regulations or otherwise provided any guidance with respect to the mechanics of reporting of the federal tax credits as the equivalent of interest income, the reporting of the availability of the tax credits to the Bonds owners, or the accrual of original issue discount on the Bonds. The failure of the Trustee to furnish a tax reporting form to a Bond owner does not necessarily mean that the owner has no taxable income. Proposed Opinion Delivery of the Bonds is subject to the receipt of an opinion of Fulbright & Jaworski L.L.P., Bond Counsel, to the effect that (i) the Bonds are qualified school construction bonds within the meaning of Section 54F of the Code, and (ii) owners of the Bonds (subject to the discussion below regarding separation of credit from the Bonds) as of the applicable credit allowance date (defined in Section 54A of the Code) are entitled, subject to the limitations of Section 54A of the Code, to a federal income tax credit for such taxable year. However, the amount of the federal credit will be treated as interest for federal tax purposes and will be included in gross income of the recipients thereof. Pursuant to procedures to be prescribed by the Secretary, the ownership of a Bond and the federal income tax credit attributable to such Bond may be separated. No such regulations have yet been promulgated. Assuming such procedures are prescribed and in the event of a subsequent separation of the tax credit from the Bonds in compliance with such procedures, the federal income tax credit shall be allocated to the owner of the instrument entitled to the credit and not to the owner of the Bond. Bond Counsel expresses no opinion with respect to any separation of the federal tax credit attributable to the Bonds. In rendering its opinion, Bond Counsel will rely upon certain representations and certifications of the Corporation and the District pertaining to the use, expenditure and investment of the proceeds of the Bonds, and has assumed continuing compliance by the Corporation and the District, subsequent to the issuance of the Bonds, with the covenants set forth in the Lease and the Trust Agreement. Failure to comply with any of these covenants would result in termination of the tax credit, possibly from the date of original issuance of the Bonds. Bond Counsel will express no current opinion as to the effect of any future action which may be taken under the Trust Agreement. Bond Counsel s opinion is not a guaranty of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Corporation and the District described above. No ruling has been sought from the IRS with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel s opinion is not binding on the IRS. If an audit of the Bonds is commenced, under current procedures applicable to tax-exempt bonds issued under Section 103 of the Code the IRS is likely to treat the Corporation as the taxpayer, and the owners of the Bonds would have no right to participate in the audit process. In responding to or defending an audit of the Bonds, the Corporation may have different or conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome. Except as described above, Bond Counsel will express no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation. Prospective purchasers of the Bonds should be aware that the ownership of the Bonds may result in collateral federal tax consequences. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may prevent owners of the Bonds from realizing the full current benefit of the tax status of the Bonds. The introduction or enactment of any future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. 20

29 STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the District Court ) against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the Commissioner ) and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate (the M&O Tax ) had become in effect a state property tax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the Finance System ) was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the Texas Constitution, because the State of Texas (the State ) did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the Supreme Court ), which rendered decisions in the case on May 29, 2003 ( West Orange-Cove I ) and November 22, 2005 ( West Orange-Cove II ). After the remand by the Supreme Court back to the District Court in West Orange-Cove, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated Article VIII, Section 1-e of the Texas Constitution because the statutory limit of $1.50 per $ of taxable assessed valuation on property taxes levied by school districts for maintenance and operation purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article VII, Section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve [a] general diffusion of knowledge as required by Article VII, Section 1 of the Texas Constitution, because the Finance System was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange-Cove II, the Supreme Court s holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education system was adequate, since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not inefficient, because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of suitability, since the Finance System was suitable for adequately and efficiently providing a public education. In reversing the District Court s holding that the Finance System was unconstitutional under Article VII, Section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of Article VII, Section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ( Edgewood IV ) that such funding variances may not be unreasonable. The Supreme Court further stated that [t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have. The Supreme Court also noted that [e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system, and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a general 21

30 diffusion of knowledge without additional facilities. Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature (the Legislature ) enacted House Bill 1 ( HB 1 ), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the State treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the Reform Legislation ). The Reform Legislation generally became effective at the beginning of the fiscal year of each district. Possible Effects of Litigation and Changes in Law on District Bonds The Reform Legislation did not alter the provisions of Chapter 45, Texas Education Code, that authorizes districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service tax as security for payment of the Bonds. Additionally, the Bonds are not secured from a pledge of ad valorem taxes nor does the Corporation have the authority to levy such a tax. Reference is made, in particular, to the information under the heading THE BONDS Security for Payment in the Official Statement. In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past State funding systems. Among other possibilities, a district s boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. In Edgewood IV, the Supreme Court stated that any future determination of unconstitutionality would not, however, affect the district s authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system s unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions (collectively, the Contract Clauses ). Consistent with the Contract Clauses, in the exercise of its police powers, the State may make such modifications in the terms and conditions of contractual covenants related to the payment of the Bonds as are reasonable and necessary for the attainment of important public purposes. Although, as a matter of law, the Bonds, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of future legislation or litigation, or how such legislation or future court orders may affect the District s financial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address school funding in Texas could substantially adversely affect the financial condition, revenues or operations of the District, as noted herein, the District does not anticipate that the security for payment of the Bonds. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. General CURRENT PUBLIC SCHOOL FINANCE SYSTEM The following description of the Finance System is a summary of the Reform Legislation and the changes made by the State Legislature to the Reform Legislation since its enactment, including modifications made during the regular session of the 81 st Texas Legislature (the 2009 Regular Legislative Session ). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon s Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded were intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately 11% in fiscal year and approximately another 22% in fiscal year , but subject to local referenda that may increase local M&O Tax levies, thus offsetting a part of the compression in local M&O Tax levies (see TAX RATE LIMITATIONS ). Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board projected that the Reform Legislation would be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years through , however State surpluses have been appropriated to offset the revenue shortfall in fiscal year and for the and State biennia. Under the Finance System, as modified during the 2009 Regular Legislative Session, a school district that imposes a M&O Tax at a rate at least equal to the product of the state compression percentage (as defined below) multiplied by the district s M&O tax rate is entitled for the school year as calculated to at least the amount of State funding necessary to provide the district with the sum of (A) the amount of State and local revenue per weighted average daily attendance ( WADA ) to which the school district would be entitled to for the school year as calculated under the law as it existed on January 1, 2009, (B) an additional $120 per WADA, (C) an amount 22

31 to which the district is entitled based on supplemental payments owed to any tax increment fund for a reinvestment zone and (D) any amount due to the district to the extent the district contracts for students residing in the district to be educated in another district (i.e., tuition allotment). State funds appropriated to provide districts the guaranteed amount may only be used for maintenance and operating purposes and not to fund facilities, debt service or other purposes. If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the fiscal year, the district s guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments (each as herein after defined) and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to compress their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the fiscal year. The state compression percentage is a basic component of the funding formulas. The state compression percentage was 66.67% for fiscal years and For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to such district s adopted M&O Tax rate for the fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. For fiscal year , the Commissioner determined the State compression percentage to be 66.67%. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the equalized wealth level (described under Wealth Transfer Provisions ) to reduce their wealth to the equalized wealth level or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for enrichment of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ( Tier One ) and (2) State guaranteed revenues per student for each cent of local tax effort that exceeds the compressed tax rate to provide operational funding for an enriched educational program ( Tier Two ). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ( EDA ), the Instructional Facilities Allotment ( IFA ), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the state compression percentage multiplied by the lesser of (a) 1.50 or (b) the District s 2005 M&O tax to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. The cost of the basic program is based on an allotment per student known as the Tier One Basic Allotment. The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the cost of education index. In addition, a district-size adjustment further adjusts the Tier One Basic Allotment for districts that (i) have not more than 1,600 students in average daily attendance (with alternative formulas established for such districts that contain at least 300 square miles and those districts that contain less than 300 square miles) or (ii) offer a kindergarten through grade 12 program and have less than 40,000 students in average daily attendance. For fiscal year , the Tier One Basic Allotment was $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort, and for fiscal year , the Tier One Basic Allotment was $3,218 based upon a guaranteed yield of $37.42 for each cent of tax effort. For the through school years, the Basic Allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district s compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 Regular Legislative Session limits, beginning with school year, the annual increases in a district s M&O Tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the school year, the revenue increases are limited to the funds that a district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two fundstier Two currently provides two levels of enrichment with different guaranteed yields depending on the district s tax effort. For fiscal year , 23

