$23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS

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1 NEW ISSUE DTC BOOK-ENTRY ONLY Fitch Rating: AAA Moody s Rating: A1 See RATINGS herein In the opinion of Parker & Covert LLP, Sacramento, California, Bond Counsel, based upon an analysis of existing statutes, regulations, rulings, and court decisions and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not an item of tax preference for purposes of the alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See LEGAL MATTERS Tax Matters herein. DATED: Date of Delivery $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS DUE: August 1, as shown on the inside cover The Vallejo City Unified School District 2017 General Obligation Refunding Bonds in the aggregate principal amount of $23,555,000 (the Bonds ) are being issued by the Vallejo City Unified School District (the District ) to (i) refund on a current basis the Vallejo City Unified School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2002 (the 2002 Bonds ), the Vallejo City Unified School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2004 (the 2004 Bonds ) and the Vallejo City Unified School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2006 (the 2006 Bonds ) and (ii) pay costs of issuance of the Bonds. See PLAN OF REFUNDING herein. The Bonds are general obligations of the District, payable solely from ad valorem property taxes levied and collected by Solano County (the County ). The Board of Supervisors of the County is empowered and obligated to annually levy and collect ad valorem property taxes without limitation as to rate or amount on all taxable property in the District (except for certain personal property which is taxable at limited rates) for the payment of principal of and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT herein. The Bonds are being issued as current interest bonds issuable in denominations of $5,000 or any integral multiple thereof. The Bonds mature on August 1 in the years and amounts set forth on the inside page following this cover page. Interest on the Bonds accrues from the date of delivery and is payable semiannually on February 1 and August 1 of each year, commencing February 1, The Bonds are subject to redemption prior to their maturity. See THE BONDS Payment of Principal and Interest and Redemption Provisions herein. The Bonds are being issued as fully registered bonds, without coupons, in book-entry form only. When delivered, the Bonds will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), acting as securities depository for the Bonds. So long as Cede & Co. is the registered owner of the Bonds, payments of principal of and interest on the Bonds will be made by U.S. Bank National Association as paying agent (the Paying Agent ) to DTC for subsequent disbursement to DTC participants who will remit such payments to the Beneficial Owners. See APPENDIX E DTC BOOK-ENTRY ONLY SYSTEM attached hereto. THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT INTENDED TO BE A SUMMARY OF ALL FACTORS RELEVANT TO AN INVESTMENT IN THE BONDS. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. CAPITALIZED TERMS USED ON THIS COVER PAGE NOT OTHERWISE DEFINED WILL HAVE THE MEANINGS SET FORTH HEREIN. MATURITY SCHEDULE See Inside Cover The Bonds are being purchased for reoffering by the Underwriter of the Bonds. The Bonds are offered when, as and if issued by the District and received by the Underwriter, subject to approval as to legality by Parker & Covert LLP, Sacramento, California, Bond Counsel. It is anticipated that the Bonds, in definitive form, will be available for delivery through the facilities of DTC on or about August 17, This Official Statement is dated August 3, 2017.

2 MATURITY SCHEDULE $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS Maturity Date August 1 Principal Amount Interest Rate Reoffering Yield Price CUSIP $930, % 0.900% % FD , FE , FF ,040, FG , FH , FJ , FK ,145, FL ,475, FM ,760, C FN , FP , FQ5 C = Yield to call at par on August 1, CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the District nor the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth herein. ii

3 Use of Official Statement. This Official Statement is submitted with respect to the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. No Securities Laws Registration. The Bonds have not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exceptions therein for the issuance and sale of municipal securities. The Bonds have not been registered or qualified under the securities law of any state. No Unlawful Offers of Solicitations. This Official Statement does not constitute an offer to sell nor the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make an offer, solicitation or sale. No Offering Except by This Official Statement. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations, other than those contained herein, and if given or made, such other information or representations must not be relied upon as having been authorized by the District. Information in Official Statement. The information set forth herein has been furnished by the District and other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. Website. The District maintains a website; however, the information presented there is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Bonds. Estimates and Projections. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, project, budget or similar words. The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The District does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based change. Statement of Underwriter. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities under 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. Stabilization of and Changes to Offering Prices. In connection with the offering, the Underwriter may over-allot or effect transactions that stabilize or maintain the market price of the Bonds offered hereby at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Bonds to certain dealers, institutional investors, banks or others at prices lower or higher than the public offering prices stated on the inside cover page hereof, and such public offering prices may be changed from time to time by the Underwriter. iii

4 $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS DISTRICT BOARD OF EDUCATION Ruscal Cayangyang, President Burky H. Worel, Vice President Marianne Kearney-Brown, Trustee Robert W. Lawson, Trustee A. C. Tony Ubalde, Jr., Trustee DISTRICT ADMINISTRATION Vallejo City Unified School District Stephen A. Goldstone, Ed.D., Interim Superintendent Mitchell Romao, Chief Operations Officer Cheri Summers, Chief Academic Officer Gigi Patrick, Ed.D., Chief Human Resources Officer Alana J. Shackelford, Ed.D., Chief Partnerships & Community Engagement Officer Adrian Vargas, Interim Chief Business Official 665 Walnut Avenue Vallejo, California (707) MUNICIPAL ADVISOR Government Financial Strategies inc N Street, Suite 13 Sacramento, California (916) BOND COUNSEL Parker & Covert LLP 2520 Venture Oaks Way, Suite 190 Sacramento, California (916) PAYING AGENT AND ESCROW AGENT U.S. Bank National Association 1 California Street, Suite 1000 San Francisco, California (800) VERIFICATION AGENT American Municipal Tax-Exempt Compliance Corporation 90 Avon Meadow Lane, Second Floor Avon, Connecticut (860) iv

5 $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS TABLE OF CONTENTS INTRODUCTORY STATEMENT... 1 General... 1 The District... 1 Purpose of Issue... 1 Authority for Issuance... 2 Description of the Bonds... 2 Source of Payment for the Bonds... 2 Tax Matters... 2 Continuing Disclosure... 2 Professionals Involved... 3 Other Information... 3 THE BONDS... 3 Authority for Issuance... 3 Purpose of Issue... 3 Form and Registration... 4 Payment of Principal and Interest... 4 Redemption Provisions... 4 Transfer and Exchange... 6 Defeasance... 6 Unclaimed Moneys... 6 Paying Agent... 6 PLAN OF REFUNDING... 7 Application and Investment of Bond Proceeds... 7 The Refunded Bonds... 7 Sources and Uses of Funds... 8 Debt Service Schedules... 9 SECURITY AND SOURCE OF PAYMENT Introduction Statutory Lien on Ad Valorem Tax Revenues (Senate Bill 222) Assessed Valuation of Property Tax Rates Tax Collections and Delinquencies Alternative Method of Tax Apportionment SOLANO COUNTY TREASURY POOL CITY AND COUNTY ECONOMIC PROFILE General Information Population Personal Income Labor Force and Employment Major Employers Commercial Activity Construction Activity Page # v

6 THE DISTRICT General Information The District Board of Education and Key Administrative Personnel Enrollment Charter Schools Employee Relations Pension Plans Other Postemployment Benefits (OPEB) DISTRICT FINANCIAL INFORMATION Accounting Practices Budget and Financial Reporting Process State Takeover and District Governance Audit Timing and Findings Financial Statements Revenues Expenditures Short-Term Borrowings Capitalized Lease Obligations Long-Term Borrowings CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Background Article XIIIA of the State Constitution Constitutional Protection For Owners of Municipal Securities Article XIIIB of the State Constitution Articles XIIIC and XIIID of the State Constitution Minimum Guarantee of State Funding for Education Community Redevelopment and Revitalization Limits on State Authority Over Local Tax Revenues Temporary State Tax Increases Enacted Budget Required for Disbursement of State Funds State and School District Budgetary Reserves School Facilities Funding Impact of Future Legislation FUNDING OF PUBLIC EDUCATION IN THE STATE Sources of Revenue for Public Education The State Budget Process The State Budget The State Budget Future Budgets LEGAL MATTERS No Litigation Legal Opinion Limitations on Remedies; Amounts Held in the Treasury Pool Tax Matters Legality for Investment in California RATINGS MUNICIPAL ADVISOR INDEPENDENT AUDITOR UNDERWRITING AND INITIAL OFFERING PRICE vi

7 CONTINUING DISCLOSURE ADDITIONAL INFORMATION APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2016 APPENDIX B FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX C FORM OF OPINION OF BOND COUNSEL APPENDIX D SOLANO COUNTY TREASURER INVESTMENT POLICY APPENDIX E DTC BOOK-ENTRY ONLY SYSTEM vii

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9 OFFICIAL STATEMENT $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT (SOLANO COUNTY, CALIFORNIA) 2017 GENERAL OBLIGATION REFUNDING BONDS INTRODUCTORY STATEMENT General The purpose of this Official Statement, which includes the cover page, inside cover page, table of contents and attached appendices (the Official Statement ), is to provide certain information concerning the sale and delivery of the Vallejo City Unified School District 2017 General Obligation Refunding Bonds in the aggregate principal amount of $23,555,000 (the Bonds ). This INTRODUCTORY STATEMENT is not a summary of this Official Statement. It is only a brief description of and guide to this Official Statement. This INTRODUCTORY STATEMENT is qualified by more complete and detailed information contained in this entire Official Statement. A full review of this entire Official Statement should be made by a person interested in investing in the Bonds. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. The District The Vallejo City Unified School District (the District ), established in 1855, is a political subdivision of the State of California (the State ) located in Solano County (the County ). Encompassing approximately 52 square miles, the District serves a population of approximately 124,150 people residing in the City of Vallejo (the City ). The District provides education to approximately 12,850 students in transitional kindergarten through twelfth grade, as well as students in preschool and adult education. The District operates 13 K-5 elementary schools, three K-8 schools, three 6-8 schools, two comprehensive high schools, one continuation school, one community day school, and one independent study school. The District is governed by a five-member Board of Education (the District Board ). See THE DISTRICT and DISTRICT FINANCIAL INFORMATION herein. From June 2004 to April 2013, all or a portion of the operations of the District were governed by a State administrator appointed by the State Superintendent of Public Instruction (the State Superintendent ) pursuant to special State legislation, Senate Bill 1190 ( SB 1190 ), enacted in response to the District s request for emergency financial assistance during fiscal year In July 2007, the District Board regained control of three out of five functional areas of governance of the District; in June 2008, the State Superintendent returned the operational control of a fourth area to the District Board. The fifth and final operational area, financial management, was returned to the control of the District Board in April A State trustee continues to work with the District Board as it repays a $60 million loan from the State. Additional information regarding the recent history of the District s finances and governance is included in this Official Statement. See DISTRICT FINANCIAL INFORMATION State Takeover and District Governance and Long-Term Borrowings herein. Purpose of Issue The Bonds are being issued by the District to (i) refund on a current basis the Vallejo City Unified School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2002 (the 2002 Bonds ), the Vallejo City Unified - 1 -

10 School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2004 (the 2004 Bonds ) and the Vallejo City Unified School District (Solano County, California) General Obligation Bonds, Election of 1997, Series 2006 (the 2006 Bonds ) and (ii) pay costs of issuance of the Bonds. See PLAN OF REFUNDING herein. Authority for Issuance The Bonds are being issued by the District under and pursuant to the California Constitution (the State Constitution ), certain provisions of the California Government Code (the Government Code ), a resolution adopted by the District Board on June 21, 2017 (the Resolution ), and a paying agent agreement dated July 1, 2017 (the Paying Agent Agreement ) between the District and U.S. Bank National Association (the Paying Agent ). Description of the Bonds The Bonds are being issued as fully registered bonds, without coupons, in book-entry form only. When delivered, the Bonds will be initially registered in the name of Cede & Co. as nominee of The Depository Trust Company ( DTC ). So long as Cede & Co. is the registered owner of the Bonds, payments of principal of and interest on the Bonds will be made by the Paying Agent to DTC for subsequent disbursement to DTC participants who will remit such payments to the beneficial owners of the Bonds (the Beneficial Owners ). See APPENDIX E DTC BOOK-ENTRY ONLY SYSTEM attached hereto. The Bonds are being issued as current interest bonds in denominations of $5,000 principal amount, or any integral multiple thereof. The Bonds are dated their date of delivery and mature on August 1 in each of the years and in the amounts set forth on the inside cover page hereof. Interest on the Bonds is payable semiannually on February 1 and August 1 of each year, commencing February 1, Interest on the Bonds is computed on the basis of a 360-day year comprised of twelve 30-day months. See THE BONDS Payment of Principal and Interest herein. The Bonds are subject to redemption prior to maturity. See THE BONDS Redemption Provisions herein. Source of Payment for the Bonds The Bonds are general obligation bonds of the District payable solely from ad valorem property taxes, which the Board of Supervisors of Solano County (the County Board ) is empowered and obligated to annually levy and collect, without limitation as to rate or amount, on all taxable property in the District (except for certain personal property which is taxable at limited rates) for the payment of principal of and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT herein. Tax Matters In the opinion of Parker & Covert LLP, Sacramento, California, ( Bond Counsel ), based upon an analysis of existing statutes, regulations, rulings, and court decisions and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not an item of tax preference for purposes of the alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See LEGAL MATTERS Tax Matters herein. A complete copy of the proposed opinion of Bond Counsel is included with this Official Statement. See APPENDIX C FORM OF OPINION OF BOND COUNSEL attached hereto. Continuing Disclosure The District will covenant for the benefit of the Registered Owners (as hereinafter defined) and Beneficial Owners to make available certain financial information and operating data relating to the District and to provide notices of the occurrence of - 2 -

11 certain enumerated events in compliance with Securities and Exchange Commission (the SEC ) Rule 15c2-12(b)(5). The specific nature of the information to be made available and of the notices of certain enumerated events are set forth in APPENDIX B FORM OF CONTINUING DISCLOSURE CERTIFICATE attached hereto. See also CONTINUING DISCLOSURE herein. Professionals Involved Government Financial Strategies inc., Sacramento, California, has acted as municipal advisor (the Municipal Advisor ) to the District with respect to the sale and delivery of the Bonds. See MUNICIPAL ADVISOR herein. Certain proceedings in connection with the sale and delivery of the Bonds are subject to the approving legal opinion of Parker & Covert LLP as Bond Counsel. U.S. Bank National Association will act as escrow agent (the Escrow Agent ) with respect to the bonds to be refunded and as paying agent with respect to the Bonds. Parker & Covert LLP and U.S. Bank National Association will receive compensation contingent upon the sale and delivery of the Bonds. Other Information This Official Statement may be considered current only as of its date that has been made a part of the cover page hereof, and the information contained herein is subject to change. A description of the Bonds and the District, together with summaries of certain provisions of the Resolution, Paying Agent Agreement and other legal documents related to the Bonds (collectively, the Legal Documents ) are included in this Official Statement. Such summaries do not purport to be comprehensive or definitive, and all references made herein to the Legal Documents approved by the District are qualified in their entirety by reference to such document, and all references herein to the Bonds are qualified in their entirety by reference to the form thereof included in the Legal Documents. Information concerning this Official Statement, the Bonds, the District, the Legal Documents or any other information relating to the sale and delivery of the Bonds is available for public inspection and may be obtained by contacting Vallejo City Unified School District, 665 Walnut Avenue, Vallejo, California 94592, telephone (707) , Attention: Chief Operations Officer, or by contacting the Municipal Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California , telephone (916) THE BONDS Authority for Issuance The Bonds are being issued by the District under and pursuant to the provisions of Article XIIIA, Section 1 and Article XVI, Section 18 of the State Constitution, the provisions of Government Code Sections and et seq. and all laws amendatory to or supplemental thereof, and pursuant to the provisions of the Resolution and the Paying Agent Agreement. The District may issue bonds payable from ad valorem taxes without a vote of the electors solely in order to refund other outstanding bonds which were originally approved by such a vote, provided that the total net interest cost to maturity plus the principal amount of the refunding bonds does not exceed the total net interest cost to maturity plus the principal amount of the bonds being refunded. The 2002 Bonds, 2004 Bonds and 2006 Bonds were issued by the District pursuant to authorization at the 1997 Election (hereinafter defined) by more than two-thirds of eligible voters in the District. See DISTRICT FINANCIAL INFORMATION Long-Term Borrowings herein. Purpose of Issue The Bonds are being issued to refund on a current basis all outstanding maturities of the 2002 Bonds (the Refunded 2002 Bonds ), all outstanding maturities of the 2004 Bonds (the Refunded 2004 Bonds ) and all outstanding maturities of the 2006 Bonds (the Refunded 2006 Bonds and, together with the Refunded 2002 Bonds and the Refunded 2004 Bonds, the Refunded Bonds ), and pay costs of issuance of the Bonds

12 Form and Registration The Bonds are being issued as fully registered bonds, without coupons, in book-entry form only. The Bonds will be evidenced by one Bond maturing on each of the maturity dates with respect to the Bonds in a denomination corresponding to the total principal amount represented by the Bonds payable on such date. Pursuant to the Paying Agent Agreement, the Paying Agent will keep and maintain for and on behalf of the District, books (the Bond Register ) for recording the owners of the Bonds (the Registered Owners ), the transfer and exchange of the Bonds, and the payment of the principal of and interest on the Bonds to the Registered Owners. All transfers and exchanges of the Bonds will be noted in the Bond Register. The Bonds are initially issued and registered in the name of Cede & Co., as nominee of DTC acting as securities depository for the Bonds. Purchases of the Bonds by Beneficial Owners will be made by or through a DTC participant, and ownership interests in the Bonds will be recorded as entries on the books of said participants. So long as Cede & Co. is the registered owner of the Bonds, payments of principal of and interest on the Bonds will be made by the Paying Agent to DTC for subsequent disbursement to Beneficial Owners by or through a DTC participant. Except in the event that use of this bookentry system is discontinued for the Bonds, Beneficial Owners will not receive physical certificates representing their ownership interests in the Bonds. See APPENDIX E DTC BOOK-ENTRY ONLY SYSTEM attached hereto. So long as the Bonds are registered in the name of Cede & Co., as nominee for DTC, references in this Official Statement to the Registered Owners means Cede & Co., and does not mean the purchasers or Beneficial Owners of the Bonds. Payment of Principal and Interest The Bonds are dated their date of delivery and mature on August 1 in each of the years and in the amounts set forth on the inside cover page hereof. The Bonds are being issued in denominations of $5,000 principal amount, or any integral multiple thereof. Interest on the Bonds is payable semiannually on February 1 and August 1 of each year (each, an Interest Payment Date ), commencing February 1, 2018, at the annual interest rates shown on the inside cover page hereof. Interest on the Bonds is computed from their dated date on the basis of a 360-day year comprised of twelve 30-day months. The principal or redemption price of and interest on the Bonds is payable in lawful money of the United States of America by wire transfer on each payment date to Cede & Co., so long as Cede & Co. is the sole Registered Owner. In the event the book-entry system is no longer in use, the principal or redemption price of the Bonds is payable upon surrender thereof at maturity or earlier redemption at the principal office of the Paying Agent, and payments of interest will be made on each Interest Payment Date by check of the Paying Agent sent to the Registered Owner thereof, provided however, that payment of interest may be by wire transfer of immediately available funds to any Registered Owner in the aggregate principal amount of $1,000,000 or more who has provided the Paying Agent with wire transfer instructions to an account within the United States of America as of the close of business on the fifteenth of the month prior to the Interest Payment Date (the Record Date ). Redemption Provisions Optional Redemption. The Bonds maturing on or before August 1, 2026 are not subject to redemption prior to their respective maturity dates. The Bonds maturing on or after August 1, 2027, are subject to redemption prior to their respective stated maturities, at the option of the District, from any source of available funds, as a whole or in part on any date (by such maturities as may be specified by the District and by lot within a maturity), on or after August 1, 2026, at a redemption price equal to the principal amount of Bonds called for redemption, plus accrued interest to the date fixed for redemption, without premium. Selection of Bonds for Redemption. In the case of any redemption at the election of the District of less than all the outstanding Bonds, the District may specify the maturities to be redeemed. If the District does not specify the maturities to be redeemed, not more than 45 days prior to the date fixed for redemption, the Paying Agent will select the maturities to be redeemed from the outstanding Bonds of such maturity that have not previously been called for redemption, in minimum amounts of $5,000 principal amount, by lot in any manner that the Paying Agent in its sole discretion deems appropriate and fair. For purposes of such selection, each $5,000 principal amount will be deemed to be a separate Bond. The Paying Agent will notify the District in writing of the Bonds selected for redemption and, in the case of a Bond selected for partial redemption, the principal amount thereof to be redeemed

13 Notice of Redemption. The Paying Agent will mail notice of redemption not fewer than 30 nor more than 60 days prior to the redemption date by first-class mail, postage prepaid, to the respective Registered Owners of any Bonds designated for redemption at their addresses appearing on the Bond Register. If the Bonds are not then registered solely to a securities depository, the Paying Agent will also give notice of redemption of Bonds to DTC, or such other securities depositories as the District may designate, and the Municipal Securities Rulemaking Board (the MSRB ) through its Electronic Municipal Market Access ( EMMA ) system, or such other services providing information with respect to Bonds called for redemption (at the same time it mails notice of redemption to the Registered Owners) by registered or overnight mail. Each notice of redemption will contain: (i) the date of such notice; (ii) the name of the Bonds and date of issue of the Bonds; (iii) the redemption date; (iv) the redemption price; (v) the dates of maturity of the Bonds to be redeemed; (vi) if less than all of the Bonds of any maturity are to be redeemed, the distinctive numbers of the Bonds of each maturity to be redeemed; (vii) in the case of Bonds redeemed in part only, the respective portions of the principal amount of the Bonds of each maturity to be redeemed; (viii) the CUSIP number, if any, of each maturity of Bonds to be redeemed; (ix) a statement that such Bonds must be surrendered by the Registered Owners at the Paying Agent s office, or at such other place or places designated by the Paying Agent; and (x) notice that further interest on such Bonds will not accrue after the designated redemption date. Such redemption notices may state that no representation is made as to the accuracy or correctness of the CUSIP numbers printed therein or on the Bonds. Defects in Notice or Procedure. The actual receipt by the Registered Owner of any Bond or by DTC or EMMA (or replacement services, if any) of notice of redemption is not a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, will not affect the validity of the proceedings for the redemption of such Bonds or the cessation of interest on the date fixed for redemption. A certificate of the Paying Agent or the District that notice of call and redemption has been given to the Registered Owners and to DTC and EMMA (or replacement services, if any) is conclusive as against all parties. Right to Rescind Notice. The District may rescind any optional redemption and notice thereof for any reason on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the Registered Owners of the Bonds so called for redemption. Any optional redemption and notice thereof will be rescinded if for any reason on the date fixed for redemption moneys are not available in the fund maintained by the Paying Agent for the payment of debt service on the Bonds (the Debt Service Fund ) or otherwise held in trust for such purpose in an amount sufficient to pay in full on said date the principal of, interest, and any premium due on the Bonds called for redemption. Notice of rescission of redemption will be given in the same manner in which notice of redemption was originally given. The actual receipt by the Registered Owner of any Bond of notice of such rescission is not a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission. Funding of Redemption. Prior to or on the redemption date of any Bonds, moneys will be available in the Debt Service Fund, or held in trust for such purpose as provided by law, for the purpose and sufficient to redeem the Refunding Bonds designated in said notice of redemption. Such moneys so set aside in any such escrow fund shall be applied on or after the redemption date solely for payment of principal of and premium, if any, on the Bonds to be redeemed upon presentation and surrender of such Bonds, provided that all moneys in the Debt Service Fund will be used for the purposes established and permitted by law. Any interest due on or prior to the redemption date will be paid from the Debt Service Fund, unless otherwise provided for to be paid from such escrow. If, after all of the Bonds have been redeemed and cancelled or paid and cancelled, there are moneys remaining in the Debt Service Fund or otherwise held in trust for the payment of redemption price of the Bonds, said moneys will be held in or returned or transferred to the Debt Service Fund for payment of any outstanding bonds of the District payable from said fund; provided, however, that if said moneys are part of the proceeds of bonds of the District, said moneys will be transferred to the fund created for the payment of principal of and interest on such bonds. If no such bonds of the District are at such time outstanding, said moneys will be transferred to the general fund of the District (the General Fund ) as provided and permitted by law. Effect of Redemption. When notice of redemption has been given substantially as provided by the Paying Agent Agreement, and when the redemption price of the Bonds called for redemption is set aside for such purpose, the Bonds designated for redemption will become due and payable on the specified redemption date and interest will cease to accrue thereon as of the redemption date, and upon presentation and surrender of such Bonds at the place specified in the notice of redemption, such Bonds will be redeemed and paid at the redemption price thereof out of the money provided therefore. The Registered Owners of such Bonds so called for redemption after such redemption date will look for the payment of such Bonds and the redemption premium thereon, if any, only to the Debt Service Fund or the escrow fund established for such purpose. All Bonds redeemed will be cancelled forthwith by the Paying Agent and will not be reissued

14 Transfer and Exchange If the book-entry system as described herein is no longer used with respect to the Bonds, the provisions in the Paying Agent Agreement summarized below will govern the transfer and exchange of the Bonds. See APPENDIX E DTC BOOK- ENTRY ONLY SYSTEM attached hereto. Any Bond may, in accordance with its terms, be transferred upon the Bond Register by the person in whose name it is registered, in person or by the duly authorized attorney of such person, upon surrender of such Bond to the Paying Agent for cancellation, accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Paying Agent. Whenever any Bond or Bonds are surrendered for transfer, the District will execute and the Paying Agent will authenticate and deliver a new Bond or Bonds of the same maturity, for a like aggregate principal amount and bearing the same rate of interest. Bonds may be exchanged at the office of the Paying Agent designated, for a like aggregate principal amount of Bonds of other authorized denominations of the same maturity and interest rate. The Paying Agent will require the payment by the Registered Owner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange. No transfer or exchange of Bonds is required to be made by the Paying Agent during the period from the close of business on the Record Date next preceding any Interest Payment Date or redemption date to and including such Interest Payment Date or redemption date. Defeasance If at any time the District pays or causes to be paid or there otherwise is paid to the Registered Owners of all outstanding Bonds all of the principal, interest and premium, if any, represented by Bonds at the times and in the manner provided in the Paying Agent Agreement and in the Bonds, then such Registered Owners will cease to be entitled to the obligation to levy taxes for payment of the Bonds, and such obligation and all agreements and covenants of the District to such Registered Owners will thereupon be satisfied and discharged and will terminate, except only that the District will remain liable for payment of all principal of and interest and premium, if any, on the Bonds, but only out of moneys on deposit in the Debt Service Fund or otherwise held in trust for such payment. The District may pay and discharge any or all of the Bonds by depositing in trust with the Paying Agent or an escrow agent at or before maturity, money or non-callable direct obligations of the United States of America or other non-callable obligations the payment of the principal of and interest on which is guaranteed by a pledge of the full faith and credit of the United States of America, in an amount that will, together with the interest to accrue thereon and available moneys then on deposit in the Debt Service Fund, be fully sufficient in the opinion of a certified public accountant licensed to practice in the State to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates. Unclaimed Moneys Any moneys held by the Paying Agent in trust for the payment of the principal or redemption price of or interest on any Bonds and remaining unclaimed for two years after the date when such Bonds have become due and payable (whether at maturity or upon call for redemption) will be transferred to the Debt Service Fund for payment of any outstanding bonds of the District payable from said fund, without liability for interest; or, if no such bonds of the District are at such time outstanding, said moneys will be transferred to the General Fund as provided and permitted by law. Paying Agent U.S. Bank National Association will act as the transfer agent, bond registrar, authenticating agent and paying agent for the Bonds. As long as DTC is the registered owner of the Bonds and DTC s book-entry method is used for the Bonds, the Paying Agent will send any notice of redemption or other notices to owners only to DTC. Any failure of DTC to advise any DTC participant, or of any DTC participant to notify any Beneficial Owner, of any such notice and its content or effect will not effect the validity or sufficiency of the proceedings relating to the redemption of the Bonds called for redemption or of any - 6 -

15 other action premised on such notice. U.S. Bank National Association, the Paying Agent, the District and the Underwriter have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising, or reviewing any records relating to beneficial ownership of interests in the Bonds. PLAN OF REFUNDING Application and Investment of Bond Proceeds A portion of the proceeds of the sale of the Bonds will be irrevocably deposited into an escrow fund (the Escrow Fund ) to be created and maintained by the Escrow Agent under an escrow agreement dated July 1, 2017 (the Escrow Agreement ) by and between the District and the Escrow Agent. Moneys deposited in the Escrow Fund will be held in cash, uninvested. Moneys deposited in the Escrow Fund will be sufficient for the payment of interest coming due and payable to the date fixed for redemption plus the redemption amount of the Refunded Bonds, redeemable on September 5, 2017, at a price of par. A portion of the proceeds of the sale of the Bonds will be retained by U.S. Bank National Association for deposit into a fund established pursuant to the Paying Agent Agreement to pay costs associated with the issuance of the Bonds (the Costs of Issuance Fund ). Moneys deposited in the Costs of Issuance Fund will be held in cash, uninvested, and used solely for the payment of costs of issuance of the Bonds. Any proceeds of the sale of the Bonds deposited into the Costs of Issuance Fund not needed to pay costs of issuance of the Bonds will be transferred to the Debt Service Fund. The Refunded Bonds American Municipal Tax-Exempt Compliance Corporation of Avon, Connecticut, and Stephen Miller, C.P.A. (an independent Certified Public Accountant) of Treasure Island, Florida, together acting as verification agent with respect to the Refunded Bonds, will certify in writing that moneys irrevocably deposited into the Escrow Fund will be sufficient for the payment of interest coming due and payable to the date fixed for redemption plus the redemption amount of the Refunded Bonds, redeemable on September 5, 2017 at a price of 100 percent of par. Upon such irrevocable deposit, the Refunded Bonds will be deemed paid and no longer outstanding. The Refunded Bonds and refunding details are identified in the following table. Refunded Bonds Vallejo City Unified School District Series Maturities to be Refunded Principal Amount to be Refunded Redemption Date Redemption Price Type of Refunding 2002 Bonds August 1, $16,550,000 September 5, % Current 2004 Bonds August 1, ,315,000 September 5, Current 2006 Bonds August 1, ,815,000 September 5, Current - 7 -

16 Sources and Uses of Funds The sources and uses of funds in connection with the sale and delivery of the Bonds are set forth in the following table. Sources and Uses of Funds 2017 General Obligation Refunding Bonds SOURCES OF FUNDS Par Amount of Bonds $23,555, Net Original Issue Premium 4,489, TOTAL SOURCES OF FUNDS $28,044, USES OF FUNDS Escrow Fund $27,802, Costs of Issuance Fund 1 170, Underwriter s Discount 71, TOTAL USES OF FUNDS $28,044, The Costs of Issuance Fund will be used to pay costs of issuance of the Bonds, including fees and expenses of Bond Counsel, the Municipal Advisor, the Paying Agent, the Escrow Agent, the rating agencies, and certain other expenses related to the issuance of the Bonds

17 Debt Service Schedules Scheduled debt service on the Bonds (without regard to optional redemption) is shown in the following table. Debt Service Schedule 2017 General Obligation Refunding Bonds Date Principal Interest Semiannual Debt Service Annual Debt Service February 1, $516, $516, August 1, 2018 $930, , ,497, $2,013, February 1, , , August 1, , , ,483, ,027, February 1, , , August 1, , , ,515, ,035, February 1, , , August 1, ,040, , ,535, ,031, February 1, , , August 1, , , ,374, ,844, February 1, , , August 1, , , ,306, ,753, February 1, , , August 1, , , ,195, ,620, February 1, , , August 1, ,145, , ,551, ,957, February 1, , , August 1, ,475, , ,777, ,080, February 1, , , August 1, ,760, , ,925, ,091, February 1, , , August 1, , , , , February 1, , , August 1, , , , , Total $23,555, $8,701, $32,256, $32,256,

18 Upon issuance of the Bonds, scheduled debt service on the District s outstanding general obligation bond debt (without regard to optional redemption) is shown in the following table. See DISTRICT FINANCIAL INFORMATION Long-Term Borrowings for more information on the District s outstanding bonded debt. Outstanding General Obligation Bond Debt Service Vallejo City Unified School District Year Ended June 30 General Obligation Bonds to Remain Outstanding 2017 General Obligation Refunding Bonds Total General Obligation Bond Debt Service 2018 $7,674,973 $516,771 $8,191, ,226,580 2,041,125 8,267, ,484,325 2,004,375 8,488, ,736,390 2,011,000 8,747, ,331,300 2,005,125 7,336, ,369,355 1,821,500 7,190, ,492,055 1,732,375 7,224, ,734,680 1,601,625 3,336, ,950 4,853,750 4,956, ,943,250 5,943, ,947,375 5,947, , , , ,938 SECURITY AND SOURCE OF PAYMENT Introduction The Bonds are general obligation bonds of the District, payable solely from ad valorem property taxes levied and collected by the County for the payment of principal of and interest on the Bonds. The County Board is empowered and is obligated to levy ad valorem taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates) in order to provide sufficient funds for repayment of principal of and interest on the Bonds when due. Although the County Board is obligated to levy and collect the ad valorem tax for the payment of the Bonds, the Bonds are not a debt of the County. The County shall levy such ad valorem tax in accordance with Education Code Section et seq. and cause the proceeds from such levy to be deposited into a tax collection fund (the Tax Collection Fund ). All funds held by the Solano County Treasurer (the County Treasurer ) in the Tax Collection Fund are expected to be invested at the sole discretion of the County Treasurer, on behalf of the District, in such investments as are authorized by Government Code Sections , and and by the Solano County Treasurer Investment Policy (the County Investment Policy ) as either may be amended or supplemented from time to time. See SOLANO COUNTY TREASURY POOL herein and APPENDIX D SOLANO COUNTY TREASURER INVESTMENT POLICY attached hereto for a description of the permitted investments under the County Investment Policy. The District will direct the County Treasurer to transfer, at least one business day prior to each Interest Payment Date, from the Tax Collection Fund to the Paying Agent for deposit in the Debt Service Fund, an amount sufficient to pay the principal and interest becoming due and payable on the next succeeding Interest Payment Date. Various County officers are responsible for the performance of each function in the property taxation system. Property tax revenues result from the application of the appropriate tax rate to the total net assessed value of taxable property in the District. All property, including real, personal and intangible property, is taxable, unless granted an exemption by the State Constitution or United States law. Under the State Constitution, exempt classes of property include household and personal effects, intangible personal property (such as bank accounts, stocks and bonds), business inventories, and property used for religious, hospital, scientific and charitable purposes. The California Legislature (the State Legislature ) may create additional exemptions for personal property, but not for real property. Taxes on property in a school district with boundaries

19 extending into more than one county are administered separately by each county in which the property is located (the District is located solely in the County). Taxes on real property located within the District are assessed and collected by the County in the same manner, at the same time, and in the same installments as other ad valorem taxes on real property located in the County. In addition to general obligation bonds issued by the District, other entities with jurisdiction in or overlapping with the District may issue debt payable from ad valorem taxes also levied on parcels in the District. Such taxes have the same priority, become delinquent at the same times and in the same proportionate amounts, and bear the same proportionate penalties and interest after delinquency as ad valorem taxes levied for the payment of the Bonds and other general obligation bonds of the District. In no event is the District obligated to pay principal of and interest and redemption premium, if any, on the Bonds from any source of funds other than ad valorem taxes. However, nothing in the Resolution or the Paying Agent Agreement prevents the District from making advances of its moneys, howsoever derived, to any use or purpose permitted by law. Statutory Lien on Ad Valorem Tax Revenues (Senate Bill 222) All general obligation bonds issued and sold by or on behalf of a local agency in the State, including the Bonds, are secured by a statutory lien on all revenues received pursuant to the levy and collection of the tax pursuant to Education Code Section and Government Code Section 53515, which became effective as of January 1, 2016 pursuant to Senate Bill 222. The lien automatically arises without the need for any action or authorization by the local agency or its governing board and is valid and binding from the time the bonds are executed and delivered. In addition, the revenues received pursuant to the levy and collection of the tax will be immediately subject to the lien, and the lien will automatically attach to the revenues and be effective, binding, and enforceable against the local agency, such as the District, as applicable, its successor, transferees, and creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without the need for physical delivery, recordation, filing, or further tax. Assessed Valuation of Property The Solano County Assessor (the County Assessor ) must annually assess all taxable property in the County (except for utility property, assessed by the State) to the person, business or legal entity owning, claiming, possessing or controlling the property on January 1, the lien date. Property assessed by the County Assessor is subject to the reappraisal provisions set forth in the State Constitution. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Article XIIIA of the State Constitution herein. The duties of the County Assessor are to discover all assessable property, to inventory and list all taxable property, to value the property, and to enroll the property on the local assessment roll. Locally assessed taxable property is classified as either secured or unsecured and is listed accordingly on separate parts of the assessment roll. The secured roll contains real property sufficient, in the opinion of the County Assessor, to secure the payment of the taxes as a lien on real property. All other property is unsecured and assessed on the unsecured roll. The District can make no predictions as to the changes in assessed values that might result from pending or future appeals of assessed valuation by taxpayers or temporary reductions in assessed valuation allowed under the State Constitution. Any reduction in aggregate District assessed valuation will cause the tax rate necessary to repay the Bonds to increase accordingly. Any refund of paid taxes triggered by a successful assessment appeal will be debited against all taxing agencies receiving tax revenues, including the District. The secured roll also includes certain utility property, entered on the utility roll, located in the County but assessed by the State Board of Equalization (the SBE ) rather than the County Assessor. Such property includes property owned or used by State-regulated transportation and communications utilities such as railways, telephone and telegraph companies, companies transmitting or selling gas or electricity, and pipelines, flumes, canals and aqueducts lying within two or more counties. Property assessed by the SBE is not subject to the provisions of Proposition 13 (1978) and is annually reappraised at its market value as of January 1 and then allocated by formula among all the taxing jurisdictions in the County, including the District. The growth or decline in the assessed valuation of utility property is shared by all jurisdictions in the County. The District can make no predictions regarding the impact of the reorganization of regulated utilities and the transfer of electricitygenerating property to non-utility companies on the amount of tax revenue collected. In general, the transfer of State-assessed property located in the District to non-utility companies will increase the assessed value of property in the District, since the property s value will no longer be divided among taxing jurisdictions in the County; the transfer of property located and taxed in the District to a State-assessed utility will, in general, reduce the assessed value in the District, as the value is shared among the other jurisdictions in the County

20 The greater the total assessed value of all taxable property in the District, the lower the tax rate necessary to generate taxes sufficient to pay scheduled debt service on the Bonds. Shown in the following table are ten years of the District s historical assessed valuation. Total secured assessed value includes net local secured, secured homeowner exemption, and utility value. Total unsecured assessed value includes net local unsecured and unsecured homeowner exemption value. Historical Total Secured and Unsecured Assessed Valuation Vallejo City Unified School District Year Ended Total Secured Total Unsecured Total Percentage June 30 Assessed Value Assessed Value Assessed Value Change 2008 $10,326,660,197 $325,406,143 $10,652,066, ,872,416, ,833,106 10,141,249,175 (4.80%) ,006,558, ,759,817 8,264,318,270 (18.51) ,512,415, ,310,776 7,766,726,461 (6.02) ,243,743, ,700,225 7,490,443,591 (3.56) ,520,268, ,470,560 7,783,738, ,463,293, ,972,387 7,707,266,276 (0.98) ,372,181, ,799,751 8,627,981, ,876,586, ,203,080 9,129,789, ,418,061, ,598,675 9,733,660, Source: Solano County Assessor. The District may not issue bonds in excess of 2.5 percent of the assessed valuation of taxable property within its boundaries. The District s gross bonding capacity in fiscal year is approximately $243.3 million. Upon issuance of the Bonds, the District will have remaining bonding capacity of approximately $185.3 million

21 Shown in the following table is a distribution of taxable real property located in the District by principal purpose for which the land is used along with the local secured assessed valuation (excludes homeowners exemption) and number of parcels for each use for fiscal year Assessed Valuation and Parcels by Land Use Vallejo City Unified School District Percent of Number of Percent of Assessed Valuation 1 Total Parcels Total Non-Residential: Agricultural $3,569, % % Commercial 969,587, , Vacant Commercial 41,177, Industrial 181,432, Vacant Industrial 10,232, Government/Social/Institutional 56,402, Miscellaneous 27,571, , Subtotal Non-Residential $1,289,973, % 3, % Residential: Single Family Residence $6,811,915, % 30, % Condominium/Townhouse 432,403, , Mobile Home 7,708, Mobile Home Park 32,435, Residential Units 789,482, , Vacant Residential 53,395, Subtotal Residential $8,127,340, % 37, % Total $9,417,314, % 41, % Source: California Municipal Statistics, Inc. Tax Rates The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed one percent of the property s full cash value, plus the amount necessary to make annual payments due on general obligation bonds or other indebtedness incurred prior to July 1, 1978, any bonded indebtedness for the acquisition or improvement or real property approved by a two-thirds majority of voters on or after July 1, 1978, and certain bonded indebtedness for school facilities approved by 55 percent of the voters. The Solano County Auditor-Controller (the County Auditor-Controller ) computes the additional rate of tax necessary to pay such scheduled debt service and presents the tax rates for all taxing jurisdictions in the County to the County Board. The tax rate necessary to pay debt service in a given year largely depends on the net assessed value of taxable property in that year. The net assessed value of taxable property may be affected by several factors, such as a general market decline in land values, reclassification of property to a class exempt from taxation, such as property owned by State and local agencies, or property used for certain educational, hospital, charitable or religious purposes, or the destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, drought, toxic dumping, etc. Any of these instances could cause a reduction in the net assessed value of taxable property within the District, necessitating a corresponding increase in the annual tax rate to be levied to pay the principal of and interest on the Bonds. Issuance of additional authorized bonds in the future might also cause the tax rate to increase

22 One factor in the ability of taxpayers to pay additional taxes for general obligation bonds is the cumulative rate of tax. The following table shows ad valorem property tax rates per $100 of assessed value for the last five years in a typical tax rate area of the District (TRA 7-000). The fiscal year assessed valuation of TRA is $4,746,002,158, approximately percent of the total assessed value of taxable property in the District. Typical Total Tax Rates per $100 of Assessed Valuation TRA Vallejo City Unified School District General Tax Rate $ $ $ $ $ Vallejo Unified School District Solano Community College District Solano County State Water Project Total Tax Rate $ $ $ $ $ Source: California Municipal Statistics, Inc

23 The more property (by assessed value) that is owned by a single taxpayer, the more tax collections are exposed to weakness in the taxpayer s financial situation and their ability or willingness to pay property taxes. In fiscal year , no single taxpayer owned more than 1.13 percent of the total secured taxable property in the District. However, each taxpayer listed is a unique name on the tax rolls. The District cannot determine from assessment records whether individual persons, corporations or other organizations are liable for tax payments with respect to multiple properties held in various names that in aggregate may be larger than is suggested by the list of largest taxpayers identified in the following table. The 20 taxpayers in the District with the greatest combined secured assessed valuation of taxable property on the fiscal year tax roll own property that comprises 6.48 percent of the local assessed valuation of secured property in the District. These taxpayers, ranked by aggregate assessed value of taxable property as shown on the fiscal year secured tax roll and the amount of each owner s assessed valuation for all taxing jurisdictions within the District are shown in the following table. Largest Taxpayers Vallejo City Unified School District Percent of Property Owner Primary Land Use Assessed Valuation Total 1 1. Centro Watt Property Owner II Commercial $106,887, % 2. Park Management Corp. Theme Park 80,326, Prime Ascot LP Apartments 59,352, Ogino LLC Commercial 31,506, MG Sterling Village Apartments GWP LP Apartments 31,374, Syar Industries Inc. Quarry 28,842, KW/WDC Vallejo LLC Apartments 27,248, Urban Land Company LLC Commercial 26,233, Lennar Mare Island LLC Mixed-Use 25,765, Lowes HIW Inc. Commercial 21,784, Alsation Land Co. Vallejo LLC Commercial 20,462, M2 Vallejo 178 LP Apartments 19,700, Locust Drive LLC Apartments 18,386, Braddock & Logan Group II LP Residential Development 17,756, Meyer Cookware Industries Inc. Industrial 17,098, Costco Wholesale Corp. Commercial 16,603, De Village Austin Creek LLC Apartments 16,036, Bai Park Place LP Commercial 15,119, Earthquake Protection Systems Industrial 15,032, James S. Riley Apartments 14,713, local secured assessed valuation: $9,417,789,851. Source: California Municipal Statistics, Inc Total $610,232, % Another factor in the ability of taxpayers to pay additional taxes for general obligation bonds is the number of other taxes already imposed by other taxing jurisdictions in which a property is included. Contained within the District s boundaries are numerous overlapping local entities providing public services which may have outstanding long-term obligations in the form of general obligation, lease revenue and special assessment bonds. Such obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. The following table shows long-term obligations sold in the public credit markets by the public agencies listed. The first column in the table names each public agency which has outstanding debt as of July 1, 2017 and whose territory overlaps the District in whole or in part. The second column shows the percentage of each overlapping agency s assessed value located within the boundaries of the District. This percentage, multiplied by the total outstanding debt of each overlapping agency

