S&P Insured Rating: AA. See RATINGS herein. This Official Statement is dated May 19, 2016.

Transcription

1 NEW ISSUE FULL BOOK-ENTRY S&P Insured Rating: AA S&P Underlying Rating: A See RATINGS herein In the opinion of Quint & Thimmig LLP, Larkspur, California, Special Counsel, subject to compliance by the District with certain covenants, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but such interest is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In addition, in the opinion of Special Counsel, interest with respect to the Certificates is exempt from personal income taxation imposed by the State of California. See LEGAL MATTERS Tax Matters herein. DATED: Date of Delivery $27,945,000 CERTIFICATES OF PARTICIPATION (2016 REFINANCING PROJECT) Evidencing Direct, Undivided Fractional Interests of the Registered Owners Thereof In Lease Payments to be Made by the FONTANA UNIFIED SCHOOL DISTRICT (SAN BERNARDINO COUNTY, CALIFORNIA) As the Rental for Certain Property Pursuant to a Lease Agreement with the FONTANA UNIFIED SCHOOL DISTRICT PUBLIC FINANCING AUTHORITY DUE: September 1, as shown on the inside cover The Fontana Unified School District Certificates of Participation (2016 Refinancing Project) (the Certificates ) are being executed and delivered by the Fontana Unified School District (the District ) to (i) refund on an advance basis the Fontana Unified School District Certificates of Participation (2007 Financing Project) (the 2007 Certificates ) and (ii) pay certain delivery costs of the Certificates, including premiums for a municipal bond insurance policy and debt service reserve insurance policy. See PLAN OF REFUNDING herein. The Certificates evidence direct, undivided fractional interests of the registered owners thereof in Lease Payments to be made by the District to the Fontana Unified School District Public Financing Authority (the Authority ) for the use and occupancy of the Property (as defined herein) under and pursuant to a lease agreement between the District and the Authority dated June 1, 2016 (the Lease Agreement ). The Authority has assigned its right to receive Lease Payments from the District under the Lease Agreement and its right to enforce payment of the Lease Payments when due or otherwise protect its interest in the event of a default by the District thereunder to The Bank of New York Mellon Trust Company, N.A. as trustee (the Trustee ) for the benefit of the registered owners of the Certificates. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS attached hereto. The Certificates will be executed and delivered in book-entry form only, and will be initially executed and registered in the name of Cede & Co. as nominee of The Depository Trust Company ( DTC ). Purchasers of the Certificates (the Beneficial Owners ) will not receive physical certificates representing their interest in the Certificates. See APPENDIX F BOOK-ENTRY SYSTEM attached hereto. Interest with respect to the Certificates is payable semiannually on March 1 and September 1 of each year, commencing September 1, The Certificates are subject to redemption prior to maturity as described herein. See THE CERTIFICATES Redemption Provisions herein. The District has covenanted in the Lease Agreement to make all Lease Payments due under the Lease Agreement, subject to abatement during any period in which by reason of damage or destruction of the Property, or by reason of eminent domain proceedings with respect to the Property, there is substantial interference with the use and occupancy by the District of the Property or any portion thereof. The District has covenanted in the Lease Agreement to take such action as may be necessary to include all Lease Payments in its annual budgets and to make the necessary annual appropriations for all such Lease Payments. See SPECIAL RISK FACTORS herein. The obligation of the District to make Lease Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation. Neither the Certificates nor the obligation of the District to make Lease Payments under the Lease Agreement constitutes a debt or indebtedness of the Authority, the District, or the State of California or any political subdivision thereof within the meaning of any Constitutional or statutory debt limitation or restriction or an obligation for which the Authority or the District is obligated to levy or pledge any form of taxation. The scheduled payment of principal of and interest with respect to the Certificates when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Certificates by Assured Guaranty Municipal Corp. See BOND INSURANCE herein and APPENDIX E SPECIMEN MUNICIPAL BOND INSURANCE POLICY attached hereto. This cover page contains certain information for general reference only. It is not a summary of all provisions of the Certificates. Prospective investors must 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 their meanings set forth herein. MATURITY SCHEDULE See Inside Cover The Certificates are being purchased for re-offering by Merrill Lynch, Pierce, Fenner & Smith Incorporated as Underwriter of the Certificates. The Certificates will be offered when, as and if executed and delivered and received by the Underwriter, subject to the approval as to their legality by Quint & Thimmig LLP, Special Counsel. It is anticipated that the Certificates, in definitive form, will be available for delivery through the facilities of DTC on or about June 8, This Official Statement is dated May 19, 2016.

2 $27,945,000 FONTANA UNIFIED SCHOOL DISTRICT (SAN BERNARDINO COUNTY, CALIFORNIA) CERTIFICATES OF PARTICIPATION (2016 REFINANCING PROJECT) MATURITY SCHEDULE Maturity Date September 1 Principal Amount Coupon Interest Rate Reoffering Yield Price CUSIP $340, % 0.650% DL ,235, DM ,335, DN ,420, DP ,505, DQ ,595, DR ,650, DS ,720, DT ,795, DU ,835, DV ,935, C DW ,920, C DX ,690, C DY ,485, C DZ ,210, C EA ,000, C EB ,045, C EC ,110, C ED ,170, EE , EF4 C = Yield to call at par on September 1, CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the 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 Certificates 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 Certificates. No Securities Laws Registration. The Certificates 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 Certificates 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 Certificates 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. Estimates and Projections. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States 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. 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 Certificates. 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 Certificates offered hereby at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Certificates 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 said public offering prices may be changed from time to time by the Underwriter. Bond Insurance. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM, supplied by AGM and presented under the heading BOND INSURANCE and APPENDIX E SPECIMEN MUNICIPAL BOND INSURANCE POLICY. - iii -

4 $27,945,000 FONTANA UNIFIED SCHOOL DISTRICT (SAN BERNARDINO COUNTY, CALIFORNIA) CERTIFICATES OF PARTICIPATION (2016 REFINANCING PROJECT) DISTRICT BOARD OF EDUCATION Lorena Corona, President Mary Sandoval, Vice President / Clerk Jesse Armendarez, Member BarBara L. Chavez, Member Matt Slowik, MURP, MPA, Member DISTRICT ADMINISTRATION Leslie Boozer, Ed.D., J.D., Superintendent Randal S. Bassett, Associate Superintendent, Business Services Antonio J. Cediel, Ed.D., Associate Superintendent, Teaching and Learning David Creswell, Associate Superintendent, Human Resources Oscar Dueñas, Associate Superintendent, Student Services Fontana Unified School District 9680 Citrus Avenue Fontana, California (909) MUNICIPAL ADVISOR Government Financial Strategies inc N Street, Suite 13 Sacramento, California (916) SPECIAL COUNSEL Quint & Thimmig LLP 900 Larkspur Landing Circle, Suite 270 Larkspur, California (415) TRUSTEE The Bank of New York Mellon Trust Company, N.A. 400 South Hope Street, Suite 400 Los Angeles, California (213) ESCROW AGENT U.S. Bank National Association 633 West Fifth Street, 24 th Floor Los Angeles, California (213) VERIFICATION AGENT AMTEC Corporation 90 Avon Meadow Lane, Second Floor Avon, Connecticut (860) iv -

5 $27,945,000 FONTANA UNIFIED SCHOOL DISTRICT (SAN BERNARDINO COUNTY, CALIFORNIA) CERTIFICATES OF PARTICIPATION (2016 REFINANCING PROJECT) TABLE OF CONTENTS Page # INTRODUCTORY STATEMENT... 1 The District... 1 The Authority... 1 Purpose of Issue... 1 The Certificates... 2 Authority for Delivery and Security and Source of Repayment for the Certificates... 2 Bond Insurance and Debt Service Reserve Insurance... 3 Tax Matters... 3 Continuing Disclosure... 3 Professionals Involved... 3 Other Information... 3 THE CERTIFICATES... 4 Amount and Purpose of the Certificates... 4 Form and Registration... 4 Payment of Principal and Interest... 4 Transfer and Exchange... 5 Redemption Provisions... 5 Lease Payments... 6 Source of Payment for the Certificates... 7 Reserve Fund... 8 Insurance... 8 Payment Plan for the Certificates... 9 BOND INSURANCE... 9 Bond Insurance Policy... 9 Assured Guaranty Municipal Corp THE PROPERTY PLAN OF REFUNDING Application and Investment of Certificate Proceeds Sources and Uses of Funds SPECIAL RISK FACTORS Payments Not District Debt Additional Obligations Levy of Special Taxes Abatement Substitution of or Removal from the Property No Earthquake Insurance Coverage Hazardous Substances No Acceleration Upon Default Enforcement of Remedies Bankruptcy Loss of Tax Exemption State Finances THE AUTHORITY THE DISTRICT General Information The Board of Education and Key Administrative Personnel Enrollment Charter Schools Pupil-to-Teacher Ratios Employee Relations Pension Plans v -

6 Other Postemployment Benefits (OPEB) DISTRICT FINANCIAL INFORMATION Accounting Practices Budget and Financial Reporting Process Financial Statements Revenues Expenditures Short-Term Borrowings Capitalized Lease Obligations Long-Term Borrowings Direct and Overlapping Bonded Debt TAXATION AND APPROPRIATIONS Property Taxation System Assessed Valuation of Property Within the District Historical Assessed Valuation Largest Taxpayers In District Alternative Method of Tax Apportionment Tax Collections and Delinquencies CITY AND COUNTY ECONOMIC PROFILE General Information Population Personal Income Labor Force and Employment Employment by Industry Major Employers Commercial Activity Construction Activity CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Overview Government Taxation and Appropriation State Authority Over Local Government Funds State and School District Reserves Impact of Future Changes to the Law STATE FUNDING OF PUBLIC EDUCATION Sources of Revenue for Public Education The State Budget Process The State Budget The Proposed State Budget The May Revision to the Proposed State Budget Future Budgets LEGAL MATTERS No Litigation Legal Opinion Tax Matters Legality for Investment RATINGS MUNICIPAL ADVISOR INDEPENDENT AUDITOR UNDERWRITING AND INITIAL OFFERING PRICE CONTINUING DISCLOSURE ADDITIONAL INFORMATION APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2015 FORM OF CONTINUING DISCLOSURE CERTIFICATE FORM OF OPINION OF SPECIAL COUNSEL SPECIMEN MUNICIPAL BOND INSURANCE POLICY BOOK-ENTRY SYSTEM - vi -

7 OFFICIAL STATEMENT $27,945,000 CERTIFICATES OF PARTICIPATION (2016 REFINANCING PROJECT) Evidencing Direct, Undivided Fractional Interests of the Registered Owners Thereof in Lease Payments to be Made by the FONTANA UNIFIED SCHOOL DISTRICT (SAN BERNARDINO COUNTY, CALIFORNIA) As the Rental for Certain Property Pursuant to a Lease Agreement with the FONTANA UNIFIED SCHOOL DISTRICT PUBLIC FINANCING AUTHORITY INTRODUCTORY STATEMENT 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 Fontana Unified School District Certificates of Participation (2016 Refinancing Project) (the Certificates ). 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 the entire Official Statement, including the cover page, inside cover page and attached appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement by prospective investors in the Certificates. The offering of the Certificates to potential investors is made only by means of the entire Official Statement. The District Fontana Unified School District (the District ), a political subdivision of the State of California (the State ), was established in The District occupies approximately 55 square miles in the southwestern portion of San Bernardino County (the County ) approximately 50 miles east of Los Angeles, serving a population of approximately 181,244 people residing in the City of Fontana (the City ) and portions of the cities of Rialto and Rancho Cucamonga as well as unincorporated areas of the County. The District operates 44 schools serving approximately 38,700 students in kindergarten through twelfth grade, as well as additional students in preschool and adult education. A five-member Board of Education (the Board ) governs the District. See THE DISTRICT and DISTRICT FINANCIAL INFORMATION herein. The Authority The Fontana Unified School District Public Financing Authority (the Authority ) is a joint powers authority duly organized and existing under and pursuant to a Joint Exercise of Powers Agreement (the JPA Agreement ) dated as of January 17, 2007, by and between the District and Community Facilities District No of the Fontana Unified School District, and is authorized pursuant to provisions of the State Education Code to assist local governmental agencies in obtaining financing. See THE AUTHORITY herein. Purpose of Issue The Certificates are being executed and delivered by the District to (i) refund on an advance basis the Fontana Unified School District Certificates of Participation (2007 Financing Project) (the 2007 Certificates ) and (ii) pay certain delivery costs of the Certificates, including the premiums for a municipal bond insurance policy and debt service reserve insurance policy. See PLAN OF REFUNDING herein