32 the first six cents of tax effort that exceeds the compressed tax rate will generate a guaranteed yield equivalent to (a) that of the Austin Independent School District or (b) the amount of tax revenue per WADA received on that tax effort in the previous year, whichever is greater. The second level of Tier Two is generated by tax effort that exceeds the compressed tax rate plus six cents and has a guaranteed yield per penny of local tax effort of $ Before , Tier Two consisted of a district s M&O Tax levy above $0.86. For fiscal year , State funding to equalize local M&O Tax levies above $0.86, up to a district s compressed rate, was funded at a guaranteed yield of $37.42 per student in WADA for each cent of tax effort; any amount above a district s compressed rate up to $0.04 was funded at a guaranteed yield of $50.98 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a rollback election was funded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district s compressed rate plus $0.04. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General for a discussion of the state compression percentage. The IFA guarantees each school district a specified amount per student (the IFA Guaranteed Yield ) in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for leasepurchase agreements and refunding bonds meeting certain prescribed conditions. If the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State s fiscal biennium, however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the EDA Yield ), which for the State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district s bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final school year of the preceding State fiscal biennium or (ii) levied taxes to pay the principal of and interest on the bonds for that school year. Access to EDA funding will be determined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district s Tier Two State funding. Local Revenue Sources - Property Tax Authority The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. The former provision by the Reform Legislation of the Education Code, Section , that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed value, was replaced by the Reform Legislation with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the and fiscal years, districts may generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts will generate equalized funding dollars from the State under the Tier Two program. In fiscal year and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in rate. The governing body of a school district cannot adopt an annual tax rate which exceeds the district s rollback tax rate without submitting such proposed tax rate to the voters at a referendum election. 24

33 Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ( wealth per student ) for each school year to no greater than the equalized wealth level, determined in accordance with a formula set forth in the Reform Legislation. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The wealth level that required wealth reduction measures for fiscal year was $319,500 per student in average daily attendance. For that wealth level was increased to $364,500 per student in average daily attendance with respect to that portion of a district s M&O tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district s local tax effort that was beyond its compressed rate plus $.04. For that wealth level was further increased to $374,200 per student in average daily attendance with respect to that portion of a district s M&O tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district s local tax effort that was beyond its compressed rate plus $0.06. For that wealth level has been increased to $476,500 per student in average daily attendance with respect to that portion of a district s M&O tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district s local tax effort that is beyond its compressed rate plus $.06. Property wealthy districts may also be able to levy up to an additional six cents per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. POSSIBLE EFFECTS OF WEALTH TRANSFER PROVISIONS ON THE DISTRICT S FINANCIAL CONDITION... The District s wealth per student for the school year is less than the equalized wealth value. Accordingly, the District has not been required to exercise one of the permitted wealth equalization options. As a district with wealth per student less than the equalized wealth value, the District may benefit in the future by agreeing to accept taxable property or funding assistance from or agreeing to consolidate with a property-rich district to enable such district to reduce its wealth per student to the permitted level. A district s wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District s wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district s combined property tax base, and the District s ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district. FINANCIAL AND OPERATING INFORMATION FOR THE DISTRICT THE DISTRICT S ONLY OBLIGATION WITH RESPECT TO THE PAYMENT OF THE BONDS IS ITS INDIRECT OBLIGATION TO PAY THE LEASE PAYMENTS TO THE TRUSTEE PURSUANT TO THE LEASE FROM MONEY TO BE APPROPRIATED ANNUALLY FOR THE PAYMENT THEREOF. THE SOURCE OF FUNDS TO BE APPROPRIATED BY THE DISTRICT FOR LEASE PAYMENTS ARE FUNDS APPROPRIATED TO THE DISTRICT BY THE TEXAS LEGISLATURE, WHICH UNDER CURRENT LAW IS LIMITED TO GUARANTEED YIELD PROGRAM TIER ONE FUNDS, AND ANY UNINTENDED SURPLUS MAINTENANCE TAX REVENUES. THE DISTRICT HAS NO AUTHORITY TO LEVY TAXES SPECIFICALLY FOR THE PAYMENT OF THE LEASE PAYMENTS. THE LEASE IS A SPECIAL, LIMITED, AND NON-RECOURSE OBLIGATION OF THE DISTRICT PAYABLE SOLELY FROM THE FUNDS SPECIFIED ABOVE DURING EACH FISCAL YEAR AND IN NO WAY CONSTITUTES AN OBLIGATION, EITHER SPECIAL, GENERAL, OR MORAL, OF THE STATE OF TEXAS OR ANY OTHER POLITICAL SUBDIVISION THEREOF. 25

34 TIER ONE ALLOTMENTS... General. One of the District s primary sources of revenue from which the Lease Payments may be paid is its Tier One allotments from the State. The amount of Tier One allotments to the District in each year is based upon average daily attendance, the District s total tax rate, its assessed valuation, and the collection rate. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. TABLE 1 Tier One Allotment History Fiscal Year Total Tier I Ended 6/30 Local Share State Share Allotment 2007 $ 37,567,491 $ 178,982,698 $ 227,351, ,231, ,013, ,244, ,743, ,764, ,507,493 Source: Texas Education Agency Website UNDESIGNATED FUND BALANCES... The District is permitted under current law to pay the Lease Payments from unintended surplus maintenance tax funds, in addition to Tier One Funds. Below is a history of the undesignated general fund balance at the end of each of the preceding three fiscal years. Because undesignated fund balances result, in part, from surplus maintenance tax money which was unintended by the District, there can be no assurance that undesignated fund balances in future years will be consistent with those of the prior years. TABLE 2 Undesignated General Fund Balance History Undesignated Fiscal Year General Ended 6/30 Fund Balance 2007 $ 94,599, ,984, ,167,972 Source: The District s Audited Financial Statements. AVERAGE DAILY ATTENDANCE... The cost of the basic program is based on an allotment per student known as the Tier One Basic Allotment. The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the cost of education index. In addition, a districtsize adjustment further adjusts the Tier One Basic Allotment for districts that have less than 40,000 students in average daily attendance. For the through school years, the basic allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district s compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 Regular Legislative Session limits, beginning with school year, the annual increases in a district s M&O tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the school year, the revenue increases are limited to the funds the district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two funds. The cost of education index is an adjustment of each school district s basic allotment, to be determined by the foundation school budget committee, reflecting the geographic variations in known resource costs and costs of education due to factors beyond the control of the school district. A significant decrease in the District s average daily attendance may result in a decrease of the District s Tier One allotment in future years, thereby decreasing the amount of money from which the District may appropriate the Lease Payments. The District s average daily attendance for fiscal year 2009/2010 is 66,738, based on the Texas Education Agency s Summary of Finances, School Year. The amount of State assistance provided to the District under Tier One is based, in part, on the weighted average daily attendance ( WADA ) of the District. The following table reflects the District s WADA for the years stated. 26