24 (not shown) produces the amount shown in the third column, which is the apportionment of each overlapping agency s outstanding debt to taxable property in the District. Property owners within the District may be subject to other special taxes and assessments levied by other taxing authorities providing services within the District. Such non-ad valorem special taxes and assessments (which are not levied to fund debt service) are not represented in the statement of direct and overlapping bonded debt. The statement of direct and overlapping bonded debt relating to the District set forth below was prepared by California Municipal Statistics, Inc. It has been included for general information purposes only. The District has not reviewed the statement for completeness or accuracy and makes no representations in connection with the statement. Statement of Direct and Overlapping Bonded Debt (As of July 1, 2017) Vallejo City Unified School District Assessed Valuation: $9,733,660,318 Percent Debt as of Applicable July 1, 2017 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Solano County Community College District % $61,123,313 Vallejo Unified School District ,440,000 1 Vallejo Unified School District Community Facilities District No ,260,000 City of Vallejo Improvement District No ,340,000 City of Vallejo Improvement District No ,370,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $161,533,313 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Solano County General Fund Obligations % $17,577,212 Solano County Pension Obligation Bonds ,462,524 Solano County Board of Education Certificates of Participation ,135 Solano Community College District General Fund Obligations ,027,166 Vallejo Unified School District Certificates of Participation ,090,000 Vallejo Unified School District Lease Revenue Bonds ,435,000 2 City of Vallejo General Fund Obligations ,152,826 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $90,816,863 OVERLAPPING TAX INCREMENT DEBT (Successor Agency): $5,685,000 COMBINED TOTAL DEBT $258,035,176 3 Ratios to Assessed Valuation: Direct Debt ($63,440,000). 0.65% Total Direct and Overlapping Tax and Assessment Debt. 1.66% Combined Direct Debt ($88,965,000) 0.91% Combined Total Debt 2.65% Ratio to Redevelopment Incremental Valuation ($357,084,811): Total Overlapping Tax Increment Debt. 1.59% 1 Excludes the Bonds to be sold. 2 Issued by California Infrastructure and Economic Development Bank (State School Fund Apportionment, Series 2005). 3 Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc

25 Tax Collections and Delinquencies Property taxes are levied for each fiscal year on taxable real and personal property situated in the taxing jurisdiction assessed as of January 1, at which time the tax lien attaches. The Solano County Tax Collector (the County Tax Collector ) is presented with a tax roll created from the combined rolls of the County Assessor and the SBE. The County Tax Collector prepares and mails tax bills to taxpayers and collects the taxes. Property taxes on the regular secured roll are due in two equal installments. The first installment is due on November 1 and becomes delinquent at 5:00 p.m. on December 10, after which time a delinquent penalty of ten percent attaches. The second installment is due on February 1 and becomes delinquent at 5:00 p.m. on April 10, after which time a delinquent penalty of ten percent plus $10 cost attach. Taxes remaining unpaid by 5:00 p.m. on June 30 are deemed to be in default and subject to additional redemption fees and penalties. After five years, the County generally has the power to sell tax-defaulted property that is not redeemed; proceeds from such sale are applied to the payment of the delinquent taxes. Annual bills for property taxes on the unsecured roll are mailed during July; taxes on the unsecured roll are due on August 31. Taxes unpaid by the delinquency date will have a lien recorded against the property owner. As long as the Teeter Plan remains in effect in the County, discussed below, the District will be credited with the full amount of the tax levy no matter the delinquency rate within the District. See Alternative Method of Tax Apportionment herein. The following table shows a five-year history of real property tax collections and delinquencies in the District. Secured Tax Charges and Delinquencies Vallejo City Unified School District Secured Amount Delinquent Percent Delinquent Year Tax Charge 1 As of June 30 As of June $7,086, $193, % ,461, , ,394, , ,208, , ,354, , The District s general obligation bond debt service levy. Source: California Municipal Statistics, Inc. Alternative Method of Tax Apportionment The County Board has approved implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ) pursuant to the California Revenue and Taxation Code (the Revenue and Taxation Code ) Section 4701 et seq. The Teeter Plan guarantees distribution to each local agency in the County an amount equal to 100 percent of the taxes levied on their behalf on the secured roll within the County, with the County retaining all penalties and interest affixed upon delinquent properties and redemptions of subsequent collections. The cash position of the County Treasurer is protected by a special fund, known as the Tax Loss Reserve Fund, which accumulates moneys from interest and penalty collections. In any given fiscal year, when the amount in the Tax Loss Reserve Fund exceeds a specified amount as prescribed by law, such excess amounts may be credited for the remainder of that fiscal year to such county's general fund. Amounts required to be maintained in the Tax Loss Reserve Fund may be drawn on to the extent of the amount of uncollected taxes credited to each agency in advance of receipt. The Teeter Plan is to remain in effect in a county unless the County Board orders its discontinuance or unless, prior to the commencement of any fiscal year of the county (which commences on July 1), the County Board receives a petition for its discontinuance from two-thirds of the participating revenue districts in the County. The County Board may also, after holding a public hearing on the matter, discontinue the procedures with respect to any tax levying agency or assessment levying

26 agency in the county if the rate of secured tax delinquency in that agency in any year exceeds three percent of the total of all taxes and assessments levied on the secured rolls in that agency. If the Teeter Plan were discontinued in the County, only those secured property taxes actually collected in the County would be allocated to political subdivisions, including the District. Further, the District s tax revenues would be subject to taxpayer delinquencies, and the District would realize the benefit of interest and penalties collected from delinquent taxpayers, pursuant to law. SOLANO COUNTY TREASURY POOL This section provides a summary description of the County s investment policy and current portfolio holdings. Certain information has been obtained from the County for inclusion in this Official Statement. The District makes no representation as to the accuracy or completeness of such information. Further information may be obtained by contacting the County of Solano, Office of the Treasurer-Tax Collector-Clerk, 675 Texas Street, Suite 1900, Fairfield, California 94533, telephone (707) The County Treasurer manages the Solano County Treasurer s Investment Pool (the Treasury Pool ) in which certain funds of the County and certain funds of other participating entities are invested pending disbursement. General participants are those government agencies within the County, including the District, for which the County Treasurer is statutorily designated as the custodian of such funds. The County Treasurer is the ex officio treasurer of each of these participating entities, and such entities are legally required to deposit their cash receipts and revenues in the Treasury Pool. Under State law, withdrawals are allowed only to pay for expenses that have become due. The governing board of each school district and special district within the County may allow, by appropriate board resolution, certain withdrawals of non-operating funds for purposes of investing outside the Treasury Pool. Some districts have from time to time authorized the County Treasurer to purchase specified investments for certain district funds to mature on predetermined future dates when cash would be required for disbursements. Other local agencies, such as special districts and cities for which the County Treasurer is not the statutory designated fund custodian, may participate in the Treasury Pool. Such participation is subject to the consent of the County Treasurer and must be in accordance with State law. Funds held in the Treasury Pool are invested by the County Treasurer in accordance with State law and the County Investment Policy, which is prepared by the County Treasurer and approved by the County Board. A copy of the investment policy is attached hereto as APPENDIX D. The Treasury Pool is invested in order to earn a reasonable return while awaiting application for governmental purposes. The specific objectives for the Treasury Pool are ranked in order of importance: safety of principal, liquidity and yield. Neither the District nor the Underwriter has made an independent investigation of the investments in the Treasury Pool and has made no assessment of the current County Investment Policy. The value of the various investments in the Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions. Additionally, the County Treasurer, upon the approval by the County Board, may change the County Investment Policy at any time. Therefore, there can be no assurance that the values of the various investments in the Treasury Pool will not vary significantly from the values described therein

27 The portfolio structure of the County Pool as of June 30, 2017 is set forth in the following table: Solano County Treasurer s Investment Pool As of June 30, 2017 Security Type Book Value Market Value Yield Avg. Maturity California Municipal Bonds 58,748,177 $58,967, % 1 yrs 6 mos Non-California Municipal Bonds 3,895,616 3,869, yrs 5 mos Solano County Municipal Bonds 5,788,822 5,786, yrs 5 mos Commercial Paper 51,423,017 51,500, yrs 2 mos Floating Certificates of Deposit 5,001,296 4,986, yrs 11 mos Federal Agency Coupon Bonds 461,409, ,478, yrs 2 mos Medium Term Notes 77,587,396 77,426, yrs 11 mos Treasury Securities 380,644, ,053, yrs 10 mos Total Security Holdings $1,044,498,740 $1,043,068, % 1 yrs 0 mos Cash on Hand $762,545 $762,545 n/a Cash in Bank 40,553,671 40,553, % Cash in Money Market Funds 69,045,761 69,045, LAIF 48,459,549 48,459, Mutual Funds 30,109,701 30,075, Accrued Interest 3,686,858 3,686,858 n/a Total Pooled Investments $1,237,116,825 $1,235,653, % Other Treasury Holdings 23,474,291 23,474,291 Total Assets $1,260,591,116 $1,259,127,532 Source: Solano County Treasurer-Tax Collector-County Clerk. CITY AND COUNTY ECONOMIC PROFILE The information in this section concerning the economy of the City and the County is provided as supplementary information only, and is not intended to be an indication of security for the Bonds. The Bonds are payable from the proceeds of an ad valorem tax, approved by the voters of the District pursuant to applicable laws and State Constitutional requirements, and required to be levied by the County on all taxable property in the District in an amount sufficient for the timely payment of principal of and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT herein. General Information The County, organized in 1850, is located in the northeast portion of the San Francisco Bay Area. Encompassing approximately 907 square miles, the County is made up of rural and farm land, urban cities and unincorporated areas, delta lands, waterfront and coastal range. Based on data compiled by CoreLogic, Inc., the median sale price of a single-family home in the County was $397,000 in May 2017, an increase of approximately 7.2 percent from $370,500 in May The City, incorporated in 1868, is located approximately 30 miles northeast of the City of San Francisco and approximately 50 miles southwest of the City of Sacramento. The City is located on the San Francisco Bay at the point at which the Sacramento, Napa and San Joaquin Rivers flow into the Bay. Based on data compiled by CoreLogic, Inc., the median sale price of a single-family home in the City was $335,000 in May 2017, an increase of approximately 5.8 percent from $310,000 in May

28 Population The following table displays estimated population data as of January 1 for the past five years for the City, County and State. Historical Population City of Vallejo, County of Solano and State of California City of Vallejo 116, , , , ,280 County of Solano 419, , , , ,023 State of California 38,238,492 38,572,211 38,915,880 38,189,035 39,523,613 Source: State Department of Finance. Personal Income Total personal income includes income from all sources including net earnings, dividends, interest and rent, and personal current transfer receipts received by residents in the region. Per capita personal income ( PCPI ) was $44,504 in the County in 2015, an increase of 7.0 percent from 2014 levels, compared to an increase of 5.4 percent Statewide and 3.7 percent nationally. The following table shows PCPI for the County as well as for the State for the past five years for which data is available. Per Capita Personal Income County of Solano and State of California County of Solano $38,617 $39,067 $40,285 $41,602 $44,504 State of California 45,820 48,312 48,471 50,988 53,741 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Labor Force and Employment The following table contains a summary of the City s historical unemployment data for the past four years and for the current year as of the most recent month available, not seasonally adjusted. Historical Unemployment City of Vallejo Annual Annual Annual Annual June Total Labor Force ,300 58,300 58,600 57,800 Number of Employed ,500 53,500 54,200 53,800 Number of Unemployed ,800 4,800 4,400 4,000 Unemployment Rate 10.4% 10.0% 8.3% 7.4% 6.9% 1 Preliminary. Source: State Employment Development Department

29 The following table contains a summary of the County s historical unemployment data for the past four years and for the current year as of the most recent month available, not seasonally adjusted. Historical Unemployment County of Solano Annual Annual Annual Annual June Total Labor Force 217, , , , ,900 Number of Employed 199, , , , ,500 Number of Unemployed 18,300 15,200 12,700 11,400 10,400 Unemployment Rate 8.4% 7.4% 6.1% 5.5% 5.1% 1 Preliminary. Source: State Employment Development Department. The following table shows the labor patterns by type of industry from 2011 through 2015 by annual average, not seasonally adjusted in the Vallejo-Fairfield Metropolitan Statistical Area. Historical Employment by Industry Vallejo-Fairfield Metropolitan Statistical Area Type of Industry Total, All Industries 122, , , , ,600 Total Farm 1,500 1,700 1,800 1,800 1,800 Total Nonfarm 121, , , , ,900 Total Private 97, , , , ,700 Goods Producing 18,300 19,000 19,600 20,900 22,200 Mining, Logging, and Construction 8,300 8,800 8,600 9,200 10,400 Manufacturing 10,000 10,200 11,000 11,700 11,800 Service Providing 102, , , , ,600 Private Service Providing 78,800 81,600 83,600 86,500 88,500 Trade, Transportation & Utilities 24,800 25,000 25,900 27,000 27,300 Wholesale Trade 4,200 4,200 4,400 4,400 4,300 Retail Trade 16,900 17,200 17,500 18,300 18,500 Transportation, Warehousing & Utilities 3,600 3,500 4,000 4,300 4,500 Information 1,100 1,100 1,100 1,100 1,100 Financial Activities 5,000 5,100 4,800 4,900 5,200 Professional & Business Services 9,800 10,300 10,400 10,400 10,100 Educational & Health Services 20,800 22,400 23,100 24,200 25,600 Leisure & Hospitality 13,400 13,700 14,300 14,800 15,000 Other Services 3,900 4,000 4,000 4,100 4,200 Government 24,100 24,000 24,400 24,800 25,200 Federal Government 3,900 3,800 3,700 3,700 3,700 State Government 5,300 5,200 5,200 5,200 5,300 Local Government 14,900 15,000 15,600 15,900 16,200 Figures may not foot due to rounding. Source: State Employment Development Department

30 Major Employers The following table provides a list of major employers, corresponding number of employees and percent of total employment in the City for fiscal year Major Employers City of Vallejo Employer Number of Employees Percent of Total County Employment Kaiser Permanente Medical Center 3, % Six Flags Discovery Kingdom 1, Vallejo City Unified School District 1, Kaiser Permanente Call Center Sutter Solano Medical Center City of Vallejo Touro University California California Maritime Academy U.S.D.A. Forest Service Costco Total 10, % Source: City of Vallejo, Comprehensive Annual Financial Report for the Year Ended June 30, The following table provides a list of major employers, corresponding number of employees and percent of total employment in the County for fiscal year Major Employers County of Solano Employer Number of Employees Percent of Total County Employment Travis Air Force Base 12, % County of Solano 3, Kaiser Permanente Vallejo 2, NorthBay Healthcare System 2, Fairfield-Suisun Unified School District 2, Six Flags Discovery Kingdom 1, Vallejo City Unified School District 1, Kaiser Permanente Vacaville 1, California Medical Facility 1, Genentech Inc. 1,200 n/a California State Prison Solano 1, Total 31, % Source: County of Solano, Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, Commercial Activity Total taxable sales during calendar year 2015 in the City were reported to be $1,166,879,000, a 1.2 percent increase from the total taxable sales of $1,152,813,000 reported during calendar year

31 The number of establishments selling merchandise subject to sales tax and the valuation of taxable transactions in the City for the past five years is presented in the following table. Data for calendar year 2016 is not yet available. Taxable Retail Sales City of Vallejo Sales Tax Permits 1,880 1,921 1,901 1,931 n/a 1 Taxable Sales (000 s) $985,525 $1,069,917 $1,119,542 $1,152,813 $1,166,879 1 Beginning in 2015, the reporting criteria for the number of permits/outlets changed, making the data not comparable to prior years. Source: State Board of Equalization. Total taxable sales during calendar year 2015 in the County were reported to be $6,961,047,000, a 3.9 percent increase from the total taxable sales of $6,700,391,000 reported during calendar year The number of establishments selling merchandise subject to sales tax and the valuation of taxable transactions in the County for the past five years is presented in the following table. Data for calendar year 2016 is not yet available. Taxable Retail Sales County of Solano Sales Tax Permits 7,916 8,102 8,129 8,206 n/a 1 Taxable Sales (000 s) $5,779,363 $6,037,959 $6,377,402 $6,700,391 $6,961,047 1 Beginning in 2015, the reporting criteria for the number of permits/outlets changed, making the data not comparable to prior years. Source: State Board of Equalization. Construction Activity Estimated new privately owned residential housing units authorized by building permits and total construction costs in the County for the past five years are shown in the following table. New Residential Building Permits County of Solano Single Family Residential Units , Multi-Family Residential Units Total New Building Permits , Total Construction Costs $98,045,325 $133,206,734 $167,513,241 $314,903,235 $251,033,753 Source: U.S. Bureau of the Census, Building Permit Estimates

32 THE DISTRICT The information in this section concerning the operations of the District and its finances is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Bonds is payable from the General Fund. The Bonds are payable from the proceeds of an ad valorem tax, approved by the voters of the District pursuant to applicable laws and State Constitutional requirements, and required to be levied by the County on all taxable property in the District in an amount sufficient for the timely payment of principal of and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT herein. General Information The District, a unified school district established in 1855, is a political subdivision of the State. Encompassing approximately 42 square miles, the District serves a population of approximately 124,150 people residing in the City. The District provides education to approximately 12,850 students in transitional kindergarten through twelfth grade, as well as additional students in preschool programs and adult education. The District operates 13 K-5 elementary schools, three K-8 schools, three 6-8 schools, two comprehensive high schools, one continuation school, one community day school, and one independent study school. The District is governed by a five-member District Board. The District Board of Education and Key Administrative Personnel The District Board governs all activities related to public education within the jurisdiction of the District. The District Board has decision-making authority, the power to designate management, the responsibility to significantly influence operations and is accountable for all fiscal matters relating to the District. The District Board consists of five members. Each District Board member is elected by the public for a four-year term of office. Elections for the District Board are held every two years, alternating between two and three positions available. A president of the District Board is elected by members each year. The current members of the District Board, together with their office and the date their term expires, are set forth in the following table. District Board of Education Vallejo City Unified School District Name Title Term Expires Ruscal Cayangyang President December 2018 Burky Worel Vice President December 2018 Marianne Kearney Brown Trustee December 2020 Bob Lawson Trustee December 2020 Dr. Tony Ubalde Trustee December 2018 The Superintendent of the District is appointed by and reports to the District Board. The Superintendent is responsible for managing the District s day-to-day operations and supervising the work of other key District administrators. The current members of the District s administration and positions held are set forth on page iv of this Official Statement. In March 2017, the District Board voted to terminate the contract of its then superintendent, Ramona E. Bishop, Ed.D., and in April 2017, retained Stephen A. Goldstone, Ed.D. as interim superintendent. Dr. Goldstone previously served as superintendent of the District from 1995 through The District has retained a search firm and is targeting September 2017 to find a permanent superintendent

33 Enrollment Student enrollment determines to a large extent the amount of funding a State public school district receives for program, facilities and staff needs. Average daily attendance ( ADA ) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. Enrollment can fluctuate due to factors such as population growth, competition from private, parochial, and public charter schools, inter-district transfers in or out, and other causes. Losses in enrollment will cause a school district to lose operating revenues, without necessarily permitting the school district to make adjustments in fixed operating costs. The ADA as of the last day of the last full attendance month concluding prior to April 15 ( P-2 ADA ) is used by the State as the basis for State apportionments. Set forth in the following table is the historical and projected ADA for the District. Average Daily Attendance Vallejo City Unified School District District P-2 ADA 12,837 12,835 12,588 12,356 11,781 11,552 Charter School P-2 ADA Unaudited. 2 Budgeted. In 2016, the Accrediting Commission for Schools, Western Association of Schools and Colleges ( WASC ) placed Vallejo High School on probation after officials toured the campus earlier that year. Vallejo High School will remain on probation through 2018, giving the campus time to address the critical areas for a follow-up report and visit in early spring After that visit, the WASC can take one of three actions: keep the high school on probation for another year, remove the institution from sanctions, or withhold accreditation. Vallejo High School had enrollment of approximately 1,600 students in fiscal year Should Vallejo High School lose accreditation from WASC, enrollment at Vallejo High School could be severely impacted. The District is taking steps to address the concerns raised by WASC. Charter Schools There are four charter schools operating in the District. Three of these charter schools operate independently of the District: Caliber Changemakers Academy, serving students in kindergarten through sixth grade, with fiscal year enrollment of approximately 306 students; Mare Island Technology / Health and Fitness Academy, serving students in kindergarten through eighth grade, with fiscal year enrollment of approximately 457 students; and MIT Academy, serving students in ninth through twelfth grade, with fiscal year enrollment of approximately 470 students. Because these charter schools receive funding directly from the State, the financial statements of these charter schools are not presented in the District s financial statements. The District operates one charter school: Vallejo Charter, serving students in kindergarten through eighth grade, with fiscal year enrollment of approximately 516 students. Vallejo Charter is dependent on the District for funding, and its financial activities are included in the District s financial statements. The District Board approved the charter of a fifth charter school, Griffin Academy Middle School, in May 2017 for a threeyear term. Griffin Academy is expected to open in fiscal year beginning with sixth grade, adding additional classes in subsequent years. The District estimates that Griffin Academy Middle School could draw 300 students from District enrollment. To the extent charter schools draw students from school district schools and reduce school district enrollment, charter schools can adversely affect school district revenues. However, certain per-pupil expenditures of a school district also decrease based upon the number of students enrolled in charter schools. Pursuant to Proposition 39, school districts are required to provide

34 facilities reasonably equivalent to those provided to regular district students for charter schools having a projected average daily attendance of at least 80 or more students from that district. Employee Relations State law provides that employees of public school districts of the State are to be divided into appropriate bargaining units which then may be represented by an exclusive bargaining agent. The District has two recognized bargaining units representing its non-management employees. The Vallejo Education Association ( VEA ) is the exclusive bargaining unit for the non-management, certificated personnel of the District. The California School Employees Association, Chapter #199 ( CSEA #199 ) is the exclusive bargaining unit for the District s classified, non-management employees. Set forth in the following table are the District s bargaining units, number of full-time equivalents ( FTEs ) budgeted for fiscal year , and contract status. Bargaining Units, Number of Employees and Contract Status Vallejo City Unified School District Bargaining Unit Full-Time Equivalents Contract Status VEA 548 Unsettled for fiscal year CSEA # Unsettled for fiscal year The District has an additional 101 FTEs not represented by a bargaining unit budgeted for fiscal year Pension Plans All full-time employees of the District, as well as certain part-time employees, are eligible to participate under defined benefit retirement plans maintained by agencies of the State. Qualified certificated employees are eligible to participate in the costsharing multiple-employer State Teachers Retirement System ( STRS ). Qualified classified employees are eligible to participate in the agent multiple-employer Public Employees Retirement Fund of the Public Employees Retirement System ( PERS ), which acts as a common investment and administrative agent for participating public entities within the State. The District accounts for its pension costs and obligations pursuant to Governmental Accounting Standards Board ( GASB ) Statement No. 67, Financial Reporting for Pension Plans ( GASB 67 ) and Statement No. 68, Accounting and Financial Reporting for Pensions ( GASB 68 ) which replaced GASB Statements Nos. 25 and 27, respectively. GASB 68 requires an employer that provides a defined benefit pension, such as the District, to recognize and report its long-term obligation for pension benefits as a liability as it is earned by employees. The District implemented the new reporting standards as reflected in the District s financial statements for fiscal year See APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2016 attached hereto. STRS Description and Contributions. STRS operates under the Education Code sections commonly known as the State Teachers Retirement Law. Membership is mandatory for all certificated employees of State public schools meeting the eligibility requirements. STRS provides retirement, disability and death benefits based on an employee s years of service, age and final compensation. Employees vest after five years of service and may receive early retirement benefits as early as age 50 or normal retirement either at age 60 or 62 depending on their hire date. Except as required for employees hired after January 1, 2013, STRS employee contribution rates are established by the State Legislature. The fiscal year contribution requirement for active plan members with an enrollment date prior to January 1, 2013 is percent of salary. For active plan members with an enrollment date on or after January 1, 2013, the employee contribution rate is at least 50 percent of the total annual normal cost of their pension benefit each year as determined by an actuary (9.205 percent in fiscal year ). Because STRS contribution rates are established by statute, unlike typical defined benefit programs, the District s contribution rate does not vary annually to make up funding shortfalls or assess credits based on actuarial determinations

35 State Assembly Bill 1469, signed into law as part of the fiscal year State budget (the State Budget ), established a plan to eliminate the unfunded STRS liability over a period of approximately 30 years through a combination of State funding and increased school district and employee payments. Employee contributions increased to percent of pay as of fiscal year , State contributions increased by percent as of fiscal year , and employer contributions increase to 19.1 percent of eligible pay by fiscal year The District s STRS contributions for fiscal years through , estimated contributions for fiscal year and budgeted contributions for fiscal year are set forth in the following table. STRS Employer Contributions Vallejo City Unified School District Fiscal Year District Contribution Rate District Contributions 1 Total District Governmental Funds Expenditures District Contributions as Percentage of Total Governmental Funds Expenditures % $4,370,797 $154,627, % ,211, ,915, ,244, ,908, ,786, ,159, ,136, ,915, ,706, ,892, ,670, ,752, In each instance equal to 100 percent of the required contribution. 2 Projected as of the fiscal year adopted budget. PERS Description and Contributions. All full-time classified employees of the District as well as certain part-time classified employees participate in PERS, which provides retirement and disability benefits, annual cost-of-living adjustments and death benefits to plan members and beneficiaries based on an employee s years of service, age and final compensation. Employees hired before January 1, 2013 fully vest after five years of service and may receive retirement benefits at age 50; employees hired after that date fully vest at age 52. These benefit provisions and all other requirements are established by State statute and District resolution. Active plan members with an enrollment date prior to January 1, 2013 are required to contribute seven percent of their salary, while active plan members with an enrollment date on or after January 1, 2013 are required to contribute the greater of 50 percent of normal costs or six percent of their salary. The District is required to pay an actuarially determined rate

36 The District s PERS contributions for fiscal years through , estimated contributions for fiscal year and budgeted contributions for fiscal year are set forth in the following table. PERS Employer Contributions Vallejo City Unified School District Fiscal Year District Contribution Rate District Contributions 1 Total District Governmental Funds Expenditures District Contributions as Percentage of Total Governmental Funds Expenditures % $2,551,056 $154,627, % ,542, ,915, ,655, ,908, ,970, ,159, ,303, ,915, ,290, ,892, ,031, ,752, In each instance equal to 100 percent of the required contribution. 2 Projected as of the fiscal year adopted budget. Unfunded Liabilities and Pension Expense Reporting. Both STRS and PERS have substantial statewide, unfunded liabilities. The amount of these liabilities will vary depending on actuarial assumptions, returns on investment, salary scales and participant contributions. The actuarial funding method used in the STRS Actuarial Valuation as of June 30, 2015 is the entry age normal cost method, and assumes, among other things, a 7.5 percent investment rate of return, 4.5 percent interest on member accounts, projected 3.0 percent inflation, and projected payroll growth of 3.75 percent. The actuarial valuation prepared as of June 30, 2016 uses new assumptions, including a 7.25 percent investment rate of return. The following table shows the statewide funding progress of the STRS plan for the past six years. Funding Progress California State Teachers Retirement System (STRS) 1 Actuarial Valuation Date as of June 30 Actuarial Value of Plan Assets Actuarial Accrued Liability Total Unfunded Actuarial Liability Funded Ratio Covered Payroll Unfunded Liability as a Percentage of Payroll 2011 $143,930 $208,405 $64,475 69% $26, % , ,189 70, , , ,281 73, , , ,213 72, , , ,753 76, , , ,704 96, n/a n/a 1 Dollars in millions. Source: California State Teachers Retirement System, Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2016; California State Teachers Retirement System, Defined Benefit Program Actuarial Evaluation for Fiscal Year Ended June 30, Pursuant to Government Code Section et seq., PERS is authorized to create risk pools for public agencies, combining assets and liabilities across employers in large risk-sharing pools to help reduce the large fluctuations in the employer s contribution rate caused by unexpected demographic events. The Schools Pool provides identical retirement benefits to nearly all classified school employees in the State. The actuarial funding method used in the PERS Schools Pool Actuarial

37 Valuation as of June 30, 2015 is the individual entry age normal cost method, and assumes, among other things, a 7.5 percent investment rate of return and projected 2.75 percent inflation; projected payroll growth varies by entry age and service. The following table shows the statewide funding progress of the PERS plan for the past six years. Actuarial valuation as of June 30, 2016 is not yet available. Funding Progress Public Employees Retirement System (PERS) Schools Pool 1 Actuarial Valuation Date as of June 30 Market Value of Plan Assets Actuarial Accrued Liability Total Unfunded Actuarial Liability Funded Ratio Covered Payroll Unfunded Liability as a Percentage of Payroll 2010 $38,435 $55,307 $16,872 70% $11, % ,901 58,358 12, , ,854 59,439 14, , ,482 61,487 12, , ,838 65,600 8, , ,814 73,325 16, , Dollars in millions. Source: California Public Employees Retirement System, Schools Pool Actuarial Valuation as of June 30, For the year ended June 30, 2016, the District s combined recognized pension expense was $9,656,346. The District s total net pension liability as of June 30, 2016 was $111,940,198. The District s recognized pension expenses and net pension liability as reported financial statements for fiscal years , the first year for which the data was provided, and are set forth in the following tables. Proportionate Share of the Net Pension Liability STRS Vallejo City Unified School District Fiscal Year Proportion of Statewide Liability Proportionate Share of Statewide Liability Covered Employee Payroll Proportionate Share of Statewide Liability as Percentage of Covered Employee Payroll Fiduciary Net Position as Percentage of Total Pension Liability % $67,021,066 $54,329, % 77% ,309,471 54,329, Proportionate Share of the Net Pension Liability PERS Vallejo City Unified School District Fiscal Year Proportion of Statewide Liability Proportionate Share of Statewide Liability Covered Employee Payroll Proportionate Share of Statewide Liability as Percentage of Covered Employee Payroll Fiduciary Net Position as Percentage of Total Pension Liability % $24,992,357 $25,237, % 83% ,630,727 24,992,

38 The District is unable to predict future amount of State pension liabilities and amount of required District contributions. Pension plan, annual contribution requirements and liabilities are more fully described in APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2016 attached hereto. Other Postemployment Benefits (OPEB) In addition to the pension benefits described above, the District provides postemployment health care benefits (known as other postemployment benefits, or OPEB ), in accordance with District employment contracts, to retirees meeting certain eligibility requirements. Governmental Accounting Standards Board Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions ( GASB 45 ) requires public agency employers providing healthcare benefits to retirees to recognize and account for the costs for providing these benefits on an accrual basis and provide footnote disclosure on the progress toward funding the benefits, in order to quantify a government agency s current liability for future benefit payments. GASB 45 is directed at quantifying and disclosing OPEB obligations, and does not impose any requirement on public agencies to fund such obligations. The District completed an actuarial study assessing the District s OPEB liability as of July 1, Based on the study, the District s actuarial accrued liability (the AAL ), which can also be considered to be the present value of all benefits earned to date assuming that an employee accrues retiree healthcare benefits ratably over his career, was $68,471,150. The AAL is an actuarial estimate that depends on a variety of assumptions about future events, such as health care costs and beneficiary mortality. Since the District has not established an irrevocable trust to pay OPEB, the unfunded actuarial accrued liability ( UAAL ) was also $68,471,150. Every year, active employees earn additional future benefits, an amount known as the normal cost, which is added to the AAL. The annual required contribution ( ARC ) is the amount required if the District were to fund each year s normal cost plus the UAAL, assuming the UAAL will be fully funded over a 22-year period. If the amount budgeted and funded in any year is less than the ARC, the difference reflects the amount by which the UAAL is growing. The actuarial study calculated the ARC to be $6,865,579 as of July 1, The District funds its OPEB liability on a pay-as-you go basis. The District paid $2,687,823 in OPEB in fiscal year , paid $3,477,042 in OPEB in fiscal year , estimates paying $2,833,344 in OPEB in fiscal year and has budgeted $2,791,428 in OPEB in fiscal year See APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2016 for additional information regarding the District s OPEB. DISTRICT FINANCIAL INFORMATION The information in this section concerning the operations of the District and its finances are provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Bonds is payable from the General Fund. The Bonds are payable from the proceeds of an ad valorem tax, approved by the voters of the District pursuant to applicable laws and State Constitutional requirements, and required to be levied by the County on all taxable property in the District in an amount sufficient for the timely payment of principal of and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT herein. Accounting Practices The District accounts for its financial transactions in accordance with the policies and procedures of the State Department of Education s California School Accounting Manual, which, pursuant to Education Code Section 41010, is to be followed by all school districts in the State. The accounting policies of the District conform to accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board and the American Institute of Certified Public Accountants

39 The District s financial statements consist of government-wide statements and fund-based financial statements. Governmentwide statements, consisting of a statement of net assets and a statement of activities, report all the assets, liabilities, revenue and expenses of the District and are accounted for using the economic resources measurement focus and accrual basis of accounting. The fund-based financial statements consist of a series of statements that provide information about the District s major and non-major funds. Governmental funds, including the General Fund, special revenues funds, capital project funds and debt service funds, are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become measurable and available, while expenditures are recognized in the period in which the liability is incurred, if measurable. Proprietary funds and fiduciary funds are accounted for using the economic resources measurement focus and accrual basis of accounting. See NOTE 1 in APPENDIX A attached hereto for a further discussion of applicable accounting policies. The independent auditor for the District in fiscal year was Vavrinek, Trine, Day & Co., LLP, Pleasanton, California (the Auditor ). The financial statements of the District as of and for the year ended June 30, 2016, are set forth in APPENDIX A attached hereto. The Auditor has not performed any subsequent events review or other procedures relative to these audited financial statements since the date of its letter. Budget and Financial Reporting Process The General Fund finances the legally authorized activities of the District for which restricted funds are not provided. General Fund revenues are derived from such sources as federal and State school apportionments, taxes, use of money and property, and aid from other governmental agencies. The District is required by provisions of the Education Code to maintain a balanced budget each year, where the sum of expenditures plus the ending fund balance cannot exceed revenues plus the carry-over fund balance from the previous year. The State Department of Education imposes a uniform budgeting format for all school districts. The fiscal year for all State school districts is July 1 to June 30. The same calendar applies to county offices of education, although their budgets and reports are reviewed by the State Superintendent. Because most school districts depend on State funds for a substantial portion of revenue, the State budget is an extremely important input in the school district budget preparation process. However, there is very close timing between final approval of the State budget (legally required by June 15), the adoption of the associated school finance legislation, and the adoption of local school district budgets. In some years, the State budget is not approved by the legal deadline which forces school districts to begin the new fiscal year with only estimates of the amount of funding they will actually receive. The school district budgeting process involves continuous planning and evaluation. Within the deadlines, school districts work out their own schedules for considering whether or not to hire or replace staff, negotiating contracts with all employees, reviewing programs, and assessing the need to repair existing or acquire new facilities. Decisions depend on the critical estimates of enrollment, fixed costs, commitments in contracts with employees as well as best guesses about how much money will be available for elementary and secondary education. The timing of some decisions is forced by legal deadlines. For example, preliminary layoff notices to teachers must be delivered in March, with final notices in May. This necessitates projecting enrollments and determining staffing needs long before a school district will know either its final financial position for the current year or its revenue for the next year. School districts must adopt an annual budget on or before July 1 of each year. The budget must be submitted to the county superintendent within five days of adoption or by July 1, whichever occurs first. The governing board of the school district must not adopt a budget before the governing board adopts a local control and accountability plan (the LCAP ) for that budget year. See FUNDING OF PUBLIC EDUCATION IN THE STATE herein. The county superintendent will examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance, will determine if the budget allows the school district to meet its current obligations, will determine if the budget is consistent with a financial plan that will enable the school district to meet its multi-year financial commitments, and will determine if the budget ensures the fiscal solvency and accountability for the goals outlined in the LCAP. On or before September 15, the county superintendent will approve or disapprove the adopted budget for each school district within its jurisdiction based on these standards. The school district board must be notified by September 15 of the county superintendent s recommendations for revision and reasons for the recommendations. The county superintendent may assign a fiscal advisor or appoint a committee to examine and comment on the superintendent s recommendations. The committee must report its findings no later than

40 September 20. Any recommendations made by the county superintendent must be made available by the school district for public inspection. The law does not provide for conditional approvals; budgets must be either approved or disapproved. No later than October 22, the county superintendent must notify the State Superintendent of all school districts whose budget may be disapproved, and no later than November 8, the county superintendent must notify the State Superintendent of all school district budgets that have been disapproved or budget committees waived. For school districts whose budgets have been disapproved, the school district must revise and readopt its budget by October 8, reflecting changes in projected income and expense since July 1, and responding to the county superintendent s recommendations. The county superintendent must determine if the budget conforms with the standards and criteria applicable to final school district budgets and not later than November 8, will approve or disapprove the revised budgets. If the budget is disapproved, the county superintendent will call for the formation of a budget review committee pursuant to Education Code Section Until a school district s budget is approved, the school district will operate on the lesser of its proposed budget for the current fiscal year or the last budget adopted and reviewed for the prior fiscal year. Under the provisions of State Assembly Bill 1200, each school district is required to file interim certifications with the county office of education as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent two fiscal years. Each school district is required by the Education Code to file two interim reports each year the first report for the period ending October 31 by not later than December 15, and the second report for the period ending January 31 by not later than March 15. Each interim report shows fiscal year-to-date financial operations and the current budget, with any budget amendments made in light of operations and conditions to that point. The county office of education reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that will be unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or subsequent two fiscal years. If either the first or second interim report is not positive, the county superintendent may require the school district to provide a third interim report by June 1 covering the period ending April 30. If not required, a third interim report is generally not prepared (though may be at the election of the school district). The county superintendent must annually present a report to the governing board of the school district and the State Superintendent of Public Instruction regarding the fiscal solvency of any school district with a disapproved budget, qualified interim certification, or negative interim certification, or that is determined at any time to be in a position of fiscal uncertainty pursuant to Education Code Section Any school district with a qualified or negative certification must allow the county office of education at least ten working days to review and comment on any proposed agreement made between its bargaining units and the school district before it is ratified by the school district board (or the state administrator). The county superintendent will notify the school district, the county board of education, the school district governing board and the school district superintendent (or the state administrator), and each parent and teacher organization of the school district within those ten days if, in his or her opinion, the agreement would endanger the fiscal well-being of the school district. Also, pursuant to Education Code Section 42133, a school district that has a qualified or negative certification in any fiscal year may not issue, in that fiscal year or the next succeeding fiscal year, non-voter approved debt unless the county superintendent of schools determines that the repayment of that debt by the school district is probable. The filing status of the District s interim reports for the past five years appears in the following table. Certifications of Interim Financial Reports Vallejo City Unified School District Fiscal Year First Interim Second Interim Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive

41 State Takeover and District Governance The Solano County Office of Education, which provides fiscal oversight to the District including the review of the District s budget, interim and unaudited financial reports throughout the year, disapproved the District s fiscal year initial budget on September 15, 2003, and subsequently disapproved the District s revised budget on October 8, At that time, School Services of California was appointed as fiscal advisor (the Fiscal Advisor ). The Fiscal Advisor s final projection was that the District would run out of cash before the end of the fiscal year and have an ending unrestricted deficit of $17.3 million as of June 30, On February 18, 2004, after the District s audited financial statements for fiscal year showed a negative General Fund ending balance, and combined with the potential for further deficits in fiscal year , the District Board took action to formally request assistance from the State. On June 21, 2004, the Governor of California (the Governor ) signed into law Senate Bill 1190 ( SB 1190 ), which required the State Superintendent to assume all rights, duties, and powers of the District Board and to appoint a State administrator (the State Administrator ) to assume the powers of the District Board beginning July Pursuant to SB 1190, the State appropriated $60 million as an emergency loan (the Emergency Loan ) and authorized the District to sell property and use the proceeds from such sale to reduce or retire the Emergency Loan. On June 23, 2004, the District drew down $50 million of the Emergency Loan. The District drew down the remaining $10 million of the Emergency Loan on May 29, 2007, placing the funds in a special reserve fund (the Special Reserve Fund ) to be used only for the payment of unresolved audit findings and repayment of the Emergency Loan. SB 1190 also authorized the Fiscal Crisis and Management Assistance Team ( FCMAT ) to conduct comprehensive assessments and improvement plans for the District in five major operational areas: (i) community relations / governance, (ii) pupil achievement, (iii) personnel management, (iv) fiscal management, and (v) facilities management, using 415 professional and legal standards of school district operations. In collaboration with the State Department of Education and the State Administrator, FCMAT subsequently identified a subset of 129 standards in each of the five operational areas the District was required to address in order to return to local governance. Criteria for the return of powers were also established to indicate the level of progress substantial enough for a recommendation to be made to the State Superintendent for the incremental return of governance of an operational area to the District Board. Over the following eight years, progress reports were issued by FCMAT. The initial assessment, the Vallejo City Unified School District Assessment and Improvement Plan, was completed in November FCMAT s Fifth Progress Report, issued in July 2007, recommended to the State Superintendent the return of three operational areas to local control: (i) community relations / governance, (ii) pupil achievement, and (iii) personnel management. The State Superintendent issued an executive order effective July 13, 2007 restoring these three areas to the District Board. The District Board recruited and selected a new superintendent to administer these three areas as of October The State Administrator became the trustee over those three areas, but remained the State Administrator over the two operational areas that continued to be under State receivership: (iv) fiscal management and (v) facilities management. FCMAT s Sixth Progress Report, issued in June 2008, recommended to the State Superintendent the return of the operational area of facilities management to the District. FCMAT s final report, the Eighth Progress Report, issued in June 2012, recommended to the State Superintendent the return of the last remaining operational area of financial management to the District. As of April 8, 2013 the District Board regained full control of all functional areas of District governance. Upon the return of governance to the District Board, the State Superintendent appointed a trustee for the District (the State Trustee ) in lieu of a State Administrator effective until the Emergency Loan is fully repaid. The State Trustee is empowered to stay or rescind any action of the District Board that, in the judgment of the State Trustee, may negatively affect the District s financial condition. Melvin Iizuka currently serves as the State Trustee. [The State Trustee has informed the District Board that he will not rescind the District Board s authorization of the Bonds because the issuance of the Bonds will not impact the District s financial condition.] Audit Timing and Findings Audits Performed by the State Fiscal Years through During the years in which the District s financial management was governed by the State Administrator, the District s financial statements were audited by the California State Controller s Office (the Controller ) acting as the District s independent auditor as required by SB The Controller performed audits of the District s financial statements for fiscal years through On August 5, 2005 the