8 The Certificates The Certificates are being executed and delivered in the aggregate principal amount of $27,945,000. The Certificates evidence direct, undivided fractional interests of the registered owners thereof (the Registered Owners ) in lease payments (the Lease Payments ) to be made by the District as the rental for the use and possession of the Property at Summit Avenue, Fontana, California, known as Summit High School (the Property ), leased from the Authority pursuant to a lease agreement dated June 1, 2016 (the Lease Agreement ). See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. Proceeds from the sale and delivery of the Certificates will be deposited into the funds and accounts as established under a trust agreement dated June 1, 2016 (the Trust Agreement ) by and among the District, the Authority and The Bank of New York Mellon Trust Company, N.A. (the Trustee ). See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS TRUST AGREEMENT attached hereto. The Certificates are executed and delivered as fully registered Certificates, without coupons, in book-entry form only, and are initially executed and delivered and registered in the name of Cede & Co. as nominee of The Depository Trust Company ( DTC ). Payments of the principal and interest with respect to the Certificates will be made by the Trustee to DTC for subsequent disbursement to the Beneficial Owners (as defined herein). See APPENDIX F BOOK-ENTRY SYSTEM attached hereto. The Certificates are dated their date of delivery and mature on September 1 in each of the years and in the amounts set forth on the inside cover page hereof. The Certificates are executed and delivered in denominations of $5,000 principal amount or any integral multiple thereof. Interest with respect to the Certificates is payable on March 1 and September 1 of each year, commencing September 1, Interest with respect to the Certificates is computed on the basis of a 360-day year comprised of twelve 30-day months. See THE CERTIFICATES herein. The Certificates are subject to redemption prior to maturity. See THE CERTIFICATES Redemption Provisions herein. Authority for Delivery and Security and Source of Repayment for the Certificates The Certificates are executed and delivered pursuant to certain provisions of the State Government Code (the Government Code ) and other applicable law, and pursuant to a resolution adopted by the District on April 20, 2016 (the Resolution ) and the Trust Agreement. Under the terms of a site and facility lease dated June 1, 2016 between the District and the Authority (the Site and Facility Lease ), the District will lease the Property to the Authority. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS SITE AND FACILITY LEASE attached hereto. Under the terms of the Lease Agreement, the District will lease back the Property from the Authority and is required to pay Lease Payments from any source of legally available funds for the use and possession of the Property, which amounts are sufficient in both time and aggregate amount to pay the principal and interest with respect to the Certificates. The District is also required to make additional payments as necessary to pay all fees and expenses it incurs in connection with or by reason of its leasehold estate in the Property, any amounts due to the Trustee pursuant to the Trust Agreement for all services rendered under the Trust Agreement, fees and expenses of the District, Authority or Trustee incurred to comply with the provisions of the Lease Agreement or Trust Agreement, and reimbursements to the issuer of the bond insurance policy and debt service reserve insurance policy of amounts drawn under such policies and any associated costs (the Additional Payments ). Pursuant to the terms of an assignment agreement dated June 1, 2016 (the Assignment Agreement ) between the Authority and the Trustee, the Authority has assigned to the Trustee, for the benefit of the Registered Owners of the Certificates, substantially all of its rights under the Lease Agreement, including (i) its right to receive Lease Payments from the District under the Lease Agreement, (ii) its right to receive and collect any proceeds of any insurance and of any condemnation award rendered with respect to the Property, and (iii) all other rights under the Lease Agreement as may be necessary to enforce payment of Lease Payments when due or otherwise to protect the interests of the Registered Owners of the Certificates. See THE CERTIFICATES Sources of Payment of the Certificates herein and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ASSIGNMENT AGREEMENT attached hereto. The District has covenanted under the Lease Agreement to take such action as may be necessary to include all Lease Payments and Additional Payments in its annual budgets and make the necessary annual appropriations therefor, subject to abatement due to - 2 -

9 damage, destruction or eminent domain with respect to the Property. Lease Payments are subject to abatement during any period during which, by reason of material damage, destruction or condemnation of the Property or any portion thereof, there is substantial interference with the District s use of a substantial portion of the Property. See SPECIAL RISK FACTORS Abatement herein and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT Abatement of Lease Payments in the Event of Damage or Destruction attached hereto. The obligation of the District to make Lease Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation. Neither the Certificates nor the obligation of the District to make Lease Payments under the Lease Agreement constitutes a debt or indebtedness of the Authority, the District or the State or any political subdivision thereof within the meaning of any Constitutional or statutory debt limitation or restriction or an obligation for which the Authority or the District is obligated to levy or pledge any form of taxation. Bond Insurance and Debt Service Reserve Insurance The scheduled payment of principal of and interest with respect to the Certificates when due will be guaranteed under a municipal bond insurance policy (the Policy ) to be issued concurrently with the delivery of the Certificates by Assured Guaranty Municipal Corp. ( AGM ). See BOND INSURANCE herein and APPENDIX E SPECIMEN MUNICIPAL BOND INSURANCE POLICY attached hereto. The District has also elected to purchase from AGM a debt service reserve insurance policy (the Reserve Policy ) to satisfy the initial reserve requirement for the Certificates. Tax Matters In the opinion of Quint & Thimmig LLP, Larkspur, California, Special Counsel ( Special Counsel ), subject to compliance by the District with certain covenants, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but such interest is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In addition, in the opinion of Special Counsel, interest with respect to the Certificates is exempt from personal income taxation imposed by the State of California. See LEGAL MATTERS Tax Matters herein. A complete copy of the proposed opinion of Special Counsel is included with this Official Statement. See APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL attached hereto. Continuing Disclosure The District will covenant for the benefit of the Registered Owners and Beneficial Owners (as defined herein) to make available certain financial information and operating data relating to the District and to provide notices of the occurrence of certain enumerated events in compliance with S.E.C. 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 C FORM OF CONTINUING DISCLOSURE CERTIFICATE. 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 Certificates. See MUNICIPAL ADVISOR herein. All proceedings in connection with the sale and delivery of the Certificates are subject to the approving legal opinion of Quint & Thimmig LLP, Special Counsel to the District with respect to the Certificates. The Bank of New York Mellon Trust Company, N.A. will act as the trustee, registrar, and paying agent with respect to the Certificates. U.S. Bank National Association will act as escrow agent (the Escrow Agent ) with respect to the refunded 2007 Certificates. Quint & Thimmig LLP, The Bank of New York Mellon Trust Company, N.A. and U.S. Bank National Association will receive compensation contingent upon the execution and delivery of the Certificates. Other Information This Official Statement may be considered current only as of its dated date affixed to the cover page hereof, and the information contained herein is subject to change. Brief descriptions of the Certificates, the security for the Certificates and the District are - 3 -

10 included in this Official Statement, together with summaries of certain provisions relating to the Trust Agreement, the Lease Agreement, the Site and Facility Lease and the Assignment Agreement (collectively, the Legal Documents ). Such descriptions 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 Certificates are qualified in their entirety by reference to the form thereof included in the Legal Documents. Information concerning this Official Statement, the Certificates, the District, the Legal Documents or any other information relating to the sale and delivery of the Certificates is available for public inspection and may be obtained by contacting the Fontana Unified School District, 9680 Citrus Avenue, Fontana, California 92335, telephone (909) , Attention: Associate Superintendent, Business Services, or by contacting the Municipal Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California , telephone (916) THE CERTIFICATES Amount and Purpose of the Certificates The Certificates are being sold in the principal amount of $27,945,000 to (i) refund on an advance basis the 2007 Certificates maturing September 1, 2018 through September 1, 2035, inclusive (the Refunded Certificates ), and (ii) pay certain delivery costs of the Certificates, including the premiums for the Policy and the Reserve Policy. See PLAN OF REFUNDING herein. Form and Registration The Certificates are dated their date of delivery and executed and delivered as fully registered certificates, without coupons, in book-entry form only. Pursuant to the Trust Agreement, the Trustee will keep and maintain for and on behalf of the District at the Trustee s principal corporate trust office, books (the Registration Books ) for recording the Registered Owners, the transfer, exchange, and replacement of the Certificates, and the payment of the principal and interest with respect to the Certificates to the Registered Owners. All transfers, exchanges, and replacement of the Certificates will be noted in the Registration Books. The Registration Books will at all times be open to inspection during normal business hours by the District and Authority. The Certificates will be initially executed and delivered and registered in the name of Cede & Co. as nominee of DTC. Purchases of Certificates under the DTC book-entry system must be made by or through a DTC participant, and ownership interests in Certificates will be recorded as entries on the books of said participants. Except in the event that use of this book-entry system is discontinued for the Certificates, purchasers of the Certificates (the Beneficial Owners ) will not receive physical certificates representing their ownership interests in the Certificates. See APPENDIX F BOOK-ENTRY SYSTEM attached hereto. So long as the Certificates are registered in the name of Cede & Co., as nominee for DTC, references in this Official Statement to the Registered Owners shall mean Cede & Co., and shall not mean the purchasers or Beneficial Owners of the Certificates. Payment of Principal and Interest The Certificates are executed and delivered in denominations of $5,000 principal amount, or any integral multiple thereof, and mature on September 1 in each of the years and in the amounts set forth on the inside cover page hereof. Interest with respect to the Certificates is payable on March 1 and September 1 of each year (each, an Interest Payment Date ), commencing September 1, Interest with respect to the Certificates is computed on the basis of a 360-day year comprised of twelve 30-day months. Each Certificate will bear interest from the Interest Payment Date next preceding the date of registration and authentication thereof, unless (i) it is executed as of an Interest Payment Date, in which event interest will be payable from such Interest Payment Date; (ii) it is executed after close of business on the fifteenth day of the month preceding an Interest Payment Date (the Record Date ) and before the following Interest Payment Date, in which event interest will be payable from such Interest Payment Date; or (iii) it is executed on or before August 15, 2016, in which event it will bear interest from the date of delivery; provided, that if, at the time of authentication of any Certificate, interest is in default thereon, such Certificate will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment. Interest with respect to the Certificates is computed on the basis of a 360-day year comprised of twelve 30-day months

11 The principal and redemption price with respect to the Certificates at maturity or upon prior redemption is payable in lawful money of the United States of America by wire transfer on each principal and redemption date to Cede & Co., so long as Cede & Co. is the sole Registered Owner, or if the book-entry system is no longer in use, to the Registered Owner thereof upon surrender thereof at the principal office of the Trustee. Interest with respect to the Certificates is payable in lawful money of the United States of America by wire transfer on each Interest 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, interest with respect to each Certificate due on any Interest Payment Date is payable by check of the Trustee mailed to the Registered Owner thereof at such Registered Owner's address as it appears on the Registration Books at the close of business on the preceding Record Date; provided that at the written request of the Registered Owner of at least $1,000,000 aggregate principal amount of Certificates, which written request is on file with the Trustee on the preceding Record Date, interest with respect to such Certificates will be paid on the succeeding Interest Payment Date by wire transfer in immediately available funds to such account in the United States as specified in such written request. Transfer and Exchange If the book-entry system as described above is no longer used with respect to the Certificates, the provisions in the Trust Agreement summarized below will govern the transfer and exchange of the Certificates. The registration of any Certificate may, in accordance with its terms, be transferred upon the Registration Books by the person in whose name it is registered, in person or by his attorney duly authorized in writing, upon surrender of such Certificate for cancellation at the Trustee s principal corporate office, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Certificates may be exchanged, upon surrender thereof, at the Trustee s principal corporate office for a like aggregate principal amount of Certificates of other authorized denominations of the same maturity. Whenever any Certificate is surrendered for transfer or exchange, the Trustee will execute and deliver a new Certificate for like aggregate principal amount in authorized denominations. No service charge will be made for any transfer or exchange of Certificates, but the Trustee may require the Registered Owner requesting such transfer or exchange to pay any tax or other governmental charge required to be paid with respect to such transfer or exchange. The Trustee is not required to transfer or exchange (i) any Certificate or any portion thereof during the period between the date 15 days prior to the date of selection of Certificates for redemption and such date of selection, or (ii) any Certificate selected for redemption. Redemption Provisions Optional Redemption. The Certificates maturing on or before September 1, 2025 are not subject to optional redemption prior to their respective maturity dates. The Certificates maturing on or after September 1, 2026 are subject to optional redemption prior to their respective stated maturity dates, at the option of the District, from any source of available funds, as a whole or in part on any date on or after September 1, 2025, at par, upon notice as described below. Extraordinary Mandatory Redemption From Net Proceeds of Insurance, Title Insurance, Condemnation or Eminent Domain Award. The Certificates are subject to mandatory redemption, in whole or in part on any Interest Payment Date, at a redemption price equal to the principal amount thereof, without premium, plus accrued interest to the date fixed for redemption with respect thereto, from (i) net insurance proceeds or condemnation awards not used to repair or replace the Property or portions thereof which have been materially damaged, destroyed or taken in eminent domain proceedings, or (ii) proceeds of title insurance if the title defect giving rise to the payment of such proceeds would result in an abatement of Lease Payments under the Lease Agreement. Selection of Certificates for Redemption. If less than all of the outstanding Certificates are to be redeemed, the Trustee will select Certificates for redemption from the outstanding Certificates not previously called for redemption in such order of maturity as designated by the District (and, in lieu of such designation, pro rata among maturities). The Trustee will select Certificates for redemption within each maturity by lot in any manner which the Trustee, in its sole discretion, deems appropriate. For the purposes of such selection, Certificates will be deemed to be composed of $5,000 portions and any such portion may be separately redeemed. The Trustee will promptly notify the District and the Authority in writing of the Certificates so selected for redemption. Selection by the Trustee of Certificates for redemption is final and conclusive