35 TABLE 3 Weighted Average Daily Attendance History Average Fiscal Year Daily Peak Ended 6/30 Attendance Enrollment ,778 44, ,230 46, ,738 48,796 Source: Texas Education Agency Website The remainder of the page intentionally left blank. 27

36 TABLE 4 TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value For Fiscal Year Ended June 30, % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $ 3,138,736, % $ 3,088,405, % $ 2,886,706, % Real, Residential, Multi-Family 146,275, % 120,974, % 107,255, % Real, Vacant Lots/Tracts 256,343, % 255,026, % 273,921, % Real, Acreage (Land Only) 212,323, % 217,545, % 220,749, % Real, Farm and Ranch Improvements 25,288, % 23,541, % 15,330, % Real, Commercial 1,118,192, % 1,044,287, % 1,004,211, % Real, Industrial 58,575, % 60,255, % 61,181, % Real and Tangible Personal, Utilities 80,435, % 72,566, % 75,363, % Tangible Personal, Commercial 420,692, % 397,326, % 357,005, % Tangible Personal, Industrial 291,576, % 249,952, % 229,134, % Tangible Personal, Mobile Homes 13,346, % 13,135, % 14,075, % Special Inventory 15,293, % 16,609, % 15,204, % Real Property, Inventory 18,750, % 7,781, % 11,532, % Total Exempt Property % % Total Appraised Value Before Exemptions $ 5,795,829, % $ 5,567,409, % $ 5,271,672, % Less: Total Exemptions/Reductions (802,121,009) (804,078,767) (819,298,254) Less: Loss Value for over 65 Freeze - (99,849,396) (81,213,691) Taxable Assesed Valuation $ 4,993,708,059 $ 4,663,481,544 $ 4,371,160,632 Taxable Appraised Value For Fiscal Year Ended June 30, % of % of Category Amount Total Amount Total Real, Residential, Single-Family $ 2,508,439, % $ 2,313,048, % Real, Residential, Multi-Family 82,200, % 86,742, % Real, Vacant Lots/Tracts 251,150, % 230,003, % Real, Acreage (Land Only) 167,336, % 173,143, % Real, Farm and Ranch Improvements 14,739, % 17,381, % Real, Commercial 863,733, % 817,748, % Real, Industrial 60,418, % 60,006, % Real and Tangible Personal, Utilities 74,011, % 76,412, % Tangible Personal, Commercial 310,373, % 311,399, % Tangible Personal, Industrial 215,706, % 198,242, % Tangible Personal, Mobile Homes 13,384, % 15,674, % Special Inventory 16,291, % 16,979, % Real Property, Inventory 6,925, % 8,865, % Total Exempt Property % 0.00% Tangible Personal, Other $ 4,584,711, % $ 4,325,648, % Total Appraised Value Before Exemptions (690,395,903) (664,842,599) Less: Total Exemptions/Reductions (44,001,636) (43,494,972) Less: Loss of Value for Over 65 Years $ 3,850,313,843 $ 3,617,311,427 (1) Fiscal Year 2004 ended on August

37 TABLE 5 TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Distribution Ending Tax General Interest and % Current % Total 8-31/6-30 (1) Rate Fund Sinking Fund Tax Levy Collections Collections 2000 $ $ $ $ 33,252, % 96.67% ,425, % 95.98% ,692, % 95.53% ,411, % 98.70% ,518, % 98.69% ,326, % (1) 95.55% (1) ,893, % 99.47% ,639, % 98.45% ,939, % % ,069, % 99.53% ,931,405 In Process of Collection Source: District's Comprehensive Annual Financial Report for the year ended 6/30/09 and District staff. (1) Fiscal Years 1999 through 2004 ended on August 31. Commencing in 2005, the District s new end of fiscal year is June 30. TABLE 6 TEN LARGEST TAXPAYERS 2009 % of Total Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation CBL/Sunrise Commons LP Real Estate/Shopping Mall $ 38,922, % Columbia Valley Healthcare System Hospital 31,461, % Southwestern Bell Telephone Telephone Utility 22,733, % Trico Products Corporation Manufacturer 20,152, % Kimco Brownsville LP Land/Improvements 19,412, % Wal-Mart Stores Retail Store 15,998, % Rich-Seapak Corp Retail Store 15,555, % Wal-Mart Stores Texas LP Grocery Store 14,993, % H.E. Butt Grocery Co Grocery Store 14,034, % Morrison Crossing LTD Retail Store 13,840, % $ 207,105, % Source: Cameron County Appraisal District 29

38 DEBT INFORMATION... Outstanding District Debt. Texas school districts are authorized to issue unlimited tax bonds payable from the District s debt service tax for the construction and equipping of school buildings and the acquisition of sites therefor, and the purchase of school buses, but only if authorized by a majority of the resident, qualified voters of the district voting at an election held for that purpose. Texas school districts are also authorized to issue general obligation bonds for the purpose of refunding other general obligation bonds, without voter authorization, as long as certain conditions are met. The District has not had a default on any of its tax-supported obligations. The District currently has the following outstanding tax-supported debt: TABLE 7 Fiscal Year Total Outstanding Total Outstanding Ended Unlimited Tax Limited Tax Total 31-Aug I&S Fund Debt Debt Requirements 2010 $ 16,554,444 $ 821,195 $ 17,375, ,593, ,205 17,411, ,610, ,360 17,429, ,603, ,565 17,423, ,595, ,820 17,413, ,599, ,030 17,421, ,589, ,195 17,409, ,589, ,315 17,409, ,590, ,295 17,410, ,585,575-16,585, ,583,825-16,583, ,578,825-16,578, ,581,275-16,581, ,583,775-16,583, ,615,000-14,615, ,602,125-14,602, ,588,500-14,588, ,922,625-11,922, ,309,219-2,309, ,301,469-2,301,469 $ 292,578,350 $ 7,378,980 $ 299,957,330 (1) (1) Excludes the Bonds which are funded as a current expense of the District from lawfully available funds, subject to annual appropriation, and not from the District I&S tax levy. OTHER OBLIGATIONS... Operating Leases. The District entered into operating leases for facilities and equipment. The following is a schedule of the future minimum lease payments under this agreement. TABLE 8 The District's Operating Leases are as follows: Fiscal Year Total 6/30 Payment 2010 $ 1,553, , , ,985 Total rentals $ 3,462,796 Rental Expenditures in Fiscal Year 2008 $ 1,688,878 30

39 AUTHORIZED BUT UNISSUED TAX-SUPPORTED BONDS... The District has no authorized but unissued tax-supported bonds however, the District may also incur other financial obligations, including maintenance tax notes payable from its collection of maintenance taxes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes. OVERLAPPING FUNDED DEBT... Expenditures of the various taxing bodies within the territory of the District are paid out of ad valorem taxes levied by these taxing bodies on properties within the District. These political taxing bodies are independent of the District and may incur borrowings to finance their expenditures. The following statement of direct and estimated overlapping ad valorem tax debt was developed from information provided by the District s Tax Assessor/Collector. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional obligations since the date of the report, and such entities may have programs requiring the issuance of substantial amounts of additional obligations the amount of which cannot be determined. The following table reflects the estimated share of overlapping net funded debt of these various taxing bodies. TABLE District's Authorized Taxable 2009 Total Estimated Overlapping But Unissued Assessed Tax Funded Debt % Funded Debt As Of Taxing Jurisdiction Valuation Rate (as of 11/1/2009) Applicable Debt 11/1/2009 Brownsville ISD $ 4,993,708,059 $ $ 194,170,000 (1) % $ 194,170,000 $ - Brownsville Navigation District 6,677,640, ,585, % 15,731,467 7,875,577 City of Brownsville, Texas 4,926,290, ,698, % 146,676,468 - Cameron County, Texas 14,352,041, ,915, % 1,499,567 - Paseo De La Resaca Mud #3 79,233, ,360, % 3,360,000 2,840,000 Southmost Union JCD 9,797,969, ,000, % 37,471,200 - Valley Mud #2 229,647, ,650, % 4,439,540 69,528,000 Total Direct and Overlapping Tax Debt $ 403,348,242 Ratio of Direct Overlapping G. O. Tax Debt to Taxable Assessed Valuation 8.08% Per Capita Overlapping Funded Debt $ 2,045 Source: "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. and Cameron County Appraisal District (1) Excludes the Bonds, which are funded as a current expense of the District from lawfully available funds, subject to annual appropriation, and not the I&S Fund tax debt. The remainder of the page intentionally left blank. 31