42 Controller released its audit for fiscal year (the 2004 Audit ). The State 2004 Audit, following the receipt by the District of $50 million of the State loan, showed a General Fund ending balance of $27.2 million. On June 2, 2006 the Controller released its audit for fiscal year (the 2005 Audit ). On November 8, 2007 the Controller released its audit for fiscal year (the 2006 Audit ). On February 23, 2009 the Controller released its audit for fiscal year (the 2007 Audit ). On March 30, 2010 the Controller released its audit for fiscal year (the 2008 Audit). On October 11, 2011 the Controller released its audit for fiscal year (the 2009 Audit ). On June 17, 2013 the Controller released its audit for fiscal year (the 2010 Audit ). On December 13, 2013, the Controller released its audit for the District for the fiscal year (the 2011 Audit ). The audits include the auditor s opinion on the District s performance regarding its financial statements. In addition, the audits contain the auditor s opinion regarding the District s compliance with the requirements of the major federal and State funding programs. In each of the 2004 through 2010 Audits, the Controller disclaimed its opinion on the financial statements of the District, due to the District not providing sufficient information for the Controller to form any opinion. In the 2011 Audit, for the first time since the Controller took responsibility for annually auditing the financial statements of the District, the Controller was able to issue an opinion on the District s financial statements, issuing a qualified opinion on the District s financial statements because the District did not present the financial statements for the student body funds, which generally accepted governmental accounting principles require as part of the fund financial statements. In the 2011 Audit, in the Controller s opinion, the District s financial statements, except for the effects of any adjustments that might have been determined to be necessary had accounting records concerning the student body funds been adequate, presented fairly, in all material respects, the financial position of the governmental activities, each major fund and the aggregate remaining fund information of the District as of June 30, 2011 and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In each of the 2004 Audit through 2011 Audit, the Controller found that the District was not always in compliance with the requirements of various federal and State funding programs. In particular, for several years the District was not in compliance with the requirements of certain federal programs (the National School Lunch Program, Title I Basic Grant, Special Education, Title II Improving Teacher Quality, and State Fiscal Stabilization Fund), nor with the requirements of certain State programs (reporting and accounting for attendance, instructional time, administrator-to-teacher ratio, and the District s appropriations limit as well as for After-School Education and Safety). Audits Performed by the District s Independent Auditor Fiscal Years through The Controller ceded responsibility for conducting the District s annual financial audits to an outside auditing firm effective fiscal year On October 20, 2014, Vavrinek, Trine, Day & Co. LLP, the District s independent auditor, released its audit for fiscal year (the 2012 Audit ). On April 21, 2016, the Auditor released its audit for fiscal year (the 2013 Audit ). On September 9, 2016, the Auditor released its audit for fiscal year (the 2014 Audit ). On December 23, 2016, the Auditor released its audit for fiscal year (the 2015 Audit ) and its audit for the most recent fiscal year, (the 2016 Audit ). In each of the 2012 Audit through the 2016 Audit, the Auditor issued an unqualified opinion that the District s financial statements fairly presented, in all material respects, the respective financial position of the governmental activities, each major fund and the aggregate remaining fund information of the District, as of the end of each fiscal year, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. The Auditor found in each of the 2012 Audit through the 2016 Audit that the District was not always in compliance with the requirements of various federal and State funding programs. In particular, the District did not comply with all of the requirements of certain federal programs (the Child Nutrition Cluster, the Title I Cluster, and Special Education), nor with all of the requirements of certain State programs (reporting and accounting attendance, instructional time, administrator-toteacher ratios, appropriations limit, and after-school education). The District continues to work to resolve all findings from past audits and has set aside $10 million of the Emergency Loan proceeds in the Special Reserve Fund to pay amounts associated with non-compliance with State and federal program requirements. To date, the District has paid approximately $3.54 million in State compliance audit findings associated with fiscal years through The District does not anticipate any material payments associated with non-compliance with State and federal program requirements going forward

43 Financial Statements Figures presented in summarized form herein have been gathered from the District s financial statements. The audited financial statements of the District for the fiscal year ending June 30, 2016, have been included in the appendix to this Official Statement. See APPENDIX A attached hereto. Audited financial statements and other financial reports for prior fiscal years are on file with the District and available for public inspection during normal business hours. Copies of financial statements relating to any year are available to prospective investors and or their representatives, upon request, from the Vallejo City Unified School District, 665 Walnut Avenue, Vallejo, California 94592, telephone (707) , Attention: Chief Operations Officer, or by contacting the Municipal Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California , telephone (916) The following table sets forth the District s audited General Fund balance sheet data for fiscal years through Historical General Fund Balance Sheet Vallejo City Unified School District Audited Audited Audited Audited ASSETS Cash and Investments $16,559,591 $8,485,971 $23,015,162 $26,403,271 Accounts Receivable 22,570,798 19,829,021 4,997,520 8,040,746 Due from Other Funds 29,814,383 11,505,000 1,679,370 3,519,251 Stores Inventories 231, , , ,668 Prepaid Expenditures 37, ,410 34,086 1,371,246 TOTAL ASSETS $69,213,900 $40,978,868 $29,950,798 $39,558,182 LIABILITIES AND FUND BALANCES LIABILITIES Accounts Payable $9,745,552 $8,744,108 $4,795,924 $4,834,655 Due to Grantor Governments ,824 Due to Other Funds 38,973,129 11,520,218 2,296,821 2,338,495 Unearned Revenue 77, ,491 3,028,268 3,767,438 TOTAL LIABILITIES $48,796,439 $20,434,817 $10,121,013 $10,976,412 FUND BALANCES Nonspendable $419,128 $1,308,876 $408,746 $1,744,914 Restricted 4,518,326 5,511,884 2,202,237 3,787,301 Assigned 13,638,319 11,447,457 13,210,160 14,459,084 Unassigned 1,841,688 2,275,834 4,008,642 8,590,471 TOTAL FUND BALANCES $20,417,461 $20,544,051 $19,829,785 $28,581,770 TOTAL LIABILITIES AND FUND BALANCES $69,213,900 $40,978,868 $29,950,798 $39,558,

44 The following table sets forth the District s audited General Fund activity for fiscal years through Historical General Fund Activity 1 Vallejo City Unified School District Audited Audited Audited Audited BEGINNING BALANCE $26,710,912 $20,417,461 $20,544,051 $19,829,785 REVENUES Revenue Limit/LCFF $68,250,434 $89,615,386 $101,632,619 $114,761,086 Federal Revenue 10,312,283 8,745,729 9,254,043 10,598,595 Other State Revenues 32,631,023 20,486,910 17,991,899 30,508,629 Other Local Revenues 5,851,912 6,936,800 6,107,928 6,669,511 TOTAL REVENUES $117,045,652 $125,784,825 $134,986,489 $162,537,821 EXPENDITURES Certificated Salaries $50,432,493 $50,853,563 $51,919,398 $56,306,170 Classified Salaries 20,973,622 21,800,753 23,243,169 26,187,570 Employee Benefits 25,585,099 26,580,365 28,790,130 33,364,370 Books and Supplies 4,981,795 5,454,952 8,500,302 10,235,276 Services and Other Operating Expenditures 17,587,278 18,010,921 18,744,555 24,490,676 Capital Outlay 138,480 1,799,577 1,820, ,552 Other Outgo 73,585 63, ,353 80,227 Transfer of Indirect Costs (426,465) (498,503) (841,168) (610,611) Debt Service 235, , , ,170 TOTAL EXPENDITURES $119,581,634 $124,261,042 $132,541,644 $151,084,400 OTHER FINANCING SOURCES ($3,757,469) ($1,397,193) ($3,159,111) ($2,701,436) NET INCREASE (DECREASE) ($6,293,451) $126,590 ($714,266) $8,751,985 ENDING BALANCE $20,417,461 $20,544,051 $19,829,785 $28,581,770 Totals may not foot due to rounding

45 The following table sets forth the District s estimated General Fund activity for fiscal year and budgeted activity for fiscal year Budgeted General Fund Activity 1 Vallejo City Unified School District Estimated Adopted Budget BEGINNING BALANCE, GAAP BASIS $28,581,770 $28,362,245 Adult Education Fund 1 (775,943) (137,052) Special Reserve Fund 1 (9,866,571) (9,215,774) Retiree Benefits Fund 1 (892,600) (892,600) INTERNAL BEGINNING BALANCE $17,046,656 $18,116,819 REVENUES Revenue Limit/LCFF $119,346,642 $116,828,443 Federal Revenue 10,559,674 9,149,932 Other State Revenues 21,375,282 16,657,685 Other Local Revenues 2,291,224 1,703,456 TOTAL REVENUES $153,572,822 $144,339,516 EXPENDITURES Certificated Salaries $57,508,505 $57,472,046 Classified Salaries 26,713,043 28,342,603 Employee Benefits 29,189,213 30,840,249 Books and Supplies 10,100,346 10,997,515 Services and Other Operating Exp. 26,831,853 19,058,146 Capital Outlay 980, ,300 Other Outgo (1,026,421) (682,928) TOTAL EXPENDITURES $150,296,890 $146,162,931 OTHER FINANCING SOURCES ($2,205,769) ($2,350,045) NET INCREASE (DECREASE) $1,070,163 ($4,173,460) ENDING BALANCE $18,116,819 $13,943,360 Adult Education Fund 1 137,052 57,849 Special Reserve Fund 1 9,215,774 8,569,977 Retiree Benefits Fund 1 892, ,600 ENDING BALANCE, GAAP BASIS $28,362,245 $23,463,785 1 The District has implemented Government Accounting Standard Board Statement No. 54, Fund Balance Reporting and Government Type Definitions ( GASB 54 ), the effect of which was to reclassify and restate the District s Adult Education Fund ( Fund 11 ), Special Reserve Fund for Other the Capital Outlay Projects ( Fund 17 ) and Retiree Benefits Fund ( Fund 71 ) within the General Fund. However, the District s internal reporting, including the fiscal year estimated actuals and adopted budget, does not reflect the implementation of GASB 54. Totals may not foot due to rounding

46 Revenues The District categorizes its General Fund revenues into four primary sources: revenue limit / LCFF sources, federal revenues, other State revenues and other local revenues. Revenue Limit / Local Control Funding Formula (LCFF). For nearly half a century, State school districts operated under general purpose revenue limit funding based on a district s average daily student attendance, much of which was restricted by category as to how each dollar could be spent. Revenue limit funding was calculated by multiplying a school district s ADA (using the greater of the current or prior year P-2 ADA) by the school district s revenue limit funding per ADA, with certain adjustments. In landmark legislation effective fiscal year , the State introduced a new formula, the local control funding formula ( LCFF ), to be phased in through fiscal year LCFF consolidates most categorical programs in order to give school districts more control over how to spend their revenues. At full implementation of LCFF, school districts will receive a uniform base grant per student based on grade span, a supplemental grant based on an unduplicated count of the targeted disadvantaged students ( unduplicated students ) in the school district, and an additional concentration grant based on the number of unduplicated students in the school district above 55 percent, with qualifying schools receiving an additional necessary small school allowance. Approximately percent of the District s students were unduplicated students for fiscal year , based on P-2 ADA. The base, supplemental, and concentration grant amounts per student were set in fiscal year and are subject to cost-of-living adjustments thereafter. School districts that would otherwise receive less funding at full implementation of LCFF than they did under the revenue-limit system are also guaranteed an additional Economic Recovery Target ( ERT ) grant to restore funding to at or above their pre-recession funding, adjusted for inflation. The ERT add-on is paid incrementally over the LCFF implementation period. In fiscal year , as of the second period report, the District s LCFF funding at full implementation is calculated to be $124,625,982, comprised of $97,356,912 in base grant funding, $14,823,563 in supplemental grant funding, $10,285,758 in concentration grant funding, and $2,159,749 in add-on funding. To calculate LCFF funding during the phase-in period, school districts calculate their funding gap, the difference between LCFF funding calculated at full implementation and their funding floor, an amount based on fiscal year funding levels under the revenue limit system adjusted for prior LCFF phase-in adjustments. School districts receive their funding floor plus a percentage of their funding gap as specified in the State budget. In fiscal year , the State has budgeted funding 55 percent of the remaining funding gap. In fiscal year , the District received $112,899,713 as its floor entitlement and $6,575,716 in gap funding under LCFF. See FUNDING OF PUBLIC EDUCATION IN THE STATE herein for more information about LCFF. Set forth in the following table is the District s funded ADA by grade span and the percentage of unduplicated student enrollment for fiscal years through Funded ADA and Unduplicated Student Enrollment Percentage Vallejo City Unified School District Fiscal Year P-2 ADA Grades TK-3 P-2 ADA Grades 4-6 P-2 ADA Grades 7-8 P-2 ADA Grades 9-12 Total P-2 ADA Unduplicated Student Enrollment Percentage , , , , , % , , , , , , , , , , , , , , , , , , , , For purposes of calculating supplemental and concentration grants, a school district s fiscal year percentage of unduplicated students is determined solely as the percentage of its fiscal year total enrollment. For fiscal year , the percentage of unduplicated students is based on the two-year average of unduplicated student enrollment in fiscal years and Beginning in fiscal year , a school district s percentage of unduplicated student enrollment is

47 based on a rolling average of such district s unduplicated student enrollment for the then-current fiscal year and the two immediately preceding fiscal years. 2 Projected as of the fiscal year budget. Set forth in the following table is the District s actual LCFF funding per ADA for fiscal years through LCFF Funding per ADA Vallejo City Unified School District Fiscal Year Funded ADA 1 Funding per ADA 2 Average LCFF Average LCFF Funding per ADA at Full Implementation , $6, $9, , , , , , , , , , , , , Funded ADA is the greater of current year P-2 ADA and prior year P-2 ADA. 2 Represents average LCFF funding per ADA across grade spans. 3 Projected as of the fiscal year budget. Funding of the District s revenue limit and LCFF is accomplished by a mix of a) local taxes (composed predominantly of property taxes, and including miscellaneous taxes and community redevelopment funds, if any) and b) State apportionments. The majority of the District s revenue limit / LCFF funding comes from State apportionments. LCFF revenues were 70.6 percent of General Fund revenues in fiscal year , are estimated to be 77.7 percent of General Fund revenues in fiscal year , and are budgeted to be 80.9 percent of General Fund revenues in fiscal year Federal Revenues. The federal government provides funding for several District programs. These federal revenues, most of which historically have been restricted, were 6.5 percent of General Fund revenues in fiscal year , are estimated to be 6.9 percent of General Fund revenues in fiscal year , and are budgeted to be 6.3 percent of General Fund revenues in fiscal year Other State Revenues. In addition to apportionment revenues, the State provides funding to the District for categorical programs. Many categorical programs previously classified as other State revenues were incorporated under LCFF in fiscal year , causing a reduction in other State revenues. These other State revenues were 18.8 percent of General Fund revenues in fiscal year , are estimated to be 13.9 percent of General Fund revenues in , and are budgeted to be 11.5 percent of General Fund revenues in fiscal year Included in other State revenues are proceeds received from the State lottery. Other Local Revenues. Revenues from other local sources were 4.1 percent of General Fund revenues in fiscal year , are estimated to be 1.5 percent of General Fund revenues in fiscal year , and are budgeted to be 1.2 percent of General Fund revenues in fiscal year Expenditures The largest components of a school district s general fund expenditures are certificated and classified salaries and employee benefits. Changes in salary and benefit expenditures from year to year are generally based on changes in staffing levels, negotiated salary increases, and the overall cost of employee benefits. Even with no negotiated salary increases or changes in staffing levels, normal step and column advancements on the salary scale result in increased salary expenditures

48 Employee salaries and benefits were 76.7 percent of General Fund expenditures in fiscal year , are estimated to be 75.5 percent of General Fund expenditures in fiscal year , and are budgeted to be 79.8 percent of General Fund expenditures in fiscal year Short-Term Borrowings The District has no short-term debt outstanding. The District has in the past issued short-term tax and revenue anticipation notes. Proceeds from the issuance of notes by the District have been used to reduce inter-fund dependency and to provide the District with greater overall efficiency in the management of its funds. The District has never defaulted on any of its short-term borrowings. Capitalized Lease Obligations The District has made use of various capital lease arrangements in the past under agreements that provide for title of items and equipment being leased to pass to the District upon expiration of the lease period. As of June 30, 2016, the District had $1.1 million in outstanding capitalized lease obligations. On June 1, 2003, the District issued the Vallejo City Unified School District 2003 Refunding Certificates of Participation (the 2003 Certificates ) in the aggregate principal amount of $25,425,000, to refund portions of the Vallejo City Unified School District 1999 Certificates of Participation, two existing capital lease purchase obligations as well as a loan payable. The following table shows the District s outstanding certificates of participation as of June 30, Outstanding Certificates of Participation Vallejo City Unified School District Issue Date Issued Amount Issued Final Maturity Outstanding Principal as of June 30, 2017 Debt Service in Fiscal Year Certificates June 2003 $25,425,000 June 1, 2030 $14,090,000 $1,427,149 The District intends to prepay its 2003 Certificates in September 2017 using a combination of approximately $10.1 million of available funds and the proceeds of a 2017 refunding lease-purchase in the approximate amount of $2.8 million anticipated to be issued in August Long-Term Borrowings General Obligation Bonds 1997 Election. At an election held on March 4, 1997 (the 1997 Election ), voters in the District authorized the issuance of not-to-exceed $133.0 million in general obligation bonds. Between 1997 and 2002, the District issued $80,000,000 of the total amount authorized by the 1997 Election in three series of general obligation bonds. On September 1, 2002, the District issued the Vallejo City Unified School District (Solano County, California) 2002 General Obligation Refunding Bonds (the 2002 Refunding Bonds ) in the aggregate principal amount of $61,060,000 to refund all of the District s then-outstanding general obligation bonds issued pursuant to the authorization of the 1997 Election. On December 31, 2002, the District issued the 2002 Bonds in the aggregate principal amount of $30,000,000. On October 14, 2004, the District issued the 2004 Bonds in the aggregate principal amount of $15,000,000. On November 22, 2006, the District issued the 2006 Bonds in the aggregate principal amount of $8,000,000. There is no unissued authorization remaining under the 1997 Election

49 The following table summarizes the District s outstanding general obligation bonded indebtedness as of June 30, Outstanding General Obligation Bonds Vallejo City Unified School District Issue Final Maturity Principal Amount Issued Outstanding Principal as of June 30, 2017 Debt Service in Fiscal Year Refunding Bonds August 1, 2025 $61,060,000 $34,770,000 $5,791, Bonds 1 August 1, ,000,000 16,550, , Bonds 1 August 1, ,000,000 9,885, , Bonds 1 August 1, ,000,000 2,235, ,158 1 To be refunded by the Bonds. Total $63,440,000 $8,100,167 Community Facilities District No Election. Pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Government Code Section et seq.), the District Board adopted a resolution to establish the Vallejo City Unified School District Community Facilities District No. 2 ( CFD No. 2 ) for the purpose of financing certain public facilities in and for the District and CFD No. 2. At an election held on April 18, 1989 (the 1989 Election ), more than twothirds of qualified landowners voting within the boundaries of CFD No. 2 authorized the issuance of not-to-exceed $30,000,000 aggregate principal amount of special tax bonds and authorized the collection of a special tax. On April 25, 1989, the landowners voting within a territory proposed for annexation to CFD No. 2 authorized the annexation and levy of the special tax. Pursuant to these authorizations and to resolutions by the District Board, the District issued special tax bonds of CFD No. 2 in 1990 and On July 24, 2001, the District issued the Vallejo City Unified School District (Solano County, California) Community Facilities District No. 2 Special Tax Bonds, Series 2001 (the CFD Series 2001 Bonds ) in the aggregate principal amount of $19,305,000, which in part, together with other funds, refunded outstanding portions of the previously issued special tax bonds of CFD No. 2. On January 25, 2007, the District issued the Vallejo City Unified School District (Solano County, California) Community Facilities District No. 2 Special Tax Bonds, Series 2007 (the CFD Series 2007 Bonds ) in the aggregate principal amount of $7,360,000. The following table summarizes the CFD No. 2 outstanding bonded indebtedness as of June 30, Outstanding CFD No. 2 Special Tax Bonds Vallejo City Unified School District Issue Final Maturity Principal Amount Issued Outstanding Principal as of June 30, 2017 Debt Service in Fiscal Year CFD Series 2001 September 1, 2031 $19,305,000 $12,980,000 $1,236,570 CFD Series 2007 September 1, ,360,000 5,280, ,903 Total $18,260,000 $1,710,473 The District intends to prepay its CFD Series 2001 Bonds and CFD Series 2007 Bonds in September 2017 using the proceeds of 2017 special tax refunding bonds in the approximate amount of $17.5 million anticipated to be issued in August State Loan. On June 21, 2004, Senate Bill 1190, Chapter 53, Statues of 2004 was enacted, providing an emergency apportionment loan to the District of $60.0 million (the Emergency Loan ). Funds were disbursed from the proceeds of the loan only when the State Administrator and FCMAT jointly determined that the disbursement was necessary. The bill also authorized the District to use proceeds from the sale of property to reduce or retire the loan without restrictions otherwise

50 applicable under the Education Code. On June 24, 2004, the District received $50.0 million of the apportionment loan. The District must repay the loan plus interest at a rate of 1.5 percent over a twenty-year period. On December 1, 2005, the Infrastructure Bank issued $21,205,000 in State School Fund Apportionment Lease Revenue Bonds, Series A 2005 (the Infrastructure Bank Loan ) to refinance a part of the Emergency Loan apportioned from the State. $20,642,992 from the Infrastructure Bank Loan proceeds were use to prepay a portion of the Emergency Loan. The District entered into a site lease with the Infrastructure Bank whereby it leases Vallejo Senior High School to the Infrastructure Bank, which is leased back pursuant to another lease agreement for which the rental payments are sufficient to pay the principal and interest on the Infrastructure Bank Loan. Pursuant to the Education Code, the State Controller will intercept moneys that are designated for apportionment to the District (from Section A of the State School Fund) and pay directly to the trustee of the Infrastructure Bank Loan the amount of rental payment due. These intercepts constitute a lien senior to any other apportionment or payment of State School Fund moneys to the District. Therefore, the rental payments are paid directly from available State School Fund moneys and not from funds held by the District. Assembly Bill 1554 (Chapter 263, Statutes of 2004) as amended by Assembly Bill 1303 (Chapter 97, Statutes of 2005), added Education Code Section which provides a hold harmless to the District for the difference in interest rates between the Infrastructure Bank Loan and the Emergency Loan. In the future, the Infrastructure Bank may issue additional bonds on parity with the Infrastructure Bank Bonds to reimburse the State for the District s unpaid Emergency Loan balance. Pursuant to Government Code Section (f), as long as the District s bonds issued by the Infrastructure Bank are outstanding, the District cannot file a bankruptcy petition. On March 24, 2008, the District drew down the remaining $10 million authorized under the Emergency Loan. As of June 30, 2016, the outstanding principal balance of the Emergency Loan was $17,549,331, and the outstanding principal balance of the Infrastructure Loan $9,860,029. Annual debt service on the Emergency Loan and Infrastructure Bank Loan totals $3,583,084, with the loans scheduled to be repaid by fiscal year The District has never defaulted on the payment of principal of or interest on any of its long-term indebtedness. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Background From the Separation of Sources Act (1910) until Proposition 13 (1978), local governments had control over property tax rates and revenues within their jurisdiction. Voter approval was not required for most taxes, charges or fees imposed by local governments. Each school district in the State raised revenue by taxing local property owners according to a tax rate established by its governing board, subject to voter approval, and received some supplemental funds from the State. The State s role in providing for public education and education facilities was limited during this time. Local school districts relied largely on general obligation bonds as the primary source of funding for school facilities. The passage of Proposition 13 brought this local property tax system to an end, fundamentally changing local government finance. Local government entities are no longer authorized to levy a general tax rate. Instead, they share in the revenues generated by Proposition 13 s countywide tax rate. In the year following the passage of Proposition 13, local property tax revenue across the State fell approximately 60 percent. In order for school districts to continue operating, the State had to assume primary responsibility for public school funding, replacing the lost property tax revenue with moneys from the State general fund. As a result of Proposition 13, control over revenues shifted away from local school districts to the State government. Proposition 13 also eliminated the ability of school districts to issue bonds; for a decade, the State provided some of the cost of school facilities projects until the passage of Proposition 46 (1986) restored the ability of school districts to issue such bonds. Article XIIIA of the State Constitution Article XIIIA, added to the State Constitution by Proposition 13 and amended over time, limits the ad valorem tax rate that can be levied on real property to one percent of its full cash value except to pay debt service, discussed below. Full cash value is defined as the property s assessed value as of the fiscal year tax bill, annually increased by the lesser of either two percent or the rate of inflation. Subsequently, the property is reappraised for tax purposes upon a change in

51 ownership or new construction. Several types of changes in ownership and construction have been exempted from the reassessment requirement by amendment, including improvements for seismic retrofit, solar energy, fire prevention, disability access, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property is destroyed in a declared disaster, and certain transfers of property between family members. In most years, the market value of a property increases at a rate greater than the maximum two percent increase a county is allowed to calculate. As amended by Proposition 8 (1978), Article XIIIA allows for a county to temporarily reduce the assessed value to current market value when the market value of the property falls below the property s adjusted acquisition value due to an economic recession, natural disaster or other cause of damage. In years in which reduced reassessments are widespread, property tax revenue available to local governments such as school districts is reduced. Pursuant to interpretation of the Revenue and Taxation Code and upheld by State courts, once the market has rebounded or the property has been repaired to substantially its original condition, a county may increase the assessed value of the property at a rate greater than two percent annually until it has reached the property s pre-decline assessed value. As a result of these laws, real property that has been owned by the same taxpayer for many years can have an assessed value that is much lower than the market value of the property and of similar properties more recently sold. Likewise, changes in ownership of property and reassessment of such property to market value commonly lead to increases in aggregate assessed value even when the rate of inflation or consumer price index would not permit the full two percent increase on any property that has not changed ownership. Any increase or decrease in assessed valuation is allocated among the various jurisdictions. The one percent tax is levied and collected by each county, and the revenue is apportioned by the county to each local government agency in the taxing area roughly in proportion to the relative shares of taxes as levied prior to Local government agencies, including school districts, may not directly levy any ad valorem tax, unless the tax is levied to pay debt service (interest and redemption charges) on a local government s indebtedness approved by voters prior to July 1, 1978 or thereafter, as amended by Proposition 46 (1986), bonded indebtedness for the acquisition or improvement of real property approved by a two-thirds majority. In addition, Proposition 39 (2000) added a provision allowing for a lowered voter approval rate specifically for bonds to fund school facilities projects. A school district or community college district may levy ad valorem taxes in excess of one percent with 55 percent voter approval if the bonds will be used for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities. The measure must include the specific list of projects to be funded and certification that the school district s governing board has evaluated safety, class size reduction, and information technology needs in developing the list, and must conduct annual, independent financial and performance audits until all bond funds have been spent to ensure that the bond funds have been used only for the projects listed in the measure. Pursuant to legislation, the projected tax rate per $100,000 of taxable property value levied as the result of any single election may be no more than $60 in a unified school district, $30 in a high school or elementary school district, or $25 in a community college district. Constitutional Protection For Owners of Municipal Securities State law imposes a duty on the county tax collector to levy a property tax sufficient to pay debt service on voter-approved indebtedness as discussed above. The initiative power cannot be used to reduce or repeal the authority and obligation of a local government, such as a school district, to levy taxes pledged as security for payment of general obligation bonds or to otherwise interfere with performance of the duty of a local government, such as a school district, and the county with respect to such taxes. Although the initiative power may be used to reduce or repeal other types of charges or taxes imposed by local governments under Article XIIIC, discussed below, the law may not be construed to mean that any owner or beneficial owner of a municipal security assumes the risk of or consents to any initiative measure that would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution. Article XIIIB of the State Constitution Article XIIIB, added to the State Constitution by Proposition 4 (1979) (the Gann Limit ), amended by Proposition 111 (1990), limits the amount of certain funds, including tax revenues, that may be annually appropriated by the State and local governments, including school districts, to the amount appropriated the prior year, adjusted to reflect the rate of economic growth by measuring the change in per capita personal income and population. Certain payments are exempt from the appropriations limit calculation, including debt service payments; certain benefit payments, mandated expenses, State payments to school districts and community college districts, increases in revenues gained from fuel, vehicle and tobacco

52 taxes, emergency appropriations; and qualified capital outlay projects (projects involving fixed assets such as land or construction that have an expected life of more than ten years and a value greater than $100,000). Tax revenues in excess of the appropriation limit are shared between increased education funding and taxpayer rebates. Calculated over two years, half of any excess is transferred to K-14 school districts and half is returned to taxpayers through a revision of tax rates within two fiscal years. Any such excess revenues transferred to K-14 school districts are not counted as part of the school districts base expenditures for calculating their entitlement for State aid in the next year, nor is the State s appropriations limit increased by this amount. If a K-14 school district s revenues exceed its appropriations limit, the school district may increase its appropriations limit to equal its spending by borrowing from the State s appropriations limit. Articles XIIIC and XIIID of the State Constitution Articles XIIIC and XIIID, added to the State Constitution by Proposition 218 (1996) and amended over time, limit the ability of local governments, including school districts, to levy and collect non-ad valorem taxes, assessments, fees and charges. The law establishes that a tax must be either a general tax, requiring the approval of a simple majority of voters, the proceeds of which can only be used for general government purposes, or a special tax, requiring the approval of two-thirds of voters, the proceeds of which are used for a specific purpose, or if the tax is levied by a special-purpose government agency, including a school district. Any tax levied on property, other than the ad valorem tax governed by Article XIIIA, is a special tax, requiring the approval of two-thirds of voters. Special-purpose government agencies, such as a school district, cannot levy general taxes. The initiative power can be used to reduce or repeal most local taxes, assessments, fees and charges. Article XIIID deals with assessments and property-related fees and charges and expressly cautions that its provisions shall not be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is available to repeal or reduce developer and mitigation fees imposed by the District. The District has no power to impose taxes except those property taxes associated with a general obligation bond election, following approval by 55 percent or two-thirds of the District s voters, depending upon the legal authority for the issuance of such bonds. As amended by Proposition 26 (2010), the law defines any levy, charge, or exaction of any kind imposed by a local government as a tax requiring voter approval. The following exceptions do not require voter approval: a reasonable charge for a specific benefit, privilege, product or service that is received only by the payor of the charge; a reasonable charge for regulatory costs of issuing a license or permit, performing an inspection or audit, or enforcing an order; a charge for use, rental, or purchase of government property; a charge, fine or penalty for violation of law; and assessments and propertyrelated fees imposed as a condition of property development. Although such fees and charges levied by one taxing jurisdiction do not directly impact the amount of revenue available to another taxing jurisdiction from ad valorem property taxes, if the ability to impose the fee or charge is restricted, it could indirectly impact such revenues. Minimum Guarantee of State Funding for Education Proposition 98 (1988), added Article XVI to the State Constitution, requiring that from all State revenues there shall first be set apart the moneys to be applied by the State for support of the public school system and higher education. Known as the minimum guarantee, funding for K-14 school districts, made up of a combination of State general fund income tax revenues and local property tax revenues, must be the greater of either the same percentage of State general fund revenues as was appropriated in fiscal year , or the amount actually appropriated to such districts from the State general fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The minimum guarantee allocated each year, determined by a set of tests, is approximately 40 percent or more of State general fund revenues. Test 1 (share of the State general fund) allocates approximately 41 percent of the State general fund revenue to K-14 school districts. Test 1 only applies if Test 2 or Test 3 (described below) does not result in additional funding for K-14 school districts. Test 1 has been used 4 times in the last 29 years, including fiscal year Test 2 (personal income) provides that K-14 school districts shall receive at least the same amount of combined State aid and local tax dollars as was received in the prior year, adjusted for the statewide growth in K-12 ADA and an inflation factor equal to the annual percentage change in per capita personal income. Test 2 is used if it results in more funding for K-14 school districts than Test 1 (unless Test 3 applies instead). Test 2 has been used in 14 of the past 29 years, including fiscal year Test 3 (available revenues) only applies in years in which the annual percentage change in per capita State general fund tax revenues plus one-half

53 percent is lower than the Test 2 inflation factor (i.e., the change in per capita personal income), in which case the inflation factor is reduced to the annual percentage change in per capita State general fund tax revenues plus one-half percent. Test 3 has been used 9 of the past 29 years, including fiscal year In any year in which Test 3 is used, the difference between the amount appropriated and the amount that would have been appropriated under Test 2 is considered a maintenance factor credit to K-14 school districts, to be restored in future years when State revenue growth rebounds to exceed personal income. In years of economic hardship, the State Legislature can suspend the minimum guarantee for a year by a two-thirds vote, which also triggers the maintenance factor obligation, to be restored in later years. Such suspension has only occurred twice, in fiscal years and The State Legislature has the authority to spend more than the minimum guarantee, although any increase creates a higher minimum floor for the following year; this has occurred from time to time. At times, the State also has had outstanding one-time Proposition 98 obligations known as settle-up obligations. A settle-up obligation is created when the minimum guarantee increases midyear and the State does not make an additional payment within that fiscal year to meet the higher guarantee. The increased amount is used as the base for the following year s minimum guarantee. Settle-up funds can be used for any educational purpose, including paying off other state one-time obligations, such as deferrals and mandates. In fiscal year , the State is projected to reduce the outstanding maintenance factor obligation to approximately $548 million. Community Redevelopment and Revitalization Beginning with the Community Redevelopment Act (1945) under Article XVI of the State Constitution, amended over time, until the termination and dissolution of the program in 2011, a local government could improve an economically depressed area by creating a redevelopment agency (an RDA ) to pay for development projects with the future increase in property tax revenue, or tax increment, attributable to the growth in assessed value of taxable property within the project area when the project was complete. However, the allocation of the tax increment to the local RDA caused a reduction in the one percent countywide property tax levy for other local taxing agencies, including school districts, although ad valorem property taxes in excess of the one percent property tax levy collected for payment of debt service on school district bonds were not affected. Although a school district could negotiate with the RDA for pass-through payments of local tax revenues, because the State was replacing the school district s lost tax revenue, there was little incentive for most school districts to negotiate for greater amounts of pass-through from the RDAs. The State s share of reimbursements to such school districts soared into the hundreds of millions of dollars per year. Facing economic crisis, Assembly Bill, First Extended Session 26 ( AB1X 26 ) (2011), upheld by the State Supreme Court in California Redevelopment Association v. Matosantos (2011), was enacted to dissolve the more than 400 RDAs in the State to preserve funding for core public services at the local level. Successor agencies were established to facilitate the management of projects underway, making payments on enforceable obligations, and disposing of assets and properties. Senate Bill 107 (2015) streamlined the dissolution process and expanded the types of loans for which cities and counties can seek reimbursement. Some school districts receive pass-through payments during the dissolution process. See DISTRICT FINANCIAL INFORMATION Revenues herein. Assembly Bill 2 ( AB2 ) (2015), the result of several legislative efforts to replace the redevelopment law in order to provide local government options for sustainable community economic development, is a limited version of the former law, targeting only the State s most impoverished areas. AB2 allows a local government to create a community revitalization investment area ( CRIA ) if several conditions are met, including measures of unemployment, crime, and dilapidated infrastructure and residential structures, which are required to insure that the CRIA process is actually used for the intended purpose of alleviating blight. Significantly, school districts are prohibited from participating in the CRIA; because schools may not contribute their share of the tax increment to the project area, the funding impact to schools and the State is avoided. Assembly Bill 2492 (2016) was enacted that clarified implementation issues of AB2. Limits on State Authority Over Local Tax Revenues State and local governments funding and responsibilities are interrelated. Both levels of government share revenues raised by certain taxes such as sales and fuel taxes, and both also share in the costs for some programs such as health and social services. Although the State does not receive local property tax revenue, it has had authority over the distribution of these revenues among local agencies and school districts. Under Article XIIIA, the State had the authority to permanently shift property taxes among local governments. At times, the State fulfilled some portion of the Proposition 98 minimum guarantee

54 by shifting some of the property tax revenues share belonging to cities, counties, other special districts and redevelopment agencies to K-14 school districts through an Educational Revenue Augmentation Fund ( ERAF ) established in each county. Proposition 1A (2004) amended Articles XI and XIII of the State Constitution to require two-thirds approval of the State Legislature to shift property tax revenues allocation between local governments, preventing the State from reducing the property tax share allocated to cities, counties, and special districts. However, the State could still transfer property tax revenues to schools in the case of severe fiscal hardship and two-thirds approval of the State Legislature. Proposition 22 (2010) amended Articles XIII and XIX of the State Constitution to further restrict the State s control over local property taxes in order to stabilize local government revenue sources. Even during times of severe fiscal hardship, the State could not take revenue derived from locally imposed taxes, such as parcel taxes, hotel taxes, utility taxes, and sales taxes, for State purposes, nor could the State delay distribution of tax revenues to local governments, redirect redevelopment agency property tax revenue to other local governments such as school districts, or shift money to the school districts under an ERAF. As a result, the State would have to take other actions to balance its budget in some years, such as reducing State spending or increasing State taxes. Proposition 22 s restriction of the State s ability to shift local funds made K-14 school districts more directly dependent on the State general fund for Proposition 98 funding. Deferrals of Payments Owed to K-14 School Districts Beginning fiscal year , as a temporary budget solution, the State postponed, or deferred, payments owed to K-14 school districts for a few weeks, allowing the State to save money while school districts continued to operate by borrowing money or dipping into reserves. Because the deferral lasted only a matter of weeks, there was little impact on school district finances or operations. However, especially during the last recession, the State came to rely excessively on deferrals of payments to K-14 school districts to balance the State budget. As both the length and the amount of deferrals increased, the State withheld several billions of dollars from school districts, resulting in a financial crisis for K-14 school districts which could no longer borrow enough or find reserves to cover the funding shortfall, and program reduction and teacher layoffs ensued. State reliance on payment deferrals peaked in fiscal year when the State deferred approximately 20 percent of all K-14 school district funding. Increasing deferrals authorize school districts to spend at a level of programming the State cannot afford, making the State budget less transparent, and create large future obligations of the State to repay the deferrals. However, as the economy has rebounded, the State has made the repayment of deferrals a priority, and repayment of the deferrals was completed in fiscal year Temporary State Tax Increases From 2008 to 2012, the State eliminated more than $56 billion from State and local funding for local services including education, police, fire, and health care. Proposition 30 (2012) allows the State to levy a temporary sales tax (lasting four years) and income tax on high-income earners (lasting seven years), the revenues of which are dedicated to increased education funding and to balance the State budget. Existing law requires that in years in which the State s general fund revenues grow by a large amount funding for education must also be increased by a large amount. The tax revenues allocated to education as part of the minimum guarantee are deposited into the Education Protection Account ( EPA ), recalculated and distributed quarterly to K-14 school districts (89 percent to K-12 school districts and 11 percent to community college districts) as a continuing appropriation not subject to budget adoption. The funds are distributed in the same manner as existing unrestricted per-student funding. The Proposition 30 tax revenue is included in the Proposition 98 calculation, raising the guarantee by billions each year. The remaining Proposition 30 tax revenues will be used to balance the budget. Proposition 55 (2016) extends the income tax increase on high-income taxpayers through the year Approximately half of the revenue raised by this measure is allocated to K-14 school districts. The measure also directs half of any excess revenues, up to a maximum of $2 billion, for additional funding for Medi-Cal, if revenues exceed the constitutionally required education spending and the costs of government programs in place as of January 1, A portion would also be saved in reserves and spent on debt payments. Any remaining revenues would be available for any State purpose. Enacted Budget Required for Disbursement of State Funds In years in which the State Legislature has not been able to enact a budget by the required deadline, the fiscal year begins without an enacted budget, and the State has, in some cases, issued registered warrants, or IOUs, to pay certain State

55 employees wages and State debts. In 1988, during such a budgetary impasse, a taxpayers association argued that such warrants were not authorized without an enacted budget. In the case, known as Jarvis v. Connell, the State Court of Appeal held that without an enacted budget, State funds may not be disbursed unless the payment is authorized by the State Constitution, as a continuing appropriation, or by federal mandate. This could affect school district budgets to the extent that, if there is neither an enacted budget nor emergency appropriation, State payments owed to school districts could be delayed unless they are required as a continuing appropriation or federal mandate. As upheld by the State Supreme Court in 2003, the State is not authorized to disburse funds without an enacted budget or other appropriation, but under federal law is required to pay State employees who are protected by federal wage laws under the Fair Labor Standards Act. State and School District Budgetary Reserves Proposition 58 (2004) amended Article IV of the State Constitution to require the State to enact a balanced budget, in which estimated revenues would meet or exceed estimated expenditures in each year, and that mid-year adjustments be made if the budget fell out of balance. The law established the Budget Stabilization Account ( BSA ) in the State s general fund, which required a deposit of three percent of the State general fund each year. Proposition 2 (2014) addressed the need for long-term financial stability in the State in the face of economic volatility by dedicating funds to pay down the State s debt, changing the State s reserve policies, and creating a separate budget reserve for K-14 school districts called the Public School System Stabilization Account ( PSSSA ). The law reduced legislative discretion over the timetable for the repayment of State debts and required that 1.5 percent of the State general fund be deposited into the BSA annually, plus an additional amount when the State experiences spikes in capital gains tax revenue in excess of eight percent of State general fund revenues. The PSSSA, also funded with capital gains spikes, is drawn upon when the Proposition 98 minimum guarantee exceeds available State general fund and property tax revenues. Through 2030, half of the funds deposited each year into the BSA must be used to pay fiscal obligations such as budget loans and unfunded State level pension plans. Funds may be withdrawn from BSA only for a disaster or if, over three years, spending does not rise above the highest level of spending. In the case of a recession, only half of the funds can be withdrawn. As a result, a large amount of incremental gains in the State s general fund revenues are allocated to building reserves and repaying debt. The State has a constitutional obligation to ensure that school districts continue to operate even in times of financial difficulty so that the education of students in the State is not disrupted. The State requires school districts to maintain a minimum reserve in their general fund s Reserve for Economic Uncertainties to help school districts manage cash flow, address unexpected costs, save for large purchases, reduce costs of borrowing money, and mitigate the volatility in funding produced by the reliance on tax revenue funding sources. The minimum reserve amount required depends on the size of the school district s enrollment. Smaller school districts are required to keep a higher percentage of reserves because they are more easily overwhelmed by unexpected costs, such as a single major facility repair, which could deplete most of its reserves in a single year. School districts with enrollment of 300 or fewer students, which represent 25 percent of school districts in the State, must keep a minimum reserve of five percent of expenditures. School districts with enrollment of 301 to 1,000 students, which represent 17 percent of school districts in the State, must keep a minimum reserve of four percent. School districts with enrollment of 1,001 to 30,000 students, which represent 55 percent of school districts in the State, must keep a minimum reserve of three percent. School districts with enrollment of 30,001 to 400,000 students, which represent three percent of school districts in the State, must keep a minimum reserve of two percent. The one school district in the State with an enrollment of 400,001 or more students must keep a minimum reserve of one percent. Many school districts attempt to keep their reserve levels higher than State minimum requirements, from five percent to as much as 25 percent of expenditures. A 17 percent reserve is equal to approximately two months of expenditures and is a standard reserve level for local public agencies. Senate Bill 858 (2014), enacted as trailing legislation to the State budget, requires school districts, in the event of a deposit by the State to the PSSSA, to reduce total assigned and unassigned reserves to no more than twice its minimum reserve for economic uncertainty, ranging from one to five percent of expenditures depending on the size of the school district. County education officials could exempt a school district from the cap if the school district demonstrates extraordinary fiscal circumstances, including undertaking multi-year infrastructure or technology projects. A smaller reserve could affect the school district s financial condition in the event of an economic downturn. The District cannot predict or when a deposit to the PSSSA might occur or whether future legislation will be enacted that changes this requirement

56 School Facilities Funding The Leroy F. Greene School Facilities Act (1998) established the State Facilities Program ( SFP ) to allocate funding grants based on proposals submitted by school districts for the new construction of or the modernization of existing school facilities, although the program has evolved to allow funding for other types of school facility needs including facility hardship, seismic mitigation, charter school facilities, relief of overcrowding, career technical education facilities, incentives for energy efficiency and high-performance architectural attributes, and joint-use programs with other government entities. Funding for SFP grants comes from statewide general obligation bonds approved by the voters in the State. The State retires these bonds by making annual debt service payments. In fiscal year , the State will pay $2.4 billion in debt service on previously issued K-12 facilities bonds and $300 million in debt service on community college facilities bonds. Proposition 1A (1998) provided $9.2 billion ($6.7 billion for K-12 facilities), Proposition 47 (2002) provided $13.2 billion ($11.4 billion for K-12 facilities), Proposition 55 (2004) provided $12.3 billion ($10 billion for K-12 facilities), Proposition 1D (2006) provided $10.4 billion ($7.3 billion for K-12 facilities), and Proposition 51 (2016), the first initiative facilities bond measure, provides $9 billion ($6 billion for K-12 facilities). The payment the State must make on Proposition 51 will average approximately $500 million per year. Proposition 51 amends the Education Code, prescribing the fiscal allocation and purpose of the $9 billion bond and establishing the 2016 State School Facilities Fund and the 2016 California Community College Capital Outlay Bond Fund in the State Treasury. Of the total amount, $6 billion is allocated to K-12 facilities (half for new construction and half for modernization), $500 million for charter schools, $500 million for career technical education programs, and $2 billion to community colleges. In most cases, K-12 school and community college districts that receive funding for approved projects must match the funding with local funding according to the type of project. Projects for the purchase of land and new construction are matched evenly. Modernization projects require a match of 40 percent local funding to 60 percent State funding. If no local funding is available, the school district can apply for additional grant funding. Community college projects do not have a specified contribution model and are determined individually. K-12 school and community college districts may sell local general obligation bonds to cover the school district s share of the cost of facility projects. K-12 school districts may also raise funds for facilities by charging fees on new development (community college districts may not). Both K-12 school and community college districts may also raise funds by parcel taxes and other methods used less frequently. Impact of Future Legislation Laws affecting school district funding and the power of State and local governments to raise and spend revenue have been subject to many changes as voters and lawmakers react to economic and political cycles. The complex patchwork of the many different provisions at times results in uncertainty regarding their operation or interpretation. Many of the laws discussed above were enacted through the State s initiative process. Initiative constitutional amendments may be changed only by another statewide initiative. Legislative constitutional provisions may be changed by a majority vote of both houses of the State Legislature and approval by the Governor, if the change furthers the purposes of the provision. The District cannot predict whether or when the voters in the State or the State Legislature will approve further legislation that could restrict the District s sources of revenue or its ability to spend that revenue, or require the District to appropriate additional revenue. FUNDING OF PUBLIC EDUCATION IN THE STATE Sources of Revenue for Public Education There are four general sources of funding for K-12 public education in the State: the federal government, local property taxes, other local funding sources and State funding, the principal source of funding for most school districts. Proposition 13 eliminated the possibility of raising additional ad valorem property taxes above one percent for general-purpose school support, and the courts have declared that school districts may not charge fees for school-related activities, unless the charge is specifically authorized by law for a particular program or activity. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES herein