12 Notice of Redemption. The District will notify the Trustee of its intention to redeem Certificates at least 45 days prior to the date fixed for redemption, unless the Trustee otherwise agrees to a shorter period for such notice. Unless waived in writing by any Registered Owner of a Certificate to be redeemed, notice of any redemption will be given by the Trustee on behalf and at the expense of the District, by mailing a copy of a redemption notice by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Registered Owner of the Certificate or Certificates to be redeemed at the address shown on the Registration Books or at such other address as is furnished in writing by such Registered Owner to the Trustee; provided, however, that neither the failure to receive such notice nor any defect in any notice will affect the sufficiency of the proceedings for the redemption of the Certificates. All notices of redemption will be dated and will state: (i) the redemption date; (ii) the redemption price; (iii) if less than all outstanding Certificates of a maturity are to be redeemed, the Certificate numbers (and, in the case of partial redemption, the respective principal amounts) of the Certificates to be redeemed; (iv) that on the redemption date the redemption price will become due and payable upon each such Certificate or portion thereof called for redemption and that interest with respect to the Certificates shall cease to accrue from and after said date; (v) the place where such Certificates are to be surrendered for payment of the redemption price; (vi) the CUSIP numbers of all Certificates being redeemed; (vii) the original date of execution and delivery of the Certificates; (viii) the rate of interest payable with respect to each maturity of Certificates being redeemed; (ix) the maturity date of each Certificate being redeemed; and (x) any other descriptive information needed to identify accurately the Certificates being redeemed. Such notice of redemption will also be filed with DTC (or successor securities depository) and the Municipal Securities Rulemaking Board (the MSRB ) through its Electronic Municipal Market Access ( EMMA ) system (or successor information service). In the case of any optional redemption of the Certificates, the notice of redemption will state that the redemption is conditioned upon the receipt by the Trustee of sufficient moneys to redeem the Certificates on the scheduled redemption date, and that the optional redemption will not occur if, by no later than the scheduled redemption date, sufficient moneys to redeem the Certificates have not been deposited with the Trustee. In the event that the Trustee does not receive sufficient funds by the scheduled optional redemption date, such event will not constitute an event of default; the Trustee will send written notice to the Registered Owners, DTC and EMMA to the effect that the redemption did not occur as anticipated, and the Certificates for which the notice of optional redemption was given will remain outstanding. The Trustee has no responsibility for a defect in the CUSIP number that appears on any Certificate or in the redemption notice. The redemption notice may provide that the CUSIP numbers have been assigned by an independent service and are included in the notice for the convenience of the Registered Owners, and that the Trustee and the District are not liable in any way for inaccuracies in said CUSIP numbers. Effect of Redemption. Notice of redemption having been given as aforesaid and the deposit of the redemption price having been made by the District, the Certificates or portions of Certificates so to be redeemed will, on the redemption date, become due and payable at the redemption price therein specified, and from and after such date interest with respect to such Certificates or portions of Certificates will cease to be payable. Upon surrender of such Certificates for redemption in accordance with said notice, such Certificates will be paid by the Trustee at the redemption price. Upon the payment of the redemption price of Certificates being redeemed, each check or other transfer of funds issued for such purpose will bear the CUSIP number identifying, by issue and maturity, the Certificates being redeemed with the proceeds of such check or other transfer, to the extent possible. Installments of interest due on or prior to the redemption date remain payable. All Certificates which have been redeemed will be canceled by the Trustee, will not be redelivered and will be destroyed. Lease Payments Lease Payments are required to be made by the District under the Lease Agreement on or before the fifteenth day of the month immediately preceding each Interest Payment Date for the use and possession of the Property. The Lease Agreement requires that Lease Payments be made to the Trustee for deposit in a special fund (the Lease Payment Fund ). On each Interest Payment Date, the Trustee will withdraw from the Lease Payment Fund the aggregate amount necessary to make annual principal and semiannual interest payments with respect to the Certificates, as shown in the following table

13 Lease Payments Schedule Certificates of Participation Interest Payment Date Principal Interest Semiannual Debt Service Annual Debt Service September 1, 2016 $340, $275, $615, $615, March 1, , , September 1, ,235, , ,826, ,417, March 1, , , September 1, ,335, , ,901, ,467, March 1, , , September 1, ,420, , ,952, ,485, March 1, , , September 1, ,505, , ,002, ,499, March 1, , , September 1, ,595, , ,054, ,514, March 1, , , September 1, ,650, , ,069, ,489, March 1, , , September 1, ,720, , ,098, ,477, March 1, , , September 1, ,795, , ,130, ,466, March 1, , , September 1, ,835, , ,125, ,416, March 1, , , September 1, ,935, , ,189, ,443, March 1, , , September 1, ,920, , ,135, ,350, March 1, , , September 1, ,690, , ,867, ,044, March 1, , , September 1, ,485, , ,628, ,771, March 1, , , September 1, ,210, , ,323, ,437, March 1, , , September 1, ,000, , ,089, ,178, March 1, , , September 1, ,045, , ,114, ,183, March 1, , , September 1, ,110, , ,158, ,206, March 1, , , September 1, ,170, , ,201, ,233, March 1, , , September 1, , , , , Total $27,945, $10,734, $38,679, $38,679, Source of Payment for the Certificates Each Certificate represents a direct, undivided fractional interest in the Lease Payments to be made by the District to the Authority. The Authority, pursuant to the Assignment Agreement, will assign its rights under the Lease Agreement to the Trustee for the benefit of the Registered Owners, including its right to receive Lease Payments thereunder and its right to exercise such rights and remedies as may be necessary to enforce Lease Payments when due or otherwise to protect its interests if an Event of Default (as defined in the Lease Agreement) occurs. Principal and interest with respect to the Certificates when due will be made from Lease Payments payable by the District for the use and occupancy of the Property, rental interruption insurance proceeds, if - 7 -

14 any, insurance net proceeds pertaining to the Property to the extent that such net proceeds are not used for repair or replacement, and from money in the reserve fund established and held by the Trustee solely for the purpose of making up any deficiencies in the Lease Payment Fund (the Reserve Fund ). The District has covenanted under the Lease Agreement to make Lease Payments for the use and possession of the Property and, as long as the Property is available for its use, to take such action as may be necessary to include all Lease Payments and any Additional Payments due under the Lease Agreement in its annual budget and to make the necessary annual appropriations therefor. The Lease Agreement requires that the District furnish annually to the Trustee a certificate stating that all Lease Payments and Additional Payments for the applicable fiscal year have been included in its annual budget. Such covenants are deemed in the Lease Agreement to be duties imposed by law and the ministerial duty of each and every public official of the District. The amount of Lease Payments due under the Lease Agreement will be abated during any period in which by reason of damage, destruction, eminent domain, material title defect or otherwise there is substantial interference with the use and occupancy of the Property or any portion thereof by the District. If abatement occurs, the amount of abatement will be such that the resulting Lease Payments and Additional Payments represent fair consideration for use of that portion of the Property that is available for use as determined by the District. See SPECIAL RISK FACTORS Abatement herein. The abated Lease Payments will be payable solely from moneys deposited in the Reserve Fund, the Lease Payment Fund, or from the proceeds of rental interruption insurance, if any, in the event of damage or destruction as determined by the District. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. Upon the cessation of such damage, destruction or title defect, the Property will be appraised to determine its current fair rental value. If such value has increased since the closing date, Lease Payments will be increased for the remaining term to reflect such increases so the amounts abated are recouped. If the Lease Payments remain abated and the rental interruption insurance is exhausted and the Reserve Fund is depleted, the diminished Lease Payments, if any, may not be sufficient to pay the principal and interest with respect to the Certificates when due. See SPECIAL RISK FACTORS herein. The failure to make such payments of principal and interest with respect to the Certificates due to such abatement does not constitute an Event of Default under the Trust Agreement, the Lease Agreement or the Certificates. The obligation of the District to make Lease Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation. Neither the Certificates nor the obligation of the District to make Lease Payments under the Lease Agreement constitutes a debt or indebtedness of the Authority, the District, or the State or any political subdivision thereof within the meaning of any Constitutional or statutory debt limitation or restriction or an obligation for which the Authority or the District is obligated to levy or pledge any form of taxation. Reserve Fund The Trust Agreement provides that a Reserve Fund funded in an amount equal to maximum aggregate Lease Payments required to be paid in any annual period (the Reserve Requirement ) from proceeds of the sale of the Certificates or cash deposited by the District. In lieu of a cash funded reserve, the District can purchase a debt service reserve insurance policy in the amount required thereunder in favor of the Trustee. In the event of insufficient funds in the Lease Payment Fund from which to make principal and/or interest payments to the Registered Owners as due on an Interest Payment Date, the Trustee will draw first on the Reserve Fund, to the extent available therefrom, to obtain sufficient funds to pay principal and/or interest as due to the Registered Owners. The Reserve Fund initially will be funded with the Reserve Policy in the amount of $2,514,223.08, the initial Reserve Requirement, issued by AGM upon the closing of the Certificates. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS TRUST AGREEMENT Reserve Fund and DEFINITIONS Reserve Requirement attached hereto. Insurance The District will maintain or cause to be maintained, throughout the term of the Lease Agreement, the following insurance: (i) A standard comprehensive general insurance policy or policies in protection of the Authority, the District and the Trustee and their respective members, officers, agents and employees. Such policy or policies will provide for indemnification against direct or consequential loss or liability for damages for bodily and personal injury, death, or property damage by reason of the operation of the Property. (ii) Insurance against loss or damage to the Property by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Such extended coverage insurance will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke, and other such hazards as are normally covered by such insurance. Such - 8 -

15 insurance will be in an amount equal to the full replacement cost of all structures constituting any part of the Property, subject to certain deductible amounts. (iii) Rental interruption insurance to cover loss, total or partial, of the use of the Property in an amount equal to two times the maximum annual Lease Payments. (iv) A policy of title insurance on the interest acquired by Authority for the purposes of the Property in an amount equal to the not less than principal amount of the Certificates. Comprehensive general insurance may be maintained through a system of self-insurance, under certain circumstances, as set forth in the Lease Agreement. For more information regarding insurance, see APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT Insurance attached hereto. Payment Plan for the Certificates The Lease Payments are payable from any source of legally available funds, including but not limited to unrestricted moneys of the District, the majority of which are deposited in the District s general fund (the General Fund ). See SPECIAL RISK FACTORS Payments Not District Debt herein. Although not pledged for repayment, the District intends to use special taxes levied in seven Fontana Unified School District Community Facilities Districts (the CFDs ), listed below, as a source of repayment for the Certificates: Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) Community Facilities District No of the Fontana Unified School District ( CFD No ) To the extent that the revenues received from special taxes are insufficient to make principal and interest payments with respect to the Certificates, the District intends to cover any shortfall from its General Fund. See SPECIAL RISK FACTORS Levy of Special Taxes herein. The seven CFDs were organized by the District for the purpose of providing for the acquisition, leasing, construction, and installation of certain facilities to serve property within each CFD. The five members of the Board serve as the legislative body of each CFD by virtue of their election to the Board. The District has not issued bonds for any of the CFDs, but has levied and will continue to levy special taxes for the purpose of paying directly for the cost of the acquisition, leasing, constructing and installing of school facilities in each of the CFDs to the extent permitted by law and the formation proceedings with respect to such CFD. The special taxes are to be levied annually against taxable units of property within any CFD, with the number of taxable units and the amount of special tax varying depending on the land use of the property, the status of development approval, and the date on which a taxable unit is placed in a category of development approval status. The special tax formula establishes maximum rates that may be levied against taxable land, depending on these various factors. Special taxes levied in the CFDs were approximately $4.9 million in fiscal year and are budgeted to be approximately $5.2 million in fiscal year BOND INSURANCE Bond Insurance Policy Concurrently with the delivery of the Certificates, Assured Guaranty Municipal Corp. ( AGM ) will issue its Municipal Bond Insurance Policy for the Certificates (the Policy ). The Policy guarantees the scheduled payment of principal of and interest with respect to the Certificates when due as set forth in the form of the Policy included as APPENDIX E to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law

16 Assured Guaranty Municipal Corp. AGM is a New York domiciled financial guaranty insurance company and an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. Neither AGL nor any of its shareholders or affiliates, other than AGM, is obligated to pay any debts of AGM or any claims under any insurance policy issued by AGM. AGM s financial strength is rated AA (stable outlook) by S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC ( S&P ), AA+ (stable outlook) by Kroll Bond Rating Agency, Inc. ( KBRA ) and A2 (stable outlook) by Moody s Investors Service, Inc. ( Moody s ). Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings. On June 29, 2015, S&P issued a credit rating report in which it affirmed AGM s financial strength rating of AA (stable outlook). AGM can give no assurance as to any further ratings action that S&P may take. On December 8, 2015, Moody s published a credit opinion maintaining its existing insurance financial strength rating of A2 (stable outlook) on AGM. AGM can give no assurance as to any further ratings action that Moody s may take. On December 10, 2015, KBRA issued a financial guaranty surveillance report in which it affirmed AGM s insurance financial strength rating of AA+ (stable outlook). AGM can give no assurance as to any further ratings action that KBRA may take. For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, Capitalization of AGM. At March 31, 2016, AGM s policyholders surplus and contingency reserve were approximately $3,742 million and its net unearned premium reserve was approximately $1,530 million. Such amounts represent the combined surplus, contingency reserve and net unearned premium reserve of AGM, AGM s wholly owned subsidiary Assured Guaranty (Europe) Ltd. and 60.7 percent of AGM s indirect subsidiary Municipal Assurance Corp.; each amount of surplus, contingency reserve and net unearned premium reserve for each company was determined in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference. Portions of the following documents filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (filed by AGL with the SEC on February 26, 2016); and (ii) The Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 (filed by AGL with the SEC on May 5, 2016). All consolidated financial statements of AGM and all other information relating to AGM included in, or as exhibits to, documents filed by AGL with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, excluding Current Reports or portions thereof furnished under Item 2.02 or Item 7.01 of Form 8-K, after the filing of the last document referred to above and before the termination of the offering of the Certificates shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52 nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Except for the information