40 THE FOLLOWING DATA IS PRESENTED FOR THE PURPOSE OF PROVIDING GENERAL INFORMATION REGARDING THE DISTRICT. THE DISTRICT S REVENUES AND ASSETS ARE NOT PLEDGED TO SECURE THE BONDS. TABLE 10 GENERAL FUND REVENUES AND EXPENDITURE HISTORY Fiscal Years Ended June 30, Revenues Local and Intermediate Sources $ 57,415,826 $ 62,395,577 $ 71,877,358 $ 68,825,779 $ 56,624,499 State Sources 298,661, ,697, ,084, ,021, ,236,959 Federal Sources 28,639,205 28,849,549 27,126,949 30,033,252 23,106,200 Total Revenues $ 384,716,150 $ 386,942,152 $ 382,088,673 $ 353,880,289 $ 307,967,658 Expenditures Instruction $ 206,583,311 (1) $ 199,080,084 $ 186,196,328 $ 178,970,451 $ 147,172,580 Instructional Recources and Media Services 5,595,594 5,889,303 5,955,183 6,911,960 4,292,240 Curriculum and Instructional Staff Dev. 7,369,287 6,552,770 7,249,734 6,265,945 4,036,962 Instructional Leadership 5,476,483 5,306,637 4,507,997 3,870,937 3,124,796 School Leadership 22,006,999 20,876,876 20,053,089 18,697,007 14,599,869 Guidance and Counseling 14,386,084 14,611,532 12,348,115 10,684,032 9,990,779 Social Work Services 565, , , , ,685 Health Services 3,611,328 3,357,181 2,922,686 2,407,211 2,112,955 Student (Pupil) Services 12,716,870 14,075,730 13,677,064 13,195,335 9,473,575 Food Services 26,552,782 27,741,816 27,675,256 25,501,250 23,189,153 Co-Curricular Activities 13,019,988 13,998,002 12,924,680 11,624,688 8,585,945 General Administration 11,911,112 11,316,177 10,804,380 9,886,734 8,211,329 Plant Maintenance and Operation 46,206,945 45,510,997 41,891,754 38,078,056 28,249,204 Security and Monitoring Services 5,515,817 4,745,144 3,964,750 3,484,652 2,678,261 Data Processing Services 3,066,968 2,722,291 2,558,726 2,191,110 1,896,124 Community Services 704, , , , ,410 Debt Services 932, , , , ,412 Capital Outlay 24,888,074 (2) 17,690,191 20,359,067 22,548,057 7,701,859 Payments to Juvenile Justice 148,558 60,000 47,427 22,538 Total Expenditures $ 411,258,309 $ 395,409,215 $ 374,918,220 $ 356,050,995 $ 276,597,138 Other Resources and (Uses) $ 46,347 $ 1,487,422 $ 169,398 $ 49,803 $ 296,149 Excess (Deficiency) of Revenues Over Expenditures $ (26,542,109) $ (8,467,063) $ 7,543,610 $ (1,964,840) $ 31,216,101 Beginning Fund Balance on July 1 176,102, ,992, ,442, ,710, ,351,605 Increase (Decrease) in Fund Balance (734,897) 10,089,271 6,326 (302,731) 142,387 Ending Fund Balance on June 30 $ 148,871,429 (2) $ 176,102,088 $ 172,992,458 $ 165,442,522 $ 167,710,093 (1) (2) Instructional costs rose due to teacher pay raises and and increase in the number of instructors employed by the District. The District is financing capital improvements from cash reserves in accordance with its Ten-Year Capital Improvement Plan. The decrease in fund balancefor Fiscal Year 2009 is in accordance with such plan. AUTHORIZED BUT UNISSUED UNLIMITED TAX BONDS The District has no voter-authorized but unissued unlimited ad valorem tax-supported debt; however, the District may also incur other financial obligations, including maintenance tax notes payable from its collection of maintenance taxes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes. 32

41 ANTICIPATED ISSUANCE OF UNLIMITED TAX DEBT The District does not plan to issue any unlimited tax bonds within the next twelve months. FINANCIAL POLICIES Basis of Accounting... The accounting policies of the District substantially comply with the rules prescribed in the Financial Excellence Indicator System of Texas Information about Education Resources ( FEIST-IER ) by the Texas State Board of Education. These accounting policies conform to generally accepted accounting principles applicable to governments (see Appendix B BROWNSVILLE Independent School District Annual Financial and Compliance Report ). General Fund Balance... The District's policy is to maintain surplus and unencumbered funds equal to three (3) months of expenditures in the General Fund. This allows the District to avoid interim borrowing pending tax receipts. Debt Service Fund Balance... The District's policy is to maintain surplus and unencumbered funds equal to 1/12th annual expenditures in the Bond Fund. Budgetary Procedures... The District policy is to begin budget preparations on the individual school level by March of each year. The principals work with the site based decision teams to formulate a working budget which then moves to the office of the Superintendent and the Assistant Superintendent for Business. After refinements at this level, the budget goes to the Board where it is further refined and goes through public hearings prior to final adoption by late August. Priorities are based on long term and annual goals. TABLE 11 CURRENT INVESTMENTS (1) Investment Maturities (in years) Investment Type Fair Value Less Than 1 1 to 5 6 to 10 Certificates of Deposit $ 100,500,000 $ 100,500,000 $ $ Texas Term Investment Pool 44,067,742 44,067,742 Lone Star Investment Pool 78,896,793 78,896,793 TexPool 5,890,488 5,890,488 MBIA Flex Repurchase Agreement 29,665,431 29,665,431 Total $ 259,020, $ 259,020, $ - $ Source: Brownsville Independent School District Administration. As of such date, the market value of such investments (as determined by the District by reference to published quotations, dealer bids, and comparable information) was approximately 100% of book value. No funds of the District are invested in derivative securities, i.e., securities whose rate of return is determined by reference to some other instrument, index or commodity. EMPLOYEE RETIREMENT PLAN AND OTHER POST-EMPLOYMENT BENEFITS The District s employees participate in a retirement plan with the State of Texas (the "Plan"). The Plan is administered by the Teacher Retirement System of Texas ("TRS"). Aside from the District's contribution to the TRS, the District has no pension fund expenditures or liabilities. The District generally does not offer any post-employment retirement benefits and has no liabilities for "Other Post Employment Retirement Benefits" as defined in GASB Statement No. 45. See "Notes to Financial Statements, Note J - Defined Benefit Pension Plan," in the audited financial statements of the District for the year ended June 30, 2008 as set forth in Appendix B hereto. During the year ended June 30, 2009, employees of the District were covered by a self-funded employee benefit plan administered by American Administration Group, Inc., with appropriate stop loss insurance coverage in place underwritten by ING insurance. The District contributed $380 per month, per employee toward health care coverage. Employees, at their option, authorize payroll withholdings to pay contributions for dependents. See Notes to Financial Statements Note K - "Risk Management in the audited financial statements for the District for the year ended June 30, 2008 as set forth in Appendix B hereto. Formal collective bargaining agreements relating directly to wages and other conditions of employment are prohibited by State law, as are strikes by teachers. There are various local, state and national organized employee groups who engage in efforts to better terms and conditions of employment of school employees. Some districts have adopted a policy to consult with employer groups with respect to certain 33