57 State Funding. Many school districts in the State receive the majority of their funds from the State. In fiscal year , State funds accounted for approximately 60 percent of State K-12 public education funding. There are three sources of State funds for K-12 public education: the Proposition 98 minimum guarantee, comprised of a combination of State general fund revenues and local property tax revenues, representing the majority (approximately 85 percent in fiscal year ) of State funding; additional State funds for targeted programs such as facilities and remaining categorical programs such as special education, nutrition, afterschool programs, and home-to-school transportation; and State lottery funds, a portion of which may only be used for instructional purposes. The Proposition 98 guaranteed minimum amount is set forth each year in the State budget. See The State Budget and The State Budget herein. More than 60 percent of the State s general fund revenue comes from personal income taxes, with capital gains taxes representing more than ten percent of the State s general fund revenue, so a downturn in the stock market may significantly impact the State s general fund. Because funding for education in the State depends on the amount of money available in the State general fund, the linkage can result in significant volatility in education funding. For instance, during the recent recession in fiscal year , State general fund revenues available for education funding were approximately eight percent less than the amount available four years prior. Provisions added to the State Constitution and statutes in 2013 and 2014 attempt to provide funding stability to public education by capturing spikes in capital gains revenue to use for paying down debts and obligations and to create reserves. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES herein. Revenue Limit Funding. The State Revenue Limit was instituted in fiscal year to provide a mechanism to calculate the total amount of general-purpose revenue a school district, community college district or county office of education is entitled to receive from combined State and local sources per average daily attendance, known as its revenue limit, and the funding from this calculation formed the bulk of school districts income, and was annually increased to adjust for changes in the cost of living. The revenue limit for each school district or county office of education was funded first by the property tax revenue available to that entity, with the remaining balance filled by State funds. Basic aid districts, whose local property tax revenues exceeded their calculated revenue limit, did not receive State revenue limit funding, although such districts did receive the constitutionally required minimum funding, or basic aid per pupil, and categorical State and federal aid that was restricted to specific programs and purposes. Local Control Funding Formula (LCFF). In landmark legislation, the fiscal year State budget replaced revenue limit funding with the LCFF. The LCFF transfers control over spending decisions to local authorities, requiring community input about those spending decisions along with increased transparency and accountability for the outcomes of those decisions. The general-purpose funds for school districts are now funneled through LCFF, and funds received through categorical programs are greatly reduced. As under the revenue limit system, the amount a school district is entitled to receive for general-purpose LCFF funds is financed through the local property tax revenue available to the school district, with the remaining balance funded by the State. Most public education funding from the State is provided through the LCFF, including approximately 80 percent of Proposition 98 funding for K-12 public education. As under the revenue limit, school districts continue to receive funds based on the greater of prior year or current year ADA figures. Under LCFF, school districts across the State receive the same base grants for each grade span, based on ADA. In fiscal year , the base grants are $7,941 for kindergarten through third grade, $7,301 for fourth through sixth grade, $7,518 for seventh through eighth grade, and $8,937 for ninth through twelfth grade. These figures include increases for class size reduction for kindergarten through third grade and career technical education for ninth through twelfth grade. School districts receive a supplemental grant of 20 percent of the base grant for each student in the school district who is lowincome, English-learner, or foster youth. Enrollment counts are unduplicated, such that students may not be counted as both English-learner and low-income (foster youth automatically meet the eligibility requirements for free or reduced-price meals, and are therefore not discussed separately). School districts with more than 55 percent enrollment of unduplicated students receive a concentration grant, an additional 50 percent of the base grant for each unduplicated student above the threshold, intended to address the additional academic challenges faced by such students when their peers are similarly disadvantaged. The supplemental and concentration grants are allocated so that as a school district s proportion of unduplicated students increases, so does its total funding allocation. A school district in which 100 percent of enrollment is unduplicated students will receive 42.5 percent more total funding than a school district with no unduplicated students. The supplemental and concentration grant amounts are based on the unduplicated count of pupils divided by the total enrollment in the school district, based on the fall P-1 certified enrollment report. School districts have broad discretion to decide how to spend the base grant. The supplemental and concentration grants must be used to increase or improve services to the population they are intended to serve, although some services may be provided district- or site-wide

58 The implementation of LCFF began in fiscal year , with full implementation planned by fiscal year Until full implementation has occurred, the difference between the actual amount districts receive in a year and the target amount they will receive as of full implementation is referred to as the funding gap. The funding gap is determined by the difference between the funding floor, or amount of funding a school district received the prior year, and the target amount of funding the school district will receive at full implementation. The funding floor consists of fiscal year s deficited revenue limit divided by ADA multiplied by current year ADA, plus the sum of any categorical funding. Sufficient funding was available to fund 12 percent of the funding gap in fiscal year , 33 percent of the gap in fiscal year , 53 percent of the gap in fiscal year , 55 percent of the gap in fiscal year , and is budgeted to fund 44 percent of the gap in fiscal year , the fifth year of implementation of LCFF, bringing LCFF to 97 percent of full implementation. Under the hold harmless provision, no school district will receive less State aid than it received in fiscal year Most districts will receive more funding at full implementation of LCFF than they did previously under the revenue-limit system. For some school districts, their per-pupil undeficited fiscal year funding was higher than their LCFF entitlement at full implementation. Such districts will have their undeficited funding level restored through a supplemental ERT add-on payment. School districts that are eligible for ERT funding will receive the difference between their LCFF target and their LEA s fiscal year undeficited funding, adjusted for cost-of-living increases. Basic aid districts continue to receive at least the amount of State funding they received in fiscal year Although basic aid districts do not receive LCFF funding grants, they must comply with the regulations and accountability requirements of LCFF. Basic aid districts also continue to receive the constitutionally guaranteed $120 per-pupil minimum from under the revenue limit, as well the $200 per-pupil minimum from the EPA pursuant to Proposition 30 as additional revenue. The District is not a basic aid district. The State funds school districts in monthly installments based on calculations made in a series of three apportionments throughout the fiscal year. Each apportionment includes funding for the LCFF and for other State programs. The amount of each apportionment is based on calculations made by each school district and reviewed by its county office of education. The Advance Principal Apportionment ( Advance Apportionment ), certified by July 20, sets forth the amount the school district will receive for the year, paid in a series of installments from August through January. The First Principal Apportionment ( P-1 Apportionment ), certified by February 20, set forth a new calculation based on the school district s first period ADA determined as of December, for installments that will be paid to the school district from February through June. The Second Principal Apportionment ( P-2 Apportionment ), certified July 2, based on second period ADA determined as of April, recalculates the amount of the final installment for the fiscal year paid to the school district in July. At the close of the fourth quarter, a final annual recalculation ( Annual Apportionment ) provides an updated estimate of the prior year s adjustment. In addition, under the EPA established for the deposit of revenues from the tax increase under Proposition 30 and extended under Proposition 55, school districts receive a quarterly allocation of the tax revenue received from the temporary tax increase under Proposition 30. The funds in the EPA are allocated between K-14 school districts by 89 percent and 11 percent, respectively, in quarterly allocations made in September, December, March and June each year. The amount received by a school district under EPA is a reduction to the aid the school district receives from the State applied at each principal apportionment certification. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES herein. The LCFF requires each school district to demonstrate that its spending decisions are producing the desired results of increased student performance as stated in each school district s own LCAP. Each school district must create its own annually updated LCAP with input from teachers, parents and the community, including the parents or guardians of unduplicated students. School districts must review and share the results to determine whether spending achieved the goals stated in the LCAP, for each school site and for the school district as a whole. All school districts must use the State s LCAP template beginning fiscal year The LCAP must include a description of the annual goals to be achieved for each student group for each State priority, including the content standards adopted by the State Board of Education. The LCAP of each school district is overseen and approved by the county superintendent. Charter schools must comply with LCFF and receive mostly the same funds as public schools, although calculation of targeted disadvantaged students differs somewhat to prevent abuse of the system. There are also differences in the process of LCAP adoption and assessment. In the case of a charter school that fails to perform according to its LCAP, the State is not required to provide the same support that a public school district or county office of education receives, and its charter can be revoked. Federal Funding. In fiscal year , federal revenues were expected to account for less than ten percent of funding for school districts in the State. Most of these funds are designated for particular purposes. There are no unfunded federal

59 education mandates; each is conditioned on a state s voluntary decision to accept federal program funds. The primary source of federal supplemental education funding is the Elementary and Secondary Education Act ( ESEA ) (1965), enacted to address inequality in education. The previous authorization of ESEA, the No Child Left Behind Act ( NCLB ) (2001), expanded the federal government s role and increased testing requirements to measure improvement. Most recently reauthorized under the Every Student Succeeds Act ( ESSA ) (2015), responsibility for school improvement has been shifted to the states. ESSA provides funding through six programs: Title I grants, tied to student assessment, to assist economically disadvantaged children; Title II grants for professional development; Title III grants for ancillary student services; Title IV grants for research and training; Title V grants for state departments; and Title VI grants for special education. Another significant source of federal funding for school districts is the Education for All Handicapped Children Act ( EHA ) (1975), enacted to support special education and related services, reauthorized by the Individuals with Disabilities Education Act ( IDEA ) (1990). The largest of the law s three sections, Part B, authorizes grants to states and local school districts to offset special education costs. As of fiscal year 2014, IDEA federal funding covered 16 percent of the estimated excess cost of educating students with disabilities; the shortfall is assumed by states and local school districts. Local Property Tax Revenue. In fiscal year , local property taxes were expected to account for approximately 25 percent of K-12 public education funding within the State. Property taxes are constitutionally limited to one percent of the property s value, except to repay voter-approved debt. Other Local Funds. In fiscal year , miscellaneous local sources were expected to account for approximately five percent of K-12 public education funding within the State. There are several types of revenue a school district may receive from other local sources, including developer fees, parcel taxes, property lease revenues, and private donations. A school district may levy developer fees on new residential or commercial development within the school district s boundaries to finance the construction or renovation of school facilities. A school district may, with two-thirds approval from local voters, levy special taxes on parcels to fund specific programs within the school district. A school district may lease or sell its unused sites or facilities as another source of revenue. A school district may also seek contributions, sometimes channeled through private foundations established to solicit donations from local families and businesses. The State Budget Process Under the State Constitution, money may be drawn from the California Centralized Treasury System (the State Treasury ) only by an appropriation authorized by law. The primary source of annual appropriations authorizations is the budget act approved by the State Legislature and signed by the Governor (the Budget Act ), which can provide for projected expenditures only to the amount of projected revenues and balances available from prior fiscal years. The annual budget cycle begins when the Governor releases a proposed budget in January for the next fiscal year, which starts each July 1 and ends June 30. The Governor releases a revised budget in May based on new projections regarding State revenues and feedback from the State Legislature and other constituents. The State Constitution requires that the State Legislature pass the Budget Act by June 15 by majority approval from both Houses. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each House of the State Legislature. Appropriations may also be included in legislation other than the Budget Act. Bills containing appropriations (including for K-14 education) must be approved by a majority vote in each House of the State Legislature, unless such appropriations require tax increases, in which case they must be approved by a two-thirds vote of each House of the State Legislature, and be signed by the Governor. The State Constitution or a State statute may also provide for continuing appropriations that are available without regard to fiscal year. Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt. The State Budget On June 27, 2016, the Governor signed the 2016 Budget Act and associated trailer bills to enact the fiscal year State budget (the State Budget ), a $170.9 billion spending plan that continues the effort to prepare the State for an expected recession by increasing investment in reserves and limiting spending increases. The State Budget features an additional $2 billion investment in the reserve fund as well as limited one-time spending initiatives that implement the State minimum wage increase, build affordable housing, repair infrastructure and address effects of the drought

60 The State Budget includes State general fund revenues of $123.6 billion, representing a four percent increase from fiscal year , and State general fund expenditures of $122.5 billion, representing a six percent increase from fiscal year The State s general fund balance is budgeted to be $2.7 billion at the end of fiscal year The State Budget funds the BSA to a total balance of $6.7 billion by the end of fiscal year , representing 54 percent of the funding goal. The following table identifies historical and budgeted State general fund revenues, expenditures and fund balances. State General Fund State Budget Revised Revised Budget (Millions) (Millions) (Millions) Prior-year Fund Balance $5,103 $3,444 $4,875 Revenues and Transfers 111, , ,310 Expenditures 113, , ,468 Ending Fund Balance $3,444 $4,875 $2,717 Encumbrances Special Fund for Economic Uncertainties 2,478 3,909 1,751 Reserves Special Fund for Economic Uncertainties $2,478 $3,909 $1,751 Budget Stabilization Account 1,606 3,420 6,714 Total Reserves $4,084 $7,329 $8,465 Source: The State Legislative Analyst s Office. Education Funding. The Proposition 98 minimum guarantee for K-14 education funding continues to increase after reaching a low of $47.3 billion in fiscal year The State Budget provides a minimum guarantee of $71.9 billion to K- 14 education, an increase of $3.5 billion from fiscal year levels. Combined with increases of $1.5 billion and other one-time savings and adjustments in fiscal years and , the State Budget provides a total increase of $5.9 billion for K-14 education. K-12 education is budgeted to receive $63.5 billion of the $71.9 billion Proposition 98 minimum guarantee to K-14 education. Proposition 98 K-12 expenditures are budgeted to be $10,657 per-pupil in fiscal year , an increase of $440 per-pupil, or 4.3 percent, from revised fiscal year levels. Since fiscal year , Proposition 98 funding for K-12 education has grown by more than $21.7 billion, representing an increase of more than $3,600 per student. The Proposition 98 maintenance factor, created in years in which revenue growth is slow or decreases, is the difference between the funding level that would have been budgeted had revenue growth been stronger and the lesser amount that is actually budgeted. The maintenance factor is carried over from year to year until the State s economy is strong enough to restore the difference by accelerating Proposition 98 funding and adjusted annually for changes in K-12 attendance and per capita personal income. The maintenance factor, which was approximately $11 billion in fiscal year , is projected to be reduced to an estimated $908 million as of the end of fiscal year LCFF Implementation: The State Budget provides an additional $2.9 billion for LCFF spending, bringing total LCFF funding to $55.8 billion, reaching approximately 96 percent of full implementation. K-12 Mandates Backlog: The State Budget provides for $1.3 billion to reimburse school districts for the costs of implementing State-mandated programs to substantially reduce outstanding mandate debt, for discretionary uses such as deferred maintenance, professional development or instructional materials. According to the State Legislative Analyst s Office, this reduces the fiscal year K-12 mandates backlog to approximately $987 million. The State Budget also provides for certain one-time increases in Proposition 98 general funds for preschool and K-12 educational programs, including:

61 Proposition 39 Energy Efficiency: $398.8 million in grants for improved energy efficiency in schools. College Readiness: $200 million in block grants over three years to improve eligibility for college admission, allocated based on unduplicated student count in grades 9-12, with a minimum grant per district or charter school of $75,000. Child Care and State Preschool: $137.5 million for increased childcare provider rates; $7.8 million for almost 3,000 additional full-day State preschool slots for children of low-income families. Teacher Workforce: $25 million (plus $10 million in non-proposition 98 funds) to fund teacher recruitment and training. California Collaborative for Educational Excellence: $24 million for the agency to assist local educational agencies in implementing individual LCAP priorities. Charter School Start-Up: $20 million in grants to offset loss of federal funds. Multi-tiered Systems of Support: $20 million in grants to improve student outcomes by providing layers of support that address students academic, behavioral, social and emotional needs. Proposition 47 Safe Neighborhoods and Schools Act: $18 million in grants for restorative justice programs to prevent truancy and reduce dropout rates. Safe Drinking Water In Schools: $9.5 million in grants to improve access to safe drinking water for students at isolated and economically disadvantaged schools

62 The following table identifies historical and proposed Proposition 98 funding. Proposition 98 Funding State Budget Actual Revised Budget Act (Millions) (Millions) (Millions) By Segment K-12 Schools General Fund $44,251 $43,340 $44,465 Local Property Tax Revenue 14,810 16,759 18,057 Subtotal $59,061 $60,099 $62,522 Community Colleges General Fund $5,025 $5,415 $5,528 Local Property Tax Revenue 2,306 2,569 2,767 Subtotal $7,331 $7,983 $8,295 Preschool 1 $664 $885 $975 Other Agencies Total $67,146 $69,050 $71,874 By Fund Source General Fund $50,029 $49,722 $51,050 Local Property Tax Revenue 17,117 19,328 20,824 Total $67,146 $69,050 $71,874 1 Beginning in fiscal year , includes $145 million for wraparound care formerly funded with non-proposition 98 State general fund. 2 Includes State agencies providing direct instruction to K-12 students. Consists entirely of State general fund. Source: The State Legislative Analyst s Office. The State Budget On June 27, 2017, the Governor signed the 2017 Budget Act and associated trailer bills to enact the fiscal year State budget (the State Budget ), a $180 billion total spending plan representing an increase of seven percent over revised levels for fiscal year The State Budget estimates that State general fund revenues exceed total general fund expenditures. The State Budget projects State general fund revenues and transfers to total $125.9 billion, an increase of six percent over revised estimates. The State s largest three sources of general fund tax revenue personal income taxes, sales and use taxes, and corporate taxes are projected to increase five percent. State general fund expenditures are projected to be $125.1 billion, an increase of $3.7 billion (three percent) over revised levels. The State s general fund balance is budgeted to be $2.4 billion at the end of fiscal year State special fund expenditures are increased by $8.5 billion (18 percent) over revised levels, largely due to increased special fund spending on transportation and Medi-Cal. The State Budget provides for year-end total reserves of $9.9 billion, comprised of $1.4 billion in the discretionary Special Fund for Economic Uncertainties (SFEU) reserve and $8.5 billion in the Proposition 2 mandatory Budget Stabilization Account (BSA) reserve fund. The State Budget includes $3.1 billion in additional funding for a total of $74.5 billion in K-14 education funding as required by Proposition 98, including $1.4 billion additional funds for LCFF, bringing its implementation to 97 percent; increased funding for transportation and infrastructure projects from revenues from fuel and vehicle-related taxes and fees; expansion of State earned-income tax credit to approximately one million additional low-wage families; increased funding for

63 Medi-Cal provider rates and growth in Medi-Cal program from Proposition 56 tobacco tax revenues; increased funding to counties for cost sharing agreement for provision of in-home supportive services; increased funding for public universities and student financial aid; and increased funding for child care and preschool. In addition, the State Budget provides for a $6 billion pension loan from the State s cash balances (from the Surplus Money Investment Fund) to PERS, based on estimates that such action will save $11 billion over the next two decades and stabilize the State s contributions to PERS. The following table identifies historical and budgeted State general fund revenues, expenditures and fund balances. State General Fund State Budget Revised Revised Budget (Millions) (Millions) (Millions) Prior-year Fund Balance $3,508 $4,504 $1,622 Revenues and Transfers 115, , ,880 Expenditures 113, , ,096 Ending Fund Balance $5,024 $1,622 $2,406 Encumbrances Special Fund for Economic Uncertainties 4, ,426 Reserves Special Fund for Economic Uncertainties $4,044 $642 $1,426 Budget Stabilization Account 3,529 6,713 8,486 Total Reserves $7,574 $7,355 $9,912 Source: The State Legislative Analyst s Office. Education Funding. The Proposition 98 minimum guarantee for K-14 education funding continues to increase after reaching a low of $47.3 billion in fiscal year The State Budget provides for funding at the minimum guarantee level of $74.5 billion for fiscal year , an increase of $3.1 billion (4.4 percent) over the three-year fiscal period of through , combined with revisions and adjustments of the minimum guarantee for fiscal years and , in investment in K-14 education across all segments. The $3.1 billion increase is required due to the spending levels provided in the past two budget years exceeding the minimum guarantee, as spending above the minimum guarantee in one year becomes part of the base calculation of the minimum guarantee for the following year. The Proposition 98 maintenance factor, created in years in which State general fund revenue growth is slow or decreases compared to growth in per capita personal income, is calculated as the difference between the funding level that would have been budgeted had revenue growth been stronger and the lesser amount that is actually budgeted. The maintenance factor is carried over from year to year until the State s economy is strong enough to restore the difference by accelerating Proposition 98 funding. The maintenance factor was approximately $11 billion in fiscal year Fiscal year is a Test 2 year (since the increase in the minimum guarantee is due to a 3.7 percent increase in per capita personal income and a 0.05 percent decline in K-12 attendance) which results in funding at the minimum guarantee level with a maintenance factor payment of $536 million. The projected year-end outstanding maintenance factor obligation is $900 million. Of the total Proposition 98 spending budgeted for fiscal year , $52.6 billion is State general fund and $21.9 billion is local property tax revenue. The State Budget includes a $603 million settle-up payment to K-14 educational agencies (allocated to LCFF and Career Technical Education ( CTE ) funding), considered as a Proposition 98 debt repayment, reducing the State s outstanding settle-up obligation from over $1 billion to $440 million. For K-12 education specifically, the State budget provides $64.7 billion in Proposition 98 funds, $2.7 billion (4.3 percent) more than the revised level, and $2.2 billion (3.6 percent) more than the State Budget provided as enacted. The State Budget increases per-pupil funding by $450 (4.3 percent) from the State Budget, bringing total Proposition 98 per-pupil funding to $10,863. This total funding includes $2.4 billion in adjustments to K-12 education funding, of which $1.5 billion is for on-going increases, $933 million is for one-time initiatives, and $328 million is

64 for one-time initiatives funded from other sources. The State Budget also authorizes $593 million in bond issuance from Proposition 51 general obligation bonds proceeds for school facilities. The State Budget provides an additional $1.4 billion in funding to school districts and charter schools for LCFF, bringing total LCFF spending to $57.4 billion in fiscal year (a 2.7 percent increase over the revised level), bringing the LCFF target level to approximately 97 percent of full implementation. The State Budget provides for certain adjustments in education spending, including the following: Per-Pupil Discretionary Grants: One-time funding of $877 million that local educational agencies may use for any educational purpose, distributed based on average daily attendance; reduces the mandates backlog to $799 million at the end of fiscal year Cost-of-Living-Adjustment: Additional ongoing funding of $65 million to provide for a 1.56 percent cost-of-living adjustment ( COLA ) for mandates block grants to K-14 educational agencies ($3.5 million for K-12 and $500,000 for community colleges) and $61 million to provide for the 1.56 percent COLA for certain categorical programs, including special education, child nutrition, foster youth services, and American Indian education. After School and Education Safety (ASES) Program: Additional ongoing funding of $50 million, bringing total spending for ASES to $600 million, for increased provider reimbursement rates, implementation of new minimum wage obligations. Classified Employee Teacher Certification: One-time funding of $25 million in grants to support up to 1,250 classified employees in completing teacher certification education. CTE Pathways: Additional ongoing funding of $15 million to support efforts linking secondary and postsecondary CTE; $200 million for the third and final year of CTE incentive grant program as required by legislation. Refugee Student Support: One-time funding of $10 million for supportive services to refugee students transitioning to new learning environments, to be allocated over the next three fiscal years by the California Department of Social Services to school districts impacted by significant numbers of refugee students. Mandated Reporter Training: Additional ongoing funding of $8.5 million to add mandated reporter training on the detection and reporting of child abuse to the K-12 mandates block grant. County Offices of Education: Additional ongoing funding of $7 million to increase LCFF funding to county offices of education for school district services. Bilingual Teacher Training: One-time funding of $5 million in Proposition 98 funds to provide professional development for bilingual teachers. Online Educational Resources: Additional ongoing funding of $3 million to fund online educational resources. California-Grown Fresh School Meals Grants: One-time funding of $1.5 million in grants to local educational agencies with high proportions of low-income or English-learner students, for the purchase of food grown in the State and expand the number of freshly prepared meals using State-grown ingredients. Proposition 56 Tobacco Prevention: Funding of $32 million in new cigarette tax revenue to support the tobacco use prevention education in schools as statutorily required. Proposition 39 Energy Efficiency: Funding of $423 million for energy efficiency projects at K-14 schools as statutorily required for the fifth and final year of such funding, with trailing legislation extending the grant opportunity for an additional year

65 The following table identifies Proposition 98 budgeted funding levels for fiscal year , revised levels for fiscal year , and final levels for fiscal year , both by segment of educational level and by source of funding. Proposition 98 Funding State Budget Final Revised Enacted (Millions) (Millions) (Millions) By Segment K-12 Schools General Fund $43,074 $43,955 $45,763 Local Property Tax Revenue 17,047 18,133 18,981 Subtotal $60,121 $62,089 $64,745 Community Colleges General Fund $5,384 $5,473 $5,654 Local Property Tax Revenue 2,631 2,768 2,911 Subtotal $8,016 $8,242 $8,565 Preschool $885 $975 $1,122 Other Agencies Total $69,103 $71,390 $74,523 By Fund Source General Fund $49,425 $50,488 $52,631 Local Property Tax Revenue 19,678 20,902 21,892 Source: The State Legislative Analyst s Office. Total $69,103 $71,390 $74,523 Future Budgets The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State s ability to fund schools as budgeted. State budget shortfalls in future fiscal years could have an adverse financial impact on the District. For more information on the State budget, please refer to the State Department of Finance s website at and to the State Legislative Analyst s Office s website at The District takes no responsibility for the continued accuracy of these Internet addresses or for the accuracy, completeness or timeliness of the information presented therein, and such information is not incorporated herein by such reference. LEGAL MATTERS No Litigation There is no action, suit or proceeding known by the District to be pending or threatened restraining or enjoining the sale or delivery of the Bonds, or in any way contesting or affecting the validity thereof or any proceeding of the District taken with

66 respect to the issuance or sale of the Bonds, or the pledge or application of moneys or security provided for the payment of the Bonds, or the authority of the County to levy property taxes to pay principal of and interest on the Bonds when due. Legal Opinion The proceedings in connection with the authorization, sale, execution and delivery of the Bonds are subject to the approval as to their legality of Parker & Covert LLP, Bond Counsel. A copy of the legal opinion will be attached to each Bond, and a form of such opinion is attached hereto as APPENDIX C FORM OF OPINION OF BOND COUNSEL. Bond Counsel s employment is limited to a review of the legal proceedings required for authorization of the Bonds and to rendering the aforementioned opinion. Bond Counsel has not undertaken any responsibility for the accuracy, completeness, or fairness of this Official Statement, and the opinion of Bond Counsel will not extend to any documents, agreements, representations, offering circulars, official statements or other material of any kind concerning the Bonds that are not referred to in the aforementioned opinion. The fees of Bond Counsel are contingent upon the issuance and delivery of the Bonds. Limitations on Remedies; Amounts Held in the Treasury Pool The opinion of Bond Counsel with respect to the enforceability of the rights of the owners of the Bonds is qualified by reference to bankruptcy, insolvency and other laws relating to or affecting creditor s rights. Bankruptcy proceedings, if initiated, could subject the owners of the Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. The County on behalf of the District is expected to be in possession of the annual ad valorem property taxes and certain funds to repay the Bonds and may invest these funds in the Treasury Pool, as described under the caption SOLANO COUNTY TREASURY POOL herein and in APPENDIX D SOLANO COUNTY TREASURER INVESTMENT POLICY attached hereto. In the event the District or the County were to go into bankruptcy, a federal bankruptcy court might hold that the owners of the Bonds are unsecured creditors with respect to any funds received by the District or the County prior to the bankruptcy, which may include taxes that have been collected and deposited into the Tax Collection Fund, where such amounts are deposited into the Treasury Pool, and such amounts may not be available for payment of the principal of and interest on the Bonds unless the owners of the Bonds can trace those funds. There can be no assurance that the Owners could successfully so trace such taxes on deposit in the Tax Collection Fund where such amounts are invested in the Treasury Pool. The Government Code requires the County to annually levy ad valorem property taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates) for the payment of the principal of and interest on the Bonds. Tax Matters The following discussion of federal income tax matters written to support the promotion and marketing of the Bonds was not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding federal tax penalties that may be imposed. Each taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. In the opinion of Parker & Covert LLP, Sacramento, California, Bond Counsel, based upon the analysis of existing statutes, regulations, ruling and court decisions, and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, the interest on the Bonds is excludable from gross income for federal income tax purposes and is exempt from State of California personal income taxes. Bond Counsel is also of the opinion that interest on the Bonds is not an item of tax preference for purposes of the alternative minimum tax imposed on individuals and corporations, however, such interest is taken into account when determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX C FORM OF OPINION OF BOND COUNSEL attached hereto. The amount, if any, by which the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds) constitutes original issue discount, the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and which is exempt from State personal

67 income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons, or organizations acting in the capacity of underwriters, placement agents, or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of purchasers who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable on their respective maturity dates (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, a purchaser s basis in a Premium Bond, and under Treasury Regulations the amount of tax-exempt interest received, will be reduced by the amount of amortizable premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable premium in their particular circumstances. The Internal Revenue Code of 1986, as amended, (the Code ) imposes various restrictions, conditions, and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The District has covenanted to comply with certain restrictions designed to assure that interest on the Bonds will not be included in federal gross income. Failure to comply with these covenants may result in interest on the Bonds being included in federal gross income, possibly from the date of issuance of the Bonds. The opinion of Bond Counsel assumes compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after that date of issuance of the Bonds may adversely affect the tax status of interest on the Bonds. Prospective Owners are urged to consult their own tax advisors with respect to proposals to restructure the federal income tax. Certain requirements and procedures contained or referred to in the Resolution, the tax certificate to be entered into on the date of issuance of the Bonds (the Tax Certificate ), and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Parker & Covert LLP, Sacramento, California. Although Bond Counsel expects to render an opinion that interest on the Bonds is excludable from gross income for federal income tax purposes and exempt from State personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner s federal or state tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the Beneficial Owner or the Beneficial Owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. In addition, no assurance can be given that any future legislation, including amendments to the Code, if enacted into law, or changes in interpretation of the Code, will not cause interest on the Bonds to be subject, directly or indirectly, to federal and/or state income taxation, or otherwise prevent Beneficial Owners of the Bonds from realizing the full current benefit of the tax status of such interest. Prospective purchasers of the Bonds should consult their own tax advisers regarding any pending or proposed federal and/or state tax legislation. Further, no assurance can be given that the introduction or enactment of any such future legislation, or any action of the Internal Revenue Service ( IRS ), including but not limited to regulation, ruling, or selection of the Bonds for audit examination, or the course or result of any IRS examination of the Bonds, or obligations that present similar tax issues, will not affect the market price or liquidity of the Bonds. The rights of the owners of the Bonds and the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting creditor s rights heretofore or hereafter enacted to the extent constitutionally applicable, and their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. The IRS has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and target audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar bonds)

68 The complete text of the final opinion that Bond Counsel expects to deliver upon the issuance of the Bonds is set forth in APPENDIX C FORM OF OPINION OF BOND COUNSEL attached hereto. Legality for Investment in California Under provisions of the California Financial Code, the Bonds are legal investments for commercial banks in the State to the extent that the Bonds, in the informed opinion of the investing bank, are prudent for the investment of funds of depositors. Under provisions of the Government Code, the Bonds are eligible security deposits of public moneys in the State. RATINGS Fitch Ratings, Inc. ( Fitch ) has assigned a municipal bond rating of AAA to the Bonds, and Moody s Investors Service, Inc. ( Moody s ) has assigned a municipal bond rating of A1 to the Bonds. Such ratings reflect only the views of Fitch and Moody s, and an explanation of the significance of each rating may be obtained from Fitch and Moody s, respectively. There is no assurance that any such rating will continue for any given period of time or that any such rating will not be revised downward or withdrawn entirely by the rating agency if, in the judgment of the rating agency, circumstances so warrant. Any such downward revision or withdrawal of any such rating may have an adverse effect on the market price of the Bonds. MUNICIPAL ADVISOR Government Financial Strategies inc. has been employed by the District to perform municipal advisory services in relation to the sale and delivery of the Bonds. Government Financial Strategies inc., in its capacity as Municipal Advisor, has read and participated in drafting this Official Statement. Government Financial Strategies inc. has not, however, independently verified nor confirmed all of the information contained within this Official Statement. Government Financial Strategies inc. will not participate in the underwriting of the Bonds. Fees charged by Government Financial Strategies inc. are not contingent upon the sale of the Bonds. INDEPENDENT AUDITOR The financial statements of the District as of and for the year ending June 30, 2016 have been audited by Vavrinek, Trine, Day & Co., LLP, Pleasanton, California. The audited financial statements of the District as of and for the year ended June 30, 2016, are set forth in APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2016 attached hereto. The Auditor has not performed any subsequent events review or other procedures relative to these audited financial statements since the date of its letter. Complete copies of past and current financial statements may be obtained from the District. UNDERWRITING AND INITIAL OFFERING PRICE The Bonds were sold to Morgan Stanley & Co. LLC (the Underwriter ) pursuant to a bond purchase agreement by and between the District and the Underwriter at a price of $27,973,301.83, being the principal amount of the Bonds of $23,555,000.00, plus a net original issue premium of $4,489,820.50, less an underwriting discount of $71,518.67, at a (TIC) to the District of percent. Morgan Stanley & Co. LLC, an underwriter of the Bonds, has entered into a distribution agreement with its affiliate, Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds

69 The Underwriter has certified the initial offering prices or yields stated on the inside cover page hereof. The Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts), dealer banks, banks acting as agents and others at prices lower than said public offering prices. The reoffering prices may be changed from time to time by the Underwriter. CONTINUING DISCLOSURE The District has covenanted for the benefit of the holders and Beneficial Owners of the Bonds to provide certain financial information and operating data relating to the District (the Annual Report ), by not later than nine months after the end of the fiscal year, commencing with the report for the fiscal year (which is due no later than March 31, 2018), and to provide notices of the occurrence of certain enumerated events. The Annual Report and notices of certain enumerated events will be filed by the District with the MSRB through EMMA. The specific nature of the information to be contained in the Annual Report or the notices are specified in APPENDIX B FORM OF CONTINUING DISCLOSURE CERTIFICATE attached hereto. These covenants have been made in order to assist the Underwriter in complying with SEC Rule 15c2-12(b)(5) (the Rule ). In the past five years, the District has not complied in all respects with its previous undertakings with regard to said Rule to provide annual reports and notices of significant events. The following annual reports were not filed in accordance with their requirements in the past five years: The annual reports for the CFD Series 2001 Bonds and CFD Series 2007 Bonds for fiscal year due March 31, 2013, and April 15, 2013, respectively, were initially filed on May 20, 2013 without the District s audited or unaudited financial statements for fiscal year Unaudited financial statements for fiscal year were filed on September 8, 2014, and the audited financial statements for fiscal year were filed on December 12, Notices of the failure to file the annual reports were not filed until June 15, The annual reports for the CFD Series 2001 Bonds and CFD Series 2007 Bonds for fiscal year due March 31, 2014, and April 15, 2014, respectively, were initially filed on April 1, 2014 without the District s audited or unaudited financial statements for fiscal year Unaudited financial statements for fiscal year were filed on September 8, 2014, and the audited financial statements for fiscal year were filed on September 16, Notices of the failure to file the annual reports were not filed until June 15, The annual reports for the 2002 Bonds, 2004 Bonds, 2006 Bonds and 2003 Certificates for fiscal year due April 1, 2015, were initially filed on March 31, 2015 without including the District s outstanding debt. The outstanding debt was filed on September 16, Notices of the failure to file the annual reports were not filed until June 15, The annual reports for the 2002 Bonds, 2004 Bonds, 2006 Bonds and 2003 Certificates for fiscal year due April 1, 2016, were initially filed on March 31, 2016 without including the District s outstanding debt. The outstanding debt was filed on January 9, Notices of the failure to file the annual reports were not filed until June 15, The annual reports for the 2003 Certificates for fiscal years , , and , were initially filed by their respective due date without including the final maturity dates and following fiscal year debt service payments as required. The required information was filed on January 5, 2015 for the annual report, July 14, 2016 for the annual report, December 18, 2016 for the annual report and January 9, 2017 for the annual report. Notices of the failure to file the annual reports were not filed until June 15, The following notices of significant event were posted more than ten business days after their occurrence: On January 17, 2013, Moody s downgraded the rating of Assured Guaranty Municipal Corp. ( AGM ), the insurer of the CFD Series 2001 Bonds, resulting in a downgrade of the rating of the CFD Series 2001 Bonds. Notice of the downgrade was not posted until September 16, On March 18, 2014, S&P Global Ratings ( S&P ) upgraded the rating of AGM, insurer of the CFD Series 2001 Bonds, resulting in an upgrade in the rating of the CFD Series 2001 Bonds. Notice of the upgrade was not posted until September 16, On May 21, 2014, Moody s upgraded the rating of National Public Finance Guarantee ( NPFG ), the insurer of the 2002 Bonds, the 2002 Refunding Bonds, and the 2003 Certificates, resulting in an upgrade of the rating of the 2002 Bonds, the 2002 Refunding Bonds, and the 2003 Certificates. Notices of the upgrades were not filed until June 25,

70 Procedures have been implemented to prevent failures to comply with continuing disclosure obligations from recurring. As of the date of this Official Statement, the District has made all required filings in the past five years for currently outstanding issues in connection with prior undertakings under the Rule. ADDITIONAL INFORMATION Additional information concerning the District, the Bonds or any other matters concerning the sale and delivery of the Bonds may be obtained by contacting the Vallejo City Unified School District, 665 Walnut Avenue, Vallejo, California 94592, telephone (707) , Attention: Chief Operations Officer, or by contacting the Municipal Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California , telephone (916) All of the preceding summaries of the Bonds, the Resolution, the Paying Agent Agreement and other documents are made subject to the provisions of such documents respectively, and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District for further information in connection therewith. Further, this Official Statement does not constitute a contract with the purchasers of the Bonds, and any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The execution and delivery of this Official Statement by the District has been duly authorized by its District Board. Vallejo City Unified School District By: /s/ Stephen A. Goldstone, Ed.D. Stephen A. Goldstone, Ed.D. Interim Superintendent

71 APPENDIX A THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2016

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73 VALLEJO CITY UNIFIED SCHOOL DISTRICT ANNUAL FINANCIAL REPORT JUNE 30, 2016

74 VALLEJO CITY UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2016 FINANCIAL SECTION Independent Auditors Report 2 Management's Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements Governmental Funds - Balance Sheet 18 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 19 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Net 20 Position Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 21 Proprietary Funds - Statement of Net Position 23 Proprietary Funds - Statement of Revenues, Expenses, and Changes in Net Position 24 Proprietary Funds - Statement of Cash Flows 25 Fiduciary Funds - Statement of Net Position 26 Fiduciary Funds - Statement of Changes in Net Position 27 Notes to Financial Statements 28 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Other Postemployment Benefits (OPEB) Funding Progress 80 General Fund - Budgetary Comparison Schedule 81 Schedule of the District s Proportionate Share of the Net Pension Liability 82 Schedule of District Contributions 83 Note to Required Supplementary Information 84 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 86 Local Education Agency Organization Structure 88 Schedule of Average Daily Attendance 89 Schedule of Instructional Time 90 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements 91 Schedule of Financial Trends and Analysis 92 Schedule of Charter Schools 93 Combining Statements - Non-Major Governmental Funds Combining Balance Sheets and Statements of Revenues, Expenditures, and Changes in 94 Fund Balance Schedule of General Unrestricted and Restricted Fund Balance Sheet and Statement of 100 Revenues, Expenditures, and Changes in Fund Balance Notes to Supplementary Information 102 i

75 VALLEJO CITY UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2016 INDEPENDENT AUDITORS REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 105 Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance 107 Report on State Compliance 109 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditors' Results 114 Financial Statement Findings 116 Federal Awards Findings and Questioned Costs 123 State Awards Findings and Questioned Costs 124 Summary Schedule of Prior Audit Findings 126 ii

76 FINANCIAL SECTION 1

77 INDEPENDENT AUDITORS REPORT Governing Board Vallejo City Unified School District Vallejo, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Vallejo City Unified School District (the District) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, issued by the California Education Audit Appeals Panel as regulations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax:

78 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the Vallejo City Unified School District, as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Change in Accounting Principles As discussed in Note 1 to the financial statements, in 2016, the District adopted new accounting guidance, GASB Statement No. 72, Fair Value Measurement and Application; GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statement 67 and 68; GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments; and GASB Statement No. 79, Certain External Investment Pools and Pool Participants. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, budgetary comparison schedule, schedule of other postemployment benefits funding progress, schedule of the district's proportionate share of net pension liability, and the schedule of district contributions as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Vallejo City Unified School District's basic financial statements. The accompanying supplementary information such as the combining and individual nonmajor fund financial statements and Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the other supplementary information as listed on the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 3

79 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 23, 2016, on our consideration of the Vallejo City Unified School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Vallejo City Unified School District's internal control over financial reporting and compliance. Pleasanton, California December 23,

80 VALLEJO UNIFIED SCHOOL DISTRICT Ramona E. Bishop, Ed.D. Superintendent GOVERNING BOARD Dr. A.C. Tony Ubalde Jr. President Ward Ace Stewart Vice President Raymond Victor Mommsen Trustee Adrienne Waterman Trustee Hazel Wilson Trustee MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 An overview of the Vallejo City Unified School District and its financial activities for the fiscal year ended June 30, 2016, is presented in this discussion and analysis of the District s financial position and performance. This information should be read in conjunction with the District s financial statements, including the notes and supplementary information, which immediately follows this section. PROFILE OF THE DISTRICT The Vallejo City Unified School District ( VCUSD or the District ) is the second largest school district in Solano County, and currently educates approximately 12,850 students who live within the City of Vallejo. The Vallejo City Unified School District was established in An elected Board of five members governs the District. The District provides pre-kindergarten, elementary and secondary education in the City of Vallejo throughout multiple campuses, as follows: School Number Elementary (K-5) 13 K-8 3 Middle Schools (6-8) 3 Comprehensive High Schools 2 Continuation High School 1 Community Day School 1 The student population is 38.6% Hispanic/Latino, 28.8% African American, 15.4% Filipino, 8.2% White, 2.5% Asian, and 6.5% Other. Vallejo City Unified employs approximately 1,500 people. In , the District had three district-approved Charter Schools: Charter Name Grade Level Type Vallejo Charter School K-8 District Approved Mare Island Technology Academy Middle Schools (6-8) District Approved MIT Academy Comprehensive High Schools District Approved Mare Island Technology Academy and MIT Academy are direct-funded charter schools that receive their allocation of state funds directly from the State. Their financial activities are not reflected in the District s books. Vallejo Charter School is a dependent school and its activities are included in the District s books. In addition, the District has an extensive child development and preschool program and an adult school, which services 1,408 adults. 5

81 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 The District s vision statement is For our diverse learners to be empowered, prepared, and equipped with academic and life skills needed to be productive citizens who can positively contribute to society, and For every student to have clear attainable pathways to career and/or college success. In Support of our Vision, we will attract and retain highly qualified staff, as well as, leverage community resources to provide support systems for all their families. To address the changing needs of our students and parents, the Board created several themed choice schools, a Health and Fitness Academy, an Environmental Science Academy, and a Dual Language Academy under the leadership of Superintendent, Dr. Ramona Bishop, planning began to build a "Pipeline to Prosperity". This initiative focused on preparing all students to enter college or a career upon graduation from high school through the implementation of STEAM (science, technology, engineering, arts, and mathematics) curriculum in the middle schools and "Wall-to-Wall" high school career academies. VCUSD is a Full Service Community Schools (FSCS) district. All 24 schools in the district will be FSCS. The district s FSCS program provides comprehensive academic, social, mental, and physical education services to meet student, family, and community needs. The program facilitates partnerships between all our schools and community resources. Our goal is to ensure school personnel work collaboratively with outside agencies to provide students and families with the support they need for school success. The District's staff members and community are committed to improving student achievement and to improving practices in financial planning and monitoring spending levels. The District s ability to analyze and estimate revenues and expenses is essential due to the continued unpredictability of financial resources and the statewide economic trends that will continue to affect the District s financial status. 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: The first two statements are government-wide financial statements that provide both short-term and long-term information about the District s overall financial status. The remaining statements are fund financial statements that focus on individual parts 6