17 referred to above, no information available on or through AGL s website shall be deemed to be part of or incorporated in this Official Statement. Any information regarding AGM included herein under the caption BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters. AGM makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE. THE PROPERTY Pursuant to the Site and Facility Lease and the Lease Agreement, respectively, the District will lease the Property to the Authority and the Authority will, in turn, lease the Property to the District. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS SITE AND FACILITY LEASE and LEASE AGREEMENT attached hereto. During the period the Certificates are outstanding, the District will retain title to the Property and all structural additions thereto, and the Authority will have a leasehold estate in the Property. The Property consists of the real property (the legal description of which is included in the Lease Agreement) and the improvements located thereon at Summit Avenue, Fontana, California, known as Summit High School. Summit High School is comprised of 216,892 square feet of school facilities constructed in In fiscal year , enrollment at Summit High School was approximately 2,606 students in ninth through twelfth grade. The Property has an insured total value, exclusive of the value of the land, of $64,188,768. PLAN OF REFUNDING Application and Investment of Certificate Proceeds A portion of the proceeds from the sale of the Certificates will be paid to AGM for the premiums of the Policy and the Reserve Policy. The remaining proceeds from the sale of the Certificates, together with certain District funds available to pay debt service on the 2007 Certificates, will be paid to the Trustee who will (i) transfer to the Escrow Agent for deposit into a fund (the Escrow Fund ) established and maintained by the Escrow Agent pursuant to an escrow agreement dated June 1, 2016, by and between the District and the Escrow Agent (the Escrow Agreement ) an amount sufficient to defease the Refunded Certificates, and (ii) deposit into a fund established with the Trustee proceeds sufficient to pay the delivery costs of the Certificates (the Delivery Costs Fund ). Moneys deposited in the Delivery Costs Fund, as well as moneys in the Lease Payment Fund and Reserve Fund, will be invested in any one or more investments generally permitted to school districts under the laws of the State. Interest earned on the investment of the moneys in the Escrow Fund and the Delivery Costs Fund will be retained within the respective fund. Moneys in the Escrow Fund will be invested in non-callable direct obligations of the United States Treasury 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, or held in cash uninvested. AMTEC Corporation, acting as verification agent with respect to the Escrow Fund, will certify in writing that moneys irrevocably 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 Certificates on September 1, Upon such irrevocable deposit, the Refunded Certificates will be deemed paid and no longer outstanding

18 The refunding details are identified in the following table. Refunded Certificates Fontana Unified School District Maturities Principal Amount Redemption Redemption Type of Series Refunded Refunded Date Price Refunding 2007 Certificates September 1, $36,480,000 September 1, % Advance Sources and Uses of Funds The sources and uses of funds in connection with the sale and delivery of the Certificates are set forth in the following schedule. Sources and Uses of Funds Certificates of Participation SOURCES OF FUNDS Par Amount of the Certificates $27,945, Net Original Issue Premium 3,960, Available Amount from 2007 Certificates 7,361, TOTAL SOURCES OF FUNDS $39,266, USES OF FUNDS Escrow Fund $38,711, Delivery Costs Fund 1 340, Underwriting Discount 215, TOTAL USES OF FUNDS $39,266, Delivery costs include the fees and expenses of Special Counsel, the Municipal Advisor, the Trustee, the Escrow Agent, the rating agency, the verification agent, the premiums for the Policy and the Reserve Policy, and other costs. SPECIAL RISK FACTORS The following factors, which represent major risk factors that have been identified at this time, should be considered along with all other information in this Official Statement by potential investors in evaluating the credit quality of the Certificates. There can be no assurance that other major risk factors do not exist or will not become evident at any future time regarding the credit quality of the Certificates. The discussion below does not purport to be, nor should it be construed to be, complete nor a summary of all factors which may affect the financial condition of the District, the District s ability to make Lease Payments in the future, the effectiveness of any remedies that the Trustee may have or the circumstances under which Lease Payments may be abated. Furthermore, no representations are made as to the future financial condition of the District. Payment of the Lease Payments is a General Fund obligation of the District and the ability of the District to make Lease Payments may be adversely affected by its financial condition as of any particular time

19 Payments Not District Debt The obligation of the District under the Lease Agreement to pay Lease Payments is in consideration for the use and possession of the Property. The obligation of the District to make Lease Payments (other than to the extent that funds to make Lease Payments are then available in the Lease Payment Fund and the Reserve Fund) may be abated in whole or in part if the District does not have full use and possession of the Property. Lease Payments due under the Lease Agreement will be abated during any period in which, by reason of condemnation, damage or destruction, there is substantial interference with the use and possession by the District of the Property, or a material portion thereof. The amount of abatement will be determined by the District, such that the resulting Lease Payments represent fair consideration for the use an possession of the portion of the Property not condemned, damaged, or destroyed. Such abatement will continue for the period commencing with the date of such condemnation, damage or destruction and ending with the restoration of the affected portion of the Property to a condition which will permit the affected portion of the Property to be used substantially as intended. The District is obligated to maintain rental interruption insurance in an amount no less than twice the maximum annual Lease Payment. Such abatement should not present a problem so long as proceeds of the District s rental interruption insurance are available and there are amounts in the Reserve Fund available to make Lease Payments when and as due. Abatement of Lease Payments is not a default under the Lease Agreement and does not permit the Trustee to take any action or avail itself of any remedy against the District. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. If damage or destruction or eminent domain proceedings results in abatement or adjustment of Lease Payments and the resulting Lease Payments, together with moneys in the Reserve Fund (and in the event of damage or destruction to the Property, together with insurance proceeds), are insufficient to make all payments of principal and interest due with respect to the Certificates during the period that the Property is being replaced, repaired or reconstructed, then such payments of principal and interest due with respect to the Certificates may not be made and no remedy is available to the Trustee or the Registered Owners under the Lease Agreement or Trust Agreement for nonpayment under such circumstances. The District will have in place at the time of closing of the sale of the Certificates a policy of rental abatement insurance that will cover at least two times the maximum annual Lease Payment. If reconstruction or replacement of the Property takes longer than two years and the Reserve Fund is depleted, then the Registered Owners would not receive payments on their Certificates as scheduled. However, if rental is abated, the term of the Lease Agreement will be extended for a period equal to the period of the abatement, up to ten years, or until all payments on the Certificates are made. Additional Obligations The District may enter into additional obligations that constitute charges against its general revenues. To the extent that additional obligations are incurred by the District, the funds available to make Lease Payments may be decreased. Levy of Special Taxes Although not pledged for repayment, the District intends to use special tax revenues from the CFDs as the source of funds for the Lease Payments. The annual levies of special taxes on the CFDs are subject to the maximum rates authorized. The levies cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the special taxes will not be sufficient to make Lease Payments. The special taxes levied in the CFDs in any particular tax year on a taxed parcel will be based upon the application of the special tax formula. The following are some of the factors which might cause the levy of the special taxes in the CFDs to vary from the special taxes that might otherwise be expected: Reduction in the number of taxed parcels, for such reason as acquisition of taxed parcels by a government and failure of the government to pay special taxes based upon a claim of exemption or, in the case of the federal government or an agency thereof, immunity from taxation. Reductions in the maximum amount of special tax for a given taxed parcel as a result of future zoning or land use decisions. Failure of the owners of taxed parcels to pay special taxes and delays in the collection of or inability to collect the special taxes by tax sale of foreclosure and sale of the delinquent parcels. Action by the District to set CFD special tax levies at less than the maximum rate allowed by the respective tax formula

20 Abatement The obligation of the District under the Lease Agreement to pay Lease Payments is in consideration for the use and possession of the Property. The obligation of the District to make Lease Payments (other than to the extent that funds to make Lease Payments are then available in the Lease Payment Fund and the Reserve Fund) may be abated in whole or in part if the District does not have full use and possession of the Property. Lease Payments due under the Lease Agreement will be abated during any period in which, by reason of material damage, destruction or condemnation, there is substantial interference with the use and right of possession by the District of the Property, or a material portion thereof. Such abatement will continue for the period commencing with the date of such damage, destruction or condemnation and ending with the restoration of the affected portion of the Property to a condition which will permit the affected portion of the Property to be used substantially as intended. The District is obligated to maintain rental interruption insurance in an amount no less than the maximum Lease Payments coming due and payable during any twenty-four (24) month period. Such abatement should not present a problem so long as proceeds of the District s rental interruption insurance are available and there are amounts in the Reserve Fund available to make Lease Payments when and as due. Abatement of Lease Payments is not a default under the Lease Agreement and does not permit the Trustee to take any action or avail itself of any remedy against the District. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. If damage or destruction or eminent domain proceedings results in abatement or adjustment of Lease Payments and the resulting Lease Payments, together with moneys in the Reserve Fund (and in the event of damage or destruction to the Property, together with insurance proceeds), are insufficient to make all payments of principal and interest due with respect to the Certificates during the period that the Property is being replaced, repaired or reconstructed, then such payments of principal and interest due with respect to the Certificates may not be made and no remedy is available to the Trustee or the Registered Owners under the Lease Agreement or Trust Agreement for nonpayment under such circumstances. The District will have in place at the time of closing of the sale of the Certificates a policy of rental abatement insurance that will cover at least two years of Lease Payments. If reconstruction or replacement of the Property takes longer than two years and the Reserve Fund is depleted, then the Registered Owners would not receive payments on their Certificates as scheduled. However, if rental is abated, the term of the Lease Agreement will be extended for a period equal to the period of the abatement, up to ten years, or until all payments on the Certificates are made. Substitution of or Removal from the Property The Lease Agreement provides that, upon satisfaction of certain conditions, the District may substitute other real property, improvements and/or equipment for all or a portion of the Property or remove real property, improvements and/or equipment from the definition of Property. Although the Lease Agreement requires that the value of the Property after substitution is at least equal to the then outstanding principal amount of the Certificates, it does not require that such property have an annual fair rental value equal to the annual fair rental value of the Property at the time of substitution or removal. Thus, the Property could be replaced with property having less annual fair rental value than the Property. Such a replacement could have an adverse impact on the security for the Certificates, particularly if an abatement of Lease Payments were to occur subsequent to such substitution or removal. Furthermore, the Lease Agreement does not require that the substituted property be of any particular type. Consequently, property could be substituted that, upon the occurrence of an event of default under the Lease Agreement, could be more difficult to re-let than the Property. No Earthquake Insurance Coverage The District is not obligated under the Lease Agreement to procure and maintain, or cause to be procured and maintained, earthquake insurance on the Property for the duration of the Lease Agreement term. Should an earthquake cause damage to the Property such that there results substantial interference with the use and occupancy of the Property, Lease Payments would be abated but the policy of rental interruption insurance would not cover the abatement. See SPECIAL RISK FACTORS herein and APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. The District would, however, promptly apply for Federal disaster aid or State disaster aid, if available, in the event that the Property is damaged or destroyed as a result of an earthquake. Any money received as a result of such disaster aid will be used to repair, reconstruct, restore or replace the damaged or destroyed portions of the Property or, at the option of the District, to redeem all outstanding Certificates if such use of such disaster aid is permitted. See THE CERTIFICATES Redemption Provisions herein

21 Hazardous Substances Owners and operators of real property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws. In addition, State laws impose particular requirements with regard to hazardous substances. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the financial and legal ability of the property owner or operator to develop the affected property or other adjacent property, and the value of the affected property or adjacent property. The valuation of the Property did not take into account the possible reduction in marketability and value of the Property by reason of the possible existence of a hazardous substance condition of the parcel. While the District is not aware of any such condition, it is possible that such hazardous substance conditions do currently exist and that the District is not aware of them. Further, it is possible that liabilities may arise in the future with respect to the Property resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the value of the Property. No Acceleration Upon Default In the case of an Event of Default as defined in the Lease Agreement, there is no available remedy of acceleration of the total Lease Payments due over the term of the Lease Agreement. The District will only be liable for Lease Payments on an annual basis, and the Trustee would be required to seek a separate judgment each year for that year s Lease Payments. Any such suit for money damages would be subject to limitations on legal remedies against school districts in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. Enforcement of Remedies If the District defaults on its obligation to make Lease Payments, the Trustee, as assignee of the Authority, may retain the Lease Agreement and hold the District liable for all Lease Payments on an annual basis and will have the right to re-enter and re-let the Property. Such re-entry and re-letting will not automatically effect a surrender of the Lease Agreement. In the event the Property is re-entered by reason of a default in Lease Payments or for any other reason, there can be no assurance that the Property can be re-let for a net amount equal to the then-due Lease Payments. The enforcement of any remedies provided in the Lease Agreement and Trust Agreement could prove both expensive and timeconsuming. In addition to the limitation on remedies contained in the Lease Agreement and the Trust Agreement, the rights and remedies provided in the Lease Agreement and the Trust Agreement may be limited by and are subject to provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principals that may affect the enforcement of creditors rights and the limitation on remedies against public agencies in the State. Moreover, due to the essential nature of the governmental function of the Property, it is not certain whether a court would permit the exercise of the remedies of repossession and leasing with respect thereto. There can be no assurance that any such re-letting of the Property will not adversely affect the exclusion of the portion of each Lease Payment constituting interest, and the amounts thereof distributable in respect of the Certificates, from the gross income of the owners thereof for federal income tax purposes. Further, after any termination of the Lease Agreement, transfer of the Certificates may be subject to the registration provisions of the applicable federal and state securities laws. Accordingly, there is no assurance that the market for the Certificates will not be impaired following any termination of the Lease Agreement