42 terms and conditions of employment. Some examples of these groups are the Texas State Teachers Association, the Texas Classroom Teachers Association, the Association of Texas Professional Educators and the National Education Association. OTHER INFORMATION RATINGS... The Corporation does not have any outstanding debt obligations, nor has it ever received a rating on debt issued by the Corporation. The Corporation has made application for contract ratings on the Bonds with Moody's Investors Service, Inc. ("Moody's") and Standard and Poor s Rating Services, a Division of the McGraw-Hill Companies, Inc. ( S&P ). Moody's has assigned an initial A2 rating and S&P has assigned an initial A rating to the Bonds. (see OTHER INFORMATION Ratings ). An explanation of the significance of any such ratings may be obtained from Moody s and S&P, respectively. The ratings of the Bonds by Moody s reflects only the respective views of such company at the time the rating is given, and the Corporation makes no representations as to the appropriateness of the ratings. There is no assurance that the ratings will continue for any given period of time, or that the ratings will not be revised downward or withdrawn entirely by Moody s, if in the sole and absolute judgment of such company, circumstances so warrant. Any such downward revision or withdrawal of a rating may have an adverse effect on the market price of the Bonds. LITIGATION...Except as disclosed elsewhere in the Official Statement generally, and in this section specifically, the District is not a party to any litigation or other pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the financial statements of the District. Cause No.: A; Arthur Rendon vs. BISD Superintendent Hector Gonzales and his Successor, and BISD Board of Trustees, Rolando Aguilar, Ruben Cortez, Jr., Joe Colunga and Rick Zayas, individually and in their official capacity and Mike Saldana in his official capacity as Counsel for BISD Hector Gonzales Cross-Plaintiff vs. BISD Board of Trustees, Rolando Aguilar, Ruben Cortez, Jr., Joe Colunga and Rick Zayas, individually and in their official capacity and Mike Saldana in his official capacity as Counsel for BISD; In the 107 th Judicial District Court of Cameron County, Texas This case was filed on January 6, The case was filed by an employee alleging violations of the Texas Open Meetings Act defamation causes of action and breach of employment contract against the Brownsville Independent School District, four Board members individually, and the Superintendent and Board Counsel in their official capacity. The defamation claims are based on discussions held in Open Session regarding the expenditure of funds at a particular department. Hector Gonzales subsequently filed a cross petition against the four listed Board members in their individual and official capacity. Gonzales alleges defamation claims and a Texas Whistleblower Act violation. All claims brought by Rendon and Gonzales were dismissed by the Court with the exception of Gonzales whistleblower claim. This matter has not been set for trial. The District is vigorously defending this matter. Civil Action No.: B ; Antonio Juarez vs. BISD Superintendent Hector Gonzales and his Successor, and BISD Board of Trustees, Rolando Aguilar, Ruben Cortez, Jr., Joe Colunga and Rick Zayas, individually and in their official capacity and Mike Saldana in his official capacity as Counsel for BISD; In the United States District Court for the Southern District of Texas, Brownsville Division This case was filed on January 16, Plaintiff, the District s former Chief Financial Officer, alleges that he was coerced into submitting his resignation. He makes general allegations of denial of due process under the Federal and State Constitution, breach of employment contract and alleges a conspiracy by former and current school Board members. Defendants filed 12(b) Motions to Dismiss which are currently pending. The District is vigorously defending this matter. Cause No.: 2008-CCL-1297-A; South Coast Spine & Rehabilitation PA vs. Brownsville Independent School District and American Administrative Group, Inc. et al.; In the County Court at Law No. 1 (Civil), Cameron County, Texas This lawsuit was filed on November 4, An amended petition was filed on May 7, The case is currently pending for a jury trial in the County Court at Law No. 1, in Cameron County, Texas, Judge Arturo McDonald, Jr. presiding. Mediation has not been conducted. The case has not been set for trial. This is a lawsuit in which a chiropractic clinic is attempting to collect unpaid balances owed by employees who received medical treatment under the District s self-funded health benefit plan. The Court granted all special exceptions plead by the District. The Plaintiff has recently replead and filed against the individual employees as well. The new cause of action is convoluted and will be subject to special exceptions with a substantial probability of an ultimate dismissal. The District is vigorously defending this matter. Cause No.: B; Melvin F. Webb, Jr. vs. Brownsville Independent School District; In the 138th Judicial District Court of Cameron, County Texas This lawsuit was filed on March 3, This lawsuit arises from an EEOC complaint that was dismissed by EEOC. The Plaintiff complains that he was discriminated against because of his national origin and sex in violation of Title VII of the Civil Right Act of 1964, as amended. The EEOC found no evidence to support the Plaintiff s allegations and dismissed his claim. Case is being vigorously defended and is set for trial on December 7, 2009 with a high likelihood of being continued. 34

43 Cause No.: H; Federico Silva and Eva Silva vs. Brownsville Independent School District; In the 444 th Judicial District Court of Cameron County, Texas This lawsuit was filed on August 24, The case is currently pending for a jury trial in the 444 th Judicial District Court of Cameron County, Texas, Judge David Sanchez is the judge presiding. Mediation has not been conducted. Trial has not been set on this case. The District is vigorously defending this matter. This is a minor motor vehicle accident between a maintenance truck owned by the District and Plaintiff s vehicle. Cause No.: D; Maria Cervera vs. Brownsville Independent School District; In the 103 rd Judicial District Court of Cameron County, Texas This is a Texas Whistleblower claim by a former Transportation employee of the District. This matter is set for Trial on March 22, All of the above Texas law claims are covered by the statutory caps found in Section (b) of the Texas Civil Practice & Remedies Code. Immunity is not waived by a Texas school district, except as to operation or use of a motor vehicle. Title VII Claims are also capped by Federal status. The District is also not subject to punitive damages. It appears at this time that all claims are covered adequately by the District s insurance carriers. None of the claims above, even if decided adversely to the District, would have a material adverse effect on the financial statements of the District. All Texas law claims are covered by the statutory caps found in Section (b) of the Texas Civil Practice & Remedies Code. Immunity is not waived by a Texas school district, except as to operation or use of a motor vehicle. Title VII Claims are also capped by Federal statute. The District is also not subject to punitive damages. It appears at this time that all claims are covered adequately by the District s insurance carriers. None of the claims above, even if decided adversely to the District, would have a material adverse effect on the financial statements of the District. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE... The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2) thereof; and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The District and the Corporation assume no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS... Section of the Public Securities Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds constitute negotiable instruments, and are investment securities governed by Chapter 8, Texas Uniform Commercial Code, notwithstanding any provisions of law or court decision to the contrary, and are legal and authorized investments for banks, savings banks, trust companies, building and loan associations, savings and loan associations, insurance companies, fiduciaries, and for the sinking funds of cities, towns, villages, school districts, and other political subdivisions or public agencies of the State of Texas. The Bonds are eligible to secure deposits of any public funds of the State, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. For political subdivisions in Texas which have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Texas Government Code, Chapter 2256), the Bonds may have to be assigned a rating of at least A or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds. See OTHER INFORMATION - Ratings herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. The District and the Corporation have made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bond for such purposes. The District and the Corporation have made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states. LEGAL MATTERS... Legal matters incident to the authorization, issuance, and sale of the Bonds are subject to the unqualified approval of the Attorney General of the State of Texas and the approval of certain legal matters by Fulbright & Jaworski L.L.P., Bond Counsel, whose opinion will be in substantially the form attached hereto as Appendix D. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds, Bond Counsel was engaged by, and only represents, the District. Fulbright & Jaworski L.L.P. was not requested to participate, and did not take part, in the preparation of this Official Statement except as hereinafter noted, and such firm has assumed no responsibility with respect thereto or undertaken to verify any of the information contained herein, except that, in its capacity as Bond Counsel, such firm has reviewed the information contained under the captions INTRODUCTION, RISK FACTORS Constitutionality of the Lease Obligation, THE BONDS (except the information therein under 35