82 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 of the District, reporting the District s operations in more detail than the governmentwide statements. The Governmental Funds statements tell how basic services like regular and special education were financed in the short term as well as what remains for future spending. Proprietary Fund statements offer financial information about the activities the District operates on a cost reimbursement basis, such as the self-insurance fund. Fiduciary Funds 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 belong. Fiduciary Fund activity is excluded from the government-wide financial statements. The financial statements also include notes that explain some of the information in the statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the financial statements with comparisons of the District s budgets, both the adopted and final version, with year-end actuals. Government-Wide Statements The government-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The Statement of Net Position includes all of the District s assets and liabilities. 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 position and how they have changed. Net position the difference between the District s assets and liabilities are one way to measure the District s financial health or position. Over time, increases or decreases in the District s net position may be an indicator of whether its financial position 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 property tax base, its student enrollment data, the State s fiscal health and the condition of school buildings and other facilities. Fund Financial Statements 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 the District uses to keep track of specific sources of funding and spending on particular programs: Some funds are required by State law and by bond covenants. The District establishes other funds to control and manage money for particular purposes (like repaying its long-term debt) or to show that it is properly using certain revenues (like federal grants). The District has three kinds of funds: Governmental Funds Most of the District s basic services are included in governmental funds, which generally focus on (1) how cash and other financial assets 7

83 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 that can readily be converted to cash flow in and out and (2) the balances left at yearend that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps one 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 district-wide statements, reconciliations between the District-wide statements and the Fund financial statements are provided. Proprietary Funds - Services for which the District charges a fee are generally reported in proprietary funds. Proprietary funds are reported in the same way as the districtwide statements. Internal service funds (one kind of proprietary fund) are used to report activities that provide supplies and services for the District s other programs and activities. The District currently has one internal service fund the self-insurance fund. Fiduciary Funds The District is the trustee, or fiduciary, for assets that belong to others, such as the scholarship and the student activities funds. The District is responsible for ensuring that the assets reported in these funds are used only for their intended purposes and by those to whom the assets belong. All of the District s fiduciary activities are reported in a separate statement of fiduciary net position. These activities are excluded from the district-wide financial statements because the District cannot use these assets to finance its operations. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net Position The statement of net position compares assets to liabilities to give an overall view of the District s financial position. The District s net position was $(43.5) million at June 30, This represents an increase of $7.6 million or 14.87% which is the result of $7.6 million net revenues over expenses. Restricted net position in the amount of $21.7 million represents resources that are subject to external restrictions on how they may be used. 8

84 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 The computation of District net position at June 30, 2015 and June 30, 2016 is presented by category in the table below: In Millions Governmental Activities Change over last year Assets Cash and other investments $ 48.2 $ 51.5 $ % Receivables % Capital assets (7.6) -4.18% Other % Total Assets % Deferred Outflows of Resources Pension related items $ % Liabilities Accounts payable and other current liabilities (2.5) % Unearned revenue % Aggregate net pension liability % Long-term liabilities (4.9) -2.96% Total liabilities % Deferred Inflows of Resources Pension related items (2.5) -9.96% Net Position $ (51.1) $ (43.5) $ % Unrestricted net position for the year ended June 30, 2016, consist of the following: In Millions Governmental Activities Change over last year Net Position Net invested in capital assets $ 73.9 $ 71.4 $ (2.5) -3.38% Restricted for: Capital projects % Debt service % Educational programs % Unrestricted (144.1) (136.6) % Total net position $ (51.1) $ (43.5) $ % 9

85 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Changes in Net Position The statement of activities provides a record of the revenue received by the district and spent during the year. Overall, net positon increased by $7.6 million as of June 30, The total revenue increased by $31.2 million while total expenditures grew by $18.2 million compared to the prior year. In Millions Governmental Activities Change over last year Revenues Program revenues Charges for services $ 0.7 $ 1.0 $ 0.3 Operating grants and contributions Total program revenues General revenues Taxes levied for general purposes Taxes levied for debt service Taxes levied for other specific purposes Federal and State Aid not restricted to Specific purposes Interest and investment earnings Interagency revenues (0.3) Miscellaneous Total general revenues Total Revenues Expenditures Instruction Instruction Related Services Pupil Support Services General Administration Plant Services Other Total expenses Increase (Decrease) in net assets (4.9) Net Position Beginning 62.8 (51.1) (113.9) Restatements (109.0) (0.5) Net Position Ending $ (51.1) $ (43.5) $

86 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the close of the year ended June 30, 2016, the District s capital assets totaled $174.2 million. Accumulated depreciation was $139.8 million at year end. Depreciation expense for the year totaled $9.6 million. Net book value (the amount of total assets after applying depreciation) decreased by $7.6 million. Governmental Activities Change over last year Land $ 5.7 $ % Land Improvements % Buildings % Equipment % Work in Progress % $ $ % The District excludes from its fixed assets any individual capital acquisitions less than $5,000 for equipment, $10,000 for vehicles and $100,000 for buildings. The majority of the recorded historical cost of assets relates to the buildings and improvements of physical school sites. The historical cost of land acquired by the District prior to July 1, 2001 is not considered significant and is excluded from total fixed assets. Likewise, the original historical construction cost of most school sites dating back to the date the school was first opened have not been included as such costs would have been fully depreciated by the beginning year date of July 1, See Note 9, Capital Assets and Depreciation, to the accompanying financial statements for a complete summary of the District s capital assets. Long-Term Obligations The District's long-term debt obligations had a beginning balance of $165.8 million. Additions were $4.1 million and deductions were $9.4 million. At June 30, 2016, the ending balance was $160.9 million. The majority of the District s long-term debt is comprised of $68.8 million of General Obligation Bonds, $19.1 million of Community Facilities Bonds, $14.7 million of Certificates of Participation, and $27.7 million in State Emergency Loan. The annual debt service requirement on the State Emergency Loan is approximately $3.0 million and is funded from the District s General Fund. General Obligation Bonds are funded by a separate property tax override and do not require the use of District resources. See Note 15 to the accompanying financial statements for a complete summary of long-term liabilities. 11

87 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Outstanding Long-Term Debt Change over last year General Obligation Bonds $ 73.1 $ % CFD Bonds % Certificates of Participation % Capital Lease Obligations* % Compensated Absences % State Emergency Loan % Self-Insurance Obligation % Other Post Employment Benefits Obligation % $ $ % Components of Governmental Funds Non-major Funds, $11.5, 22% Debt Service Fund, $0.5, 1% Capital Projects Fund for Blended Component Units, $12.2, 23% General Fund - Restricted, $3.2, 6% General Fund - Unrestricted, $25.4, 48% At June 30, 2016, the district has thirteen governmental funds reporting combined fund balance of $52.8 million, an increase of $10.1 million over the prior year. The following table details the Non-major governmental funds. FINANCIAL HIGHLIGHTS OF THE DISTRICT S FUNDS At June 30, 2016, the district has thirteen governmental funds reporting a combined fund balance of $52.8 million, an increase of $10.1 million over the prior year. The following table details the Nonmajor governmental funds. Fund Balance - June 30, 2016 Non-major Funds Bond Interest and Redemption Fund $ 6.2 Building Fund 1.9 Charter School Fund 1.6 Capital Facilities Fund 1.0 County School Facilities Fund 0.4 Child Development Fund 0.3 Cafeteria Special Revenue Fund 0.1 Totals $

88 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Unrestricted General Fund Results of Operations During fiscal year , the District s unrestricted General Fund ending balance, which includes nonspendable, assigned, and unassigned balances, increased from $18.7 million to $26.5 million, an $7.7 million or 41.2% increase. Total unrestricted General Fund revenues in the current year were $130.6 million, which was offset by expenditures of $104.9 million. This resulted in an increase of $7.7 million compared to The unrestricted General Fund balance was required to contribute to other funds, primarily for child development, student nutrition, capital facilities, debt service, and self-insurance. Transfers to other funds in the amount of $3.7 million are $0.7 million or 24.1% more than Table I Local control funding formula Federal sources Other state sources Other local sources Transfers in / Other sources $114.8 General Fund Ending Balance and Reserves The table below displays unaudited actual General Fund revenue by major category for fiscal year 2016, along with the increases or decreases. $ $30.5 $6.6 $1.0 The following comparison of revenue and expenditures focuses solely on General Fund operations. Table I shows the year to year revenue and Table II shows the same comparison of expenditures. Table II $100.0 $90.0 $80.0 $95.5 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $ $- 1 Instruction Pupil Services Plant services Ancillary services Other (outgo) Debt service Transfers out Instruction related activities General administration Facility acquisition and construction Enterprise 13

89 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Budgeting The Budget was developed using projected revenue from state and federal sources and includes revenue generated from local sources, to include interest. The associated expenditures are budgeted at the site and District level as applicable and are aligned with the associated revenue sources to spend within allocation limits. This budget reflects the District s goal to increase student proficiency, decrease all gaps within ethnic groups, maintain safe campus clients, establish career/college pathways, and maintain fiscal solvency. The budget is amended throughout the year with revised forecasts and updates and communicated during public meetings during budget updates and interim financial reporting periods. Carryover and/or deferred revenue are included in the First Interim budget update. Expenditures are also updated and reflected in these interim reports and aligned with program needs and adjustments. A budget comparison of the Adopted Budget, Second Interim, and Unaudited Actuals for the General Fund is reflected on page 81. The variance column reflects the delta between Second Interim and Unaudited Actuals. Budgeting ( ) denotes unfavorable variance Adopted Revised Budget Budget Actual Variance Local control funding formula $ $ $ $ (0.1) Federal Revenues State Revenues Other Local Revenues Transfer In/Other Sources Total Revenues Certificated Salaries $ 60.3 $ 60.3 $ 56.3 $ 4.0 Classified Salaries (0.8) Employee Benefits (3.9) Books and Supplies Services/Other Operating Expenses (4.9) Capital Outlay (0.1) Other Outgo/Debt (0.1) Transfer of Indirect Costs (0.8) (0.8) (0.6) (0.2) Debt Service - Principal (0.1) Debt Service - Interest Transfers Out/Other Uses Total Expenditures (4.2) Inc/(Dec) in Fund Balance Beginning Fund Balance Ending Fund Balance $ 22.0 $ 22.0 $ 28.6 $

90 VALLEJO UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 FACTORS BEARING ON THE DISTRICT S FUTURE The District s staff continues to use assessments to measure and re-evaluate ways to invest in sound, educational, and programmatic activities while ensuring financial solvency. The District achieved a reserve of 5.0% for FY and we project that it will maintain its minimum reserve in FY In addition to the Local Control Funding Formula income source, the District also received approximately $44.9 million of other program funding from Federal, State, and local sources. As it relates to future State Budgets, the District s ability to predict what actions will be taken in the future by the State Legislature and Governor to address the State s current or future budget and cash management practices is limited. Future State budgets will be affected by national and State economic conditions and other factors over which the District has no control. However, in a welcome departure from the past several years, prospects for State funding are brighter due to recent improvement in California s economy and the implementation of the Local Control Funding Formula. The District s Superintendent and senior staff members will continue to work very closely with the Board of Education to monitor revenues and manage expenditures. VCUSD is totally committed to take whatever measures are necessary to maintain a stable financial position. At the same time, the District will also continue its dedicated mission to ensure improvement in academic achievement, closing achievement gaps, improving its facilities, and meeting the priorities of the Board of Education and the Vallejo community. It is the District s goal to ensure that all children receive a quality education and a positive foundation necessary for them to achieve academic success. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors, with a general overview of the District s finances and to show the District s accountability for the money it receives. If you have questions about this report or need any additional financial information, contact the Chief Business Officer, Business Services, at Vallejo City Unified School District, 665 Walnut Avenue, Vallejo, California, 94592, or at cnunley@vallejo.k12.ca.us. 15

91 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2016 EXHIBIT 1 Governmental Activities Assets Cash in county treasury (Note 2) $ 49,629,587 Cash in bank (Note 2) 165,919 Cash in revolving fund (Note 2) 150,000 Cash with fiscal agent (Note 2) 1,568,312 Accounts receivable (Note 4) 10,406,862 Stores inventories-supplies (Note 1-H.4) 223,668 Stores inventories-food (Note 1-H.4) 110,384 Prepaid expense (Note 6) 2,248,805 Other current assets 1,050 Capital assets Capital assets, not depreciated (Note 9) $ 5,682,127 Capital assets, net of depreciation (Note 9) 168,500, ,182,194 Total Assets 238,686,781 Deferred Outflows of Resources Pension related items (Note 19) 24,997,997 Liabilities Accounts payable (Note 7) 8,028,459 Unearned revenue (Note 8) 3,772,098 Long-term obligations: Current portion of long term obligations (Note 15) 9,788,354 Noncurrent portion of long term obligations (Note 15) 151,070,503 Total long-term obligations 160,858,857 Aggregate net pension liability 111,940,198 Total Liabilities 284,599,612 Deferred Inflows of Resources Pension related items (Note 19) 22,603,515 Net Position Net investment in capital assets 71,409,415 Restricted for: Capital projects 13,262,689 Debt service 4,278,592 Educational programs 4,169,376 Unrestricted (136,638,421) Total Net Position $ (43,518,349) The notes to the financial statements are an integral part of this statement. 16

92 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2016 EXHIBIT 2 Net (Expense) Revenues and Changes in Net Program Revenues Assets Expenses Charges for Services Operating Grants and Contributions Governmental Activities Governmental activities Instruction $ 100,683,867 $ 72,136 $ 24,148,347 $ (76,463,384) Instruction-related services: Supervision of instruction 4,011,130 2,354 1,457,378 (2,551,398) Instructional library, media, and technology 1,710, (1,710,077) School site administration 11,828,902 23,763 2,152,256 (9,652,883) Pupil services: Home-to-school transportation 3,379, (3,379,255) Food services 6,373, ,240 4,906,611 (902,678) All other pupil services 5,066,282 3, ,745 (4,383,692) General administration: Centralized data processing 3,026, ,054 (3,012,170) All other general administration 10,117,413 37,405 2,479,539 (7,600,469) Plant services 26,079,871 15, ,263 (25,914,615) Ancillary services 697,489-7,567 (689,922) Enterprise activities 2,337,843-2,510, ,469 Interest on long-term debt 5,706, (5,706,075) Other outgo 83, ,647 1,411,137 1,625,926 Depreciation (unallocated) 1, (1,168) Total governmental activities $ 181,103,279 $ 1,018,679 $ 39,915,209 (140,169,391) General revenues: Taxes and subventions: Property taxes, levied for general purposes Property taxes, levied for debt service Taxes levied for other specific purposes Federal and state aid not restricted to specific purposes Interest and investment earnings Miscellaneous Total general revenues Change in net assets Net Position - Beginning Net Position - Restatement (Note 17) Net Position - Ending The notes to the financial statements are an integral part of this statement. $ 24,910,330 8,450,947 4,163, ,806, ,729 4,685, ,243,519 8,074,128 (51,141,468) (451,009) (43,518,349) 17

93 VALLEJO CITY UNIFIED SCHOOL DISTRICT BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2016 EXHIBIT 3 Capital Projects Fund for Blended Component Units COP Debt Service Fund Non-major Governmental Funds Total Governmental Funds General Fund ASSETS Cash in county treasury (Note 2) $ 26,119,577 $ 12,182,616 $ 2,071,533 $ 9,247,560 $ 49,621,286 Cash in bank (Note 2) 83, , ,919 Cash in revolving fund (Note 2) 150, ,000 Cash with fiscal agent (Note 2) 50, ,418,311 1,468,312 Accounts receivable (Note 4) 8,040,746-1,285 1,887,337 9,929,368 Due from other fund (Note 5) 3,519, ,688 4,415,939 Stores inventories supplies (Note 1-H.4) 223, ,668 Stores inventories - food (Note 1-H.4) , ,384 Prepaid expenditures (Note 6) 1,371, ,372,162 Other current assets ,050 1,050 Total Assets $ 39,558,182 $ 12,182,617 $ 2,072,818 $ 13,644,471 $ 67,458,088 LIABILITIES AND FUND BALANCE Liabilities Accounts payable (Note 7) $ 4,834,655 $ 10,396 $ - $ 179,768 $ 5,024,819 Due to a Grantor Government 35, ,824 Due to other fund (Note 5) 2,338,495-1,595,145 1,896,180 5,829,820 Unearned revenue (Note 8) 3,767, ,660 3,772,098 Total Liabilities 10,976,412 10,396 1,595,145 2,080,608 14,662,561 Fund Balances Nonspendable 1,744, ,299 1,856,213 Restricted 3,787,301 12,172,221-7,756,276 23,715,798 Assigned 14,459, ,673 3,696,288 18,633,045 Unassigned 8,590, ,590,471 Total Fund Balance 28,581,770 12,172, ,673 11,563,863 52,795,527 Total Liabilities and Fund Balance $ 39,558,182 $ 12,182,617 $ 2,072,818 $ 13,644,471 $ 67,458,088 The notes to the financial statements are an integral part of this statement. 18

94 VALLEJO CITY UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2016 EXHIBIT 4 Total Governmental Fund Balance $ 52,795,527 Amounts reported for assets, deferred outflow of resources, liabilities and deferred inflows of resources for governmental activates in the statement of net position are different from amount reported in governmental funds because of Capital assets: In governmental funds, only current assets are reported. In the statement of net assets, all assets are reported, including capital assets and accumulated depreciation Capital assets at historical cost $ 314,025,168 Accumulated depreciation (139,842,974) 174,182,194 Unamortized costs: In governmental funds, debt insurance issue costs are recognized as expenditures in the period they are incurred. In the government-wide statements, debt insurance issue costs are amortized over the life of the debt. Unamortized debt insurance issue costs included in prepaid expenses on the statement of net assets are: 876,643 Deferred outflow expenditures relating to pension plans were recognized on the modified accrual basis, but are not recognized on the accrual basis. $ 24,997,997 Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is not recognized until the period in which it matures and is paid. In the government-wide statement of activities, it is recognized in the period that it is incurred. The additional liability for unmatured interest owed at the end of the period was: (2,005,140) Internal service funds: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full cost-recovery basis. Because internal service funds are presumed to operate for the benefit of governmental activities, assets and liabilities of internal service funds are reported with governmental activities in the statement of net assets. Net ending assets for internal service funds are: 100,000 The difference between the projected and actual earnings on pension plan investments are not recognized on the modified accrual basis but are recognized on the accrual basis as an adjustment to pension expense. $ (22,603,515) Long-term obligations are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term obligations at year end consist of: Community facilities district bond payable $ (19,051,626) General obligation bonds payable (68,798,392) Compensated absences payable (1,394,271) Certificates of participation payable (14,698,298) Capital lease payable (1,101,106) Other post employment benefits obligations (27,164,424) Emergency apportionment loan payable (27,713,740) Total long-term obligations other than net pension liability (159,921,857) Net pension liability (111,940,198) Total Net Position Governmental Activities $ (43,518,349) The notes to the financial statements are an integral part of this statement. 19

95 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS YEAR ENDED JUNE 30, 2016 EXHIBIT 5 Capital Projects Fund for Blended Component Units COP Debt Service Fund Non-major Governmental Funds Total Governmental Funds General Fund Revenue Local control funding formula $ 114,761,086 $ - $ - $ 3,650,154 $ 118,411,240 Federal revenue 10,598, ,682,600 16,281,195 Other state revenue 30,508, ,452,202 33,960,831 Other local revenue 6,669,512 4,187, ,604 9,562,275 20,524,142 Total Revenues 162,537,822 4,187, ,604 22,347, ,177,408 Expenditures: Instruction 92,606, ,531,565 97,137,905 Instruction-related services: Supervision of instruction 3,529, ,882 3,901,786 Instructional library, media, and technology 1,640, ,508 1,659,004 School site administration 10,465, ,087,513 11,553,264 Pupil services: Home-to-school transportation 2,982, ,982,213 Food services 1, ,396,642 6,397,887 All other pupil services 5,031, ,031,477 General administration: Centralized data processing 2,892, ,892,330 All other general administration 11,860, ,131 12,472,193 Plant services 16,251, ,748 16,396,313 Facility acquisition and construction 628, , ,397 1,526,076 Ancillary services 570, ,185 Enterprise activities 2,333, ,333,289 Other outgoing Transfers between agencies 80, ,227 Debt Service - Principal 206,791-3,125,067 5,799,077 9,130,935 Debt Service - Interest 4, ,017 5,384,386 5,846,782 Debt Service - Issuance costs and discounts - 3, ,570 Total Expenditures 151,084, ,103 3,583,084 24,828, ,915,436 Excess (deficiency) of revenue over (under) expenditures 11,453,422 3,768,648 (3,478,480) (2,481,618) 9,261,972 Other Financing Sources (Uses) Operating transfers in - - 3,580,601 3,143,359 6,723,960 Operating transfers out (3,658,852) (3,143,359) - - (6,802,211) Other sources and uses 957, ,415 Total Other Financing Sources (Uses) (2,701,437) (3,143,359) 3,580,601 3,143, ,164 Excess of revenues and other financing sources over (under) expenditures and other financing sources (uses) 8,751, , , ,741 10,141,136 Fund Balances - Beginning 19,829,785 11,546, ,552 10,902,122 42,654,391 Fund Balances-Ending $ 28,581,770 $ 12,172,221 $ 477,673 $ 11,563,863 $ 52,795,527 The notes to the financial statements are an integral part of this statement. 20

96 VALLEJO CITY UNIFIED SCHOOL DISTRICT EXHIBIT 6 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE TO THE STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2016 Total Net Change in Fund Balances Governmental Funds $ 10,141,136 Capital outlay: In governmental funds, the costs of capital assets are reported as expenditures in the period when the assets are acquired. In the statement of activities, costs of capital assets are allocated over their estimated useful lives as depreciation expense. The difference between capital outlay expenditures and depreciation expense for the period is: Expenditures for capital outlay $ 1,969,398 Depreciation expense (9,600,032) Net capital outlay (7,630,634) Debt service: In governmental funds, repayments of long-term debt are reported as expenditures. In the government-wide statements, repayments of long-term debt are reported as reductions to liabilities. Expenditures for repayment of the principal portion of long-term debt were: 9,130,935 Debt proceeds: In governmental funds, proceeds from debt are recognized as other financing sources. In the government-wide statements, proceeds from debt are reported as increases to liabilities. Amounts recognized in governmental funds as proceeds from debt, net of issue premium or discount, were: (957,415) Debt insurance issue costs: In governmental funds, debt insurance issue costs are recognized as expenditures in the period they are incurred. In the governmentwide statements, insurance issue costs are amortized over the life of the debt. The difference between debt insurance issue costs recognized in the current period and insurance issue costs amortized for the period is: (81,341) Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is recognized in the period that it becomes due. In the government-wide statement of activities, it is recognized in the period that it is incurred. Unmatured interest owing at the end of the period, less matured interest paid during the period but owing from the prior period, is: 118,117 Compensated absences: In governmental funds, compensated absences are measured by the amounts paid during the period. In the statement of activities, compensated absences are measured by the amounts earned. The difference between compensated absences paid and compensated absences earned was: 5,712 The notes to the financial statements are an integral part of this statement. 21

97 VALLEJO CITY UNIFIED SCHOOL DISTRICT EXHIBIT 6 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2016 (CONTINUED) Amortization of debt-issue premium or discount: In governmental funds, if debt is issued at a premium or at a discount, the premium or discount is recognized as an other financing source or another financing use in the period it is incurred. In the government-wide statements, the premium or discount is amortized as interest over the life of the debt. Amortization of premium or discount for the period is: 103,931 Other post-employment benefits (OPEB): In governmental funds, OPEB costs are recognized when employer contributions are made. In the statement of activities, OPEB costs are recognized on the accrual basis. This year, the difference between OPEB costs and actual employer contributions was: (3,094,350) In the governmental funds, pension costs are based on employer contributions made to pension plans during the year. However, in the Statement of Activities, pension expense is the net effect of all changes in the deferred outflows, deferred inflows and net pension liability during the year. 338,024 Internal service funds are used by the district to charge the cost of insurance to other funds on a full cost-recovery basis. Because internal service funds are presumed to benefit governmental activities, internal service activities are reported as governmental in the statement of activities. The net decrease in internal service fund was: 15 Rounding (2) Total Change in Net Assets Governmental Activities $ 8,074,128 The notes to the financial statements are an integral part of this statement. 22

98 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION PROPRIETARY FUNDS JUNE 30, 2016 EXHIBIT 7 Governmental Activities Self-Insurance Fund Assets Cash in county treasury $ 8,301 Cash with fiscal agent 100,000 Due from other funds 957,250 Total Assets 1,065,551 Liabilities Accounts payable 28,551 Other general long-term debt 937,000 Total Liabilities 965,551 Net Position Unrestricted/unappropriated $ 100,000 The notes to the financial statements are an integral part of this statement. 23

99 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS YEAR ENDED JUNE 30, 2016 EXHIBIT 8 Governmental Activities Self-Insurance Fund Operating revenues $ 60 Operating expenses: Professional services and claims payments (78,296) Operating income (loss) (78,236) Non-operating activities: Interfund transfers in (out) 78,251 Change in net position 15 Total Net Position - Beginning 99,985 Total Net Position - Ending $ 100,000 The notes to the financial statements are an integral part of this statement. 24

100 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS YEAR ENDED JUNE 30, 2016 EXHIBIT 9 Governmental Activities Self-Insurance Fund Cash flows from operating activities: Cash paid for professional services $ (52,995) Net cash provided (used) by operating activities (52,995) Cash flows from investing activities: Interest income received 60 Net cash provided (used) by investing activities 60 Cash flows from financing activities: Interfund transfers in (out) 58,000 Net cash provided (used) by financing activities 58,000 Net increase (decrease) in cash 5,065 Cash--beginning 3,236 Cash--ending $ 8,301 Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities Operating income (loss) $ (78,236) Adjustments to reconcile operating income (loss) to net cash used by operating activities: Increase (Decrease) in accounts payable 25,241 Net cash provided (used) by operating activities $ (52,995) The notes to the financial statements are an integral part of this statement. 25

101 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION FIDUCIARY FUNDS JUNE 30, 2016 EXHIBIT 10 Foundation Private Trust Fund Warrant/Pass- Through Fund Agency Fund Student Body Fund Assets Cash in county treasury $ - $ 6,540,140 $ - Cash in banks 134, ,477 Accounts receivable (Note 4) 158,783 - Due from other funds - 484,557 - Total Assets 134,063 7,183, ,477 Liabilities Due to other funds - 27,926 - Salaries and benefits payable - 7,155,554 - Due to student groups/other agencies ,477 Total Liabilities - 7,183, ,477 Net Position Unrestricted/unappropriated 134, Total Net Position $ 134,063 $ - $ - The notes to the financial statements are an integral part of this statement. 26

102 VALLEJO CITY UNIFIED SCHOOL DISTRICT STATEMENT OF CHANGES IN NET POSITON FIDUCIARY FUNDS YEAR ENDED JUNE 30, 2016 EXHIBIT 11 Foundation Private Trust Fund Additions Interest income $ 54 Fundraising income and donations 92,369 Total additions 92,423 Deductions Fundraising expenses and reimbursements (90,877) Total deductions (90,877) Change in net assets 1,546 Total Net Position - Beginning 132,517 Total Net Position - Ending $ 134,063 The notes to the financial statements are an integral part of this statement. 27

103 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES A. Accounting Policies The Vallejo City Unified School District accounts for its financial transactions in accordance with the policies and procedures of the California Department of Education s California School Accounting Manual. The accounting policies of the district conform to generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants (AICPA). B. Reporting Entity The district is the level of government primarily accountable for activities related to public education in the City of Vallejo, California, in Solano County. The Advisory Board consists of five elected officials. Oversight responsibility is derived from the governmental unit s power and includes, but is not limited to: Financial interdependency Selection of governing authority Designation of management Ability to significantly influence operations Accountability for fiscal matters The district includes all funds and other entities that are controlled by or dependent on the district's advisory board for financial reporting purposes. The district has considered all potential component units in determining how to define the reporting entity using criteria set forth in accounting principles generally accepted in the United States of America. For financial reporting purposes, the component units discussed below are reported in the district s financial statements as if they were part of the district s operations because the advisory board of the component units is essentially the same as the advisory board of the district, and because their purpose is to finance construction of facilities used for the district. The Vallejo City Unified School District and the Community Facilities Districts No. 1, No. 2, and No. 3 (CFDs) have a financial and operational relationship that meets the reporting entity definition criteria of the GASB 14, The Reporting Entity, for inclusion of the CFDs as component units of the district. Accordingly, the financial activities of the CFDs have been included in the financial statements of the district. Individually prepared financial statements are not prepared for the Corporations. 28

104 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The CFDs are community facilities districts pursuant to the provisions of the Mello-Roos Community Facilities Act of 1982 as amended by Chapter 2.5, Part I, Division 2, and Title 5 of the Government Code of the State of California established in March 30, The CFDs were formed to provide financing assistance to the district for construction, rehabilitation, and acquisition of major capital facilities to support the student population. The Mello-Roos districts financial activities are presented in the financial statements as the Capital Projects Fund for Blended Component Units. C. Implementation of Accounting Pronouncements In February 2015, the GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. The definition of fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The District has implemented the provisions of this Statement as of June 30, In June 2015, the GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. The objective of this Statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits with regard to providing decisionuseful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement No. 68. It also amends certain provisions of Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68 for pension plans and pensions that are within their respective scopes. 29

105 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The provisions in this Statement effective as of June 30, 2016, include the provisions for assets accumulated for purposes of providing pensions through defined benefit plans and the amended provisions of Statements No. 67 and No. 68. The District has implemented these provisions as of June 30, The provisions in this Statement related to defined benefit pensions that are not within the scope of Statement No. 68 are effective for periods beginning after June 15, In June 2015, the GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify in the context of the current governmental financial reporting environment the hierarchy of generally accepted accounting principles (GAAP). The "GAAP hierarchy" consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This Statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and non-authoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. This Statement supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The District has implemented the provisions of this Statement as of June 30, In December 2015, the GASB issued Statement No. 79, Certain External Investment Pools and Pool Participants. This Statement addresses accounting and financial reporting for certain external investment pools and pool participants. Specifically, it establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. An external investment pool qualifies for that reporting if it meets all of the applicable criteria established in this Statement. The specific criteria address (1) how the external investment pool transacts with participants; (2) requirements for portfolio maturity, quality, diversification, and liquidity; and (3) calculation and requirements of a shadow price. Significant noncompliance prevents the external investment pool from measuring all of its investments at amortized cost for financial reporting purposes. Professional judgment is required to determine if instances of noncompliance with the criteria established by this Statement during the reporting period, individually or in the aggregate, were significant. 30

106 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 If an external investment pool does not meet the criteria established by this Statement, that pool should apply the provisions in paragraph 16 of Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, as amended. If an external investment pool meets the criteria in this Statement and measures all of its investments at amortized cost, the pool's participants also should measure their investments in that external investment pool at amortized cost for financial reporting purposes. If an external investment pool does not meet the criteria in this Statement, the pool's participants should measure their investments in that pool at fair value, as provided in paragraph 11 of Statement No. 31, as amended. This Statement establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized cost for financial reporting purposes and for governments that participate in those pools. Those disclosures for both the qualifying external investment pools and their participants include information about any limitations or restrictions on participant withdrawals. The District has implemented the provisions of this Statement as of June 30, Upcoming Accounting Principles. In June 2015, the GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. It also includes requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement No. 43, and Statement No. 50, Pension Disclosures. The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. 31

107 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 In June 2015, the GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). It also improves information provided by state and local governmental employers about financial support for OPEB that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple- Employer Plans, for OPEB. Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, establishes new accounting and financial reporting requirements for OPEB plans. The requirements of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. In August 2015, the GASB issued Statement No. 77, Tax Abatement Disclosures. This Statement requires governments that enter into tax abatement agreements to disclose the following information about the agreements: Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients The gross dollar amount of taxes abated during the period Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement The requirements of this Statement are effective for financial statements for periods beginning after December 15, Early implementation is encouraged. In December 2015, the GASB issued Statement No. 78, Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans. The objective of this Statement is to address a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. This issue is associated with pensions provided through certain multiple-employer defined benefit pension plans and to state or local governmental employers whose employees are provided with such pensions. 32

108 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Prior to the issuance of this Statement, the requirements of Statement No. 68 applied to the financial statements of all state and local governmental employers whose employees are provided with pensions through pension plans that are administered through trusts that meet the criteria in paragraph 4 of that Statement. This Statement amends the scope and applicability of Statement No. 68 to exclude pensions provided to employees of state or local governmental employers through a costsharing multiple-employer defined benefit pension plan that (1) is not a state or local governmental pension plan, (2) is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local governmental employers, and (3) has no predominant state or local governmental employer (either individually or collectively with other state or local governmental employers that provide pensions through the pension plan). This Statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosures; and required supplementary information for pensions that have the characteristics described above. The requirements of this Statement are effective for reporting periods beginning after December 15, Early implementation is encouraged. In January 2016, the GASB issued Statement No. 80, Blending Requirements for Certain Component Units - amendment of GASB Statement No. 14. The objective of this Statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This Statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units. The requirements of this Statement are effective for reporting periods beginning after June 15, Early implementation is encouraged. In March 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements. The objective of this Statement is to improve accounting and financial reporting for irrevocable split-interest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. 33

109 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 This Statement requires that a government that receives resources pursuant to an irrevocable split-interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. Furthermore, this Statement requires that a government recognize assets representing its beneficial interests in irrevocable splitinterest agreements that are administered by a third party, if the government controls the present service capacity of the beneficial interests. This Statement requires that a government recognize revenue when the resources become applicable to the reporting period. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2016, and should be applied retroactively. Early implementation is encouraged. In March 2016, the GASB issued Statement No. 82, Pension Issues - An Amendment of GASB Statements No. 67, No. 68, and No. 73. The objective of this Statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. Specifically, this Statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer's pension liability is measured as of a date other than the employer's most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, Early implementation is encouraged. D. Basis of Presentation Government-Wide Financial Statements. The government-wide statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements but differs from the manner in which governmental fund financial statements are prepared. 34

110 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The government-wide statement of activities presents a comparison between expenses, both direct and indirect, and program revenues for each governmental function, and excludes fiduciary activity. Direct expenses are those that are specifically associated with a service, program or department and are therefore clearly identifiable to a particular function. Indirect expenses for centralized services and administrative overhead are allocated among the programs, functions and segments using a full cost allocation approach and are presented separately to enhance comparability of direct expenses between governments that allocate direct expenses and those that do not. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each governmental function is self-financing or draws from the general revenues of the district. Eliminations have been made to minimize the double counting of internal activities. Net position should be reported as restricted when constraints placed on net position use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation in the amount of $21,710,657. Fund Financial Statements. Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Nonmajor funds are aggregated and presented in a single column. The internal service fund is presented in a single column on the face of the proprietary fund statements. Governmental Funds. All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide statements are prepared. Governmental fund financial statements therefore include reconciliations with brief explanations to better identify the relationship between the government-wide statements, prepared on the accrual basis of accounting using the economic resources measurement focus, and the governmental fund statements, prepared on the modified accrual basis of accounting and using the flow of current financial resources measurement focus. 35

111 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Proprietary Funds. Proprietary funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the statement of net position. The statement of revenues, expenses and changes in fund net position presents increases (revenues) and decreases (expenses) in net total position. The statement of cash flows provides information about how the District finances and meets the cash flow needs of its proprietary fund. Fiduciary Funds. Fiduciary funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government wide financial statements because they do not represent resources of the District. E. Basis of Accounting Basis of accounting refers to when transactions are recorded in the financial records and reported in the financial statements. Government-wide financial statements are prepared using the accrual basis of accounting. Governmental fund financial statements use the modified accrual basis of accounting. Proprietary and fiduciary funds use the accrual basis of accounting. Revenues Exchange and Non-Exchange Transactions. Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded under the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the district, available means collectible within the current period or within 60 days after year-end. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to State-aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. 36

112 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Non-exchange transactions, in which the district receives value without directly giving equal value in return, include property taxes, grants, and entitlements. Under the accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants and entitlements is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which shall specify the year when the resources are to be used or the fiscal year when use is first permitted; matching requirements, in which the district must provide local resources to be used for a specific purpose; and expenditure requirements, in which the resources are provided to the district on a reimbursement basis. Under the modified accrual basis, revenue from nonexchange transactions must also be available before it can be recognized. Expenses/Expenditures. On the accrual basis of accounting, expenses are recognized at the time a liability is incurred. On the modified accrual basis of accounting, expenditures are generally recognized in the accounting period in which the related fund liability is incurred, as under the accrual basis of accounting. However, under the modified accrual basis of accounting, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Allocations of cost, such as depreciation and amortization, are not recognized in the governmental funds. When both restricted and unrestricted resources are available for use, it is the district s policy to use restricted resources first, then unrestricted resources as they are needed. F. Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. The district s funds are grouped into three broad fund categories: governmental, proprietary and fiduciary. Major Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the district s major governmental funds 37

113 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The General Fund is the chief operating fund for all districts. It is used to account for the ordinary operations of a district. All transactions except those required or permitted by law to be in another fund are accounted for in this fund. Fund 17, Special Reserve Fund for Other Than Capital Outlay Projects, and Fund 20, Special Reserve Fund for Postemployment Benefits are defined as special revenue funds in the California State Accounting Manual (CSAM) but do not meet the GASB Statement No. 54 special revenue fund definition. While these funds are authorized by statute and will remain open for internal reporting purposes, these funds function effectively as extensions of the General Fund, and accordingly have been combined with the General Fund for presentation in these audited financial statements. In addition, under the flexibility provisions of current statute that allow certain formerly restricted revenues to be used for any educational purpose, Fund 11, Adult Education Fund/Fund 14, Deferred Maintenance Fund do not currently meet the definition of special revenue funds as these funds are no longer primarily composed of restricted or committed revenue sources. As the District has not taken formal action to commit the flexed revenues formerly restricted to these programs to the continued operation of the original programs, the revenues within these fund would be considered to be available for general educational purposes, resulting in Fund 11, Adult Education Fund/Fund 14, Deferred Maintenance Fund being combined with the General Fund for presentation in these audited financial statements. As a result, the General Fund reflects an increase in assets, fund balance, revenues and expenditures of $12,086,368, $11,535,114, $4,638,664 and $3,599,842, respectively. The Capital Projects Fund for Blended Component Units is used to assess taxes for the financing of new schools and required school improvements. The COP Debt Service Fund is used to account for the interest and redemption of principal of Certificates of Participation/Special Tax Bonds. Non-major Governmental Funds: Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. The district maintains three non-major special revenue funds. The Charter Schools Fund This fund may be used by authorizing districts to account separately for the activities of district-operated charter schools that would otherwise be reported in the authorizing District's General Fund. The Child Development Fund is used to account for resources committed to child development programs maintained by the district. The Cafeteria Fund is used to account for revenues received and expenditures made to operate the district s food service program. 38

114 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Capital Project Funds are used to account for the acquisition or construction of major capital facilities (other than those financed by proprietary funds). The district maintains five non-major capital projects funds. The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued. This fund includes proceeds from the district s general obligation bonds and certificates of participation. The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections ). Expenditures are restricted to the purposes specified in Government Code Sections or to the items specified in agreements with the developer (Government Code Section 66006). The County School Facilities Fund is established to receive apportionments from the State School Facilities Fund authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants. The State School Building Lease-Purchase Fund is used primarily to account separately for state apportionments provided by Education Code sections The Special Reserve Fund for Capital Outlay Projects exists primarily to provide for the accumulation of General Fund moneys for capital outlay purposes. Debt Service Funds are used to account for the accumulation of resources for, and the payment of, long-term debt principal, interest, and related costs. The district maintains three non-major debt service funds. The Bond Interest and Redemption Fund are used for the repayment of bonds issued by the district. The Debt Service Fund for Blended Component Units is used for the accumulation of resources for and the retirement of principal and interest on the Community Facilities Districts general long-term debt. Proprietary Funds. Proprietary fund reporting focuses on the determination of operating income, changes in net assets, financial position and cash flows. The district applies all GASB pronouncements as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Proprietary funds are classified as enterprise or internal service. The district has no enterprise funds. 39

115 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Internal Service Fund. Internal service funds may be used to account for any activity for which services are provided to other funds of the District on a cost-reimbursement basis. The district operates a Self-Insurance Fund for its workers compensation that is accounted for as an internal service fund. Fiduciary Funds. Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into two classifications: investment trust funds and agency funds. Trust funds are used to account for the assets held by the district under a trust agreement for individuals, private organizations, or other governments and are therefore not available to support the district s own programs. Private-purpose trust funds are accounted for as a restricted component of the General Fund. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. Trust Funds The Private Purpose Trust Fund is used for scholarships to students. Agency Funds The Student Body Fund is used to account for transactions in raising and expending money to promote the general welfare, morale, and educational experiences of the student body. The Warrant/Pass-through Fund is used to account separately for amount collected from employees for federal taxes, state taxes, transfers to credit unions, and other contributions. G. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. 40

116 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 H. Assets, Liabilities and Fund Balance 1. Cash. Cash balances held in banks and in revolving funds are insured to $250,000 by the Federal Depository Insurance Corporation. In accordance with Education Code section 41001, the district maintains substantially all of its cash in the Solano County Treasury. The county pools these funds with those of other districts in the county and invests the cash. These pooled funds are carried at cost, which approximates market value. Interest earned is deposited quarterly into participating funds. Any investment losses are proportionately shared by all funds in the pool. The District s cash and cash equivalents are considered to be cash on hand, demand deposits, and short term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flow. 2. Receivables and Payables. Transactions among funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as interfund receivables/payables or due from and due to other funds. Interfund transactions between governmental funds and business activities are eliminated in the government-wide statements. Amounts reported as receivable or payable to fiduciary funds are included in the Statement of Net Assets as a receivable or payable to external parties. 3. Prepaid Expenditures. Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The district has the option of reporting expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The district has chosen to report the expenditures during the period benefited. 4. Stores Inventories. Inventories are recorded using the consumption method, in that inventory acquisitions are initially recorded in inventory (asset) accounts, and are charged as expenditures when used. Reported inventories are equally offset by a fund balance reserve, which indicates that these amounts are not available for appropriation and expenditure even though they are a component of net current assets. The district's central warehouse inventory and cafeteria inventory valuation is average cost. 5. Other Current Assets. Other current assets represent assets that are available or that can be made readily available to meet operating costs or to pay current liabilities. 41

117 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Capital Assets and Depreciation. The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. Capital assets are long-lived assets of the District as a whole. The District maintains a capitalization threshold as follows: infrastructure of $200,000, buildings of $100,000, Vehicles of $10,000, Donated Equipment of $10,000 and all other items at $5,000. Items purchased with a value of less than $5,000, but more than $500, shall be inventoried but not capitalized. The costs of normal maintenance and repairs that do not add to the value of the assets or materially extend the assets lives are not capitalized, but are expensed as incurred When purchased, such assets are recorded as expenditures in the governmental funds but are capitalized and depreciated over their estimated service lives in the government-wide financial statements. The valuation bases for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings and improvements, 20 to 50 years; equipment, 2 to 15 years. 7. Due to Grantor Governments. Due to Grantor Governments, represents cash received from state or federal sources that exceeds the amounts earned and which must be returned to the grantors. The account is also used if the grantors are other governmental agencies, including counties 8. Unearned Revenue. Unearned revenue arises when assets are received before revenue recognition criteria have been satisfied. Grants and entitlements received before eligibility requirements are met are recorded as unearned revenue. On governmental fund financial statements, receivables associated with non-exchange transactions that will not be collected within the availability period have also been recorded as unearned revenue. 9. Deferred Issuance Costs, Premiums and Discounts. Long-term obligations are reported as liabilities in the governmental activities column on the statement of net position. Debt premiums, discounts and insurance portion of the issuance costs are amortized over the life of the bonds using the straight-line method. In governmental fund financial statements, bond premiums and discounts, as well as debt issuance costs are recognized in the current period. The face amount of the debt is reported as other financing sources. Premiums received on debt issuance are also reported as other financing sources. Issuance costs, whether or not withheld from the actual debt proceeds, are reported as debt service expenditures. 42