22 The Trustee is not empowered to sell the Property for the benefit of the owners of the Certificates. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT attached hereto. Bankruptcy The District is a unit of State government and therefore is not subject to the involuntary procedures of the United States Bankruptcy Code (the Bankruptcy Code ). However, pursuant to Chapter 9 of the Bankruptcy Code, the District may seek voluntary protection from its creditors for purposes of adjusting its debts. In the event the District were to become a debtor under the Bankruptcy Code, the District would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding and a Registered Owner would be treated as a creditor in a municipal bankruptcy. Among the adverse effects of such a bankruptcy would be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the District or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the District; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the incurrence of unsecured or court-approved secured debt which may have a priority of payment superior to that of secured debt which may have a priority of payment superior to that of Registered Owners; and (iv) the possibility of the adoption of a plan for the adjustment of the District s debt (a Plan ) without the consent of all of the Registered Owners, which Plan may restructure, delay, compromise or reduce the amount of the claim of the Registered Owners if the Bankruptcy Court finds that the Plan is fair and equitable. In addition, the Bankruptcy Code would invalidate any provision of the Certificates of which makes the bankruptcy or insolvency of the District an Event of Default. With the exception of the provisions contained in the Plan, a Bankruptcy Court could not impose restrictions on the District s power or its property without the consent of the District. Loss of Tax Exemption In the opinion of Special Counsel, the Certificates constitute governmental obligation under the Internal Revenue Code of 1986, as amended (the Code ). The District has covenanted to comply with restrictions under the Code relating to use of Certificate proceeds, Reserve Fund funding requirements, investment yield limitations, rebate requirements, federal guarantee prohibitions and registration requirements so that interest paid with respect to the Certificates is excludable from gross income for federal income tax purposes. However, in the event the District fails to comply with any of these covenants, interest paid with respect to the Certificates would be includable in gross income for federal income tax purposes, possibly retroactive to the date of Certificate delivery. State Finances The District is dependent on the State to set its funding levels each fiscal year. See STATE FUNDING OF PUBLIC EDUCATION herein. Changes to the prevailing economic conditions within the State or the State s funding priorities could substantially alter the general fund revenues available to the District in any fiscal year. The District cannot predict whether such changes may occur or how such changes may affect the District s finances. THE AUTHORITY The Authority is a joint powers authority duly organized and existing under and pursuant to the JPA Agreement, and is authorized pursuant to provisions of the State Education Code to assist local governmental agencies in obtaining financing. The Authority is governed by a five-member board of directors, consisting of the members of the Board. The Chairman of the Authority is the President of the Board. The Authority is specifically granted all of the powers specified in the State Government Code known as the Joint Exercise of Powers Act. The Authority is entitled to exercise powers common to its members and necessary to accomplish the purposes for which it was formed

23 THE DISTRICT General Information The District, established in 1956 as a result of the unification of the Fontana Elementary School District and the Chaffey Union High School District, occupies approximately 55 square miles in the Inland Empire, a region in the southwestern corner of the County approximately 50 miles east of Los Angeles. The District serves a population of approximately 181,244 people residing in the City and portions of the cities of Rialto and Rancho Cucamonga as well as unincorporated areas of the County. The District operates 30 elementary schools, seven middle schools, five high schools, two continuation high schools serving approximately 38,700 students in kindergarten through twelfth grade, as well as additional students in an adult school and preschool programs. The Board of Education and Key Administrative Personnel The Board governs all activities related to public education within the jurisdiction of the District. The Board has the decisionmaking authority, the power to designate management, the responsibility to significantly influence operations and is accountable for all fiscal matters relating to the District. The Board consists of five members. Each Board member is elected by the public for a four-year term of office. Elections for the Board are held every two years, alternating between two and three positions available. A president of the Board is elected by members each year. The current members of the Board, together with their office and the date their term expires, are set forth in the following table. Board of Education Fontana Unified School District Name Title Term Expires Lorena Corona President November 2016 Mary Sandoval Vice President / Clerk November 2018 Jesse Armendarez Member November 2018 BarBara L. Chavez Member November 2016 Matt Slowik, MURP, MPA Member November 2018 The Superintendent of the District is appointed by and reports to the 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. 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. See STATE FUNDING OF PUBLIC EDUCATION herein. 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. Set forth in the following table is the historical and budgeted ADA for the District as of the second period report ( P-2 ), 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

24 Average Daily Attendance Fontana Unified School District Total P-2 ADA 39,107 38,975 38,641 38,106 37,394 1 Budgeted as of the fiscal year second interim report. Charter Schools 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 facilities comparable 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. There are no charter schools operating within the District. Pupil-to-Teacher Ratios Set forth in the following table are the pupil-to-teacher ratios of the District in fiscal year Pupil-to-Teacher Ratios Fontana Unified School District Level Pupil-to-Teacher Ratio Elementary 26.5 : 1 Middle 23.5 : 1 High School 21.5 : 1 Continuation 13.9 : 1 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 three recognized bargaining agents for its employees. The Fontana Teachers Association (the FTA ) represents certain non-management certificated staff. The Fontana School Police Officers Association (the FSPOA ) represents the District s non-management school resource officers. The United Steelworkers, Local 8599 (the USW ) represents District safety officers and the remainder of the District s classified non-management employees

25 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 Fontana Unified School District Bargaining Unit Full-Time Equivalents Contract Status Fontana Teachers Association 2,010 Settled for fiscal year Fontana School Police Officers Association 50 Settled for fiscal year United Steelworkers, Local ,207 Settled for fiscal year The District has budgeted for fiscal year an additional 290 FTEs not represented by a bargaining unit. 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 cost-sharing 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 B THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, STRS Description and Contributions. STRS operates under the State 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 9.2 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 (8.56 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. 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 increase to percent of pay by fiscal year , employer contributions increase to 19.1 percent of eligible pay by fiscal year , and State contributions increase by percent by fiscal year

26 The District s STRS contributions for the past six years are set forth in the following table. STRS Employer Contributions Fontana Unified School District Fiscal Year District Contributions 1 District Contribution Rate District Contributions as Percentage of Total Governmental Funds Expenditures $12,314, % 3.25% ,688, ,896, ,889, ,809, ,546,762 2, In each instance equal to 100 percent of the required contribution. 2 Excludes on-behalf-of employee contributions paid by the State. 3 Includes on-behalf-of employee contributions paid by the State of $8,857, Budgeted as of the fiscal year second interim report. 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; employee 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 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. The District s PERS contributions for the past six years are set forth in the following table. PERS Employer Contributions Fontana Unified School District Fiscal Year District Contributions 1, 2 District Contribution Rate District Contributions as Percentage of Total Governmental Funds Expenditures $5,422, % 1.43% ,459, ,889, ,104, ,799, ,343, Excludes on-behalf-of employee contributions paid by the District. 2 In each instance equal to 100 percent of the required contribution. 3 Budgeted as of the fiscal year second interim report. 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, 2014 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

27 The following table shows the statewide funding progress of the STRS plan for the last five years. Actuarial valuation data as of June 30, 2015 is not yet available. 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 2010 $140,291 $196,315 $56,024 71% $26, % , ,405 64, , , ,189 70, , , ,281 73, , , ,213 72, , Dollars in millions. Source: California State Teachers Retirement System, Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2014; California State Teachers Retirement System Defined Benefit Program Actuarial Evaluation for Fiscal Year Ended June 30, The actuarial funding method used in the PERS Schools Pool Actuarial Valuation as of June 30, 2014 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 five years. Actuarial valuation as of June 30, 2015 is not yet available. Funding Progress Public Employees Retirement System (PERS) 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, , Dollars in millions. Source: California Public Employees Retirement Schools Pool Actuarial Valuation as of June 30,

28 For the year ended June 30, 2015, the District s recognized pension expense was $21,174,872. The District s net pension liability (the NPL ) as of June 30, 2015 was $243,517,899. The District s recognized pension expenses and NPL as reported financial statements for fiscal year are set forth in the following table. Recognized Pension Expenses as of June 30, 2015 Fontana Unified School District Plan District s Proportion of Statewide Liability District s Proportionate Share of Statewide Liability District Covered Employee Payroll District s Proportionate Share of Statewide Liability as Percentage of Covered Employee Payroll STRS % $184,076,550 $156,232, % PERS ,441,349 53,355, 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 B THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 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. The plan provides medical benefits to eligible retirees and beneficiaries. GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions ( GASB 45 ) requires public agency employers providing health care 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 April 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 health care benefits ratably over their career, was $151,970,067. The AAL is an actuarial estimate that depends on a variety of assumptions about future events, such as health care costs and beneficiary mortality. Every year, active employees earn additional future benefits, an amount known as the normal cost, which is added to the AAL. To the extent that the District has not set aside moneys in an irrevocable trust with which to pay these accrued and accruing future liabilities, there is an unfunded actuarial accrued liability ( UAAL ). As of March 31, 2016, the District had set aside $16,516,513 in an irrevocable trust to fund its future obligations. The District s UAAL, as of the fiscal year second interim report, was $75,702,262. The annual required contribution ( ARC ) is the amount required if the District were to fund each year s normal cost plus an annual amortization of the unfunded actuarial accrued liability, assuming the UAAL will be fully funded over a 30-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 $13,135,612. The contribution requirements of plan members and the District are established, and may be amended, by the District and the District s bargaining groups. The District funds its OPEB liability on a pay-as-you go basis. The required contribution is based on projected pay-as-you-go financing requirements. The District paid $7,375,000 in OPEB expenditures in fiscal year , and is budgeted to pay $13,135,612 of OPEB expenditures in fiscal year as of the second interim report. See APPENDIX B THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDED JUNE 30, 2015 for additional information regarding the District s OPEB

29 DISTRICT FINANCIAL INFORMATION 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 Section of the State Education Code, 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. 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 nonmajor funds. Governmental funds, including the District s 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 B attached hereto for a further discussion of applicable accounting policies. The independent auditor for the District in fiscal year was Nigro & Nigro, PC, A Professional Accountancy Corporation, Murrieta, California (the Auditor ). The financial statements of the District as of and for the year ended June 30, 2015, are set forth in APPENDIX B attached hereto. The District has not requested nor did the District obtain permission from the Auditor to include the audited financial statements as an appendix to this Official Statement. 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 District s 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 State 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 of Public Instruction (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

30 not adopt a budget before the governing board adopts a local control and accountability plan (the LCAP ) for that budget year. See STATE FUNDING OF PUBLIC EDUCATION Sources of Revenue for Public Education 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 and 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 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, including 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 State 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 State 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 State Education Code Section Any school district with a qualified or negative certification must allow the county office of education at least 10 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 10 days if, in his or her opinion, the agreement would endanger the fiscal well-being of the school district. Also, pursuant to State 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

31 The filing status of the District s interim reports for the past five years appears in the following table. Certifications of Interim Financial Reports Fontana Unified School District Fiscal Year First Interim Second Interim Positive Qualified Positive Positive Positive Positive Positive Positive Positive Positive 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, 2015, have been included in the appendix to this Official Statement. See APPENDIX B 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 by contacting the Fontana Unified School District, 9680 Citrus Avenue, Fontana, California 92335, telephone (909) , Attention: Associate Superintendent, Business Services, or by contacting the Municipal Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California , telephone (916)

32 The following table sets forth the District s audited General Fund balance sheet data for fiscal years through General Fund Balance Sheet Fontana Unified School District Audited Audited Audited Audited ASSETS Cash $18,201,196 $58,627,252 $51,932,301 $100,939,233 Accounts Receivable 107,800,925 76,732,704 47,539,124 17,594,703 Due from Other Funds 2,310,689 1,804,969 3,224,392 3,617,093 Inventories 66,605 15, Prepaid Expenditures 111, , , ,054 TOTAL ASSETS $128,490,943 $137,422,243 $102,960,747 $122,396,011 LIABILITIES AND FUND BALANCES LIABILITIES Accounts Payable $22,042,811 $23,886,812 $24,382,863 $31,231,895 TRAN Payable 0 29,915, Due to Other Funds 46,845,380 26,431,570 8,737,615 3,601,777 Unearned Revenue 440,248 4,310,821 47,665 42,104 TOTAL LIABILITIES $69,328,439 $84,544,203 $33,168,143 $34,875,776 FUND BALANCES Nonspendable $253,133 $332,318 $339,930 $319,982 Restricted 13,926,281 10,560,485 19,197,214 13,949,374 Committed 27,886, Assigned 4,698,832 6,144,811 16,489,752 17,664,066 Unassigned 12,397,266 35,840,426 33,765,708 55,586,813 TOTAL FUND BALANCES $59,162,504 $52,878,040 $69,792,604 $87,520,235 TOTAL LIABILITIES AND FUND BALANCES $128,490,943 $137,422,243 $102,960,747 $122,396,

33 The following table sets forth the District s audited General Fund activity for fiscal years through and estimated activity for fiscal year as of the second interim report. General Fund Activity 1 Fontana Unified School District 1 The actual amounts reported on this schedule do not agree with the amounts reported on the Statement of Revenues, Expenditures and Changes in Fund Balance in the respective audit. Actual amounts reported in this schedule are for the General Fund only, while the amounts reported on the Statement of Revenues, Expenditures and Changes in Fund Balance in the audits include the financial activity of the Special Reserve Fund for Other than Capital Outlay Projects in accordance with the fund type definitions promulgated by GASB Statement No As of the second interim report. Totals may not foot due to rounding Audited Audited Audited Audited Budgeted 2 BEGINNING BALANCE $54,331,989 $59,162,504 $52,878,040 $58,080,045 $75,762,054 REVENUES Revenue Limit / LCFF $206,818,200 $206,283,007 $259,797,006 $304,478,927 $354,543,833 Federal Revenue 34,334,592 25,625,244 22,827,026 22,478,789 29,300,132 Other State Revenues 69,878,488 71,305,809 46,233,761 49,746,535 59,253,474 Other Local Revenues 3,730,881 5,038,047 4,940,130 6,065,054 4,770,391 TOTAL REVENUES $314,762,161 $308,252,107 $333,797,923 $382,769,305 $447,867,830 EXPENDITURES Certificated Salaries $153,373,600 $156,581,146 $156,624,770 $168,695,885 $190,173,463 Classified Salaries 43,544,104 44,771,550 45,961,896 51,355,783 56,662,414 Employee Benefits 71,786,192 74,625,798 73,140,977 89,141, ,260,918 Books and Supplies 13,243,250 9,922,636 10,260,100 20,485,901 24,268,070 Services / Other Operating Exp. 28,404,731 28,451,626 30,581,487 34,266,559 39,062,179 Transfers of Indirect Costs 0 (1,008,211) (823,535) (856,184) (1,321,392) Capital Outlay 709, , ,828 1,791,012 19,759,483 Intergovernmental/Other Outgo (1,129,315) 43, , ,458 Debt Service 0 816, TOTAL EXPENDITURES $309,931,646 $314,535,174 $316,890,714 $364,880,775 $431,565,593 OTHER FINANCING SOURCES $0 ($1,397) ($11,705,204) ($206,521) $0 NET INCREASE (DECREASE) $4,830,515 ($6,284,464) $5,202,005 $17,682,009 $16,302,237 ENDING BALANCE $59,162,504 $52,878,040 $58,080,045 $75,762,054 $92,064,291 Special Reserve Fund for Other than Capital Outlay Projects 1 $0 $0 $11,712,559 $11,758,180 $11,758,180 ENDING BALANCE, GAAP BASIS $59,162,504 $52,878,040 $69,792,604 $87,520,235 $103,822,471 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