44 the subcaption Cumulative Sinking Fund Deposits, and Book-Entry-Only System and Sources and Uses of Funds, as to which no opinion is expressed), PLAN OF FINANCING, SECURITY FOR THE BONDS, FEDERAL TAX CREDIT AND TAX MATTERS, STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM (except for information contained in the subheading Possible Effects of Wealth Transfer Provisions on the District s Financial Condition, as to which no opinion is expressed), THE CORPORATION, and OTHER INFORMATION Continuing Disclosure of Information (except Compliance with Prior Undertakings ), OTHER INFORMATION Registration and Qualification of Bonds for Sale, OTHER INFORMATION Legal Investments and Eligibility to Secure Public Funds in Texas, and in APPENDIX A of this Official Statement, to determine that the information contained under such captions is a fair and accurate summary of the information or the law purported to be described. The payment of legal fees to Bond Counsel in connection with the issuance of the Bonds is contingent on the sale and delivery of the Bonds. Certain legal matters will be passed upon for the Corporation by their legal counsel, Fulbright & Jaworski L.L.P.. Certain legal matters will be passed upon for the District by Fulbright & Jaworski L.L.P. Certain legal matters will be passed upon by the Underwriter by their counsel, Vinson & Elkin LLP, Houston, Texas, whose compensation is contingent upon the sale and delivery of the Bonds. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION... The financial data and other information contained hereunder has been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and orders contained in this Official Statement are made subject to all of the provisions of such statutes, documents and orders. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. CONTINUING DISCLOSURE OF INFORMATION... In accordance with the Securities and Exchange Commission Rule 15c2-12 (the Rule ), the District, as the obligated person under the Rule, will agree under the Lease to provide certain information for the benefit of the beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains an obligated person with respect to the Bonds. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually and timely notice of specified material events to the Municipal Securities Rulemaking Board (the MSRB ). The information provided to the MSRB will be available to the public free of charge via the Electronic Municipal Market Access ( EMMA ) system at Annual Reports... The District will provide certain updated financial information and operating data to EMMA annually. The information to be updated includes all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement (with the exception of Table 9) and in Appendix C. The District will update and provide this information within six months after the end of each Fiscal Year ending in or after The District will provide the updated information to the MSRB in an electronic format, which will be available through EMMA to the general public without charge. The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. The updated information will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix C or such other accounting principles as the District may be required to employ from time to time pursuant to State law or regulation. The District s current fiscal year end is June 30. Accordingly, it must provide updated information by the last day of December following the end of its fiscal year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify EMMA of the change. Material Event Notices... The District will also provide timely notices of certain events to EMMA. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. Neither the Bonds nor the Order make any provision for debt service reserves, credit enhancement, or liquidity enhancement. In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under Annual Reports. The District will provide each notice described in this paragraph to EMMA. Availability of Information from MSRB and SID... Effective July 1, 2009 (the EMMA Effective Date ), the SEC implemented amendments to the Rule which approved the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities information repositories with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the District in accordance with its 36

45 undertaking made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. In relation to debt of the District issued prior to the EMMA Effective Date, the District will continue to make any required information filings, including material event notices, with the Texas state information repository (the SID ) so long as it is required to do so pursuant to the terms of any undertakings made under the Rule prior to the EMMA Effective Date. The Municipal Advisory Council of Texas (the MAC ) has been designated by the State and approved by the SEC staff as a qualified SID. The address of the MAC is 600 West 8th Street, P.O. Box 2177, Austin, Texas , and its telephone number is 512/ Limitations and Amendments... The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the District to comply with its agreement. The District may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the District (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the registered owners of the Bonds. The District may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. If the District so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under Annual Reports an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS... During the past five years, the District has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule. UNDERWRITING... The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the District and the Corporation at the initial public offering prices indicated on the inside front cover of this Official Statement, less an underwriting discount of $151,884.00, and no accrued interest. The Underwriter s obligation is subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds may be offered and sold to certain dealers and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. FINANCIAL ADVISOR... Estrada Hinojosa & Company, Inc. is employed as Financial Advisor to the District and the Corporation in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. Estrada Hinojosa & Company, Inc., in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants, and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the District and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. FORWARD LOOKING STATEMENTS... The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. It is important to note that the District s actual results could differ materially from those in such forward-looking statements. 37

46 The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. MISCELLANEOUS... The financial data and other information contained herein have been obtained from the District s records, audited financial statements, and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents, and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents, and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The authorizations, agreements, and covenants of the District and the Corporation are set forth in the Financing Documents and neither this Official Statement nor any advertisement of the Bonds is to be construed as a contract with the Owners of the Bonds. Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not expressly so identified, are intended merely as such and not as representations of fact. The Resolution authorizing the issuance of the Bonds will also approve the form and content of this Official Statement and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds by the Underwriter. This Official Statement has been approved by the Board of Directors of the Corporation for distribution in accordance with the provisions of the Rule. ATTEST: Joe Colunga Secretary, Board of Director Brownsville Independent School District Public Facility Corporation Rolando Aguilar President, Board of Directors Brownsville Independent School District Public Facility Corporation 38

47 APPENDIX A SELECTED PROVISION OF THE FINANCING DOCUMENTS

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185 APPENDIX B GENERAL INFORMATION REGARDING THE DISTRICT

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187 THE DISTRICT From an agriculture and trade-based economy, the District, which includes the City of Brownsville, Texas (the City ) has evolved into a diverse region with a major presence in manufacturing, tourism, and retailing. Brownsville, the county seat, the southernmost city in Texas, and the largest city in the lower Rio Grande Valley, is home to a branch of the University of Texas. The City is located approximately 2.5 miles inland from the Gulf of Mexico, on the north bank of the Rio Grande River directly across from Matamoros, Mexico, joined by three international bridges. The Brownsville/Matamoros area is the manufacturing center of the Rio Grande Valley. More than 150 manufacturers are located on both sides of the river, employing over 740,000 workers. The industrial community includes Fortune 500 giants. The City s 2000 population was 157,457, an increase of 41.19% over 1990, making it one of the nation s most rapidly growing areas of the current decade. The City s population is estimated to be over 197,279 in Manufacturers employing over 500 persons each produce offshore platforms, apparels, automotive parts, electrical equipment, household consumer durables, buses, and a call center. Other manufacturers employing over 250 persons each produce plastic molding, agriculture tires, motors, seafood processing, automotive crash sensors, and safety system; electrical and electric switches, accessories, and apparel. DISTRICT ENROLLMENT AND FACILITIES The school facilities currently provided by the District include 32 elementary schools, 9 middle schools, 5 high schools, and 3 alternative schools. For the school year, the District employs a staff of approximately 7,500, which includes the professional staff of approximately 3,734. Educational degree status of the teaching staff and salary range are as follows: Doctorate s degree 7 Master s degree 504 Bachelor s degree 2,718 Average years of classroom experience per teacher 12 Personnel distribution within the District is as follows: Teachers 3,322 Professional Support 3,727 Campus Administration 199 Central Administration 18 Educational Aides 808 Auxiliary Staff 2,497 Teacher salaries are competitive with surrounding districts. Teacher salaries range from $39,000 (BA) / $42,000 (MA) for beginning teachers to a maximum of $58,034 (BA) / $61,034 (MA). Teachers eligible for the teacher compensation allotment program may qualify for supplements from $280 to $10,000. Teacher/pupil ratios for were: BISD Schools: Elementary schools 21.6 Middle/high schools 20.4 High Schools 21.3 Elementary schools 32 Middle/high schools 10 High Schools 5 Alternative Schools 3 B-1