118 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Deferred Outflows/Inflows of Resources. In addition to assets, the Statement of Net Position also reports deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The District reports deferred outflows of resources pension related items. In addition to liabilities, the statement of net position reports a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. The District reports deferred inflows of resources for pension related items. 11. Pensions. For purposes of measuring the net pension liability and deferred outflows and inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the California State Teachers Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) and additions to/deductions from the plans' fiduciary net position have been determined on the same basis as they are reported by CalSTRS and CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Member contributions are recognized in the period in which they are earned. Investments are reported at fair value. 12. Compensated Absences. Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide Statement of the Net Position. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. 13. Accrued Liabilities and Long-Term Obligations. All payables, accrued liabilities and long-term obligations are reported in the government-wide financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the funds. However, claims and judgments compensated absences, special termination benefits and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. Long-term obligations are not recognized as liabilities in governmental funds but are disclosed in the notes to financial statements. Debt service expenditures, including principal and interest on bonds, COP s, state loan and capital leases are recognized as expenditures in governmental funds when paid. 43

119 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Fund Balance Reserves and Designations- Governmental Funds. As of June 30, 2016, fund balances of the governmental funds are classified as follows: Nonspendable - amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact. Restricted - amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments. Committed - amounts that can be used only for specific purposes determined by a formal action of the governing board. The governing board is the highest level of decision-making authority for the District. Commitments may be established, modified, or rescinded only through resolutions or other action as approved by the governing board. Assigned - amounts that do not meet the criteria to be classified as restricted or committed but that are intended to be used for specific purposes. Under the District s adopted policy, only the governing board or chief business may assign the amounts for specific purpose. Unassigned - all other spendable amounts. Spending Order Policy when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the district considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the District considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds, as needed, unless the governing board has provided otherwise in its commitment or assignment actions. Minimum Fund Balance Policy the governing board adopted a minimum fund balance policy for the General Fund in order to protect the district against revenue shortfalls or unpredicted one-time expenditures. The policy requires a Reserve for Economic Uncertainties consisting of unassigned amounts equal to no less than three percent of General Fund expenditure and other financing uses. 15. Operating Revenues and Expenses. Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. For the District, these revenues are Interfund Insurance Premiums. Operating expenses are necessary costs incurred to provide the good or service that are the primary activity of the fund. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 44

120 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Interfund Balances. On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables." These amounts are eliminated in the governmental activities columns of the Statement of Net Position. 17. Interfund Activity. Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented on the financial statements. 18. Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. 19. Property Taxes. Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Solano bills and collects the taxes in behalf of the district. Local property tax revenues are recorded when received. NOTE 2 CASH AND INVESTMENTS Cash on hand, in banks, and in revolving fund Cash at June 30, 2016 consisted of the following: Capital Projects Fund for Blended Component Units COP Debt Service Fund Non-major Governmental Funds Total Governmental Fund Proprietary Fund Fiduciary Fund General Fund Total Deposits: Cash in banks $ 83,694 $ - $ - $ 82,225 $ 165,919 $ - $ 375,540 $ 541,459 Cash in revolving fund 150, , ,000 Cash with fiscal agent 50, ,418,311 1,468, ,000-1,568, , ,500,536 1,784, , ,540 2,259,771 Pooled Funds: Cash in county treasury 26,119,577 12,182,616 2,071,533 9,247,560 49,621,286 8,301 6,540,139 56,169,726 Total $ 26,403,271 $ 12,182,617 $ 2,071,533 $ 10,748,096 $ 51,405,517 $ 108,301 $ 6,915,679 $ 58,429,497 45

121 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The Federal Deposit Insurance Corporation (FDIC) insures cash balances held in banks and revolving funds, up to $250,000. At June 30, 2016, the carrying account of the revolving fund was $150,000. The California Government Code requires California banks and savings and loan associations to secure the District s cash deposits by pledging securities as collateral. Funds held in excess of the amount insured by FDIC, of approximately $500,000 were covered by collateral held in the pledging financial institutions trust departments but not in the name of the District. Pooled Funds In accordance with Education Code section 41001, the District maintains substantially all of its cash in the Solano County Treasury. The district is considered an involuntary participant in an external investment pool. The county pools these funds with those of school districts and other agencies in the county and invests the cash. These pooled funds of $56,169,726 are carried at cost, which approximates fair value. The average weighted average maturity of these funds was 1.1 years at June 30, Interest earned is deposited quarterly into participating funds. Any investment losses are proportionately shared by all funds in the pool. The county is restricted by Government Code section 53635, pursuant to section 53601, to invest in time deposits, U.S. government securities, state registered warrants, notes or bonds, State Treasurer s investment pool, bankers acceptances, commercial paper, negotiable certificates of deposit, and repurchase or reverse repurchase agreements. Solano County issues a separate comprehensive annual financial report that includes a financial report and required supplemental information. Copies of the Solano County financial report may be obtained from the Solano County Auditor-Controller, Solano County, 675 Texas Street, Fairfield, CA As the District s deposits are maintained in a recognized pooled investment fund under the care of a third party and the District s share of the pool does not consist of specific, identifiable investment securities owned by the County Office, no disclosure of the individual deposits and investments or related custodial credit risk classifications is required. In accordance with applicable state laws, the Solano County Treasurer may invest in derivative securities. However, at June 30, 2016 the Solano County Treasurer has represented that the Pooled Investment Fund contained no derivatives or other investments with similar risk profiles. Cash with Fiscal Agent The amount of $1,468,312 represents cash held by a bank as trustee for the repayment of Certificates of Participation, General Obligation Bonds, and Community Facilities District Bonds and for $100,000 Workers Compensation reserves. 46

122 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Foundation Private-Purpose Trust Fund and Associated Student Body Funds The amount of $375,540 which is included in the cash in banks fiduciary fund represents cash held for gifts or bequests per Education Code Section that benefit individuals, private organizations, or other governments and under which neither principal nor income may be used for purposes that support the LEA's own programs. These funds are used for gifts and bequests that are to be used for scholarships, warrant pass through, and for student activities. Interest Rate Risk The district does not have a formal investment policy that limits cash and investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. At June 30, 2016, the district had no significant interest rate risk related to cash and investments held. Credit Risk The district does not have a formal investment policy that limits its investment choices other that the limitations of state law. Concentration of Credit Risk The district does not place limits on the amount it may invest in any one issuer. At June 30, 2016, the district had no concentration of credit risk. NOTE 3 FAIR VALUEMEASUREMENTS The District categorizes the fair value measurements of its investments based on the hierarchy established by generally accepted accounting principles. The fair value hierarchy, which has three levels, is based on the valuation inputs used to measure an asset's fair value. The following provides a summary of the hierarchy used to measure fair value: Level 1 - Quoted prices in active markets for identical assets that the District has the ability to access at the measurement date. Level 1 assets may include debt and equity securities that are traded in an active exchange market and that are highly liquid and are actively traded in over-the-counter markets. Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable, such as interest rates and curves observable at commonly quoted intervals, implied volatilities, and credit spreads. For financial reporting purposes, if an asset has a specified term, a Level 2 input is required to be observable for substantially the full term of the asset. 47

123 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Level 3 - Unobservable inputs should be developed using the best information available under the circumstances, which might include the District's own data. The District should adjust that data if reasonably available information indicates that other market participants would use different data or certain circumstances specific to the District are not available to other market participants. Uncategorized - Investments in the Solano County Treasury Investment Pool and/or Local Agency Investment Funds/State Investment Pools are not measured using the input levels above because the District's transactions are based on a stable net asset value per share. All contributions and redemptions are transacted at $1.00 net asset value per share. The District's fair value measurements are as follows at June 30, 2016: Fair Value Measurements Using Level 1 Level 2 Level 3 Investment Type Fair Value Inputs Inputs Inputs Uncategorized County Pool $ 56,169,726 $ - $ - $ - $ 56,169,726 All assets have been valued using a market approach, with quoted market prices. NOTE 4 ACCOUNTS RECEIVABLE Accounts receivable at June 30, 2016, consist of the following: Non-major Total General COP Debt Governmental Governmental Fund Service Fund Funds Funds Federal $ 4,489,983 $ - $ 943,849 $ 5,433,832 State 1,456, ,863 2,367,889 Local 2,094,737 1,285 31,625 2,127,647 $ 8,040,746 $ 1,285 $ 1,887,337 $ 9,929,368 All receivables are considered collectible in full. 48

124 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 5 INTERFUND TRANSACTIONS Interfund transactions either are reported as loans, services provided, reimbursements, or transfers. Temporary loans are reported as interfund receivables and payables, as appropriate, and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures/expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers among governmental or proprietary funds are netted as part of the reconciliation to the government-wide financial statements. Pursuant to Education Code section interfund loans are expected to be repaid within the same fiscal year or in the following year if the transfer takes place within the final 120 days of a fiscal year. Interfund Receivables/Payables (Due From/Due To) As of June 30, 2016, interfund receivables and payables were as follows: Non-major Governmental Funds Due From Total Governmental Fund Proprietary Fund Fiduciary Fund General Fund Total Due to General fund $ - $ 896,688 $ 896,688 $ 957,250 $ 484,557 $ 2,338,495 COP Debt service fund 1,595,145-1,595, ,595,145 Nonmajor governmental funds 1,896,180-1,896, ,896,180 Agency fund 27,926-27, ,926 $ 3,519,251 $ 896,688 $ 4,415,939 $ 957,250 $ 484,557 $ 5,857,746 49

125 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Interfund Transfers Interfund transfers consist of operating transfers from funds receiving revenue to funds through which the resources are to be expended. Transfer In COP Debt Service Fund Non-major Government al Funds Total Governmental Fund Proprietary Fund Total Transfer Out General Fund $ 3,580,601 $ - $ 3,580,601 $ 78,251 $ 3,658,852 Capital Projects Fund for Blended Component Units - 3,143,359 3,143,359-3,143,359 $ 3,580,601 $ 3,143,359 $ 6,723,960 $ 78,251 $ 6,802,211 General Fund tranferred to Debt Service Fund to cover General Fund tranferred to Self Insurance Fund to offset Capital Projects Fund for Blended Component Units to Debt Service Fund for Blended Component to cover debt service payment. debt service payment $ 3,580,601 negative balance 78,251 $ 3,143,359 6,802,211 NOTE 6 PREPAID EXPENDITURES Prepayment as of June 30, 2016, consists of the following: Governmental Funds Net Position Total Benefits $ 199,516 $ - $ 199,516 Educational software 10,000-10,000 Van purchase 25,000-25,000 Pension 1,130,937-1,130,937 USPS Postage 6,709-6,709 Unamortized costs of issuance - 876, ,643 Total $ 1,372,162 $ 876,643 $ 2,248,805 50

126 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 7 ACCOUNTS PAYABLE Accounts payable at June 30, 2016, consist of the following: General Fund Capital Projects Fund for Blended Component Units Non-major Governmental Funds Total Governmental Funds Proprietary Fund Total Vendor Related $ 4,666,822 $ 10,396 $ 179,768 $ 4,856,986 $ 28,551 $ 4,885,537 Salary Related 167, , ,833 $ 4,834,655 $ 10,396 $ 179,768 $ 5,024,819 $ 28,551 $ 5,053,370 Additional interest payable in the Statement of Net Position includes $2,005,140 for accrued interest on long term obligations. NOTE 8 UNEARNED REVENUE Unearned revenue at June 30, 2016, consists of the following: General Governmental Governmental Fund Funds Funds Federal $ 13,297 $ 4,660 $ 17,957 State 3,434,840-3,434,840 Local 319, ,301 $ 3,767,438 $ 4,660 $ 3,772,098 51

127 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 9 CAPITALASSETS AND DEPRECIATION Balance as of Balance as of June 30, 2015 Additions Deductions June 30, 2016 Capital assets, not being depreciated: Land $ 5,682,127 $ - $ - $ 5,682,127 Work in progress 240, ,136 (893,090) - Total capital assets, not being depreciated 5,923, ,136 (893,090) 5,682,127 Capital assets being depreciated: Building 281,877, ,877,740 Land Improvements 11,727, ,090-12,620,870 Equipment 12,579,823 1,317,262 (52,654) 13,844,431 Total capital assets being depreciated 306,185,343 2,210,352 (52,654) 308,343,041 Total Capital Assets 312,108,424 2,862,488 (945,744) 314,025,168 Less accumulated depreciation for: Building 112,953,192 8,483, ,436,513 Land Improvements 8,324, ,239-8,808,042 Equipment 9,017, ,472 (52,654) 9,598,419 Total Accumulated Depreciation 130,295,596 9,600,032 (52,654) 139,842,974 Total capital assets being depreciated, net 175,889,747 (7,389,680) - 168,500,067 Governmental Activities Capital Assets, Net $ 181,812,828 $ (6,737,544) $ (893,090) $ 174,182,194 Capital assets activity for the year ended June 30, 2016, is shown below: Total Instruction $ 392,456 Instructional media and library 2,898 School administration 8,263 Pupil transportation 173,377 Food services 66,192 Other general administration 31,162 Plant Services 8,924,516 Other 1,168 $ 9,600,032 Assets consisting of building and equipment in the amount of $17,424,682 have been pledged as collateral for the Certificates of Participation described in Note

128 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 10 GENERALOBLIGATION BONDS The bonds are general obligations of the district. The board of education of the district and the board of supervisors of Solano County are empowered and are obligated to levy ad valorem taxes, without limitation of rate or amount, for the payment of interest on and principal of the bonds, upon all property subject to taxation by the district. On March 4, 1997, the district received authorization from its voters to issue $133 million of general obligation bonds. On August 16, 2002, the district issued $61,060,000 General Obligation Refunding Bonds, Series A to defease General Obligation Bonds Series 1997, 1999 and On December 18, 2002, the district issued $30,000,000 General Obligation Bonds, Series The bonds bearing interest rates of 2.00% % are scheduled to mature through On October 14, 2004 the district issued $15,000,000 General Obligation Bonds, Series The bonds bearing interest rates of 3.60% % are scheduled to mature through On November 8, 2006, the district issued $8,000,000 General Obligation Bonds, Series 2006, the final issuance. The bonds bearing interest rates of 3.60% % are scheduled to mature through The outstanding general obligation debt of the district as of June 30, 2016 is as follows: General Obligation Bond Interest Rate Date of Issue Maturity Date Amount of Original Issue Outstanding July 1, 2015 Redeemed During Year Outstanding June 30, 2016 Refunding 2002, Series A 2.20% % $ 61,060,000 $ 41,535,000 $ 3,225,000 $ 38,310,000 Election 1997, Series % % ,000,000 16,600,000 50,000 16,550,000 Election 1997, Series % % ,000,000 10,965, ,000 10,435,000 Election 1997, Series % % ,000,000 3,035, ,000 2,640,000 Premium 1,824, ,051 84, ,392 Total $ 115,884,652 $ 73,083,051 $ 4,284,659 $ 68,798,392 The annual requirements to amortize the general obligation bonds are as follows: Refunding 2002 Year Ended June 30 Principal Interest Total 2017 $ 3,540,000 $ 2,251,735 $ 5,791, ,975,000 2,041,990 6,016, ,420,000 1,806,580 6,226, ,940,000 1,544,325 6,484, ,485,000 1,251,390 6,736, ,950,000 2,080,340 18,030,340 Total $ 38,310,000 $ 10,976,360 $ 49,286,360 53

129 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Election Series 2002 Year Ended June 30 Principal Interest Total 2017 $ - $ 815,375 $ 815, , , , , , , , , ,850,000 3,883,313 8,733, ,700, ,500 12,292,500 Total $ 16,550,000 $ 8,552,688 $ 25,102,688 Election Series 2004 Year Ended June 30 Principal Interest Total 2017 $ 550,000 $ 444,899 $ 994, , , , , , , , ,764 1,001, , ,264 1,001, ,735,000 1,304,602 5,039, ,710, ,493 4,072,493 Total $ 10,435,000 $ 3,665,080 $ 14,100,080 Election 1997 Series 2006 Year Ended June 30 Principal Interest Total 2017 $ 405,000 $ 93,158 $ 498, ,000 78, , ,000 62, , ,000 46, , ,000 28, , ,000 9, ,500 Total $ 2,640,000 $ 318,067 $ 2,958,067 NOTE 11 CERTIFICATES OF PARTICIPATION On June 1, 2003, the district issued $25,425,000 Refunding Certificates of Participation to defease the district s 1999 Certificates of Participation, two existing capital lease purchase obligations and a loan payable. Principal is due on June 1, in each of the years and interest is payable semi-annually on each June 1 and December 1. 54

130 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The outstanding Certificates of Participation debt of the district as of June 30, 2016, are as follows: Certificates of Participation Bond Interest Rate Date of Issue Maturity Date Amount of Original Issue Outstanding July 1, 2015 Redeemed During Year Outstanding June 30, 2016 Refunding % $ 25,425,000 $ 15,695,000 $ 790,000 $ 14,905,000 Discount (398,637) (221,466) (14,764) (206,702) $ 25,026,363 $ 15,473,534 $ 775,236 $ 14,698,298 The principal and interest payments of the certificates of participation are as follows: Year Ended June 30 Principal Interest Total 2017 $ 815,000 $ 612,149 $ 1,427, , ,809 1,427, , ,544 1,431, , ,104 1,428, , ,704 1,431, ,355,000 1,791,796 7,146, ,150, ,238 5,708,238 Total $ 14,905,000 $ 5,096,344 $ 20,001,344 NOTE 12 COMMUNITY FACILITIES DISTRICT (CFD) BONDED DEBT On July 24, 2001, the district issued $19,305,000 Special Tax Bonds (Series 2001). The bonds are issued pursuant to the Mello-Roos Community Facilities Act of 1982 and a Fiscal Agent Agreement dated as of August 1, 2001, by and between the school district and BYN Western Trust Company, as fiscal agent. The net proceeds of the bonds, together with other funds, were used to refund outstanding Vallejo City Unified School District Community Facilities District No. 2 Special Tax Bonds, Series 1991 refunding bonds, in the principal amount of $6,730,000. The proceeds of the bonds were also used to provide funds for the Series 2001 project, to pay the premium for a municipal bond debt service reserve insurance policy issued by Financial Security Assurance Inc., in a dollar amount equal to the bond reserve requirement and to pay costs of issuance of the bonds. On January 25, 2007, the district issued Special Tax Bonds in the aggregate principal amount of $7,360,000 (Series 2007). The Series 2007 bonds were authorized by the registered landowners voting in the Community Facilities District at an election held on April 18, 1989 with the Bank of New York as the Fiscal Agent. The proceeds from both issuances were also used to provide funds for the designated projects, to pay the premium for a municipal bond debt service reserve insurance policy issued by Financial Security Assurance Inc., in a dollar amount equal to the bond reserve requirement and to pay costs of issuance of the bonds. 55

131 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The outstanding CFD bond debt of the district as of June 30, 2016, is as follows: CFD Special Tax Bond Interest Rate Date of Issue Maturity Date Amount of Original Issue Outstanding July 1, 2015 Redeemed During Year Outstanding June 30, 2016 Series % -5.00% $ 19,305,000 $ 14,105,000 $ 550,000 $ 13,555,000 Discount (200,258) (109,818) (6,460) (103,358) Series % -5.00% ,360,000 5,780, ,000 5,535,000 Premium 108,305 69,316 4,332 64,984 Total $ 26,573,047 $ 19,844,498 $ 792,872 $ 19,051,626 The principal and interest payments of the certificates of participation are as follows: Series 2001 Year Ended June 30 Principal Interest Total 2017 $ 575,000 $ 661,570 $ 1,236, , ,070 1,233, , ,935 1,232, , ,875 1,235, , ,875 1,231, ,040,000 2,112,250 6,152, ,160, ,500 6,127, ,190,000 29,750 1,219,750 Total $ 13,555,000 $ 6,114,825 $ 19,669,825 Series 2007 Year Ended June 30 Principal Interest Total 2017 $ 255,000 $ 218,903 $ 473, , , , , , , , , , , , , ,660, ,413 2,344, ,040, ,204 2,353, ,000 9, ,545 Total $ 5,535,000 $ 1,993,677 $ 7,528,677 NOTE 13 EMERGENCY APPORTIONMENT LOAN On June 21, 2004, Senate Bill 1190, Chapter 53, Statutes of 2004, was enacted. This legislation provided an emergency apportionment loan to the district of $60 million. This loan provides a floating line of credit. As of June 24, 2004, the district received $50 million of the apportionment loan amount. The legislation requires the district repay the loan, including interest at a rate of 1.50%, which the rate is earned by the State s Pooled Money Investment account on the effective date of Senate Bill The bill provides that the loan be repaid over a 20-year period. 56

132 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 On December 1, 2005, the State of California refinanced $20,642,992 of the district s loan through the issuance of State School Fund Apportionment Lease Revenue Bonds, Series A The district will make monthly principal and interest payments from July to January to California Infrastructure and Economic Development Bank (I-Bank). Pursuant to Education Code section , the state will make make-whole payments, which is the difference in interest between the average pooled money investment account rate and I-Bank interest rate. On March 24, 2008, the district drew down the remaining $10 million of the $60 million authorized emergency apportionment loan. The legislation requires the district repay the loan, including interest at a rate of 1.5%. The funds were placed in the special reserve fund to be used to pay off this loan within a few years, or earlier, if pending audit findings are resolved. All of the State Emergency Loan payments are deducted from the district s monthly apportionments. The outstanding emergency apportionment loan debt of the district as of June 30, 2016 is as follows: Emergency Apportionment Interest Rate Date of Issue Maturity Date Amount of Original Issue Outstanding July 1, 2015 Redeemed During Year Outstanding June 30, 2016 I-Bank 1.50% $ 20,642,992 $ 11,011,991 $ 1,151,962 $ 9,860,029 Premium $ 687, ,544 36, ,380 State of California 1.50% $ 50,000,000 (1) 13,336,230 1,395,102 11,941,128 State of California 1.50% $ 10,000,000 6,186, ,004 5,608,203 $ 30,874,972 $ 3,161,232 $ 27,713,740 57

133 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The annual requirements to amortize the emergency state apportionment loans are as follows: State of California Emergency Apportionment Loan $50 Million Loan (1) $10 Million Loan Year ended June 30 Principal Interest Total Principal Interest Total 2017 $ 1,416,028 $ 179,117 $ 1,595,145 $ 586,674 $ 84,123 $ 670, ,437, ,877 1,595, ,474 75, , ,458, ,317 1,595, ,406 66, , ,480, ,435 1,595, ,472 57, , ,502,921 92,224 1,595, ,674 48, , ,645, ,053 4,785,426 2,585,503 97,678 2,683,181 Subtotal $ 11,941,128 $ 820,023 $ 12,761,151 $ 5,608,203 $ 428,963 $ 6,037,166 State of California Emergency Apportionment Loan Total Year ended June 30 Principal Interest Total 2017 $ 2,002,702 $ 263,240 $ 2,265, ,032, ,200 2,265, ,063, ,708 2,265, ,094, ,760 2,265, ,125, ,347 2,265, ,230, ,731 7,468,607 Subtotal $ 17,549,331 $ 1,248,986 $ 18,798,317 I-Bank Loan Year ended June 30 Principal Interest Total 2017 $ 1,169,242 $ 147,900 $ 1,317, ,186, ,362 1,317, ,204, ,560 1,317, ,222,651 94,491 1,317, ,240,991 76,152 1,317, ,835, ,645 3,951,428 Subtotal 9,860, ,110 10,537,139 Total $ 27,409,360 $ 1,926,096 $ 29,335,456 (1) Loan was partially refinanced by 12/1/05 leaving a remaining principal balance of $25,000,000. NOTE 14 SELF-INSURANCE OBLIGATION Self-insurance obligation represents the district s estimated long-term liability to cover selfinsured claims. As of June 30, 2016, the district s obligation was $937,000, which is based upon its actuarial report as of June 30,

134 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 15 LONG-TERM DEBT SCHEDULE OF CHANGES Long term debt activity for the year ended June 30, 2016, is shown below: Balance as of Audit Adjustment Balance as of Balance as of Due Within June 30, 2015 Restatements July 1, 2015 Additions Deductions June 30, 2016 One Year Bonds and notes payable CFD bonded debt $ 19,885,000 $ - $ 19,885,000 $ - $ (795,000) $ 19,090,000 $ 830,000 Bond Discount (40,502) - (40,502) - 2,128 (38,374) (2,128) Total CFD bonded debt 19,844,498-19,844,498 - (792,872) 19,051, ,872 General obligation bond 72,135,000-72,135,000 - (4,200,000) 67,935,000 4,495,000 Bond Premium 948, ,051 - (84,659) 863,392 84,659 Total General Obligation Bond 73,083,051-73,083,051 - (4,284,659) 68,798,392 4,579,659 Certificates of participation 15,695,000-15,695,000 - (790,000) 14,905, ,000 Bond Discount (221,466) - (221,466) - 14,764 (206,702) (14,764) Total Certificates of participation 15,473,534-15,473,534 - (775,236) 14,698, ,236 State emergency apportionment loan 30,534,428-30,534,428 - (3,125,068) 27,409,360 3,171,944 Bond Premium 340, ,544 - (36,164) 304,380 36,164 Total State emergency appotionment loan 30,874,972-30,874,972 - (3,161,232) 27,713,740 3,208,108 Total 139,276, ,276,055 - (9,013,999) 130,262,056 9,415,875 Other liabilities Compensated absences 1,399,983-1,399,983 - (5,712) 1,394,271 - Capital leases obligations 428,174 (63,616) 364, ,415 (220,867) 1,101, ,479 Self-insurance obligation 1,123,000-1,123,000 - (186,000) 937,000 - Other postemployment benefits 23,555, ,625 24,070,074 3,094,350-27,164,424 - Total 26,506, ,009 26,957,615 4,051,765 (412,579) 30,596, ,479 $ 165,782,661 $ 451,009 $ 166,233,670 $ 4,051,765 $ (9,426,578) $ 160,858,857 $ 9,788,354 Payments on the District s long-term are funded by local revenues from the following funds: General obligation bonds are made by the bond interest and redemption fund. Certificates of participation are made by COP debt service fund. CFD bonds are made by debt service fund for blended component units. Emergency Loans are paid by general fund and special reserve fund for other than capital outlay. Capital leases are paid by general fund and cafeteria special revenue fund. The compensated absences, other post-employment benefits, and self-insurance obligations, will be paid by the fund for which the employee worked. 59

135 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The District has entered into agreements to lease various vehicles and copiers. Such agreements are, in substance, purchases (capital leases) and are reported as capital lease obligations. The District's liability on lease agreements with options to purchase is summarized below: Equipment $ 2,856,880 Less: Accumulated depreciation (1,382,078) Total $ 1,474,802 Year ending June 30 Principal Interest Total 2017 $ 372,479 $ 7,119 $ 379, ,497 23, , ,221 15, ,859 $ 1,101,106 $ 54,431 $ 1,155,537 NOTE 16 GENERAL LONG-TERM DEBT DEBT SERVICE REQUIREMENTS General Obligation Bonds Community Facilities Bonds Year ended June 30 Principal Interest Total Principal Interest Total 2017 $ 4,495,000 $ 3,605,167 $ 8,100,167 $ 830,000 $ 880,473 $ 1,710, ,965,000 3,359,514 8,324, , ,573 1,706, ,445,000 3,085,807 8,530, , ,638 1,705, ,010,000 2,782,630 8,792, , ,378 1,707, ,600,000 2,446,329 9,046, , ,778 1,701, ,010,000 7,277,755 32,287,755 5,700,000 2,796,663 8,496, ,410, ,993 16,364,993 7,200,000 1,280,704 8,480, ,650,000 39,295 1,689,295 $ 67,935,000 $ 23,512,195 $ 91,447,195 $ 19,090,000 $ 8,108,502 $ 27,198,502 Emergency Apportionment Loans Certificates of Participation Year ended June 30 Principal Interest Total Principal Interest Total 2017 $ 3,171,944 $ 411,140 $ 3,583,084 $ 815,000 $ 612,149 $ 1,427, ,219, ,562 3,583, , ,809 1,427, ,267, ,268 3,583, , ,544 1,431, ,316, ,251 3,583, , ,104 1,428, ,366, ,499 3,583, , ,704 1,431, ,066, ,376 11,420,035 5,355,000 1,791,796 7,146, ,150, ,238 5,708,238 $ 27,409,360 $ 1,926,096 $ 29,335,456 $ 14,905,000 $ 5,096,344 $ 20,001,344 60

136 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Total Debt Service Year ended June 30 Principal Interest Total 2017 $ 9,311,944 $ 5,508,929 $ 14,820, ,894,522 5,147,458 15,041, ,497,816 4,753,257 15,251, ,186,833 4,324,363 15,511, ,906,586 3,856,310 15,762, ,131,659 12,219,590 59,351, ,760,000 2,793,935 30,553, ,650,000 39,295 1,689,295 $ 129,339,360 $ 38,643,137 $ 167,982,497 NOTE 17 RESTATEMENT OF NET POSITION Statement of Net Position Net Position - Beginning $ (51,141,468) Other Post Employment Benefit Plan (514,625) Capital Leases 63,616 Total Restatements (451,009) Net Position - Beginning as Restated $ (51,592,477) NOTE 18 JOINT VENTURES (JOINT POWERS AGREEMENTS) The district is a member of the Alliance of Schools for Cooperative Insurance Programs (SCIP), a public entity risk pool. The district pays an annual premium to the entity for property loss and automobile liability coverage. The relationship between the Vallejo City Unified School District and the Alliance of Schools for Cooperative Insurance Programs is such that the Joint Powers Authority (JPA) is not a component unit of the district for financial reporting purposes. The JPA arranges and/or provides coverage for their members. The JPA is governed by a board consisting of representatives elected from member districts. The board controls the operations of the JPA, including selection of management and approval of operating budgets. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionately to their participation in the JPA. 61

137 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The following is a summary of the financial information for the Alliance of Schools for Cooperative Insurance Programs at June 30, 2015: Total assets $ 408,305,221 Total liabilities (223,490,351) Total net assets $ 184,814,870 Total revenues $ 271,770,851 Net expenses (244,523,682) Change in net assets $ 27,247,169 The relationship between Vallejo City Unified School District and the Alliance of Schools for Cooperative Insurance Programs is such that the Joint Powers Authority is not a component unit of the district for financial reporting purposes. Schools Excess Liability Fund (SELF) JPA The Vallejo City Unified School District is not a member of the Schools Excess Liability Fund (SELF) JPA. However, the district participates in SELF s excess liability coverage for up to $20,000,000 per occurrence over the district s primary $5 million retention. SELF services California schools insurance and other risk management needs. SELF is governed by a Board of Directors consisting of 17 member elected directors plus alternates. The following is a summary of the financial information for SELF s Excess Liability Fund at June 30, 2015: Total assets $ 139,086,680 Total liabilities (117,552,059) Total net assets $ 21,534,621 Total revenues $ 13,898,598 Net expenses (24,553,606) Change in net assets $ (10,655,008) 62

138 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 19 EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Academic employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). The District implemented GASB Statements No. 68 and No. 71 for the fiscal year ended June 30, For the year ended June 30, 2016, the District reported its proportionate share of the net pension liabilities, pension expense and deferred inflow of resources for each of the above plans and a deferred outflow of resources for each of the above plans as follows: Collective Deferred Collective Net Outflows of Collective Deferred Collective Pension Plan Pension Liability Resources Inflow of Resources Pension Expense CalSTRS $ 78,309,471 $ 13,322,924 $ 13,862,116 $ 6,247,322 CalPERS 33,630,727 11,657,073 8,741,399 3,409,024 Total $ 111,940,198 $ 24,979,997 $ 22,603,515 $ 9,656,346 The details of each plan are as follows: California State Teachers' Retirement System (CalSTRS) Plan Description The District contributes to the State Teachers Retirement Plan (STRP) administered by the California State Teachers' Retirement System (CalSTRS). STRP is a cost-sharing multipleemployer public employee retirement system defined benefit pension plan. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2014, annual actuarial valuation report, Defined Benefit Program Actuarial Valuation. This report and CalSTRS audited financial information are publically available reports that can be found on the CalSTRS website under Publications at: 63

139 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Benefits Provided The STRP provides retirement, disability and survivor benefits to beneficiaries. Benefits are based on members' final compensation, age and years of service credit. Members hired on or before December 31, 2012, with five years of credited service are eligible for the normal retirement benefit at age 60. Members hired on or after January 1, 2013, with five years of credited service are eligible for the normal retirement benefit at age 62. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service. The STRP is comprised of four programs: Defined Benefit Program, Defined Benefit Supplement Program, Cash Balance Benefit Program and Replacement Benefits Program. The STRP holds assets for the exclusive purpose of providing benefits to members and beneficiaries of these programs. CalSTRS also uses plan assets to defray reasonable expenses of administering the STRP. Although CalSTRS is the administrator of the STRP, the state is the sponsor of the STRP and obligor of the trust. In addition, the state is both an employer and nonemployer contributing entity to the STRP. The District contributes exclusively to the STRP Defined Benefit Program, thus disclosures are not included for the other plans. The STRP provisions and benefits in effect at June 30, 2016, are summarized as follows: STRP Defined Benefit Program Hire date On or before December 31, 2012 On or after January 1, 2013 Benefit formula 2% at 60 2% at 62 Benefit vesting schedule 5 years of service 5 years of service Benefit payments Monthly for life Monthly for life Retirement age Monthly benefits as a percentage of eligible compensation 2.0% - 2.4% 2.0% - 2.4% Required employee contribution rate 9.20% 8.56% Required employer contribution rate 10.73% 10.73% Required State contribution rate % % Contributions Required member, District and State of California contributions rates are set by the California Legislature and Governor and detailed in Teachers' Retirement Law. The contributions rates are expressed as a level percentage of payroll using the entry age normal actuarial method. In accordance with AB 1469, employer contributions into the CalSTRS will be increasing to a total of 19.1 percent of applicable member earnings phased over a seven-year period. The contribution 64

140 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 rates for each plan for the year ended June 30, 2016, are presented above and the District's total contributions were $6,136,697. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2016, the District reported a liability for its proportionate share of the net pension liability that reflected a reduction for State pension support provided to the District. The amount recognized by the District as its proportionate share of the net pension liability, the related state support and the total portion of the net pension liability that was associated with the District were as follows: Total net pension liability, including State share: District's proportionate share of net pension liability $ 78,309,471 State's proportionate share of net pension liability associated with the District 41,417,078 Total $ 119,726,549 The net pension liability was measured as of June 30, The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts and the State, actuarially determined. The District's proportionate share for the measurement period June 30, 2015 and June 30, 2014 respectfully was percent and percent, resulting in a net increase of percent. For the year ended June 30, 2016, the District recognized pension expense of $6,247,322. In addition, the District recognized pension expense and revenue of $3,665,430 for support provided by the State. At June 30, 2016, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Pension contributions subsequent to measurement date $ 6,136,697 $ - Net change in proportionate share of net pension liability 1,016,175 - Differences between projected and actual earnings on plan investments 6,170,052 12,553,547 Differences between expected and actual experience in - 1,308,569 the measurement of total pension liability $ 13,322,924 $ 13,862,116 65

141 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent year. The deferred outflows (inflows) of resources related to the difference between the projected and actual earnings on pension plan investments will be amortized over a closed five-year period and will be recognized in pension expense as follows: Deferred Outflows Year Ended (Inflows of June 30, Resources) 2017 $ (2,642,002) 2019 (2,642,002) 2019 (2,642,002) ,542,511 Total $ (6,383,495) The deferred outflow of resources related to the net change in proportionate share of net pension liabilities and differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the measurement period is 7 years and will be recognized in pension expense as follows: Deferred Outflows Year Ended (Inflows of June 30, Resources) 2017 $ (48,733) 2019 (48,733) 2019 (48,733) 2020 (48,733) 2021 (48,733) Thereafter $ (48,729) (292,394) 66

142 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Actuarial Methods and Assumptions Total pension liability for STRP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2014, and rolling forward the total pension liability to June 30, The financial reporting actuarial valuation as of June 30, 2014, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date June 30, 2014 Measurement date: June 30, 2015 Experience study July 1, 2006 through June 30, 2010 Actuarial cost method Entry age normal Discount rate 7.60% Investment rate of return 7.60% Consumer price inflation 3.00% Wage growth 3.75% CalSTRS uses custom mortality tables to best fit the patterns of mortality among its members. These custom tables are based on RP2000 series tables adjusted to fit CalSTRS experience. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. The best estimate ranges were developed using capital market assumptions from CalSTRS general investment consultant. Based on the model for CalSTRS consulting actuary' investment practice, a best estimate range was determined be assuming the portfolio is re-balanced annually and that the annual returns are lognormally distributed and independently from year to year to develop expected percentile for the long-term distribution of annualized returns. The assumed asset allocation is based on Teachers Retirement Board of the California State Teachers Retirement System board policy for target asset allocation in effect on February 2, 2012, the date the current experience study was approved by the board. Best estimates of 10- year geometric real rates of return and the assumed asset allocation for each major asset class used as input to develop the actuarial investment rate of return are summarized in the following table: Long-Term Assumed Asset Expected Real Asset Class Allocation Rate of Return Global equity 47% 4.50% Private equity 12% 6.20% Real estate 15% 4.35% Inflation sensitive 5% 3.20% Fixed income 20% 0.20% Cash/liquidity 1% 0.00% 67

143 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Discount Rate The discount rate used to measure the total pension liability was 7.60 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Projected inflows from investment earnings were calculated using the long-term assumed investment rate of return (7.60 percent) and assuming that contributions, benefit payments and administrative expense occurred midyear. Based on these assumptions, the STRP's fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Discount Rate Liability 1% decrease (6.60%) $ 118,241,207 Current discount rate (7.60%) $ 78,309,471 1% increase (8.60%) $ 45,122,977 California Public Employees Retirement System (CalPERS) Plan Description Qualified employees are eligible to participate in the School Employer Pool (SEP) under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2014 annual actuarial valuation report, Schools Pool Actuarial Valuation, This report and CalPERS audited financial information are publically available reports that can be found on the CalPERS website under Forms and Publications at: 68

144 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Benefits Provided CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of service credit, a benefit factor and the member's final compensation. Members hired on or before December 31, 2012, with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. Members hired on or after January 1, 2013, with five years of total service are eligible to retire at age 52 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after five years of service. The Basic Death Benefit is paid to any member's beneficiary if the member dies while actively employed. An employee's eligible survivor may receive the 1957 Survivor Benefit if the member dies while actively employed, is at least age 50 (or 52 for members hired on or after January 1, 2013), and has at least five years of credited service. The cost of living adjustments for each plan are applied as specified by the Public Employees' Retirement Law. The CalPERS provisions and benefits in effect at June 30, 2016, are summarized as follows: School Employer Pool (CalPERS) Hire date On or before December 31, 2012 On or after January 1, 2013 Benefit formula 2% at 55 2% at 62 Benefit vesting schedule 5 years of service 5 years of service Benefit payments Monthly for life Monthly for life Retirement age Monthly benefits as a percentage of eligible compensation 1.1% - 2.5% 1.0% - 2.5% Required employee contribution rate 7.000% 6.000% Required employer contribution rate % % Contributions Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Total plan contributions are calculated through the CalPERS annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. The contributions rates are expressed as percentage of annual payroll. The contribution rates for each plan for the year ended June 30, 2016, are presented above and the total District contributions were $3,303,

145 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions As of June 30, 2016, the District reported net pension liabilities for its proportionate share of the CalPERS net pension liability totaling $33,630,727. The net pension liability was measured as of June 30, The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts, actuarially determined. The District's proportionate share for the measurement period June 30, 2015 and June 30, 2014, respectively was percent and percent, resulting in a net increase in the proportionate share of percent. For the year ended June 30, 2016, the District recognized pension expense of $3,409,024. At June 30, 2016, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Pension contributions subsequent to measurement date $ 3,303,213 $ - Net change in proportionate share of net pension liability 908,326 - Difference between projectd and actual earnings on pension plan investments 5,523,489 6,675,034 Differences between expected and actual experience in the measurement of the total pension liability 1,922,045 - Change in assumptions - 2,066,365 Total $ 11,657,073 $ 8,741,399 The deferred outflow of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent year. The deferred inflow of resources will be amortized over a closed fiveyear period and will be recognized in pension expense as follows: Deferred Year Ended Outlflows/(Inflows) June 30, of Resources 2017 $ (844,139) 2018 (844,139) 2019 (844,139) ,380,872 Total $ (1,151,545) 70

146 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The deferred outflows/(inflows) of resources related to the net change in proportionate share of net pension liability, changes of assumptions, and differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the measurement period is 3.9 years and will be recognized in pension expense as follows Deferred Outflows Year Ended (Inflows) of June 30, Resources 2017 $ 263, , $ 237, ,006 Actuarial Methods and Assumptions Total pension liability for the SEP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2014, and rolling forward the total pension liability to June 30, The financial reporting actuarial valuation as of June 30, 2014, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date June 30, 2014 Measurement date June 30, 2015 Experience study July 1, 1997 through June 30, 2011 Actuarial cost method Discount rate 7.65% Investment rate of return 7.65% Entry age normal Consumer price inflation 2.75% Wage growth Varies by entry age and service Mortality assumptions are based on mortality rates resulting from the most recent CalPERS experience study adopted by the CalPERS Board. For purposes of the post-retirement mortality rates, those revised rates include five years of projected ongoing mortality improvement using Scale AA published by the Society of Actuaries. 71

147 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound returns were calculated over the short-term (first ten years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Long-Term Assumed Asset Expected Real Asset Class Allocation Rate of Return Global equity 51% 5.25% Global fixed income 19% 0.99% Private equity 10% 6.83% Real estate 10% 4.50% Inflation sensitive 6% 0.45% Infrastructure and Forestland 2% 4.50% Liquidity 2% -0.55% Discount Rate The discount rate used to measure the total pension liability was 7.65 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Based on these assumptions, the School Employer Pool fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Discount Rate Liability 1% decrease (6.65%) $ 54,736,810 Current discount rate (7.65%) $ 33,630,727 1% increase (8.65%) $ 16,079,609 72

148 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Social Security As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (CalSTRS or CalPERS) must be covered by Social Security or an alternative plan. The District has elected to use the social security. Contributions made by the District and an employee vest immediately. The District contributes 7.65 percent of an employee's gross earnings. An employee is required to contribute 7.65 percent of his or her gross earnings to the pension plan. On Behalf Payments The State of California makes contributions to CalSTRS on behalf of the District. These payments consist of State General Fund contributions to CalSTRS in the amount of $3,665,430 ( percent of annual payroll). Contributions are no longer appropriated in the annual Budget Act for the legislatively mandated benefits to CalPERS. Therefore, there is no on behalf contribution rate for CalPERS. Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budgeted amounts reported in the General Fund - Budgetary Comparison Schedule. 73

149 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 20 - OPEB COST AND NET OPEB OBLIGATION The District's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District's net OPEB obligation to the Plan: Year Ended June 30, Calculation of the Annual OPEB Expense a. ARC for current fiscal year $ 6,865,579 c. Adjustment to the ARC (1,256,990) d. Annual OPEB Expense (a + b + c) 6,571, Calculation of Employer Contribution a. Contribution to CalPERS for retirees 2,252,156 b. Estimated Current year's implicity subsidy 1,224,886 c. Contribution to OPEB trust - d. Total Employer Contribution 3,477, Change in Net OPEB Obligation (1.d. minus 2.c.) 3,094,350 Net OPEB Obligation, beginning of the fiscal year 23,555,449 Restatement 514,625 Restated Net OPEB Obligation, at the beginning of fiscal year 24,070,074 Net OPEB Obligation, at the fiscal year end $ 27,164,424 74

150 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for 2016 was as follows: Annual Employer Net OPEB Fiscal Year OPEB OPEB Percentage Obligation Ended Cost Contribution Contributed (Asset) 6/30/2014 $ 5,981,904 $ 2,135, % $ 19,945,825 6/30/2015 $ 6,571,392 $ 2,687, % $ 23,555,449 6/30/2016 $ 6,571,392 $ 3,477, % $ 27,164,424 Funded Status and Funding Progress Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 75