34 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, 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 87.4 percent of the District s students were unduplicated students as of the fiscal year first period report. 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 prerecession funding, adjusted for inflation. The ERT add-on is paid incrementally over the LCFF implementation period. In fiscal year , the District s LCFF funding at full implementation is calculated to be $408,899,259, comprised of $303,432,926 in base grant funding, $53,034,007 in supplemental grant funding, $49,140,962 in concentration grant funding and $3,291,364 in add-on funding. See STATE FUNDING OF PUBLIC EDUCATION Sources of Revenue for Public Education herein. 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 51 percent of the funding gap, and the District is calculated to receive $301,653,739 as its floor entitlement and $54,158,202 in gap funding under LCFF. See STATE FUNDING OF PUBLIC EDUCATION Sources of Revenue for Public Education herein for more information about LCFF. Set forth in the following table is the District s actual LCFF funding per ADA for fiscal years and along with budgeted LCFF funding per ADA for fiscal year as of the second interim report. LCFF Funding per ADA Fontana Unified School District Fiscal Year Funded ADA 1 Funding per ADA 2 Average LCFF ,033 $6, ,700 7, ,116 9,302 1 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 Estimated as of the second interim report. 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 77.8 percent of General Fund revenues in fiscal year , were 79.5 percent of General Fund revenues in fiscal year , and are budgeted to be 79.2 percent of General Fund revenues in fiscal year as of the second interim report. Federal Revenues. The federal government provides funding for several District programs, including special education programs and specialized programs such as the No Child Left Behind Act. These federal revenues, most of which historically have been restricted, were 6.8 percent of General Fund revenues in fiscal year , were 5.9 percent of General Fund revenues in fiscal year , and are budgeted to be 6.5 percent of General Fund revenues in fiscal year as of the second interim report

35 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 13.9 percent of General Fund revenues in fiscal year , were 13.0 percent of General Fund revenues in fiscal year , and are budgeted to be 13.2 percent of General Fund revenues in fiscal year as of the second interim report. Included in other State revenues are proceeds received from the State from the State lottery. Other Local Revenues. Revenues from other local sources were 1.5 percent of General Fund revenues in fiscal year , were 1.6 percent of General Fund revenues in fiscal year , and are budgeted to be 1.1 percent of General Fund revenues in fiscal year as of the second interim report. Included in other local revenues are pass-through payments from dissolution of redevelopment agencies in the District. The District is budgeted to receive $555,000 in pass-through payments for fiscal year as of the second interim report. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Government Taxation and Appropriation herein. 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. The District has settled negotiations with its certificated and classified bargaining units to finalize salary and benefit increases for fiscal year , and such costs are included in fiscal year second interim report. Employee salaries and benefits were 87.0 percent of General Fund expenditures in fiscal year , were 84.7 percent of General Fund expenditures in fiscal year and are budgeted to be 80.9 percent of General Fund expenditures in fiscal year as of the second interim report. 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, 2015, the District had no such capital lease arrangements outstanding. On April 1, 2005, the District entered into a site lease agreement with the California School Boards Association Finance Corporation in connection with the issuance of a Qualified Zone Academy Bond ( QZAB ) in the principal amount of $5,000,000 pursuant to Section 1397E of the Internal Revenue Code. The purpose of the agreement is to provide financing for the cost of purchasing equipment for and making certain improvements to facilities of the District. Pursuant to the QZAB, the District is obligated to make annual payments until the QZAB matures in fiscal year

36 The District s outstanding certificates of participation ( COP ) and QZAB are set forth in the following table. Outstanding COP and QZAB Fontana Unified School District Issue Date Issued Amount Issued Final Maturity Outstanding as of March 31, 2016 Debt Service in Fiscal Year QZAB 1 April 1, 2005 $5,000,000 April 1, 2021 $2,158,446 $247, COP 2 April 25, ,910,000 September 1, ,580,000 3,305,819 Total $54,910,000 $41,738,446 $3,553,447 1 The District is obligated to make annual payments into a sinking fund for payment of QZAB at maturity. 2 To be refunded in part by the Certificates. Long-Term Borrowings The 1990 Election. On June 5, 1990, voters within the District approved the issuance of not to exceed $75,000,000 aggregate principal amount of general obligation bonds (the 1990 Election ). On July 1, 1990, the District issued the first series of bonds authorized by the 1990 Election, Fontana Unified School District (San Bernardino County, California) Election 1990 General Obligation Bonds, Series A (the 1990A Bonds ) in the aggregate principal amount of $20,757,500. On August 4, 1993, the District issued the second series of bonds authorized by the 1990 Election, Fontana Unified School District (San Bernardino County, California) Election 1990 General Obligation Bonds, Series B (the 1990B Bonds ) in the aggregate principal amount of $20,352,628. On May 5, 1995, the District issued the third series of bonds authorized by the 1990 Election, Fontana Unified School District (San Bernardino County, California) Election 1990 General Obligation Bonds, Series C (the 1990C Bonds ) in the aggregate principal amount of $15,438,160. On May 22, 1997, the District issued the fourth series of bonds authorized by the 1990 Election, Fontana Unified School District (San Bernardino County, California) Election 1990 General Obligation Bonds, Series D (the 1990D Bonds ) in the aggregate principal amount of $18,451,712. There is no remaining authorization under the 1990 Election. On August 27, 1992 the District issued the Fontana Unified School District (San Bernardino County, California) 1992 General Obligation Refunding Bonds (the 1992 Refunding Bonds ) in the aggregate principal amount of $23,668,126 to refund a portion of the 1990A Bonds. On June 18, 1997, the District issued the Fontana Unified School District (San Bernardino County, California) 1997 General Obligation Refunding Bonds, Series A (the 1997A Refunding Bonds ) in the aggregate principal amount of $18,670,227 to refund a portion of the 1990B Bonds. On June 17, 2004, the District issued the Fontana Unified School District (San Bernardino County, California) 2004 General Obligation Refunding Bonds (the 2004 Refunding Bonds ) in the aggregate principal amount of $18,930,000 to refund a portion of the 1990C Bonds. On February 10, 2009, the District issued the Fontana Unified School District (San Bernardino County, California) 2009 General Obligation Refunding Bonds (the 2009 Refunding Bonds ) in the aggregate principal amount of $18,110,000 to refund a portion of the 1990D Bonds. The 2006 Election. On June 6, 2006, voters within the District approved the issuance of not to exceed $275 million aggregate principal amount of general obligation bonds for authorized school purposes. On August 10, 2006, the District issued the first series of bonds authorized by the 2006 Election, Fontana Unified School District (San Bernardino County, California) Election of 2006, General Obligation Bonds, Series A (the 2006A Bonds ) in the aggregate principal amount of $90,000,000. On March 26, 2008, the District issued the second series authorized by the 2006 Election, Fontana Unified School District (San Bernardino County, California) Election of 2006, General Obligation Bonds, Series B (the 2006B Bonds ) in the aggregate principal amount of $70,585,909. In January 2009, the District issued $94,997,120 in Bond Anticipation Notes (the 2009 BANs ). On October 25, 2012, the District issued the third series of bonds authorized by the 2006 Election, Fontana Unified School District (San Bernardino County, California) Election of 2006, General Obligation Bonds, Series C (the 2006C Bonds ) in the aggregate principal amount of $47,259,440. There is $67,154,651 remaining authorization under the 2006 Election. Also on October 25, 2012, the District issued the Fontana Unified School District (San Bernardino County, California) 2012 General Obligation Refunding Bonds (the 2012 Refunding Bonds ) in the aggregate principal amount of $78,115,000 to refund a portion of the 2006A Bonds

37 On May 22, 2014, the District issued $12,975,000 Fontana Unified School District (San Bernardino County, California) 2014 General Obligation Refunding Bonds (the 2014 Refunding Bonds ) to refund portions of the 2004 Refunding Bonds and the 2006A Bonds. The District plans to refund a portion of 2006B Bonds with its Fontana Unified School District 2016 General Obligation Refunding Bonds (the 2016 Refunding Bonds ) expected to be issued in June The following table summarizes the District s outstanding long-term indebtedness as of March 31, Outstanding General Obligation Bonds Fontana Unified School District Issue Final Maturity Principal Issued Principal Outstanding as of March 31, Debt Service in Fiscal Year Refunding Bonds January 1, 2016 $23,668,126 $0 $1,880, A Refunding Bonds July 1, ,670,227 1,739,885 2,400, Refunding Bonds May 1, ,110,000 11,500,000 1,864, B Bonds 1 February 1, ,585,909 66,020,909 4,205, C Bonds August 1, ,259,440 47,259, Refunding Bonds August 1, ,115,000 72,910,000 5,097, Refunding Bonds August 1, ,975,000 9,810,000 3,686,338 1 To be refunded in part by the District s 2016 General Obligation Refunding Bonds. 2 Excludes accreted interest of capital appreciation bonds. Total $269,383,702 $209,240,234 $19,133,081 The District has never defaulted on the payment of principal of or interest on any of its long-term indebtedness. Direct and Overlapping Bonded Debt The statement of direct and overlapping bonded debt relating to the District, which is set forth on the following page, 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. Contained within the District s boundaries are numerous overlapping local entities providing public services. These local entities may have outstanding bonds issued in the form of general obligation, lease revenue and special assessment bonds. The first column in the table names each public agency which has outstanding debt as of April 1, 2016, 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 (which is not shown in the table) 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

38 The table generally includes long-term obligations sold in the public credit markets by the public agencies listed. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. In addition, property owners within the District may be subject to other special taxes and assessments levied by other taxing authorities that provide services within the District. Such special taxes and assessments are not represented in the statement of direct and overlapping bonded debt. Statement of Direct and Overlapping Bonded Debt (As of April 1, 2016) Fontana Unified School District Assessed Valuation: $12,866,862,822 Percent Debt as of Applicable April 1, 2016 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Metropolitan Water District 0.481% $446,681 Chaffey Community College District ,846,987 Fontana Unified School District ,240,234 1 City of Fontana Community Facilities District No ,964,689 City of Fontana Community Facilities District No ,135,000 City of Fontana Community Facilities District No ,820,000 City of Fontana Community Facilities District No ,695,000 City of Fontana Community Facilities District No ,334,699 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $279,483,290 DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Bernardino County General Fund Obligations 6.856% $29,860,622 San Bernardino County Pension Obligation Bonds ,752,064 San Bernardino County Flood Control District General Fund Obligations ,388,764 Chaffey Community College District General Fund Obligations ,545,053 Fontana Unified School District Certificates of Participation ,580,000 2 City of Fontana Certificates of Participation ,895,198 City of Rialto Certificates of Participation ,213 West Valley Vector Control District Certificates of Participation ,341 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $137,226,255 OVERLAPPING TAX INCREMENT DEBT: $243,678,511 COMBINED TOTAL DEBT $660,388,056 3 Ratios to Assessed Valuation: Direct Debt ($209,240,234) % Total Direct and Overlapping Tax and Assessment Debt % Combined Direct Debt ($253,820,234) % Combined Total Debt % Ratio to Redevelopment Incremental Valuation ($7,145,295,803): Total Overlapping Tax Increment Debt % 1 Excludes the 2016 General Obligation Refunding Bonds to be sold. 2 Excludes the Certificates to be sold. 3 Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal amount due at maturity. Source: California Municipal Statistics, Inc

39 TAXATION AND APPROPRIATIONS Property Taxation System The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed one percent of the full cash value of the property, a portion of which is provided to local school districts for general operating purposes. The levy of special ad valorem property taxes in excess of the one percent levy is permitted as necessary to provide for debt service payments on school bonds and other voter-approved indebtedness. Property tax revenues result from the application of the appropriate tax rate to the total net assessed value of taxable property in the District. Local property taxation is the responsibility of various county officers. For each school district, the county assessor computes the value of locally assessed taxable property. Based on the net assessed value of property and the scheduled debt service on outstanding bonds in each year, the county auditor-controller computes the rate of tax necessary to pay such debt service, and presents the tax rolls (including rates of tax for all taxing jurisdictions in the county) to the county board of supervisors for approval. The county treasurer-tax collector prepares and mails tax bills to taxpayers and collects the taxes. In addition, the county treasurer-tax collector, as ex officio treasurer of each school district located in the county, holds and invests school district funds, including taxes collected for payment of school bonds, and is charged with payment of principal and interest on such bonds when due. Taxes on property in a school district whose boundaries extend into more than one county are administered separately by each county in which the property is located (the District is located in only one county). The State Board of Equalization also assesses certain special classes of property, as described later in this section. Assessed Valuation of Property Within the District All property, real, personal and intangible, is taxable unless an exemption is granted 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 State Legislature may create additional exemptions for personal property, but not for real property. Although most taxable property is assessed by the assessor of the county in which the property is located, some special classes of property are assessed by the State Board of Equalization, as described below under the heading State-Assessed Property. Taxes are levied for each fiscal year on taxable real and personal property assessed as of the preceding January 1, at which time the lien attaches. Under Proposition 13, an amendment to the State Constitution adopted in 1978, the county assessor s valuation of real property is established as shown on the fiscal year tax bill, or, thereafter, as the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. Assessed value of property may be increased annually to reflect inflation at a rate not to exceed two percent per year, or reduced to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction or in the event of declining property value caused by substantial damage, destruction, market forces or other factors. As a result of these rules, 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. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Government Taxation and Appropriation. Economic and other factors beyond the District s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use, or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc., could cause a significant reduction in the net assessed value of taxable property within the District, and as a result there could be substantial delinquencies in the payment of ad valorem taxes within the District. Appeals of Assessed Valuation. State law affords an appeal procedure to taxpayers who disagree with the assessed value of their taxable property. Taxpayers may request a reduction in assessment directly from the county assessor, who may grant or refuse the request, and may appeal an assessment directly to the county board of supervisors which rules on appealed assessments whether or not settled by the county assessor. The county assessor is also authorized to reduce the assessed value of any taxable property upon a determination that the market value has declined below the then-current assessment, whether or not appealed by the taxpayer. Any refund of paid taxes triggered by a successful assessment appeal will be debited by the respective county treasurer-tax collector against all taxing agencies who received tax revenues, including the District