188 Historical peak enrollment for the District is as follows: School Year Peak Enrollment School Year Peak Enrollment , , , , , , , , , , , , , , , , , ,858 Historical average daily attendance for the District is as follows: School Average Year Daily Attendance , , , , , , , , , , ,796 SECONDARY EDUCATION Institutions of higher learning within a 60-mile radius of the City include University of Texas-Brownsville and University of Texas-Pan American, which began operations in September of 1927 as a two-year junior college. Both institutions are a direct branch of the University of Texas System. Within the City is Texas Southmost College. The College formally opened on September 28, 1926 with the Southmost Union Junior College District being created in November 1949, separating the college from the public schools. The College is a two-year comprehensive community college with boundaries encompassing all of the Brownsville, Point Isabel and Los Fresnos Independent School Districts and part of the San Benito Independent School District. MEDICAL FACILITIES Valley Baptist Medical Center (243 beds), formerly Brownsville Medical Center, and the Valley Regional Medical Center (214 beds) are accredited by the Joint Commission on Accreditation of Health Care Institutions. Both hospitals offer full emergency room facilities, lab work facilities and the latest heart and radiology equipment. Several bacteriological, clinical and medical laboratories are also available. The City has several nursing homes and is a member of the Texas Visiting Nurse Services, Inc., with complete nurse service and medical supplies. CAMERON COUNTY Cameron County, Texas (the County ) was created in 1848, and it is the southernmost County in Texas. According to the 1990 U.S. Census, the population of the County is 266,600, an increase of 27.1% since The population according to the 2000 U.S. Census was 335,227, representing an increase of 25.7% over The area of the County is approximately 883 square miles, comprising the Brownsville-Harlingen- San Benito Metropolitan Area. The largest city in the County is Brownsville which serves as the county seat. The economy is well diversified, based on agricultural production, fishing industries, manufacturing plants and tourism. Major agricultural crops include oranges, grapefruit, cotton, grains and sugar cane. Principal manufacturing products include off-shore drilling platforms, fiberglass products, dairy products, clothing, electric equipment and frozen foods. The County is the only port of entry from Mexico that provides all four methods of transportation - sea, air, highway and rail. B-2

189 Tourist attractions include South Padre Island, Laguna-Atascosa Wildlife Refuge, Confederate Air Force Flying Museum and the Gladys Porter Zoo. The Port of Brownsville is one of the world's largest shrimp loading points and a very important link between the United States and Mexico. The County is traversed by U.S. Highways 77, 83 and 281; State Highways 4, 48, 100, 107 and 245; and nine farm-to-market roads. Fifteen motor freight trucking firms provide service to and from Brownsville. Rail transportation is provided by Union Pacific and National Railways of Mexico. Commercial air service is provided to Brownsville by Continental Airlines; and to Harlingen by Southwest, American, and Continental Airlines. Air freight service is provided by Emery, UPS, Kitty Hawk, Casino Express, and Burlington. The Brownsville International Airport also includes an industrial park. The Port of Brownsville is the main shipping port for the Rio Grande Valley and South Texas. Port facilities include a man-made basin connected by 17 miles of channel to the Gulf of Mexico, various docking and terminal facilities, turning basin and approach, fishing harbor, warehousing and railway switching operations, worldwide shipping lines and barge transportation services. EMPLOYMENT BY INDUSTRY January January Manufacturing 7,500 7,700 Mining Res., Mining & Construction 4,400 4,600 Trade, Transp., Utilites 24,700 4,500 Wholesale Trade 4,900 3,400 Retail Trade 16,500 16,200 Financial Activites 4,900 4,800 Information 1,400 1,300 Profes., Business Services 9,200 8,100 Education & Health 28,900 27,900 Leisure & Hospitality 12,700 11,800 Other Services 3,200 3,200 Government 28,700 27,700 Total 147, ,200 EMPLOYMENT STATISTICS Cameron County Texas Sept Sept Sept Sept Sept Sept Civilian Labor Force 150, , ,938 12,069,432 11,773,054 11,527,762 Total Employment 134, , ,604 11,073,437 11,167,709 11,019,132 Total Unemployment 16,221 10,593 8, , , ,630 Percentage Unemployment 10.8% 7.3% 5.9% 8.3% 5.1% 4.4% Source: Texas Workforce Commission B-3

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191 APPENDIX C BROWNSVILLE INDEPENDENT SCHOOL DISTRICT ANNUAL FINANCIAL AND COMPLIANCE REPORT For the Year Ended June 30, 2009 The information contained in this Appendix consists of excerpts from the Brownsville Independent School District Annual Financial and Compliance Report for the Year Ended June 30, 2009, and is not intended to be a complete statement of the District's financial condition. Reference is made to the complete Report for further information.

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193 INDEPENDENT AUDITORS REPORT Board of Trustees Brownsville Independent School District Brownsville, Texas We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Brownsville Independent School District (the District ) as of and for the year ended June 30, 2009, which collectively comprise the District s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District s management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Brownsville Independent School District as of June 30, 2009, and the respective changes in financial position and cash flows, where applicable, thereof and the respective budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated October 19, 2009, on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. The Management s Discussion and Analysis as listed in the table of contents, are not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it EAST 7 th STREET g BROWNSVILLE, TX g (956) g FAX: (956) g AFFILIATE OFFICES: McALLEN, TX (956) g HILLSBORO, TX (254) g TEMPLE, TX (254) WACO, TX (254) g WHITNEY, TX (254) g ALBUQUERQUE, NM (505)

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195 Brownsville Independent School District 1900 Price Road Brownsville, Texas MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2009 This section of Brownsville Independent School District s comprehensive financial report presents our discussion and analysis of the District s financial performance during the year ended June 30, Please read it in conjunction with the District s financial statements, which follow this section. FINANCIAL HIGHLIGHTS At June 30, 2009 the District s assets exceed its liabilities by $410,979,152. Total assets were $725,411,089 and total liabilities were $314,431,937. (Exhibit A-1) During fiscal period, the District s district-wide revenues were $472,536,533 whereas, total district-wide expenses were $479,005,459 resulting in a ($6,468,926) change in net assets (Exhibit B-1). At the end of fiscal year , the District incurred a $13,699,896 surplus. The general fund reported a fund balance this year of $148,871,429. Fund balance for the general fund at June 30, 2008 was $176,102,088, for a decrease of ($27,230,659). General fund expenses exceeded revenues by $26,542,109. Last year s total revenues were $386,942,152, whereas this year s total revenues were only $384,716,150, resulting in a decrease of ($2,226,002) (Exhibit C-3). OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts management s discussion and analysis (this section), the basic financial statements, and required supplementary information. The basic financial statements include two kinds of statements that present different views of the District: Figure A-1, Required Components of the District s Comprehensive Financial Report The first two statements are government-wide financial statements that provide both long-term and short-term information about the District s overall financial status. The remaining statements are fund financial statements that focus on individual parts of the government, reporting the District s operations in more detail than the government-wide statements. The governmental funds statements tell how general government services were financed in the short term as well as what remains for future spending. Proprietary fund statements offer short- and long-term financial information about the activities the government operates like businesses, such as catering. 13