151 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 In the October 2015, actuarial valuation as of July 1, 2013, the entry age normal method was used. The actuarial assumption was based on the pay-as-you-go basis using a 4.0% interest rate. This way of financing benefits is not a funding method, because no assets are accumulated. The cost allocated to each year is the actual benefits paid. The annual payment might be claims costs, total premiums, or the total of stipends paid by the employer which represent part of the premiums included a 6.5 percent investment rate of return (net of administrative expenses), based on assumed long term return on plan assets or employer assets, as appropriate. Healthcare cost trend rate is 4.5 percent with the assumption that trend increases in excess of general inflation result in fundamental changes in health care finance and/or delivery which will bring increases in health care costs more closely in line with general inflation. The UAAL is being amortized at a level percentage of payroll method. The initial UAAL is amortized using a closed amortization period of 30 years. The remaining amortization period at June 30, 2016, was 21 years. The residual UAAL is amortized using an open amortization period of 30 years. The actuarial value of assets is assumed to be zero. NOTE 21 - COMMITMENTS AND CONTINGENCIES Grants The District received financial assistance from federal and state agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the general fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, Construction Commitments There were no significant construction commitments as of June 30,

152 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 Litigation The District is involved in litigation on various matters arising in the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending has an estimated potential range of loss, in excess of insurance deductibles and is not expected to have a material adverse effect on the overall financial position of the District at June 30, NOTE 22 FUND BALANCES Fund balances are composed of the following elements: Capital Projects Fund for Blended Component COP Debt Nonmajor Governmental Total Governmental General Fund Units Service Fund Funds Funds Nonspendable Revolving cash $ 150,000 $ - $ - $ - $ 150,000 Stores inventory 223, , ,051 Prepaid expenditures 1,371, ,372,162 Total Nonspendable 1,744, ,299 1,856,213 Restricted Legally restricted programs 3,787, ,076 4,169,377 Capital Projects - 12,172,221-1,090,468 13,262,689 Debt Services ,283,732 6,283,732 Total Restricted 3,787,301 12,172,221-7,756,276 23,715,798 Assigned Special Revenues 14,459, ,531,369 15,990,453 Capital Projects ,145,519 2,145,519 Debt Services ,673 19, ,073 Total Assigned 14,459, ,673 3,696,288 18,633,045 Unassigned Reserve for economic uncertainties 5,194, ,194,879 Remaining unassigned 3,395, ,395,592 Total Unassigned 8,590, ,590,471 Total $ 28,581,770 $ 12,172,221 $ 477,673 $ 11,563,863 $ 52,795,527 77

153 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 NOTE 23 EXPENDITURES (BUDGET VERSUS ACTUAL) At June 30, 2016 expenditures by major object exceeded the budgeted amounts as follows: Final Budget Actual Variance Expenditures: Classified salaries $ 25,415,579 $ 26,187,570 $ (771,991) Employee Benefits * 29,550,814 33,364,370 (3,813,556) Services and other operating expenditures 19,570,552 24,490,676 (4,920,124) Capital outlay 718, ,552 (100,776) Other outgoing - 80,227 (80,227) Transfer of indirect costs (848,648) (610,611) (238,037) Debt service - principal 160, ,791 (46,791) *Budget excludes STRS on behalf amounts that are included in actual. NOTE 24 - SUBSEQUENT EVENTS The district has reviewed all events occurring from June 30, 2016 through December 23, 2016 the date the financial statements were issued. There are no subsequent events requiring accrual or disclosure. 78

154 VALLEJO CITY UNIFIED SCHOOL DISTRICT REQUIRED SUPPLEMENTARY INFORMATION SECTION 79

155 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS YEAR ENDING JUNE 30, 2016 [a] [b] Actuarial Accrued Liability (AAL)-Entry UAAL as a Percentage of Covered Payroll Actuarial Report Date Actuarial Valuation Date Actuarial Value of the Asset Age Normal Unfunded AAL (UAAL) (col. [b] - [a] Funded Ratio (col. [a]/[b] Covered Payroll (col. [b] - [a]/[c]) 6/30/2014 7/1/2013 $ 64,484,304 $ 64,484,304 0% $ 70,742, % 6/30/2015 7/1/2013 $ 64,484,304 $ 64,484,304 0% $ 72,579, % 6/30/2016 7/1/2015 $ 68,471,150 $ 68,471,150 0% $ 84,535, % The notes to the required supplementary information are an integral part of this statement. 80

156 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL GENERAL FUND YEAR ENDED JUNE 30, 2016 Original Budgeted Amounts Final Actual (Budgetary Basis) Variance with Final Budget Positive (Negative) Revenues: LCFF Sources $ 114,933,622 $ 114,933,622 $ 114,761,086 $ (172,536) Federal revenue 9,609,797 9,609,797 10,598, ,798 Other state revenue 22,971,527 22,971,527 30,508,629 7,537,102 Other local revenue 4,421,402 4,421,402 6,669,511 2,248,109 Total revenues 151,936, ,936, ,537,821 10,601,473 Expenditures: Certificated salaries 60,285,090 60,285,090 56,306,170 3,978,920 Classified salaries 25,415,579 25,415,579 26,187,570 (771,991) Employee Benefits 29,550,814 29,550,814 33,364,370 (3,813,556) Books and supplies 11,292,950 11,292,950 10,235,276 1,057,674 Services and other operating expenditures 19,570,552 19,570,552 24,490,676 (4,920,124) Capital outlay 718, , ,552 (100,776) Other outgoing ,227 (80,227) Transfer of indirect costs (848,648) (848,648) (610,611) (238,037) Debt service - principal 160, , ,791 (46,791) Debt service - interest 50,000 50,000 4,379 45,621 Total expenditures 146,195, ,195, ,084,400 (4,889,287) Excess (deficiency) of revenues over (under) expenditures 5,741,235 5,741,235 11,453,421 5,712,186 Other financing sources (uses): Operating transfers in (Note 4) 772, ,850 - (772,850) Operating transfers out (Note 4) (4,414,197) (4,414,197) (3,658,852) 755,345 Other sources , ,415 Total other financing sources (uses) (3,641,347) (3,641,347) (2,701,437) 939,910 Excess (deficiency) of revenues and other financing sources over (under) expenditures and other financing sources (uses) 2,099,888 2,099,888 8,751,984 6,652,096 Fund balances--beginning 19,829,786 19,829,786 19,829,786 - Fund balances--ending $ 21,929,674 $ 21,929,674 $ 28,581,770 $ 6,652,096 The notes to the required supplementary information are an integral part of this statement. 81

157 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF THE DISTRICT'S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY FOR THE YEAR ENDED JUNE 30, 2016 CalSTRS District's proportion of the net pension liability (asset) % % District's proportionate share of the net pension liability (asset) $ 78,309,471 $ 67,021,066 State's proportionate share of the net pension liability (asset) associated with the District 41,417,078 40,470,213 Total $ 119,726,549 $ 107,491,279 District's covered - employee payroll $ 54,329,144 $ 54,329,144 District's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll % % Plan fiduciary net position as a percentage of the total pension liability 74% 77% CalPERS District's proportion of the net pension liability (asset) % % District's proportionate share of the net pension liability (asset) $ 33,630,727 $ 24,992,357 District's covered - employee payroll $ 24,992,357 $ 25,237,976 District's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll % Plan fiduciary net position as a percentage of the total pension liability 79% 83% Note : In the future, as data become available, ten years of information will be presented. 82

158 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF DISTRICT CONTRIBUTIONS FOR THE YEAR ENDED JUNE 30, 2016 CalSTRS Contractually required contribution $ 6,136,697 $ 4,786,837 Contributions in relation to the contractually required contribution (6,136,697) (4,786,837) Contribution deficiency (excess) $ - $ - District's covered - employee payroll $ 57,224,249 $ 54,329,144 Contributions as a percentage of covered - employee payroll 10.72% 8.81% CalPERS Contractually required contribution $ 3,303,213 $ 2,970,759 Contributions in relation to the contractually required contribution (3,303,213) (2,970,759) Contribution deficiency (excess) $ - $ - District's covered - employee payroll $ 27,883,567 $ 24,992,357 Contributions as a percentage of covered - employee payroll 11.85% 11.89% Note : In the future, as data become available, ten years of information will be presented. 83

159 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTE TO THE REQUIRED SUPPLEMENTARY INFORMATION YEAR ENDED JUNE 30, 2016 NOTE 1 Schedule of Other Postemployment Benefits-Refer to Note 20 in the notes to the basic financial statements. NOTE 2 Budgetary Data Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual for the General Fund and other major fund. The accompanying Budgetary Comparison Schedule - General Fund and other major special revenue funds presents both the original and the final legally adopted budgets, as well as actual data on a budgetary basis. The original budget is adopted by the Governing Board. Generally Accepted Accounting Principles (GAAP) requires that the final legal budget be reflected in the "final budget" column. (Note 1(G) of the notes to the basic financial statements identifies the budgeting process and control.) This statement includes the general fund and funds consolidated due to GASB 54. NOTE 3 District s Proportionate Share of the Net Pension Liability This schedule presents information on the District's proportionate share of the net pension liability (NPL), the plans' fiduciary net position and, when applicable, the State's proportionate share of the NPL associated with the District. In the future, as data becomes available, ten years of information will be presented. Schedule of District Contributions This schedule presents information on the District's required contribution, the amounts actually contributed, and any excess or deficiency related to the required contribution. In the future, as data becomes available, ten years of information will be presented. Change in Benefit Terms There were no changes in benefit terms since the previous valuation for either CalSTRS or CalPERS. Changes in Assumptions The CalSTRS plan rate of investment return assumption was not changed from the previous valuation. The CalPERS plan rate of investment return assumptions was changed from 7.50 percent to 7.65 percent since the previous valuation. 84

160 VALLEJO CITY UNIFIED SCHOOL DISTRICT SUPPLEMENTARY INFORMATION SECTION 85

161 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2016 Pass-Through Federal Entity CFDA Identifying Federal Federal Grantor/Pass - Through Grantor/Program Title Number Number Expenditures U.S. Department of Education: Passed through California Department of Education Adult Education Cluster Adult Education: Adult Basic Education & ESL A $ 131,693 Adult Education: Adult Secondary Education ,172 Adult Education: English Literacy & Civics Education A ,282 Subtotal Adult Education Cluster 286,147 NCLB: Title I, Part A, Basic Grants Low-Income and Neglected ,739,819 Special Education Cluster Special Ed: IDEA Basic Local Assistance Entitlements, Part B, Sec 611 (formerly PL ) ,073,049 Special Ed: IDEA Local Assistance Entitlements, Part B, Sec 611, Private School ISP's ,118 Special Ed: IDEA Preschool Local Entitlement, Part B Sec A ,800 Special Ed: IDEA Mental Health Allocation Plan, Part B, Sec A ,194 Special Ed: IDEA Preschool Grants, Part B, Sec ,504 Special Ed: IDEA Preschool Staff Development, Part B, Sec A ,000 Special Ed: IDEA Early Intervention Grants ,534 Subtotal Special Education Cluster 4,691,199 Career and Technical Education Cluster Vocational Programs: Career and Technical Education Secondary, Sec 131 (Carl Perkins Act) ,457 Subtotal Career and Technical Education Cluster 107,457 Indian Education Department of Rehab: Workability II, Transition Partnership ,468 NCLB: Title III, Immigrant Education Program ,197 NCLB: Title III, Limited English Proficiency (LEP) Student Program ,778 NCLB: Title II, Part A, Teacher Quality ,404 CA Promise P ,810 NJROTC * * 55,575 Project READ * * 56,562 Total U.S. Department of Educaton $ 10,450,105 *Award number not available. See accompanying note to supplementary information. 86

162 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (CONTINUED) YEAR ENDED JUNE 30, 2016 U.S. Department of Agriculture: Passed through CDE: Child Nutrition: School Breakfast Program - Needy $ 961,921 National School Lunch Program ,516,481 Summer Food Feeding Option - Breakfast ,591 Summer Food Feeding Option - Lunch ,592 Commodities ,930 Subtotal Child Nutrition Cluster 4,993,515 Summer Food Feeding Option - Supplement ,864 National School Lunch Program - Supplement ,205 CACFP MLS (Supper Program) ,858 CENTER CIL (Supper Program) ,971 Total U.S. Department of Agriculture 5,536,413 U.S. Department of Health and Human Services: Passed through CDE: Child Development Cluster Child Development: Center Based - General Program ,117 Subtotal Child Development Cluster 561,117 Medi-Cal ,247 Total U.S. Department of Health and Human Services 954,364 Total Expenditures of Federal Awards $ 16,940,882 *Award number not available. See accompanying note to supplementary information. 87

163 VALLEJO CITY UNIFIED SCHOOL DISTRICT ORGANIZATION JUNE 30, 2016 The Vallejo City Unified School District was established in 1852, and is located in Solano County. There were no changes in the boundaries of the district during the current year. The district consists of thirteen K-5 elementary schools (K-5), three K-8 elementary schools, three middle schools (6-8), and three high schools (9-12), one of which serves as an alternative school. There are two charter schools within the district, four childcare/preschool sites, and an adult school. In July 2004, a state administrator was appointed and granted authority to carry out the responsibilities formerly handled by the Board of Trustees. In February 2014, full control over all areas of operations was returned to the Board of Trustees. The Board of Education at June 30, 2016 was comprised of the following members: Name Title Term Tony Ubalde President November 2018 Ruscal Cayangyang Vice President November 2016 Burky H. Worel Trustee November 2018 Hazel Wilson Trustee November 2016 Ward Steward Trustee November 2016 The State Trustee at June 30, 2016 was: Mel Iizuka May 2013 to present The Superintendent's Executive Staff at June 30, 2016 was comprised of the following: Ramona E. Bishop, Ed.D Superintendent Cheri Summers Cecile Nunley Gigi Patrick, Ed.D. Mitchell Romao Alana L. Shackelford, Ed.D. Eleanor Bruton Chief Academic Officer Chief Business Officer Chief Human Resources Officer Chief Operations Officer Chief Partnerships & Community Engagement Officer Assistant Chief Human Resources Officer See accompanying note to supplementary information. 88

164 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE YEAR ENDED JUNE 30, 2016 Second Period Report Second Period Report Annual Report Annual Report Regular ADA Transitional kindergarten through third 4, , , , Fourth through sixth 2, , , , Seventh and eight 1, , , , Ninth through twelfth 3, , , , Total Regular ADA 12, , , , Extended Year Special Education Transitional kindergarten through third Fourth through sixth Seventh and eight Ninth through twelfth Total Extended Year Special Education Special Education, Nonpublic, Nonsectarian Schools Transitional kindergarten through third Fourth through sixth Seventh and eight Ninth through twelfth Total Special Education, Nonpublic, Nonsectarian Schools Community Day School Seventh and eight Ninth through twelfth Total Special Education, Nonpublic, Nonsectarian Schools Grade K-12 totals 12, , , , Charter school: 3 Final Report Audited Transitional kindergarten/kindergarten through 3 (1) Fourth through sixth Seventh and eight Charter school totals Average daily attendance is a measurement of the number of pupils attending classes of the district. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. There was no charter school non-classroom based average daily attendance. See accompanying note to supplementary information. 89

165 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME YEAR ENDED JUNE 30, Minutes Traditional Grade Level Requirement Actual Minutes Calendar Status Kindergarten 36,000 39, Complied Grades ,400 Grade 1 50, Complied Grade 2 50, Complied Grade 3 50, Complied Grades ,000 Grade 4 54, Complied Grade 5 54, Complied Grade 6 54, Complied Grades ,000 Grade 7 54, Complied Grade 8 54, Complied Grades ,800 Grade 9 65, Complied Grade 10 65, Complied Grade 11 65, Complied Grade 12 65, Complied CHARTER SCHOOL Minutes Traditional Grade Level Requirement Actual Minutes Calendar Status Kindergarten 36,000 36, Complied Grades ,400 Grade 1 50, Complied Grade 2 50, Complied Grade 3 50, Complied Grades ,000 Grade 4 54, Complied Grade 5 54, Complied Grade 6 54, Complied Grades ,000 Grade 7 54, Complied Grade 8 54, Complied See accompanying note to supplementary information. 90

166 VALLEJO CITY UNIFIED SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2016 Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements. General Self Insurance Fund Fund FUND BALANCE Balance June 30, 2016, Unaudited Actuals $ 16,990,742 $ 100,000 Adult Education Fund 775,943 - Special Reserve Fund for Other than Capital Outlay Projects Fund 9,866,571 - Retiree Benefit Fund 892,600 - Fund balance before adjustments 28,525, ,000 Due from/to 55,914 (55,914) Claims Payable - 55,914 Audited Financial Statements, June 30, 2016 $ 28,581,770 $ 100,000 See accompanying note to supplementary information. 91

167 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS 1 YEAR ENDED JUNE 30, 2016 For the Year Ended June 30, General Fund 2017 (Budget) Revenues and other financing sources $ 152,748,629 $ 163,495,237 $ 135,431,907 $ 128,067,404 Expenditures 150,185, ,084, ,541, ,261,042 Other uses and transfers out 2,809,084 3,658,852 3,604,532 3,679,772 Total outgo 152,994, ,743, ,146, ,940,814 Change in fund balance (deficit) (245,895) 8,751,985 (714,266) 126,590 Ending fund balance $ 28,335,875 $ 28,581,770 $ 19,829,785 $ 20,544,051 Available reserves 2 $ 9,283,425 $ 8,590,471 $ 4,008,639 $ 2,275,834 Designated for economic uncertainties $ 5,208,598 $ 5,194,879 $ 4,650,000 $ 3,910,830 Undesignated fund balance $ 4,074,827 $ 3,395,592 $ (641,361) $ (1,634,996) Available reserves as a percentage of total outgo 6.1% 5.6% 2.9% 1.8% Total long-term debt $ 151,070,503 $ 160,858,857 $ 166,233,670 $ 170,281,943 Average daily attendance (ADA) at P ,403 12,283 12,588 12,835 The district's general fund's ending balance has increased by $8,751,985 from the previous year, but has increased by $8,037,719 over the past two years. The fiscal year ending June 30, 2017 is projecting a decrease of $245,895 in the ending fund balance. For a district this size, the State recommends available reserves of at least 3% of total general fund expenditures, transfer out, and other uses (total outgo). The District met this requirement as of June 30, Total long-term debt has decreased by $5,374,813 from the previous year, and $9,423,086 over the past two years. Average daily attendance has decreased by 305 from the previous year, and by 552 over the past two years. 1 This schedule discloses the district s financial trends by displaying past years data along with current year budget information. These financial trend disclosures are used to evaluate the district s ability to continue as a going concern for a reasonable period of time. 2 The budget and actual columns include the Adult, Deferred Maintenance and Special Reserve Fund for Other Than Capital Outlay Projects, and Retiree Benefits non trust funds, which are included with the General Funds due to the implementation of GASB 54. Available reserves consist of all undesignated fund balances (net of restatements) and all funds designated for economic uncertainty contained with the general fund and the funds blended with the general fund under the provisions of GASB Excludes Adult Education ADA and Charter School ADA. See accompanying note to supplementary information. 92

168 VALLEJO CITY UNIFIED SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOL YEAR ENDED JUNE 30, 2016 Charter School Chartered by the District Vallejo Charter School Mare Island Technology Academy MIT Academy Included in District Financial Statement or separate Included in district Financial statements Separate Report Separate Report See accompanying note to supplementary information. 93

169 VALLEJO CITY UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NON-MAJOR SPECIAL REVENUE FUNDS JUNE 30, 2016 EXHIBIT A-1 Non-major Special Revenue Fund Cafeteria Charter Schools Fund Child Development Fund Special Revenue Fund Total ASSETS Cash in county treasury (Note 2) $ 989,362 $ 7,536 $ 98,564 $ 1,095,462 Cash in bank (Note 2) ,414 82,225 Accounts receivable (Note 4) 55,108 1,061, ,692 1,887,337 Due from other fund (Note 5) 856,251-1, ,724 Stores inventories - food (Note 1-H.4) , ,384 Prepaid expenditures (Note 6) Other current assets (Note 1-H.5) - - 1,050 1,050 Total Assets $ 1,900,721 $ 1,069,884 $ 1,064,493 $ 4,035,098 LIABILITIES AND FUND BALANCE Liabilities Accounts payable (Note 7) $ 20,226 $ 41,465 $ 47,823 $ 109,514 Due to other fund (Note 5) 272, , ,203 1,896,180 Unearned revenue (Note 8) - - 4,660 4,660 Total Liabilities 292, , ,686 2,010,354 Fund Balances Nonspendable , ,299 Restricted 130, ,875 20, ,076 Assigned 1,478,140 51,581 1,648 1,531,369 Total Fund Balances 1,608, , ,807 2,024,744 Total Liabilities and Fund Balances $ 1,900,721 $ 1,069,884 $ 1,064,493 $ 4,035,098 See accompanying note to supplementary information. 94

170 VALLEJO CITY UNIFIED SCHOOL DISTRICT EXHIBIT A-2 COMBING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE NON-MAJOR SPECIAL REVENUE FUNDS YEAR ENDED JUNE 30, 2016 Charter School Fund Non-major Special Revenue Fund Cafeteria Child Special Development Revenue Fund Fund Total Revenue Local control funding formula $ 3,650,154 $ - $ - $ 3,650,154 Federal revenue - 561,117 5,121,483 5,682,600 Other state revenue 382,956 2,715, ,238 3,470,878 Other local revenue 35, , , ,524 4,068,277 3,401,454 6,114,425 13,584,156 Expenditures: Instruction 2,288,871 2,242,694-4,531,565 Instruction-related services: Supervision of instruction 209, , ,882 Instructional library, media, and technology 18, ,508 School site administration 373, ,631-1,087,513 Pupil services: Food services - - 6,396,642 6,396,642 General administration: All other general administration , , ,131 Plant services 141,307 3, ,748 Other outgoing Debt Service - Principal ,077 14,077 Debt Service - Interest Debt service - Issuance Cost and Discounts ,032,693 3,406,786 6,737,943 13,177,422 Excess (deficiency) of revenue over (under) expenditures 1,035,584 (5,332) (623,518) 406,734 Fund Balances - Beginning 572, , ,325 1,618,010 Fund Balances - Ending $ 1,608,481 $ 282,456 $ 133,807 $ 2,024,744 See accompanying note to supplementary information. 95

171 VALLEJO CITY UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NON-MAJOR CAPITAL PROJECT FUNDS JUNE 30, 2016 EXHIBIT B-1 Non-major Capital Project Funds Building Fund Capital Facilities Fund County School Facilities Fund Special Reserve Fund for Capital Outlay Projects State School Building Lease- Purchase Total ASSETS Cash in county treasury (Note 2) $ 403,715 $ 973,124 $ 466,109 $ 5,903 $ 115 $ 1,848,966 Cash with fiscal agent (Note 2) 1,418, ,418,311 Due from other fund (Note 5) 38, ,964 Total Assets $ 1,860,990 $ 973,124 $ 466,109 $ 5,903 $ 115 $ 3,306,241 LIABILITIES AND FUND BALANCE Liabilities Accounts payable (Note 7) $ - $ - $ 70,254 $ - $ - $ 70,254 Total Liabilities , ,254 Fund Balances Restricted 69, , , ,090,468 Assigned 1,791, , ,724 5, ,145,519 Total Fund Balances 1,860, , ,855 5, ,235,987 Total Liabilities and Fund Balances $ 1,860,990 $ 973,124 $ 466,109 $ 5,903 $ 115 $ 3,306,241 See accompanying note to supplementary information. 96

172 VALLEJO CITY UNIFIED SCHOOL DISTRICT EXHIBIT B-2 COMBING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE NON-MAJOR CAPITAL PROJECT FUNDS YEAR ENDED JUNE 30, 2016 Building Fund Capital Facilities Fund Non-major Capital Project Funds Special County School Facilities Fund Reserve Fund for Capital Outlay Projects State School Building Lease- Purchase Total Revenue Other state revenue $ - $ - $ (82,795) $ - $ (25,801) $ (108,596) Other local revenue 41, ,423 4, ,136 41, ,423 (77,963) 38 (25,686) 275,540 Expenditures: Facility Acquisition and Construction 1,775 3, , ,397 1,775 3, , ,397 Excess (deficiency) of revenue over (under) expenditures 39, ,443 (554,605) 38 (25,686) (206,857) Fund Balances - Beginning 1,821, , ,460 5,865 25,801 3,442,844 Fund Balances - Ending $ 1,860,990 $ 973,124 $ 395,855 $ 5,903 $ 115 3,235,987 See accompanying note to supplementary information. 97

173 VALLEJO CITY UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NON-MAJOR DEBT SERVICE FUNDS JUNE 30, 2016 EXHIBIT C-1 Non-major Debt Service Funds Debt Service Bond Interest and Redemption Fund Fund for Blended Component Units Total Total Nonmajor funds ASSETS Cash in county treasury (Note 2) $ 6,260,251 $ 42,881 $ 6,303,132 $ 9,247,560 Cash in bank (Note 2) ,225 Cash with fiscal agent (Note 2) ,418,311 Accounts receivable (Note 4) ,887,337 Due from other fund (Note 5) ,688 Stores inventories - food (Note 1-H.4) ,384 Prepaid expenditures (Note 6) Other current assets (Note 1-H.5) ,050 Total Assets $ 6,260,251 $ 42,881 $ 6,303,132 $ 13,644,471 LIABILITIES AND FUND BALANCE Liabilities Accounts payable (Note 7) $ - $ - $ - $ 179,768 Due to other fund (Note 5) ,896,180 Unearned revenue (Note 8) ,660 Total Liabilities ,080,608 Fund Balances Nonspendable ,299 Restricted 6,260,251 23,481 6,283,732 7,756,276 Assigned - 19,400 19,400 3,696,288 Total Fund Balances 6,260,251 42,881 6,303,132 11,563,863 Total Liabilities and Fund Balances $ 6,260,251 $ 42,881 $ 6,303,132 $ 13,644,471 See accompanying note to supplementary information. 98

174 VALLEJO CITY UNIFIED SCHOOL DISTRICT EXHIBIT C-2 COMBING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE NON-MAJOR DEBT SERVICE FUNDS YEAR ENDED JUNE 30, 2016 Non-major Debt Service Funds Debt Service Fund for Bond Interest and Redemption Fund Blended Component Units Total Total Nonmajor funds Revenue Local control funding formula $ - $ - $ - $ 3,650,154 Federal revenue ,682,600 Other state revenue 89,920-89,920 3,452,202 Other local revenue 8,387,594 10,021 8,397,615 9,562,275 8,477,514 10,021 8,487,535 22,347,231 Expenditures: Instruction ,531,565 Instruction-related services: Supervision of instruction ,882 Instructional library, media, and technology ,508 School site administration ,087,513 Pupil services: Food services ,396,642 General administration: All other general administration ,131 Plant services ,748 Facility Acquisition and Construction ,397 Other outgoing Debt Service - Principal 4,200,000 1,585,000 8,910,067 8,924,144 Debt Service - Interest 3,825,671 1,558,359 5,842,047 5,842,403 8,025,671 3,143,359 14,752,114 28,411,933 Excess (deficiency) of revenue over (under) expenditures 451,843 (3,133,338) (2,681,495) (2,481,618) Operating transfers in - 3,143,359 3,143,359 3,143,359 Total other financing sources (uses) - 3,143,359 3,143,359 3,143,359 Excess of revenues and other financing sources over (under) expenditures and other financing sources (uses) 451,843 10, , ,741 Fund Balances - Beginning 5,808,408 32,861 5,841,269 10,902,122 Fund balances - Ending $ 6,260,251 $ 42,882 $ 6,303,133 $ 11,563,863 See accompanying note to supplementary information 99

175 VALLEJO CITY UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET GENERAL UNRESTRICTED AND RESTRICTED FUNDS JUNE 30, 2016 Total ASSETS Unrestricted Restricted General Fund Cash in county treasury (Note 2) $ 23,835,843 $ 2,283,734 $ 26,119,577 Cash in bank (Note 2) 1,716 81,978 83,694 Cash in revolving fund (Note 2) 150, ,000 Cash with fiscal agent (Note 2) 50,000-50,000 Accounts receivable (Note 4) 2,108,667 5,932,079 8,040,746 Due from other fund (Note 5) 3,519, ,519,251 Stores inventories supplies (Note 1-H.4) 223, ,668 Prepaid expenditures (Note 6) 1,371,246-1,371,246 Total Assets $ 31,260,371 $ 8,297,811 $ 39,558,182 LIABILITIES AND FUND BALANCE Liabilities Accounts payable (Note 7) $ 3,508,153 $ 1,326,502 $ 4,834,655 Due to Grantor Government 35,824-35,824 Due to other fund (Note 5) 2,338,495-2,338,495 Unearned evenue (Note 8) - 3,767,438 3,767,438 5,882,472 5,093,940 10,976,412 Fund Balances Nonspendable 1,744,914-1,744,914 Restricted 583,431 3,203,870 3,787,301 Assigned 14,459,084-14,459,084 Unassigned: 8,590,471-8,590,471 Total Fund Balance 25,377,900 3,203,870 28,581,770 Total Liabilities and Fund Balance $ 31,260,372 $ 8,297,810 $ 39,558,182 See accompanying note to supplementary information. 100

176 VALLEJO CITY UNIFIED SCHOOL DISTRICT COMBING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GENERAL UNRESTRICTED AND RESTRICTED FUNDS YEAR ENDED JUNE 30, 2016 Total Unrestricted Restricted General Fund Revenue Local control funding formula $ 114,761,086 $ - $ 114,761,086 Federal revenue 286,147 10,312,448 10,598,595 Other state revenue 13,649,725 16,858,904 30,508,629 Other local revenue 4,769,114 1,900,398 6,669,512 Total Revenues 133,466,072 29,071, ,537,822 Expenditures: Instruction 65,325,254 30,131,998 95,457,252 Instruction-related services: 12,068,441 3,567,710 15,636,151 Pupil services: 6,852,894 1,162,041 8,014,935 Ancillary services 562,133 8, ,185 Community services Enterprise activities 2,333,289-2,333,289 General administration 8,664,878 3,236,602 11,901,480 Plant services 11,072,146 5,179,419 16,251,565 Facility acquisition and construction 628, ,146 Other outgoing Transfers between agencies 80,227-80,227 Debt Service - Principal 206, ,791 Debt Service - Interest 4,379-4,379 Debt Service - Issuance costs and discounts Total Expenditures 107,798,578 43,285, ,084,400 Excess (deficiency) of revenue over (under) expenditures 25,667,494 (14,214,072) 11,453,422 Other Financing Sources (Uses) Operating transfers in Operating transfers out (3,658,852) - (3,658,852) Other sources and uses (14,277,746) 15,235, ,415 Total Other Financing Sources (Uses) (17,936,598) 15,235,161 (2,701,437) Excess of revenues and other financing sources over (under) expenditures and other financing sources (uses) 7,730,896 1,021,089 8,751,985 Fund Balances - Beginning 17,647,004 2,182,781 19,829,785 Fund Balances - Ending $ 25,377,900 $ 3,203,870 $ 28,581,770 See accompanying note to supplementary information. 101

177 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2016 NOTE 1 PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying Schedule of Expenditures of Federal Awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in this schedule may differ from amounts presented or used in the preparation of the financial statements. The District has not elected to use the ten percent de minimus cost rate as covered in Section Indirect (F&A) costs of the Uniform Guidance. Total Federal Revenues reported on the Statement of Revenues, Expenditures and Changes in Fund Balance: $ 16,281,195 Carryover Medi-Cal ,757 Non-cash commondities ,930 Total per the Schedule of Expenditures of Federal Awards $ 16,940,882 Local Education Agency Organization Structure This schedule provides information about the District s boundaries and schools operated members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. The District neither met nor exceeded its target funding. The schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through Districts must maintain their instructional minutes at the requirements, as required by Education Code Section

178 VALLEJO CITY UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION (CONTINUED) JUNE 30, 2016 Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Schedule of Charter Schools This schedule lists all schools chartered by the District or County Office of Education, and displays information for each charter school on whether or not the school is included in the District audit. Nonmajor Governmental Funds Combining Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances The Nonmajor Governmental Funds Combining Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the individual funds that have been included in the Nonmajor Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances. General Unrestricted and Restricted Funds Balance Sheet Schedule and Schedule of Revenues, Expenditures and Changes in Fund Balances The General Unrestricted and Restricted Funds Balance Sheet and Schedule of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the unrestricted and restricted funds that have been included in the General Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances. 103

179 INDEPENDENT AUDITORS REPORTS 104

180 INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Governing Board Vallejo City Unified School District Vallejo, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Vallejo City Unified School District(the District) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise Vallejo City Unified School District's basic financial statements, and have issued our report thereon dated December 23, Emphasis of Matter - Change in Accounting Principles As discussed in Note 1 to the financial statements, in 2016, the District adopted new accounting guidance, GASB Statement No. 72, Fair Value Measurement and Application; GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statement 67 and 68; GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments; and GASB Statement No. 79, Certain External Investment Pools and Pool Participants. Our opinion is not modified with respect to this matter. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Vallejo City Unified School District's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Vallejo City Unified School District's internal control. Accordingly, we do not express an opinion on the effectiveness of Vallejo City Unified School District's internal control Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax:

181 A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify certain deficiencies in internal control, described in the accompanying schedule of findings and questioned costs as items to that we consider to be significant deficiencies. Compliance and Other Matters As part of obtaining reasonable assurance about whether Vallejo City Unified School District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and questioned costs as items to Vallejo City Unified School District's Response to Findings Vallejo City Unified School District's response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. Vallejo City Unified School District's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the District's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Pleasanton, California December 23,

182 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Governing Board Vallejo City Unified School District Vallejo, California Report on Compliance for Each Major Federal Program We have audited Vallejo City Unified School District's compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Vallejo City Unified School District's (the District) major Federal programs for the year ended June 30, Vallejo City Unified School District's major Federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its Federal awards applicable to its Federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of Vallejo City Unified School District's major Federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major Federal program occurred. An audit includes examining, on a test basis, evidence about Vallejo City Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major Federal program. However, our audit does not provide a legal determination of Vallejo City Unified School District's compliance Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax:

183 Opinion on Each Major Federal Program In our opinion, Vallejo City Unified School District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major Federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of Vallejo City Unified School District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Vallejo City Unified School District's internal control over compliance with the types of requirements that could have a direct and material effect on each major Federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major Federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Vallejo City Unified School District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Pleasanton, California December 23,

184 INDEPENDENT AUDITORS REPORT ON STATE COMPLIANCE Governing Board Vallejo City Unified School District Vallejo, California Report on State Compliance We have audited Vallejo City Unified School District's compliance with the types of compliance requirements as identified in the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting that could have a direct and material effect on each of the Vallejo City Unified School District's State government programs as noted below for the year ended June 30, Management's Responsibility Management is responsible for compliance with the requirements of State laws, regulations, and the terms and conditions of its State awards applicable to its State programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance of each of the Vallejo City Unified School District's State programs based on our audit of the types of compliance requirements referred to above. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting. These standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the applicable government programs noted below. An audit includes examining, on a test basis, evidence about Vallejo City Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. Our audit does not provide a legal determination of Vallejo City Unified School District's compliance with those requirements. Basis for Qualified Opinion on Attendance Program As described in the accompanying schedule of findings and questioned costs, Vallejo City Unified School District did not comply with requirements regarding the independent study program item Compliance with such requirements is necessary, in our opinion, for Vallejo City Unified School District to comply with the requirements applicable to that program. Qualified Opinion on Attendance In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, Vallejo City Unified School District complied, in all material respects, with the types of compliance requirements referred to above for the year ended June 30, Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax:

185 Unmodified Opinion on Each of the Other Programs In our opinion Vallejo City Unified School District complied, in all material respects, with the compliance requirements referred to above that are applicable to the government programs noted below that were audited for the year ended June 30, 2016, except as described in the Schedule of State Awards Findings and Questioned Costs section of the accompanying Schedule of Findings and Questioned Costs. In connection with the audit referred to above, we selected and tested transactions and records to determine the Vallejo City Unified School District's compliance with the State laws and regulations applicable to the following items: LOCAL EDUCATION AGENCIES OTHER THAN CHARTER SCHOOLS Attendance Teacher Certification and Misassignments Kindergarten Continuance Independent Study Continuation Education Instructional Time Instructional Materials Ratios of Administrative Employees to Teachers Classroom Teacher Salaries Early Retirement Incentive Gann Limit Calculation School Accountability Report Card Juvenile Court Schools Middle or Early College High Schools K-3 Grade Span Adjustment Yes Transportation Maintenance of Effort Yes Procedures Performed Yes Yes Yes Yes Yes, see below Yes Yes Yes Yes No, see below Yes Yes No, see below No, see below SCHOOL DISTRICTS, COUNTY OFFICES OF EDUCATION, AND CHARTER SCHOOLS Educator Effectiveness California Clean Energy Jobs Act After School Education and Safety Program: General Requirements After School Before School Proper Expenditure of Education Protection Account Funds Unduplicated Local Control Funding Formula Pupil Counts Local Control Accountability Plan Independent Study - Course Based Immunizations CHARTER SCHOOLS Attendance Mode of Instruction Non Classroom-Based Instruction/Independent Study for Charter Schools Determination of Funding for Non Classroom-Based Instruction Annual Instruction Minutes Classroom-Based Charter School Facility Grant Program Yes Yes Yes Yes No, see below Yes Yes Yes No, see below No, see below Yes Yes No, see below No, see below Yes No, see below 110

186 Vallejo City Unified School District's response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. Vallejo City Unified School District's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. The District does not offer a Work Experience Program; therefore, we did not perform procedures related to the Work Experience Program within the Continuation Education Attendance Program. The District did not offer an Early Retirement Incentive Program during the current year; therefore, we did not perform procedures related to the Early Retirement Incentive Program. The District does not have any Juvenile Court Schools or Middle or Early School Programs; therefore, we did not perform any procedures related to Juvenile Court Schools, or Middle or Early School Programs. The District does not offer a Before School Education and Safety Program; therefore, we did not perform any procedures related to the Before School Education and Safety Program. The District did not offer an Independent Study Course Based Program, therefore, we did not perform any procedures related to the Independent Study Course Based Program. The District did not have any schools listed on the immunization assessment reports; therefore, we did not perform any related procedures. The Charter Schools; do not have Non Classroom based ADA over the testing threshold therefore, we did not perform any procedures for Non Classroom Based Instruction or Determination of Funding for Non-Classroom Based Instruction. Pleasanton, California December 23,

187 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 113

188 Vallejo City Unified School District Summary of Auditors Results For the Year Ended June 30, 2016 FINANCIAL STATEMENTS Type of auditors' report issued: Internal control over financial reporting: Material weakness identified? Significant deficiency identified? Noncompliance material to financial statements noted? FEDERAL AWARDS Internal control over major Federal programs: Material weakness identified? Significant deficiency identified? Type of auditors' report issued on compliance for major Federal programs: Any audit findings disclosed that are required to be reported in accordance with Section.510(a) of OMB Circular A-133? Unmodified No Yes No No No Unmodified No Identification of major Federal programs: CFDA Number(s) Name of Federal Program or Cluster NCLB: Title I, Part A, Basic Grants Low-Income and Neglected NCLB: Title II, Part A, Teacher Quality , A, Special Education Cluster , , Child Nutrition Cluster Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? STATE AWARDS Type of auditors' report issued on compliance for programs: Unqualified for all programs except for the following programs which were qualified: Name of Program Attendance $ 750,000 No Qualified 114

189 Vallejo City Unified School District Index to Findings and Recommendations For the Year Ended June 30, 2016 Finding Page Number Description Number Financial Statement Findings Prior Year Findings Internal Controls Over Financial Reporting Payroll Internal Control Deficiencies ASB and Site Cash Internal Control Deficiencies Long Term Debt Arbitrage Internal Control Deficiencies Equipment 122 Federal Compliance Findings None State Compliance Findings Attendance

190 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, 2016 The following findings represent significant deficiencies, material weaknesses, and/or instances of noncompliance related to the financial statements that are required to be reported in accordance with Government Auditing Standards. The findings have been coded as follows: Five Digit Code AB 3627 Finding Type Inventory of Equipment Internal Control Miscellaneous Code Prior Year Findings Internal Controls over Financial Reporting Significant Deficiency Criteria or Specific Requirements Office of Management and Budget Uniform Guidance, 2 CFR Section requires that non Federal entities receiving Federal awards establish a system of internal control designed to reasonably ensure compliance with Federal statutes, regulations, and terms and conditions of Federal awards. Part 6 Internal Controls includes a concept referred to as Principal 4 that states, in part that: Management initiates positive responsiveness to prior compliance and control findings. In addition, best practices include the evaluation of whether the audited entity has taken appropriate corrective action to address prior year audit findings and recommendations that could have a material effect on the financial statements. Condition During our review of prior year audit findings, we observed findings and recommendations that were not implemented, or we identified additional issues as part of our evaluation. The prior year audit findings and recommendations that we determined were not implemented, or which were partially implemented, are identified as follows: Not Implemented or Partially Implemented Finding Prior Year Findings Finding Payroll Internal Control Deficiencies Finding Associated Student Body (ASB) Internal Control Deficiencies Finding Long Term Debt Arbitrage Finding Internal Control Deficiencies Implemented / No Longer Applicable Finding Financial Reporting - Implemented Finding Adult Education Maintenance of Effort Procedure no longer applicable Questioned costs Not applicable. 116

191 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, 2016 Context Good internal controls require that the district take appropriate corrective action to address prior year audit findings and recommendations. The prior year audit report included 7 findings and was completed in December Effect The District continues to need to strengthen internal controls around accurate reporting. Cause Several items from prior years findings continued to be an issue for the fiscal year. Recommendation The district should ensure that it takes appropriate corrective action to address prior audit findings and recommendations. District Response The District agrees with the auditor's recommendation. The Audit Committee continues to work with responsible District s Cabinet Members on the development of written policies and procedures to correct these findings. 117

192 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, Code Payroll Internal Control Deficiencies Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District follow its payroll policies and procedures and ensure that payroll records are current, accurate, and properly maintained. Condition Payroll withholding amounts for 20 of 40 tested were not able to be recalculated manually. I-9 forms for 4 of 18 employees tested were not signed by a District representative. The District has not reconciled its payroll clearing accounts, nor routinely reviewed summaries of changes made to payroll and benefits systems. Questioned costs Not applicable Context Payroll and related costs are approximately 77 percent of the District s annual budget. Procedures related to preparing and processing accurate payroll is critical to the reporting of accurate information needed by the management of the District to make informed decisions. The District has had similar findings in prior years. Effect Forms supporting amounts paid and withheld from employees paychecks were not consistently available for review. Cause Records were not consistent with amounts paid or accrued. Recommendation The District should strengthen controls over payroll and maintain adequate documentation to support all salaries and wages paid to its employees and reconcile its payroll clearing accounts. District Response The District agrees with the auditor's recommendation. Work continues with the Audit Committee and payroll related team members on the development of written policies and procedures to correct these findings. Written procedures will be provided to employees in key positions. As part of the written policies and procedures, the District will also develop an ongoing system of monitoring to ensure the policies are consistently followed. 118

193 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, Code and ASB, and Site Cash Internal Control Deficiencies Significant Deficiency Criteria or Specific Requirements Education Code Section (and California Department of Education's "Accounting Procedures for Student Organizations Handbook") requires student body organizations to follow the regulations set by the Governing Board of the School District. Internal control best practices over processing of cash receipts include maintaining a separate record of funds received. Education Code Section states that the governing board of any school district shall provide for the supervision of all funds raised by any student body or student organization using the name of the school. Condition ASB Revenue potentials for significant fundraisers not consistently prepared. Food products sold at the student store are not consistent with nutritional requirements. Questioned costs Not applicable. Context We reviewed ASB cash collections at Hogan Middle School, John Finney Continuation School and Vallejo High School. Effect The risk of potential error or misappropriation of Associated Student Body funds and Site Cash / Cafeteria funds is increased when internal control operations are not operating effectively. Cause Internal controls over Associated Student Body and Site Cash have not been optimized. Recommendation Revenue potentials should be used for significant events. consistency with the requirements of Education Code Food sold should be evaluated for District Response The District accepts the findings and continues to train staff on procedures as it relates to proper fundraising activities and student store management. The Audit Committee continues to review corrective action plans to ensure proper staff training and implementation of appropriate accounting procedures for ASB. Internal Audit will perform random audit of school sites with ASB activities. 119

194 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, Code and Long Term Debt Arbitrage Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District identify and record all liabilities when incurred. Internal Revenue Service Sections govern the monitoring of the expenditure of tax exempt bond proceeds and provide that in certain cases payments representing excess interest earnings (arbitrage) may be due to the IRS. Tax liabilities on long term debt (arbitrage) may exist if the proceeds were not spent in a timely manner, or if excess interest was earned on the proceeds while they were invested Condition The District has not performed arbitrage calculations in several years to determine whether or not it has unrecorded liabilities due to the Internal Revenue Service. Questioned costs Not applicable. Context The District has approximately $1,800,000 of unspent building funds. There were four general obligation bonds issued from 2002 to 2006 with outstanding balances of approximately $85 million, along with various other types of long term debt that may be subject to interest arbitrage. Effect The full accrual financial statements may not include all obligations of the District. Cause No arbitrage study has been performed. Recommendation The District should provide for the updated calculation of Long Term Debt arbitrage calculations and record a liability for any amounts due and payable to the Internal Revenue Services District Response The District agrees with this finding. The Chief Business Officer is working on soliciting a vendor to perform an arbitrage calculation of its long-term debt during the Fiscal Year. 120

195 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, Code Internal Control Deficiencies Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District ensure that financial records are current, accurate, and properly maintained. Condition We noted differences between supporting records, the unaudited actual, and the financial statements as follows: The inventory does not agree to the financial statements by $8,848 and access to the inventory areas was available to approximately 10 individuals in this time period. An adjustment of $55,914 related to due from/to amounts between the self insurance and general funds was necessary after the Unaudited Actuals were filed. We noted disbursements for benefit payments were paid prior to review processes occurring. Questioned costs Not applicable Context Supporting information did not reconcile to the general ledger, SACS form, or financial statements, and internal control risks are increased when review processes do not occur timely. Effect The amounts reported in the financial statements were immaterially different from the supporting records. Cause Records were not consistent with amounts paid or accrued, inventory quantity counts differed, records were unable to be located, or entries were recorded after the filing of the Unaudited Actuals, and adequate time was not allowed for review functions to occur prior to disbursements. Recommendation The District should improve its processes to verify the accuracy of its supporting records. District Response The District agrees with this finding. The Audit Committee will review fiscal year-end procedures and staff training plans with the Chief Business Officer. The District will ensure that all benefits disbursement are properly reviewed and approved by Accounting Manager and Chief Business Officer. The Audit Report adjustment for $992,915 was recorded in the Unaudited Financial Statements. On September 23, 2016, the District received an updated actuarial study for the self-insured workers compensation program, which projected June 30 th long-term liability as $937,000. The correct liability was recorded in the Audit Report and will be an adjustment to Unaudited actuals. 121

196 Vallejo City Unified School District Financial Statement Findings For the Year Ended June 30, Code Equipment Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District ensure that financial records are current, accurate, and properly maintained. Condition We noted disposals of equipment in the board minutes that were not removed from the accounting records. Questioned costs Not applicable Context Nine buses and 4 other vehicles were noted in the minutes as having been disposed but were not removed from the capital asset balances and supporting information. Effect After accounting for depreciation expense to date, the equipment disposed of did not have a material effect on the financial statements, however it creates inaccuracies in reported amounts and depreciation schedules. Cause Reported amounts and depreciation schedules were not updated for disposals of items. Recommendation The District should improve its processes to capture and record information on equipment disposals. District Response The District agrees with this finding. The Audit Committee and Chief of Operations will work on developing procedures to ensure proper update of our asset management system. 122

197 Vallejo City Unified School District Federal Awards Findings and Questioned Costs For the Year Ended June 30, 2016 None noted. 123

198 Vallejo City Unified School District State Awards Findings and Questioned Costs For the Year Ended June 30, 2016 The following findings represent instances of noncompliance and/or questioned costs relating to State program laws and regulations. The findings have been coded as follows: Five Digit Code AB 3627 Finding Type Attendance State Compliance Charter School Facilities Programs Classroom Teacher Salaries Local Control Accountability Plan Instructional Materials Teacher Misassignments School Accountability Report Card Code Attendance Significant Deficiency Criteria or Specific Requirements In accordance with Education code Section , attendance in all schools and classes shall be recorded and kept according to regulations prescribed by the State Board of Education subject to the provisions of this chapter. One of the provisions includes reporting only apportionment days for which students were in attendance. Condition Days of apportionment were claimed for students not in attendance. Questioned Costs 1.76 ADA or approximately $9,500. (236 attendance days divided by 134 P2 divisor) Context Students absent during finals week of 12/15/15 to 12/17/15 were not indicated as such using the All Day Code in the attendance software. Without checking the Absent All Day box the software used includes the students in attendance totals. The exceptions appeared to be isolated to finals week when a short class schedule was in effect. Effect Apportionment days claimed during finals week appears to have been overstated. Cause The absent All Day code was not used appropriately during the finals week. The design of the software and the purpose of this code was not understood. The days in question were minimum days of only two periods therefore, it was not thought to be an absent all day situation. Recommendation We recommend that training be provided as a reminder that checking absent for individual periods does not remove students from being counted as in attendance. The All Day code must be used when a students is absent all periods that are applicable to a particular day. Emphasis should be placed on the fact that a day may vary based on the schedule for a particular day. 124

199 Vallejo City Unified School District State Awards Findings and Questioned Costs For the Year Ended June 30, 2016 Corrective Action Plan Plan: The Audit Committee will work with secondary administrators to ensure that bell schedules are reflected of all non-regular days. Currently, Aeries bell schedule is updated for only regular and minimum days. However, special days such as rallies and final schedule are not entered as minimum days, thus showing all six periods. Rallies and final schedules are block schedules. Aeries can accommodate such scheduling. Using this feature will accurate attendance by the system and not manual manipulation by site staff. Expected Implementation Date: February 28, 2017 Contact: Cleo Chaney, Director, Compliance and Audit 125

200 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 Except as specified in previous sections of this report, summarized below is the current status of all audit findings reported in the prior year's schedule of financial statement findings. Financial Statement Findings Five Digit Code AB 3627 Finding Type Inventory of Equipment Internal Control Miscellaneous Code Internal Controls over Financial Reporting Significant Deficiency Criteria or Specific Requirements Education Code 41020(h) provides that not later than December 15, a report of each local educational agency audit for the preceding fiscal year shall be filed with the county superintendent of schools of the county in which the local educational agency is located, and the California State Controller. Condition The audit for the fiscal year ended June 30, 2015 was not completed by December 15, Questioned costs Not applicable. Context The audit for the fiscal year ended June 30, 2015 was contracted performed in Effect The District was unable to meet the December 15, 2015 timeline to provide audited financial information to the public. Cause Auditable records were not available in a timely manner. Recommendation We recommend the District continue to devote personnel and resources to improving the timeliness and quality of auditable records. District Response It is the District s goal to complete the Audit Report by the required deadline of December 15, 2016 as required. Status Implemented 126

201 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, Code Prior Year Findings Internal Controls over Financial Reporting Significant Deficiency Criteria or Specific Requirements Office of Management and Budget (OMB) Circular A-133, section 315(a) states, in part: The auditee is responsible for follow-up and corrective action on all audit findings.. Generally accepted government auditing standards require auditors to evaluate whether the audited entity has taken appropriate corrective action to address prior year audit findings and recommendations that could have a material effect on the financial statements. Condition During our review of prior year audit findings, we observed findings and recommendations that were not implemented, or we identified additional issues as part of our evaluation. The prior year audit findings and recommendations that we determined were not implemented, or which were partially implemented, are identified as follows: Not Implemented Finding Financial Reporting Finding Prior Year Findings Finding Payroll Internal Control Deficiencies Finding Associated Student Body (ASB) Internal Control Deficiencies Finding Long Term Debt Arbitrage Finding Internal Control Deficiencies Implemented Finding Special Education Reporting Finding After School Education and Safety Program (ASES) Finding Instructional Time Calculations Finding Independent Study Teacher Ratio Finding Gann Limit Calculations Finding Attendance Questioned costs Not applicable. Context Good internal controls require that the district take appropriate corrective action to address prior year audit findings and recommendations. The prior year audit report included 12 findings and was completed in September Effect The District continues to need to strengthen internal controls around accurate reporting. Cause Several items from prior years findings continued to be an issue for the fiscal year. 127

202 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 Recommendation The district should ensure that it takes appropriate corrective action to address prior audit findings and recommendations. District Response The District agrees with the auditor's recommendation. The Audit Committee continues to work with responsible District s Cabinet Members on the development of written policies and procedures to correct these findings. Current Status Not Implemented, See Finding Code Payroll Internal Control Deficiencies Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District follow its payroll policies and procedures and ensure that payroll records are current, accurate, and properly maintained. Condition Timecard or rate information for 10 of 31 employees reviewed not available. Supplemental payments for all 10 employees reviewed not paid within 30 days of service. Payroll withholding amounts for 19 of 40 tested were not able to be recalculated manually. I-9 forms for 2 of 30 employees tested were not signed by a District representative. W4 forms for 2 of 80 employees tested were not able to be located. The District has historically allowed individuals to accumulate vacation balances over the maximum cap as set in the employment policies and contracts. The excess at June 30, 2015 was approximately $22,000. The District has not reconciled its payroll clearing accounts, nor routinely reviewed summaries of changes made to payroll and benefits systems. Questioned costs Not applicable Context Payroll and related costs are approximately 66 percent of the District s annual budget. Procedures related to preparing and processing accurate payroll is critical to the reporting of accurate information needed by the management of the District to make informed decisions. The District has had similar findings in prior years. Effect Forms supporting amounts paid and withheld from employees paychecks were not consistently available for review. In addition, the District has a historic precedent of allowing employees to go over vacation maximum amounts, thus subjecting the District to payments larger than authorized. Cause Records were not able to be located or were not consistent with amounts paid or accrued. 128

203 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 Recommendation The District should strengthen controls over payroll and maintain adequate documentation to support all salaries and wages paid to its employees and reconcile its payroll clearing accounts. District Response The District agrees with the auditor's recommendation. The Audit Committee continues to work with the Business Services and the Human Resources team leaders on the development of proper internal controls to correct issues. Status Partially implemented, see finding Code and ASB, and Site Cash Internal Control Deficiencies Significant Deficiency Criteria or Specific Requirements Education Code Section (and California Department of Education's "Accounting Procedures for Student Organizations Handbook") requires student body organizations to follow the regulations set by the Governing Board of the School District. Internal control best practices over processing of cash receipts include maintaining a separate record of funds received. Education Code Section states that the governing board of any school district shall provide for the supervision of all funds raised by any student body or student organization using the name of the school. Condition Revenue potentials for significant fundraisers not consistently prepared. Donations received at school sites are deposited to accounts called Student Funds The name of the account contributes to a lack of clarity as to whether these are site cash, district cash, or student body funds. Questioned costs Not applicable. Context We reviewed cash collections at Solano Middle School, Jesse Bethel High School and John Finney Continuation School. Effect The risk of potential error or misappropriation of Associated Student Body funds and Site Cash is increased when internal control operations are not operating effectively. Cause Internal controls over Associated Student Body and Site Cash have not been optimized. 129

204 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 Recommendation Revenue potentials should be used for significant events. The District may wish to consider the title used for site cash accounts to provide for additional clarity as to the purpose of these funds. District Response The District accepts the findings and continues to implement new procedures as it related to proper treatment of donations. The Business Services Department provides continuous training to high school Finance Secretaries and ASB Advisors on the fundraising procedures. Status Partially implemented, See Finding Code and Long Term Debt Arbitrage Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District identify and record all liabilities when incurred. Internal Revenue Service Sections govern the monitoring of the expenditure of tax exempt bond proceeds and provide that in certain cases payments representing excess interest earnings (arbitrage) may be due to the IRS. Tax liabilities on long term debt (arbitrage) may exist if the proceeds were not spent in a timely manner, or if excess interest was earned on the proceeds while they were invested Condition The District has not performed arbitrage calculations in several years to determine whether or not it has unrecorded liabilities due to the Internal Revenue Service. Questioned costs Not applicable. Context The District has approximately $400,000 of unspent building funds. There were four general obligation bonds issued from 2002 to 2006 with outstanding balances of approximately $85 million, along with various other types of long term debt that may be subject to interest arbitrage. Effect The full accrual financial statements may not include all obligations of the District. Cause No arbitrage study has been performed. Recommendation The District should provide for the updated calculation of Long Term Debt arbitrage calculations and record a liability for any amounts due and payable to the Internal Revenue Services 130

205 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 District Response The District agrees with this finding. The Chief Business Officer is working on soliciting a vendor to perform an arbitrage calculation of its long-term debt during the Fiscal Year. Status Not implemented, see finding Code Internal Control Deficiencies and Fiscal Solvency Significant Deficiency Criteria or Specific Requirements Good internal controls and prudent business practices require the District ensure that financial records are current, accurate, and properly maintained. Condition We noted differences between supporting records, the unaudited actual, and the financial statements as follows: The inventory does not agree to the financial statements by $27,943 and access to the inventory areas was available to approximately 10 individuals in this time period. We noted disbursements for benefit payments were paid prior to review processes occurring. Self insurance liabilities of $1,123,000 were recorded after the Unaudited Actuals were filed. The recognition of the self insurance adjustment noted above that was recorded after the Unaudited actual were filed caused the measurement of the fiscal reserves to drop from the 3% recommended level to 2.9%. Questioned costs Not applicable Context Supporting information did not reconcile to the general ledger, SACS form, or financial statements, and internal control risks are increased when review processes do not occur timely. Effect The amounts reported in the financial statements for the inventory were immaterially different from the supporting records. The self insurance liability was included in the financial statements but not in the Unaudited Actuals. Internal controls over disbursements were not operating optimally. Cause Records were not consistent with amounts paid or accrued, inventory quantity counts differed, records were unable to be located, or entries were recorded after the filing of the Unaudited Actuals, and adequate time was not allowed for review functions to occur prior to disbursements. Recommendation The District should improve its processes to verify the accuracy of its supporting records. 131

206 Vallejo City Unified School District Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2016 District Response The District agrees with this finding. Business Service s Leadership Team will review its fiscal yearend procedures to ensure that inventory adjustments are properly recorded and that staff is properly trained on record retention procedures. Required adjustments for the settlement cost and selfinsurance were recorded in the Unaudited Actuals. Status Partially implemented, see Finding Code State Compliance Adult Education Maintenance of Effort Criteria or Specific Requirements Education Code section 2575(k) or (a)(7) requires that if the LEA had adult education expenditures in the fiscal year, that at least that amount, or the amount of revenue received for that purpose in if that is less, is spent in the fiscal year. Condition Adult Education expenditures were $1,114,607 for ; and $1,600,345 for Questioned Costs $485,738 Context Adult education levels of expenditures decreased between and Effect The District was not in compliance with the requirement to spend the less of the expenditures or apportionment received. Cause The District did not maintain the spending levels for adult education expenditures. Recommendation The District should monitor maintenance of effort requirements and ensure compliance where such measures are required. Corrective Action Plan The District agrees with this finding. The Audit Committee and key fiscal managers will review the California Audit Guide to ensure full compliance with ongoing new guidelines. Status This test is no longer applicable. 132

207 APPENDIX B FORM OF CONTINUING DISCLOSURE CERTIFICATE

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209 APPENDIX B FORM OF CONTINUING DISCLOSURE CERTIFICATE $23,555,000 VALLEJO CITY UNIFIED SCHOOL DISTRICT 2017 GENERAL OBLIGATION REFUNDING BONDS CONTINUING DISCLOSURE CERTIFICATE Dated: [CLOSING DATE] This Continuing Disclosure Certificate (the Disclosure Certificate ) is delivered by the Vallejo City Unified School District (the District ) in connection with the issuance of the above-referenced bonds (the Bonds ) pursuant to a Paying Agent Agreement dated August 1, 2017 (the Paying Agent Agreement ), between the District and U.S. Bank National Association (the Paying Agent ). The District covenants and agrees as follows: Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being delivered by the District for the benefit of the beneficial owners of the Bonds and to assist the Participating Underwriters in complying with S.E.C. Rule 15c2-12(b)(5). Section 2. Definitions. Unless the context otherwise requires, the definitions set forth in the Paying Agent Agreement apply to this Disclosure Certificate. The following additional capitalized terms shall have the following meanings: Annual Report means any report provided by the District pursuant to, and as described in, Sections 3 (Provision of Annual Reports) and 4 (Content of Annual Reports) of this Disclosure Certificate. Beneficial Owner means any person that (a) has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. Bondholders mean either the registered owners of the Bonds, or, if the Bonds are registered in the name of The Depository Trust Company or another recognized depository, any Beneficial Owner or applicable participant in its depository system. Dissemination Agent means the District, or any successor Dissemination Agent designated in writing by the District and that has filed with the District a written acceptance of such designation. EMMA or Electronic Municipal Market Access means the centralized on-line repository for documents filed with the MSRB, such as official statements and disclosure B-1

210 information relating to municipal bonds, notes and other securities as issued by state and local governments. Listed Events means any of the events listed in Section 5(a) (Reporting of Significant Events Significant Events) of this Disclosure Certificate. MSRB means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information, which may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. Official Statement means the final Official Statement dated August 3, 2017 relating to the Bonds. Opinion of Bond Counsel means a written opinion of a law firm or attorney experienced in matters relating to obligations the interest on which is excludable from gross income for federal income tax purposes. Participating Underwriter means any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. Repository means MSRB or any other repository of disclosure information that may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. (As of the date of this Certificate, there is no California state information depository.) Rule means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. State means the State of California. Section 3. Provision of Annual Reports. (a) Delivery of Annual Report to Repository. The District shall, or shall cause the Dissemination Agent to, not later than nine (9) months following the end of the District s fiscal year (being March 31 of each year, based on a fiscal year ending each June 30), commencing with the report for the Fiscal Year due March 31, 2018, provide to the Repository an Annual Report that is consistent with the requirements of Section 4 (Content of Annual Reports) of this Disclosure Certificate. The Annual Report may be submitted as a single document or as a package of separate documents and may include by cross-reference other information as provided in Section 4 (Content of Annual Reports) of this Disclosure Certificate; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. (b) Change of Fiscal Year. If the District s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(d) (Notice of Listed Events). B-2

211 (c) Delivery of Annual Report to Dissemination Agent Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the Repository, the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the District. (d) Report of Non-Compliance. If the District is unable to provide an Annual Report to the Repository by the date required in subsection (a), the Dissemination Agent shall send a notice to the Repository in substantially the form attached as Exhibit A. (e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is other than the District, file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided. Section 4. Content of Annual Reports. The District s Annual Report shall contain or include by reference the following: (a) The audited financial statements of the District for the prior fiscal year, prepared in accordance with generally accepted accounting principles. If the District s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a) (Delivery of Annual Report to Repository), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available; (b) Material financial information and operating data with respect to the District of the type included in the Official Statement in the following categories (to the extent not included in the District s audited financial statements): summary thereof; fiscal year; (1) adopted budget of the District for the current fiscal year, or a (2) average daily attendance of the District for the last completed (3) District outstanding debt; (4) information regarding total assessed valuation of taxable properties within the District, if and to the extent provided to the District by Solano County; and (5) information regarding total secured tax charges and delinquencies on taxable properties within the District, if and to the extent provided to the District by Solano County. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities that have been submitted to the Repository or the Securities and Exchange Commission. If the document B-3

212 included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference. Section 5. Reporting of Significant Events. (a) Significant Events. Pursuant to the provisions of this Section, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax-exempt status of the Bonds; (7) modifications to rights of Bondholders, if material; (8) Bond calls, if material; (9) tender offers; (10) defeasances; (11) release, substitution, or sale of property securing repayment of the Bonds, if material; (12) rating changes; (13) bankruptcy, insolvency, receivership or similar event of the District; (14) the consummation of a merger, consolidation, or acquisition, or certain asset sales, involving the District, or entry into or termination of a definitive agreement relating to the foregoing, if material; (15) appointment of a successor or additional trustee or paying agent, or the change of name of the trustee or paying agent, if material. (b) Determination of Materiality. Whenever the District obtains knowledge of one of the foregoing events, notice of which must be given only if material, the District shall immediately determine if such event would be material under applicable federal securities laws. (c) Notice to Dissemination Agent. If the District has determined an occurrence of a Listed Event under applicable federal securities laws, the District shall promptly notify the Dissemination Agent (if other than the District) in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to 5(d) (Notice of Listed Events). (d) Notice of Listed Events. The District shall file, or cause the Dissemination Agent to file with the Repository, in an electronic format prescribed by the B-4

213 MSRB, a notice of the occurrence of a Listed Event to provide notice of specified events in a timely manner not in excess of ten (10) business days after the event s occurrence. Notwithstanding the foregoing, notice of Listed Events described in Subscription (a)(8) (bond calls) need not be given under this subsection any earlier than the notice (if any) given to Bondholders of affected Bonds pursuant to the Paying Agent Agreement. Section 6. Filings with MSRB. All documents provided to MSRB under this Disclosure Certificate shall be filed in a readable PDF or other electronic format as prescribed by MSRB and shall be accompanied by identifying information as prescribed by MSRB. Section 7. Termination of Reporting Obligation. The District s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds or upon the delivery to the District of an Opinion of Bond Counsel to the effect that continuing disclosure is no longer required. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(d) (Notice of Listed Events). Section 8. Dissemination Agent. (a) Appointment of Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such agent, with or without appointing a successor Dissemination Agent. If the Dissemination Agent is not the District, the Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall be Government Financial Strategies inc. (b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the District from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent may at any time resign by giving written notice of such resignation to the District. (c) Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate. The District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense, and liability that it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the District, the Bondholders, or any other party. The Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any direction from the District or an Opinion of Bond Counsel. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. No person shall have any right to commence any action against the Dissemination Agent seeking any remedy other than to compel specific performance of this Disclosure Certificate. B-5

214 Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate (and the Dissemination Agent shall agree to any amendment so requested by the District that does not impose any greater duties or risk of liability on the Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a) (Delivery of Annual Report to Repository), 4 (Content of Annual Reports), or 5(a) (Reporting of Significant Events Significant Events), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver, would have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, and the District obtains an Opinion of Bond Counsel to that effect; and (c) Consent of Holders: Non-impairment Opinion. The amendment or waiver either (i) is approved by the Bondholders in the same manner as provided in the Paying Agent Agreement for amendments to the Paying Agent Agreement with the consent of Bondholders, or (ii) does not materially impair the interests of the Bondholders and the District obtains an Opinion of Bond Counsel to that effect. If this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived, the District shall describe such amendment or waiver in the next following Annual Report and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(d) (Notice of Listed Events), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. B-6

215 Section 11. Default. If the District fails to comply with any provision of this Disclosure Certificate any Bondholder of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Paying Agent Agreement, and the sole remedy under this Disclosure Certificate if the District fails to comply with this Disclosure Certificate shall be an action to compel performance. Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriters, and the Bondholders and shall create no rights in any other person or entity. IN WITNESS WHEREOF, the District has caused this Continuing Disclosure Certificate to be executed by its authorized officer as of the day and year first above written. VALLEJO CITY UNIFIED SCHOOL DISTRICT By: Mitchell Romao, Chief Operations Officer B-7

216 EXHIBIT A FORM OF NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of District: Name of Bonds: Date of Delivery: Vallejo City Unified School District Vallejo City Unified School District 2017 General Obligation Refunding Bonds [CLOSING DATE] NOTICE IS HEREBY GIVEN that the Vallejo City Unified School District (the District ) has not provided an Annual Report with respect to the above-named Bonds as required by a Continuing Disclosure Certificate executed [CLOSING DATE], with respect to the above-captioned bond issue. The District anticipates that the Annual Report will be filed by. Date: VALLEJO CITY UNIFIED SCHOOL DISTRICT By: [SAMPLE ONLY] 52092v2 / VALCUSD.35.3 B-8

217 APPENDIX C FORM OF OPINION OF BOND COUNSEL

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219 Board of Education Vallejo City Unified School District APPENDIX C FORM OF OPINION OF BOND COUNSEL PARKER & COVERT LLP Attorneys at Law 2520 Venture Oaks Way, Suite 190 Sacramento, California [CLOSING DATE] Re: Vallejo City Unified School District 2017 General Obligation Refunding Bonds Final Opinion of Bond Counsel Ladies and Gentlemen: We have acted as bond counsel in connection with the issuance by the Vallejo City Unified School District (the District ) of $23,555,000 principal amount of Vallejo City Unified School District, 2017 General Obligation Refunding Bonds (the Bonds ). In such capacity, we have examined such law and such certified proceedings, certifications, and other documents as we have deemed necessary to render this opinion. Regarding questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials and others furnished to us without undertaking to verify the same by independent investigation. Based upon the foregoing, we are of the opinion that, under existing law: 1. The Bonds have been duly authorized and executed by the District and are valid and binding general obligations of the District. 2. All taxable property in the territory of the District is subject to ad valorem taxation without limitation regarding rate or amount (except certain personal property that is taxable at limited rates) to pay the Bonds. Solano County is required by law to include in its annual tax levy the principal and interest coming due on the Bonds to the extent that necessary funds are not provided from other sources. 3. Interest on the Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the C-1

220 condition that the District comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the issuance of the Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The District has covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds. 4. Interest on the Bonds is exempt from State of California personal income taxation. The rights of the owners of the Bonds and the enforceability thereof are limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting creditors rights generally, and by equitable principles, whether considered at law or in equity. We express no opinion regarding the accuracy, adequacy, or completeness of the Official Statement or other offering material relating to the Bonds. Further, we express no opinion regarding tax consequences arising with respect to the Bonds other than as expressly set forth herein. This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Very truly yours, PARKER & COVERT LLP C-2

221 APPENDIX D SOLANO COUNTY TREASURER INVESTMENT POLICY

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223 SOLANO COUNTY TREASURER INVESTMENT POLICY

224 Table of Contents Purpose... 3 Scope... 3 Implementation... 3 Participants... 3 General Policy Statement... 4 Objectives... 4 Standard of Care... 5 Safekeeping and Custody... 6 Reporting... 6 Compensation... 7 Financial Dealers and Institutions... 7 Borrowing of Pool Funds... 8 Calculating and Apportioning Pool Earnings... 8 Deposit and Withdrawal Requests... 9 Authorized Investments and Restrictions... 9 Other Policy Considerations Investment of Bond Proceeds California Government Code Sections Referenced:... 13

225 Purpose This policy provides guidance, control, and direction for the management of surplus funds entrusted to the care of the Solano County Treasurer. These funds are invested collectively and referred to as the Treasury Pool. In addition, the Treasurer is entrusted with segregated investments related to debt issuance and other sources. These funds are invested within the scope of all applicable bond issuance documents, government codes, trust agreements, or other restrictions in affect at the time of the deposit and during the holding period. Any funds entrusted and invested outside the Treasury Pool are accounted for separately. Scope This policy applies to all funds over which the Treasurer has been granted fiduciary responsibility and direct control for their management. Implementation The guidelines and restrictions found herein shall be applied to all actions taken after its adoption by the Board of Supervisors and shall remain in effect until replaced. Participants This investment policy generally restricts deposits to those funds mandated by law or contractual agreement to be held in care of the County Treasurer. On the consent of the Treasurer, exemptions may be granted pursuant to Government Code for non-mandatory depositing agencies or non-mandated funds, if it is determined that the additional deposit provides a benefit to the Treasury Pool as a whole while not creating an unmanageable liquidity risk. Non-mandated depositors or funds may be subject to specific transactional limitations that mitigate the non-mandated deposit liquidity risk. These restrictions may include but are not limited to restrictions on the number of transactions per month, on the size of individual transactions, and on the amount of notification time required before processing a transaction. Non-mandated depositors must agree to the terms and conditions of deposit prior to the Treasurer s acceptance of any non-mandated funds. As a default, these restrictions shall be not more than five transactions per month, not more than the lesser of five million dollars or one percent of the portfolio in aggregate transaction totals per month, and a minimum of thirty days prior notification for any transaction.

226 General Policy Statement It shall be the policy of the Solano County Treasurer to manage the Treasury Pool in accordance with applicable State codes and for the benefit of the pool participants. The Treasurer will make every reasonable effort to maintain the composition of the Treasury Pool within an acceptable risk return profile. To achieve and maintain this profile, the Treasurer may direct investment purchases or sales to adjust the credit risk, interest rate risk, liquidity risk, or other risks inherent in investment pools. Objectives It is the objective of the Solano County Treasurer to invest public funds in a manner that provides security of principal, sufficient liquidity to ensure that the specific portfolio is able to meet its cash flow needs, and generates returns consummate with the inherent risks being managed. This practice is generally referred to as the SLY principal; which is Safety, Liquidity, and Yield. Safety: Safety of principal seeks to insure the preservation of capital. The objective will be to manage credit risk and liquidity risk Credit risk, also known as default risk, is the risk that the issuer of a fixed income security may be unable to make timely principal and interest payments. This risk is mitigated through diversification, a process whereby funds are invested in multiple issuers as opposed to a single name. Liquidity risk, is the risk that an investment will be difficult or impossible to sell at a reasonable price relative to its potential return. Marketability risk increases or decreases based on a number of factors including the notoriety of the debt issuer and the frequency at which they issue debt. The size, structure, and complexity of the particular deal, and the size of the market it is issued in are also factors that impact marketability of the security. Market risk is mitigated in the portfolio through the purchase and holding of securities issued by larger, more well-known, and higher rated issuers, such as the United States Treasury and Federal Agencies. Liquidity: The investment pool shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by purchasing securities from large, well known, and highly rated issuers. As well as maintaining a ladder of investment whose maturities are timed to match the historical needs of depositors. This includes structuring the ladder to provide additional maturities in summer months when cash demands exceed deposits. The Treasury Pool also maintains cash balances in several Money Market and Money Market-like instruments including the Local Agency Investment Fund.

227 Yield: The Treasury Pool shall be managed with the objective of maintaining a rate of return commensurate with the risk through various budgetary and economic cycles. Taking into account prevailing interest rates, liquidity needs as described above, and the limits on the types of securities the Treasury Pool is authorized to purchase. A prudent balancing of liquidity needs results in an investment return for Treasury Pool participants that is higher, under most conditions, than that which would be available to them in an overnight investment. However, as a consequence of purchasing longer maturity investments with higher yields, the yield on the Treasury Pool can be expected to lag changes in market interest rates. The result is a buffered Treasury Pool yield that moves slowly and steadily in the direction of market rates, while providing higher long term rates of return, and an increased ability to forecast depositor yields for budgetary purposes. Standard of Care The following policies are designed in accordance with Government Code et al and the recommended best practices of the Government Finance Officers Association (GFOA) to provide transparency to Treasury operations while enhancing portfolio controls. a) Mark to Market: The portfolio will be marked to market on a monthly or more frequent basis. b) Wires, ACH s, and other electronic transfers: Electronic transfers will require either dual control in the establishment of a repetitive transaction or dual control in the release of a non-repetitive transaction. c) Prudent Investor: Treasury staff will at all times be held to the Prudent Investor Standard when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds. The County Treasurer and his/her deputies shall act with care, skill, prudence, and diligence under the circumstances then prevailing, specifically including, but not limited to, the general economic conditions and the anticipated needs of the County and other depositors that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of investing funds of a like character and with like aims to safeguard the principal and maintain the liquidity needs of the County and other depositors. d) Indemnification: The Treasurer and his or her staff, when acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security s credit risk or market price changes. Investments shall be made with judgment and care under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs. Investments will not be made for speculation but for investment consistent with the stated objectives.

228 e) Ethics and Conflicts of Interest: County officers, employees, agents and any others who may be directly involved in the investment decision making process shall adhere to all applicable laws regarding conflicts of interest and refrain from personal business activity that could conflict with the proper execution and management of the investment program or that could impair their ability to make impartial decisions. Individuals making or advising on investment decisions shall refrain from conducting personal investment transactions with the same individual firm with whom business is conducted on behalf of the County. The receipt of gifts is subject to the disclosure requirements and limitations set forth in sections and of the Government Code. In addition, the receipt of honoraria is prohibited. f) Delegation of Authority Government Code 53607: California Government Code authorizes the County Board of Supervisors the authority to delegate the investment function to the County Treasurer for a one-year period. The Treasurer shall thereafter assume full responsibility for those transactions until the authority is revoked or expires. g) Transactions Records: All Treasury records will be maintained in accordance with the County s adopted records retention policy. Safekeeping and Custody Delivery vs. Payment: Purchased, or otherwise acquired, investment securities will be delivered by Fed Book Entry, DTC, or physical deliver, and to the extent feasible, held in third party safekeeping with a designated custodian. To the greatest extent possible, all transactions will be conducted on a Delivery Versus Payment (DVP) methodology where funds for payment are released simultaneously with the arrival of the investment. Third-party Safekeeping: The trust department of a bank or other qualified provider will be designated as custodian for safekeeping specific securities. The custodian shall provide reporting and as needed real time access to financial records that show the specific instrument, selling broker/dealer, issuer, coupon, maturity, CUSIP number, purchase or sale price, transaction date, and other pertinent information. Reporting In accordance with the recommendations of Government Code the Treasurer will publish on the County public website, or make available through other electronic means, a detailed report of the investment transactions on a monthly basis. The report will also disclose the amount of liquidity available to meet cash flow demands for the subsequent six month period.

229 In addition, it is the practice of the Treasurer to provide additional and more frequent information to provide transparency in Treasury operations. These reports include: a) A monthly summary report showing the ending assets, monthly average assets, summary income, and net asset value of the Treasury Pool portfolio. b) Detailed supporting documentation for asset balances, income, and net asset values. Transaction records, bank statements, account reconciliations, and associated accounting materials are filed and maintained in accordance with Government Code inclusive; and the County s adopted records retention policy. Compensation In accordance with Government Code and 53684, the Treasurer will charge all pool participants for administrative and overhead costs. Costs include, but are not limited to, employee salaries and benefits, portfolio management, bank and custodial fees, software maintenance fees, and other direct and indirect costs incurred from handling or managing funds Costs will be deducted from interest earnings on the pool prior to apportioning and payment of interest. The Treasurer shall annually prepare a proposed budget providing a detailed itemization of all estimated costs which comprises the administrative fee charged in accordance with California Government Code The administrative fee will be subject to change annually. At the end of each fiscal year the amount of the administrative fee is adjusted to reflect the actual Treasury costs for the year. Financial Dealers and Institutions As a trustee of public funds held on behalf of other governing bodies it is the Treasurer s policy to use those financial institutions and financial service providers who provide the greatest investment benefit to the pool participants. a) Issues of public social concern and benefit will be evaluated on a case by case basis using the minimum criteria that to be eligible to receive County funds, all banks, savings associations or federally insured industrial loan companies must have received an overall rating of not less than satisfactory in its most recent evaluation by the appropriate federal financial supervisory agency of its record meeting the credit needs of California s communities, including low, moderate income neighborhoods pursuant to Section 2906 of Title 12 of the United States Code. b) Any decision to conduct financial transactions with an entity shall be made exercising the care, skill, prudence and diligence under the circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs.

230 c) Authorization of Broker/Dealers to conduct business with the County is in the sole discretion of the Treasurer. In order to assist in the determination process, Broker/Dealers must provide reasonable proof of qualifications. The criteria for authorization of Broker/Dealers are as follows: i. Any individual Broker/Dealer or Broker/Dealer firm that has made any political contribution to any agency, individual, or campaign within the potential scope of this policy, at any time during the prior 48 months that exceeds the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board shall be barred from consideration. ii. Individual Broker/Dealers and Broker/Dealer firms must be in good standing with the NASD. iii. Individual Broker/Dealer and Broker/Dealer firms must be licensed to conduct business in the State of California. Constitutionally Mandated Temporary Transfers Pursuant to Article XVI, section 6 of the California Constitution, the County Treasurer, upon resolution of the Board of Supervisors, has the power and the duty to make temporary transfers of Treasury Pool funds to districts whose funds are in the custody of and paid out solely through the Treasurer s Office. In accordance with statute, these temporary transfers will be limited to 85% of all anticipated revenues accruing to the district that are mandated for deposit with the Treasury. Calculating and Apportioning Pool Earnings The Solano County Investment Pool is comprised of monies from multiple units of the county, schools, agencies and districts. Each entity has unique cash flow demands, which dictate the type of investments the Treasurer must purchase. To ensure parity among the pool members when apportioning interest, the following procedures have been developed. a) Interest is apportioned on an at least quarterly basis in accordance with the California Government Code. b) Interest is apportioned to pool participants based on the participants average daily fund balance as determined by the Auditor-Controller. c) Interest is calculated on an accrual basis for all investments in the Treasurer s Pool by the Treasurer and reported to the Auditor-Controller for distribution into the funds of the participants. d) The Auditor-Controller deducts accounting fees and makes any adjustments from the interest earning and apportions the remaining earnings to all participants based on the positive average daily balance.

231 e) Negative average daily fund balance will be charged interest at the rate of interest that is being apportioned. Deposit and Withdrawal Requests Solano County operates a Pooled Investment Portfolio that allows optimal liquidity and diversification for depositing agencies. Unless otherwise specified, monies from all units of government, schools, agencies and districts deposited into the Treasury are combined into the Treasury Pool. The purpose of the combined portfolio is to increase participant s liquidity and not limit them to specific investments. This portfolio is managed as a unit based on a calculated combined cash flow of all the participants. See Participants section for additional information and restrictions on deposits. Per Government Code 27136, the Treasurer will approve all material withdrawals from the investment pool that are made for the purpose of investing or depositing those funds outside the County Treasury Pool. Transactions by non-mandatory depositors will be at a minimum subject to the limitations as described in Treasurer s Pool Participants section of this policy. Exceptions to the combined pool are allowed for bond proceeds and other funds that must be segregated by applicable bond documents, trust agreements, statutes, or other restrictions in place at or during the time the funds are entrusted to the Solano County Treasurer. Investment and reporting of these funds will be segregated from the Treasury Pool. For additional information see Bond Proceeds Portfolios. Authorized Investments and Restrictions The Solano County Treasurer s Pool shall be governed by the tenets of Government Code et seq. In addition to these tenets the portfolio is further restricted to the following percentages based on book value at the time of purchase. a) Bonds issued by Solano County as the local agency i. Not more than 20% of the portfolio ii. Maximum maturity of 30 years in accordance with Resolution b) Treasury Bills, Notes, Bonds, and other Certificates of Indebtedness backed by the full faith and credit of the United States Government i. No restrictions above those mandated by c) Registered state warrants or treasury notes or bonds of the State of California i. Not more than 20% of the portfolio ii. Maximum maturity of 30 years in accordance with Resolution

232 d) Registered treasury notes or bonds issued by any of the other 49 states in accordance with (d) i. Not more than 20% of the portfolio. ii. Maximum maturity of 30 years in accordance with Resolution e) Bonds, notes, warrants, or other evidences of indebtedness of any local agency within the State of California not including Solano County i. Not more than 20% of the portfolio ii. Maximum maturity of 30 years in accordance with Resolution f) Federal Agency or United States government-sponsored enterprise obligations, participations, or other instruments i. Not more than 80% of the portfolio ii. Not more than 50% of the portfolio in any single agency g) Bankers Acceptances i. No restrictions above those mandated by h) Commercial Paper i. Must be credit rated the equivalent of A-1 or higher by at least two nationally recognized statistical rating organizations. i) Negotiable Certificates of Deposit i. Not more than 20% of the portfolio j) Repurchase Agreement or Reverse Repurchase Agreements Collateral i. No restrictions above those mandated by k) Corporate Bonds, Notes, or other Certificates of Indebtedness i. No restrictions above those mandated by l) Shares of Beneficial Interest i. No restrictions above those mandated by m) Bond Proceeds i. No restrictions above those mandated by n) Security Interests i. No restrictions above those mandated by o) Any mortgage or other asset backed pass-through security or collateralization i. No restrictions above those mandated be p) JPA Participations i. No restrictions above those mandated by 53601

233 q) International Bank for Reconstruction and Development, International Finance Corporation, Inter-American Development Bank i. Dollar denominated senior unsecured unsubordinated rated AA or better. r) Other Restrictions i. Currently callable securities restricted to not more than 60% of the portfolio. Restriction does not apply to make whole calls. ii. Securities downgraded to below investment grade shall be reviewed and sold at market prices if the determination is made that they present a material risk to the portfolio liquidity. s) Commercial Bank, Savings Bank, Savings and Loan Association, or Credit Union Certificate distribution mechanisms. i. No Restrictions above those mandated by Any investment currently held in the portfolio that does not meet the guidelines established in this policy is exempted from the requirements of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy. In accordance with California Government Code Section the Treasurer retains the right to petition the Solano County Board of Supervisors for approval to invest in securities with a final maturity in excess of five years. The Solano County Board of Supervisors adoption of any resolution allowing maturities beyond five years shall be considered an allowed modification to this policy and any investments made in accordance with the modification shall be allowable under this policy. The Board s previously granted exception in the form of Resolution on April 07, 2009 shall remain in effect regarding the purchase of extended maturity securities, pursuant to Government Code Other Policy Considerations Disaster Recovery: The County Treasury maintains disaster recovery policies, procedures, and practices that are tested and updated on a regular basis as technologies and conditions change. These items are intended first and foremost to provide the maximum protection to Treasury assets in the event of a natural or manmade disaster. The Treasury also maintains contingency operating procedures to provide business continuity in the event that key County facilities or equipment are unavailable for extended periods of time. Auditing: Pursuant to Government Code the Treasury undergoes a quarterly review of the Treasurer s statement of assets conducted by the Internal Audit division of the Auditor-Controller s office. The Auditor s review shall be accomplished in accordance with the appropriate professional standards, as determined by the County Auditor. The Treasurer shall prepare a statement showing the amount and type of assets in the County Treasury as of the date of the review. The review shall include:

234 a) Counting cash in the Treasury. b) Verifying that the records of the Treasurer and Auditor are reconciled pursuant to California Government Code c) Issuing a report to the Board of Supervisors in accordance with the Statements on Standards of Accounting and Review Services issued by the American Institute of Certified Public Accountants. d) On an annual basis, the Internal Audit Division of the Auditor-Controller s Office shall perform or cause to be performed an audit of the assets in the County Treasury and express an opinion whether the Treasurer s statement of assets is presented fairly and in accordance with generally accepted accounting principles. e) The report shall be addressed to the Board of Supervisors. The quarterly review referenced above need not be performed for the period when an audit is conducted. Investment of Segregated Funds As needed, the Treasurer may be entrusted to manage the proceeds of specific bond issuances or other deposited funds as separate investments from the Treasury Pool. These include, but are not limited to General Obligations of the County, County TRANs, Pension Trust Fund, School General Obligations, School TRANs, and State or other entity provided loans or deposits to local agencies including School Districts. Participation: Participation in a segregated funds portfolio is restricted to the terms of the specific issues trust agreement or as directed by the appropriate legal counsel. Establishment of a segregated investment will be by mutual agreement of the requesting agency and the Treasurer Portfolio Restrictions: Funds in any segregated portfolio will be governed by the tenets of the trust agreement, and any other agreed upon governance. Segregated investment will be held to the prudent investor standard. a) Investments in this portfolio are not subject to the limitations of inclusive. b) For tax purposes portfolio investments may be restricted to tax exempt or other specific tax treatment securities. c) As a result of spending restrictions, portfolio funds may be invested in securities with durations of up to forty years or as otherwise proscribed in the trust agreement

235 Withdrawing funds from the Portfolio: Withdrawals are subject to the limitations and restrictions as described in the trust agreement. Any gains or losses realized as a result of changes in the anticipated withdrawal schedule will be apportioned to the depositor s fund. Special Investments: Special investments are subject to the restrictions of the individual bond issuance as described in the trust agreement or as directed by the appropriate legal counsel. Roles and Responsibilities: The Treasurer manages these funds on behalf of the depositor and relies on the depositor to provide accurate information with regard to liquidity and other specific investment needs. It shall be the responsibility of the depositor to notify the Treasurer of any changes in the investment requirements. Balances are validated against records maintained by the Auditor Controller s office. California Government Code Sections Referenced:

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237 APPENDIX E DTC BOOK-ENTRY ONLY SYSTEM

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239 The following information concerning The Depository Trust Company, New York, New York ( DTC ) and DTC s book-entryonly system has been provided by DTC for use in securities disclosure documents. The District takes no responsibility for the accuracy or completeness thereof. There can be no assurance that DTC will abide by its procedures or that such procedures will not be changed from time to time. The following description includes the procedures and record-keeping with respect to beneficial ownership interests in the Bonds payment of principal and interest, other payments with respect to the Bonds to Direct Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in such Bonds, notices to beneficial owners and other related transactions by and between DTC, the Participants, and the Beneficial Owners. However, DTC, the Participants, and the Beneficial Owners should not rely on the following information with respect to such matters, but should instead confirm the same with DTC or the Direct Participants, as the case may be. The Depository Trust Company, New York, New York ( DTC ) will act as securities depository for the securities (in this Appendix, 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 Bond will be issued for each maturity of the Bonds, in the aggregate principal amount of such maturity, 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 a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them

240 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 MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend 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 Paying Agent, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the District or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bonds are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. 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 takes no responsibility for the accuracy thereof

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