196 Fiduciary fund statements provide information about the financial relationships in which the District acts solely as a trustee or agent for the benefit of others, to whom the resources in question belong. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements. Figure A-1 shows how the required parts of this annual report are arranged and related to one another. Figure A-2 summarizes the major features of the District s financial statements, including the portion of the District government they cover and the types of information they contain. The remainder of this overview section of management s discussion and analysis explains the structure and contents of each of the statements. GOVERNMENT-WIDE STATEMENTS The government-wide statements report information about the District as a whole using accounting methods similar to those used by privatesector All revenues and expenses during year, companies. The statement of Type of is received or paid regardless of when cash net assets includes all of the inflow/outflow government s assets and liabilities. information All of the current year s revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two government-wide statements report the District s net assets and how they have changed. Net assets the difference between the District s assets and liabilities is one way to measure the District s financial health or position. Over time, increases or decreases in the District s net assets are an indicator of whether its financial health is improving or deteriorating, respectively. To assess the overall health of the District, one needs to consider additional nonfinancial factors such as changes in the District s tax base, average daily membership and average daily attendance. The government-wide financial statements of the District include the Governmental activities. Most of the District s basic services are included here, such as instruction, extracurricular activities, curriculum and staff development, health services and general administration. Property taxes and grants finance most of these activities. FUND FINANCIAL STATEMENTS Scope (except fiduciary funds) and the Agency's component units The fund financial statements provide more detailed information about the District s most significant funds not the District as a whole. Funds are accounting devices that the District uses to keep track of specific sources of funding and spending for particular purposes. Some funds are required by State law and by bond covenants. Figure A-2. Major Features of the District's Government-wide and Fund Financial Statements Fund Statements Type of Statements Government-wide Governmental Funds Proprietary Funds Fiduciary Funds Entire Agency s government The activities of the district Activities the district that are not proprietary or operates similar to private fiduciary businesses: self insurance Required financial statements Accounting basis and measurement focus Type of asset/liability information Instances in which the district is the trustee or agent for someone else's resources Statement of net assets Balance sheet Statement of net assets Statement of fiduciary net assets Statement of activities Statement of revenues, expenditures & changes Statement of revenues, expenses and changes in Statement of changes in fiduciary net assets in fund balances fund net assets Statement of cash flows Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, short-term and long-term Modified accrual accounting and current financial resources focus Only assets expected to be used up and liabilities that come due during the year or soon thereafter; no capital assets included Revenues for which cash is received during or soon after the end of the year; expenditures when goods or services have been received and payment is due during the year or soon thereafter Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, and short-term and longterm All revenues and expenses during year, regardless of when cash is received or paid Accrual accounting and economic resources focus All assets and liabilities, both short-term and longterm; the Agency's funds do not currently contain capital assets, although they can All revenues and expenses during year, regardless of when cash is received or paid 14

197 The Board of Trustees establishes other funds to control and manage money for particular purposes or to show that it is properly using certain taxes and grants. The District has the following kinds of funds: Governmental funds Most of the District s basic services are included in governmental funds, which focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental fund statements provide a detailed shortterm view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the District s programs. Because this information does not encompass the additional long-term focus of the government-wide statements, we provide additional information at the bottom of the governmental funds statement, or on the subsequent page, that explain the relationship (or differences) between them. Proprietary funds Services for which the District charges customers a fee are generally reported in proprietary funds. Proprietary funds, like the government-wide statements, provide both long-term and short-term financial information. We use internal service funds to report activities that provide supplies and services for the District s other programs and activities. Fiduciary funds The District is the trustee, or fiduciary, for certain funds. It is also responsible for other assets that because of a trust arrangement can be used only for the trust beneficiaries. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of the District s fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. We exclude these activities from the District s government-wide financial statements because the District cannot use these assets to finance its operations. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net Assets. The District s combined net assets were $410,979,152 at June 30, (See Table A-1). Table A -1 Brownsville Independent School District (In Thousands Dollars) Statement of Changes in Net Assets Governmental Business Total Total % Activities Activities Change Current Assets Cash and Cash Equivalents $ 3,656 $ 2,745 $ - $ - $ 3,656 $ 2, % Investments 234, , , , % Property Taxes Receivable 11,342 12,076-11,342 12, % Due From Other Governments 44,693 46, ,693 46, % Accrued Interest % 15

198 Due From Fiduciary Funds 12,086 13, ,086 13, % Other Receivables (Net) % Inventories, At Cost 4,981 4, ,981 4, % Debt Issuance Costs 285 (5,936) (5,936) % Land 23,368 20, ,368 20, % Buildings, Furniture, Equip. (Net) 274, , , , % Construction in Progress 115,035 24, ,035 24, % Total Assets $ 725,411 $ 725,597 $ - $ - $ 725,411 $725, % Current Liabilities Accounts Payable $ 28,997 $ 32,471 $ - $ - $ 28,997 $ 32, % - Interest Payable ,431.25% Payroll Deductions 12,809 8, ,809 8, % Accrued Wages Payable 34,586 33, ,586 33, % Due to Fiduciary Funds % Due to Other Governments 26,456 17, ,456 17, % Due to Student Groups % Accrued Expenses % Deferred Revenues 1, , % Noncurrent Liabilities Due Within One Year 7,690 7, ,690 7, % Due In More Than One Year 201, , , , % Total Liabilities $ 314,432 $305,103 $ - $ - $314,432 $ 305, % Nets Assets Invested In Capital Assets 239, , , , % Restricted 17,637 29, ,637 29, % Unrestricted 153, , , , % Total Net Assets $ 410,979 $ 420,494 $ - $ - $ 410,978 $ 420, % The restricted fund balance amount of $17.6 million (Table A-2) is comprised of the following: 16

199 The restricted fund balance amount of $17.6 million (Table A-2) is comprised of the following: Table A-2 Summary of Restricted Fund Balance Description Amount Restricted - Federal and State Programs $ 580,042 Restricted - Debt Service 7,415,666 Restricted - Capital Projects 9,640,879 Total $ 17,636,587 CHANGES IN NET ASSETS: The District s total revenues were $472,536,533. Revenues from property taxes were 11.49% of the District s revenue (See Figure A-3). State aid and other formula grants account for 59.08% of revenues. Only 0.72% relates to charges for services. Summary of Revenues Figure A-3 De scription Amount Pe rce nt Charges for Services $ 3,406, % Operating Grants/contributions 82,140, % Property Taxes 54,307, % State Aid - Formula Grants 279,184, % Unrestricted Grants/Contributions 46,407, % Investment Earnings 6,867, % Special Item 222, % $ 472,536, % 17

200 The total cost of all programs and services was $479,005,459. Eighty-two percent of these costs were for instructional and other student services, such as transportation, food services, health services, extracurricular activities, etc. The remaining eighteen percent in costs were for general administration, security services, maintenance, computer services, debt service, etc. (Figure A-3a). Governmental Activities The district s total property tax rate remained the same at $ per $100 of property valuation. Further, the Maintenance and Operations tax rate remained at $ per $100/property valuation and the debt service rate remained at $ The beginning tax levy for FY was $51,069,707, whereas the beginning tax levy for FY was $52,931,405. Total tax revenues were $54,307,238 (Exhibit B-1 in Comprehensive Annual Financial Report), whereas last year s tax revenues were $52,488,575, resulting in a $1,818,663 (3.35%) increase in tax revenues. Table A-3 Summary of Tax Rates, Tax Levies and Tax Collections % Change Tax Rates Maintenance & Operations $ $ % Debt Service % $ $ % Beginning Tax Levy $ 51,069,707 $ 52,931, % Tax Collections $ 52,488,575 $ 54,307, % 18