40 State-Assessed Property. Under the State Constitution, the State Board of Equalization assesses property of State-regulated transportation and communications utilities, including railways, telephone and telegraph companies, and companies transmitting or selling gas or electricity. The State Board of Equalization also is required to assess pipelines, flumes, canals and aqueducts lying within two or more counties. The value of property assessed by the State Board of Equalization is allocated by a formula to local jurisdictions in the county, including school districts. Taxation by the local county tax officials is in the same manner as for locally assessed property. Taxes on privately owned railway cars, however, are levied and collected directly by the State Board of Equalization. Property used in the generation of electricity by a company that does not also transmit or sell that electricity is taxed locally instead of by the State Board of Equalization. Thus, the reorganization of regulated utilities and the transfer of electricity-generating property to non-utility companies, as often occurred under electric power deregulation in the State, affects how those assets are assessed, and which local agencies benefit from the property taxes derived. In general, the transfer of Stateassessed property located in a county to non-utility companies will increase the assessed value of property in such county, since the property s value will no longer be divided among taxing jurisdictions in the county. The transfer of property located and taxed in a school district to a State-assessed utility will have the opposite effect: generally reducing the assessed value in such school district, as the value is shared among the other jurisdictions in the county. The District is unable to predict future transfers of State-assessed property in the District, the County, the impact of such transfers on its utility property tax revenues, or whether future legislation or litigation may affect ownership of utility assets, the State s methods of assessing utility property, or the method by which tax revenues of utility property is allocated to local taxing agencies, including the District. Historical Assessed Valuation Locally taxed property is classified either as secured or unsecured, and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing State-assessed property and property (real or personal) for which there is a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. All other property is unsecured and is assessed on the unsecured roll. Property assessed by the State Board of Equalization is commonly identified for taxation purposes as utility property. Shown in the following table are 10 years of the District s historical assessed valuation. Total secured assessed values include net local secured, secured homeowner exemption and utility values. Total unsecured assessed values include net local unsecured and unsecured homeowner exemption values. Historical Total Secured and Unsecured Assessed Valuation Fontana Unified School District Year Ended Total Secured Total Unsecured Total Percentage June 30 Assessed Value Assessed Value Assessed Value Change 2007 $9,780,530,882 $570,919,938 $10,351,450, % ,357,583, ,257,443 11,990,840, ,726,850, ,905,823 12,433,756, ,561,799, ,304,605 11,293,104,283 (9.17) ,149,839, ,202,985 10,893,042,718 (3.54) ,077,336, ,588,486 10,777,925,299 (1.06) ,082,951, ,923,424 10,804,875, ,446,563, ,217,558 11,166,781, ,419,218, ,558,446 12,162,776, ,113,205, ,656,993 12,866,862, Source: San Bernardino County Assessor

41 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 Fontana Unified School District Percent of No. of Percent of Non-Residential: Assessed Valuation 1 Total Parcels Total Agricultural $13,243, % % Commercial/Race Track 1,139,252, Professional Offices 120,007, Industrial 2,447,688, Recreational/Golf 29,144, Government/Social/Institutional 11,124, Miscellaneous/Water Company 23,591, Subtotal Non-Residential $3,784,053, % 1, % Residential: Single Family Residence $6,656,241, % 31, % Condominium/Townhouse 214,907, , Mobile Home 26,305, Mobile Home Park 24,771, Residential Units 253,522, , Residential Units/Apartments 380,216, Miscellaneous Residential 10,251, Subtotal Residential $7,566,216, % 35, % Vacant/Undeveloped Parcels $760,893, % 3, % Total $12,111,163, % 40, % 1 Local Secured Assessed Valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. Largest Taxpayers In District The more property (by assessed value) 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 4.43 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 table

42 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 13.6 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 Secured Taxpayers Fontana Unified School District Percent of Property Owner Primary Land Use Assessed Valuation Total 1 1. California Steel Industries Inc. Industrial $536,902, % 2. San Gabriel Valley Water Company Water Company 157,364, Vintage Park East LLC Industrial 121,980, Teachers Insurance & Annuity Association of America Industrial 108,853, California Speedway Corporation Race Track 88,291, North Fontana Investment Co. LLC Undeveloped 67,726, Intex Properties Inland Empire Corp. Industrial 55,898, Prologis Undeveloped 50,197, James Hardie Building Products Inc. Industrial 49,706, Calabash LLC Industrial 42,160, Trader Joes Company Industrial 41,962, California Auto Dealers Exchange LLC Commercial 40,783, The Baralat Company Commercial 39,718, Lennar Homes of California Inc. Residential Development 39,624, Dayton Hudson Corporation Industrial 38,222, Western Pacific Housing Inc. Race Track 35,279, Elm Legacy Property LLC Industrial 34,424, Hua-Jian Investment LLC Industrial 34,198, Forged Metals Inc. Industrial 34,124, Misa LLC Industrial 30,294, Total $1,647,715, % 1 Fiscal year local secured assessed valuation (excluding tax-exempt property): $12,111,163,115. Source: California Municipal Statistics, Inc. Alternative Method of Tax Apportionment The County Board of Supervisors approved implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ) pursuant to sections 4701 through 4717 of the State s Revenue & Taxation Code. This action of the County Board of Supervisors came pursuant to the endorsement of the Teeter Plan by the taxing districts of the County. The Teeter Plan guarantees distribution of 100 percent of the ad valorem taxes and assessments levied to the taxing entities 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 treasurer-tax collector is protected by a special fund, known as the Tax Loss Reserve Fund, which accumulates moneys from interest and penalty collections. In each fiscal year, the Tax Loss Reserve Fund is required to be funded to the amount of delinquent taxes plus one percent of that year s tax levy. Amounts exceeding the amount required to be maintained in the Tax Loss Reserve Fund may be credited to the 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 unless the County Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the County Board of Supervisors receives a petition for its discontinuance from two-thirds of the participating revenue districts in the County. The County Board of Supervisors may also, after holding a public hearing on the matter, discontinue the procedures with respect to any tax levying

43 agency or assessment levying 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, only those secured property taxes actually collected 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. Tax Collections and Delinquencies The District s share of the one percent countywide tax is based on the actual allocation of property tax revenues to each taxing jurisdiction in the County in fiscal year , as adjusted according to a complex web of statutory modifications enacted since that time. Revenues derived from special ad valorem taxes for voter-approved indebtedness are reserved to the taxing jurisdiction that approved and issued the debt, and may only be used to repay that debt. The Treasurer prepares the property tax bills. Property taxes on the regular secured assessment roll are due in two equal installments: the first installment is due on November 1, and becomes delinquent at 5:00 p.m. December 10, after which time a 10 percent penalty attaches. The second installment is due on February 1 and becomes delinquent at 5:00 p.m. April 10, after which time a 10 percent penalty and $10 cost attach. If taxes remain unpaid by 5:00 p.m. June 30, the tax is deemed to be in default and a $15 redemption fee is immediately added and the delinquent bill accrues penalties of 1.5 percent per month until paid. After five years, the county has the power to sell tax-defaulted property that is not redeemed. Annual bills for property taxes on the unsecured roll are mailed no later than August 1. Taxes on the unsecured roll as of July 31, if unpaid are delinquent at 5:00 p.m. on August 31, and thereafter subject to a 10 percent penalty as well as an additional $76 fee. Taxes added to the unsecured roll after July 31, if unpaid are delinquent and subject to a penalty at 5:00 p.m., or the close of business, whichever is later, on the last day of the month succeeding the month of enrollment. CITY AND COUNTY ECONOMIC PROFILE General Information The County, founded in 1853 and located in the southern portion of the State, is the largest county by land area in the United States. Comprised of approximately 20,160 square miles, the County stretches from the greater Los Angeles metropolitan area to the State s eastern border and is comprised of urban areas as well as deserts, lakes, and mountains. With 24 incorporated cities, the County is home to more than two million residents, the fifth largest county by population in the State. With major highway systems and railroads, international and cargo airports, and its proximity to the Los Angeles and Long Beach seaports, the County is a center of manufacturing and distribution. Based on data compiled by CoreLogic, the median sale price of a single-family home in the County was $272,000 in March 2016, an increase of approximately 4.6 percent from $260,000 in March The City, founded in 1913 and comprised of approximately 42 square miles, is located in the southwestern corner of the County in a region known as the Inland Empire, at the base of the San Bernardino Mountains. The second largest city in the County, located at a crossroads of three major interstate highway trade routes, the City has grown from a farming community to an industrial manufacturing and distribution center, and is now also home to large retailers. In addition, many residents commute to the Los Angeles metropolitan area by commuter rail that links the County with the neighboring counties of Ventura, Los Angeles, Riverside, Orange and San Diego. The City is a vibrant community with many cultural opportunities for art, sports, recreation, and the home of the Lewis Library and Technology Center, which contains the largest library collection in the County. Based on data compiled by CoreLogic, the median sale price of a single-family home in the City was $340,750 in March 2016, an increase of approximately 0.2 percent from $340,000 in March The health of a region s economy can be measured by several indicators, including population changes, personal income levels, employment rates and commercial activity

44 Population The following table displays estimated population data as of January 1 for the past five years for the City and County. Historical Population City of Fontana and San Bernardino County City of Fontana 198, , , , ,895 San Bernardino County 2,054,786 2,069,806 2,084,151 2,121,088 2,139,570 Source: State Department of Finance. Personal Income Personal income is a significant indicator of future consumer demand. 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 $32,892 in the County in 2014, an increase of 3.82 percent from 2013 levels, compared to an increase of 3.86 percent Statewide and 3.63 percent nationally. The following table shows PCPI for the County as well as for the State for the past five years data is available. Data for the County for 2015 is not yet available. Per Capita Personal Income San Bernardino County and the State of California San Bernardino County $30,491 $31,064 $31,683 $32,892 n/a State of California 44,852 47,614 48,125 49,985 $52,651 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 Fontana Annual Annual Annual Annual March Total Labor Force 62,300 62,600 93,000 94,700 95,400 Number of Employed 54,600 56,000 84,900 88,800 89,600 Number of Unemployed 7,800 6,600 8,100 6,000 5,800 Unemployment Rate 12.5% 10.5% 8.7% 6.3% 6.1% 1 Preliminary. Source: State Employment Development Department

45 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 San Bernardino County Annual Annual Annual Annual March Total Labor Force 860, , , , ,700 Number of Employed 758, , , , ,300 Number of Unemployed 103,000 87,000 73,200 59,800 52,400 Unemployment Rate 12.0% 10.1% 8.0% 6.5% 5.6% 1 Preliminary. Source: State Employment Development Department

46 Employment by Industry The following table shows the County s labor patterns by type of industry from 2010 through Historical Employment by Industry San Bernardino County Total Nonfarm 823, , , , ,289 Private Nonfarm Forestry, fishing, and related Mining, quarrying and oil & gas extraction 1,203 1,068 1,461 1,573 1,742 Construction 40,245 41,293 42,963 44,026 47,155 Manufacturing 50,699 50,973 52,140 52,928 55,577 Wholesale Trade 35,393 35,348 37,062 40,373 42,666 Retail Trade 94,843 98, , , ,419 Transportation & Warehousing 53,875 65,763 58,804 64,674 70,001 Utilities 4,283 4,357 4,365 4,157 4,095 Professional, Scientific and Technical 39,950 36,823 37,290 38,086 39,406 Finance and insurance 29,675 31,697 31,456 31,343 32,150 Information 7,752 7,345 7,155 7,022 6,854 Real Estate, Rental and Leasing 41,089 41,331 40,068 40,372 40,565 Management of Companies and Enterprises 5,981 6,311 5,781 6,005 5,992 Admin. Support, Waste Management, Remediation 68,694 72,993 72,533 73,695 74,741 Educational Services 13,257 13,336 13,803 14,204 15,249 Health Care and Social Assistance 85,257 88, , , ,691 Arts, Entertainment and Recreation 12,219 12,648 12,978 13,623 13,792 Accommodation and Food Services 53,349 54,072 55,511 58,807 62,088 Other Private Nonfarm Services 50,913 54,652 56,235 57,911 60,184 Total Government 138, , , , ,016 Federal Government Civilian 15,232 14,312 13,877 13,596 13,540 Federal Government Military 21,406 21,281 20,365 20,165 18,704 State Government 12,049 11,734 11,352 11,398 12,673 Local Government 89,582 87,109 86,808 86,501 88,099 Total Farm 2,752 2,690 2,617 2,562 2,627 Total, All Industries 1 826, , , , ,916 1 Industry employment is by place of work; excludes self-employed individuals, unpaid workers, and workers on strike. Not seasonally adjusted. Figures may not foot due to rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis

47 Major Employers The following table provides a list of the 10 largest employers in the County, corresponding number of employees and percent of total employment in the County. Major Employers San Bernardino County Rank Employer Number of Employees Percent of Total County Employment 1 County of San Bernardino 19, % 2 Stater Bros. Market 18, U.S. Army, Fort Irwin & National Training Center 13, Loma Linda University 13, U.S. Marine Corps Air Ground Combat Center 12, United Parcel Service 8, San Bernardino City Unified School District 8, Ontario International Airport 7, Loma Linda University Medical Center 6, Kaiser Permanente (Fontana only) 6, Total 114, % Source: San Bernardino County, Comprehensive Annual Financial Report for the Year Ended June 30, The following table provides a list of the 10 largest employers in the City, corresponding number of employees and percent of total employment in the City. Major Employers City of Fontana Rank Employer Number of Employees Percent of Total City Employment 1 Kaiser Hospital & Medical Group 5, % 2 Fontana Unified School District 5, City of Fontana 1 1, Target Stores T Schneider National Carriers, Inc Sierra Aluminum Company Estes West Walmart Store T Target Store T Saia Motor Freight Line LLC Total 14, % 1 Includes part-time employees. Source: City of Fontana, Comprehensive Annual Financial Report, Fiscal Year Ending June 30, Commercial Activity Total taxable sales reported during calendar year 2013 in the City were reported to be $2,652,341,000, a 6.7 percent increase from the total taxable sales of $2,484,968,000 reported during calendar year

48 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 years 2014 and 2015 is not yet available. Taxable Retail Sales City of Fontana Sales Tax Permits 3,705 3,920 4,004 4,004 3,877 Taxable Sales (000 s) $1,787,499 $1,994,725 $2,258,996 $2,484,968 $2,652,341 Source: State Board of Equalization. Total taxable sales reported during calendar year 2013 in the County were reported to be $31,177,823,000, a 5.6 percent increase from the total taxable sales of $29,531,921,000 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 years 2014 and 2015 is not yet available. Taxable Retail Sales San Bernardino County Sales Tax Permits 45,062 47,562 47,791 48,936 46,632 Taxable Sales (000 s) $23,652,433 $24,687,862 $27,322,980 $29,531,921 $31,177,823 Source: State Board of Equalization. Construction Activity The number of residential building permits, which are required for all new residential construction, is an indicator of residential building activity in the near future. Estimated new residential building permits and total construction costs in the County for the past five years are shown in the following table. Data for calendar years 2014 and 2015 is not yet available. New Residential Building Permits San Bernardino County Single Family Residential Units 1,438 1,216 1,060 1,321 1,952 Multi-Family Residential Units ,384 Total New Building Permits (All Types) 2,195 1,745 1,424 1,837 3,336 Total Construction Costs $365,772,668 $276,462,522 $257,312,011 $361,245,374 $588,562,720 Source: U.S. Bureau of the Census, Building Permit Estimates

49 CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Overview For more than a century, funding for public school districts in the State has consisted of a combination of local property tax revenue and State general funds. 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 (1978) brought this local property tax system to an end, fundamentally changing local government finance. Local governments in the State were no longer able to set local property tax rates above one percent of a property s assessed value as of its amount on the fiscal year tax roll, adjusted for inflation, or thereafter when newly built or sold. 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. After 1978, local governments sought revenue to fund public services and improvements from other sources such as assessments, property-related fees, and various small general-purpose taxes not subject to the limit on ad valorem taxes, and from the tax increment revenues from redevelopment agencies, discussed below. For more than a decade, local governments and anti-tax interest groups struggled over the difference between general and special taxes and voter approval requirements. The passage of Proposition 218 (1996) shifted the power of general taxation away from local governing boards to voting residents and property owners and increased the voter approval required for any special tax, including any parcel tax or any tax levied by a specialpurpose agency such as a school district, significantly restricting the ability of local governments to raise revenue. In the year following Proposition 13, another measure was enacted that limited government spending to the inflation-adjusted amount appropriated in the prior year and returned any excess tax revenues to taxpayers (Proposition 4, 1979). In the decades following these limits on both government s power to tax and its power to increase spending even when revenues grew, billions of dollars in excess revenues were returned to taxpayers while the State dropped to nearly the bottom of the national ranking in per pupil education spending. In reaction, voters passed Proposition 98 (1988), an initiative measure dedicating a significant portion of the State general fund as well as excess tax revenues to public education. As a result of Proposition 13, which made school districts dependent on the State for the bulk of their funding, funding for public education has been more vulnerable to the economic cycle because of their reliance on revenues from sales and income taxes, which tend to be more volatile from year to year than revenues from local property taxes. In years of economic hardship, the State has struggled to maintain its funding obligation to school districts, and has sought to shift local tax revenues from other local governments to school districts, or, after that practice was prohibited by Proposition 22 (2010), to defer payments owed to school districts. Recent legislative and initiative measures have focused on the need for budgetary reserves and long-term forecasting to attempt to bring stability to the State general fund and education funding. All of the initiatives discussed above have been subject to initiative and legislative amendments, which are discussed below along with other relevant law. Government Taxation and Appropriation Limit on Ad Valorem Property Tax. 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 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

50 Any increase or decrease in assessed valuation is allocated among the various jurisdictions. In most years, the market value of a property increases at a rate greater than the two percent increase a county is allowed to calculate. As amended by Proposition 8 (1978), Article XIIIA allows for the 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 State 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 recapture the loss from the decreased value by increasing the assessed value of the property at a rate greater than two percent annually until it has regained the property s pre-decline assessed value. 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 repay voter-approved indebtedness. Tax May Exceed One Percent Only to Pay Voter-Approved Debt Service. As enacted by Proposition 13, the one percent limit on ad valorem taxes on real property does not apply to taxes levied to pay debt service (interest and redemption charges) on a local government s indebtedness approved by the 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. Protection For Owners of Municipal Securities. State law imposes a duty on the county treasurer-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. State-Assessed Unitary Property. Property that is part of a larger, integrated utility system with components located in more than one taxing jurisdiction is refereed to as unitary property, such as property owned or used by regulated railway, telegraph and telephone companies, companies selling or transmitting gas or electricity, and pipelines, flumes, canals, ditches and aqueducts located in more than one county. Unitary property is assessed by the State Board of Equalization as a whole, on a statewide basis, rather than by individual counties. These properties are not subject to Article XIIIA and are reappraised annually at their market value. The State allocates the property to the counties and other local tax jurisdictions in which the property is located; the taxes are levied and collected in the same manner as county-assessed property at the assessed value determined by the State. Voter Approval Requirements for Taxation. 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 other non-ad valorem taxes, assessments, fees and charges. The law established that every tax must be either a general tax, the proceeds of which can only be used for general government purposes, requiring the approval of a simple majority of voters, or a special tax, if the proceeds will be used for a specific purpose or if it is levied by a special-purpose government agencies, including school districts, requiring the approval of two-thirds of voters. Special purpose government agencies, such as school districts, cannot levy general taxes. Any tax levied on property, other than the ad valorem tax governed by Article XIIIA, is a special tax that must be approved by two-thirds of voter approval. The initiative power can be used to reduce or repeal 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. Any Charge Imposed By Government Is A Tax. 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. The following exceptions do not require voter approval: a

51 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 have an indirect affect on such revenues. For instance, if a school district shares taxing jurisdiction with another local government that charges certain properties for a benefit that increases the assessed value of the property, but then must discontinue the benefit, the lowered property values could impact the school district s share of the available revenues. Limits on Government Spending. Article XIIIB, added to the State Constitution by Proposition 4 (1979) (the Gann Limit ), later amended by Proposition 111 (1990), limits the amount of tax revenue that may be spent each year by the State, counties, cities, and special districts, including school districts, to the amount appropriated by that entity in the prior year, adjusted for change in population and inflation (modified by Proposition 111, see below). Among other amendments made by Proposition 111, the spending limit is also adjusted when responsibility for the provision of a service is transferred from one government entity to another. The appropriation limit was initially to be calculated from the base year of fiscal year ; as amended by Proposition 111, it is calculated using fiscal year As a result of several amendments, certain types of payments are exempted from the appropriations limit calculation, including debt service payments on indebtedness existing prior to January 1, 1979, or thereafter as approved by voters; certain benefit payments; court- or federally-mandated expenses; subventions, including certain State payments to K-12 school districts and community college districts (together, K-14 school districts ); certain increases in revenues gained from fuel, vehicle and tobacco taxes; certain emergency appropriations; and qualified capital outlay projects (projects involving fixed assets such as land or construction that have an expected life of more than 10 years and a value greater than $100,000). Adjustments to Government Spending Limits. The method by which annual adjustments to the appropriation limit are made has significant impact. Initially tied to the rate of inflation, the adjustment is now more closely linked to the rate of economic growth by measuring the change in per capita personal income in the State, as amended by Proposition 111. Change in cost of living for the State and K-14 school districts is measured by the percentage change over the prior year in State per capita personal income. Change in population for K-14 school districts is measured by the prior year s average daily attendance; the State uses a complex formula that takes into account both changes in State population and changes in public school enrollment. Taxpayer Rebates. As initially enacted, Article XIIIB required that any tax revenues received by the State in excess of its appropriation limit be returned to taxpayers. As amended by Proposition 111, the excess tax revenues are now divided between increased education funding and taxpayer rebates. Calculated over two years so that government does not have to return excess tax revenues from one year if in the following year its appropriations are below its limit, 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. All excess tax revenues received by any local government entity must be returned to taxpayers. 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. Proposition 98 s Minimum Guarantee of Education Funding. Article XVI, added to the State Constitution by Proposition 98 (1988), requires 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 Proposition 98 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. Each year, the exact amount allocated as the minimum guarantee, which is approximately equal to 40 percent or more of State general fund revenues, is determined by a set of tests. Test 1 ( Share of the State General Fund ). Test 1 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 does not result in additional funding for K-14 school districts. Test 1 has been used 4 times in the last 28 years, including fiscal year Test 2 ( Personal Income ). Test 2 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

52 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 28 years, including fiscal year Test 3 ( Available Revenues ). Test 3 only applies in years in which the annual percentage change in per capita State general fund tax revenues plus one-half 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 8 of the past 28 years, including fiscal year Maintenance Factor. In any year in which Test 3 is used, the difference between the amount appropriated under Test 3 and the amount that would have been appropriated under Test 2 is considered a credit to K-14 school districts (the maintenance factor ) to be restored in future years when State revenue growth rebounds to exceed personal income. The State has carried an outstanding maintenance factor in 20 of the past 25 years, including an estimated $2.6 billion as of the end of fiscal year In fiscal year the State is budgeted to reduce the maintenance factor obligation to approximately $772 million. 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. Temporary Tax Increase To Fund Education and Repay Debt. From 2008 to 2012, the State eliminated more $56 billion from State and local funding of services including education, police, fire, and health care. The passage of Proposition 30 (2012) allowed the State to levy a temporary sales tax (lasting four years) and income tax (lasting seven years), the revenues of which would be used to support increased funding for education and to help 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 (the EPA ) 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 to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district receives less than $200 per unit of ADA, and no community college district receives less than $100 per full time equivalent student. The $200 per ADA minimum funding guarantee of Proposition 30 is in addition to the $120 ADA constitutional guarantee under Proposition 98. Each fiscal year, every school district s proportionate share of the EPA will be recalculated four times. K-14 school districts have discretion to determine how the funding is spent as long as it is for any educational purpose and not for administrative costs, salaries or benefits. 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. Community Redevelopment Agencies and Dissolution: Reduced Revenues For Local Governments and Increased State Education Costs. Beginning with the enactment of the Community Redevelopment Act (1945), superseded by the Community Redevelopment Law (1951) under Article XVI of the State Constitution, until the termination of the program by the State in 2011, a local government could improve an economically depressed area by creating a redevelopment agency (an RDA ). The mechanism allowed the 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. To recover some of the lost tax revenue, school districts could negotiate with the RDA for pass-through payments of local tax revenues. However, because property tax revenues redirected to redevelopment agencies were replaced by increased State aid to the school district, in some cases there was little incentive for school districts to negotiate for greater amounts of pass-through from the RDAs; thus, the State s share of reimbursements to such school districts soared into the hundreds of millions of dollars per year. However, basic aid school districts, in which there are unusually high property tax revenues per pupil, sustained property tax revenue losses unless passthrough payments were negotiated. In 2011, the State Legislature approved Assembly Bill, First Extended Session 26 ( AB1X 26 ) dissolving the more than 400 RDAs in the State to preserve core public services at the local level. The State Supreme Court upheld the legislation against legal challenges, ruling in California Redevelopment Association v. Matosantos (2011) that Proposition 22 did not prevent the State from ending the redevelopment program. RDAs were officially dissolved as of February 1, 2012 and successor agencies were

53 established to facilitate the dissolution by managing projects underway, making payments on enforceable obligations, and disposing of assets and properties. Property taxes that would have been allocated to each RDA were deposited into a redevelopment property tax trust fund created and held for each former RDA by the county auditor-controller. Amounts in the redevelopment property tax fund, after payment of the county auditor-controller administrative costs, are applied each January 2 and June 1 in the following priority: (i) to pay pass-through payments to affected tax entities in the amounts that would have been owed had the former redevelopment agency not been dissolved; provided however that if a successor agency determines that insufficient funds will be available to make payments on the recognized obligation payment schedule and the county auditor controller verifies such determination, pass-through payments that had previously been subordinated to debt service may be reduced; (ii) to the former redevelopment agency s successor agency for payments listed on the successor agency s recognized obligation payment schedule for the ensuing six month period; (iii) to the former redevelopment agency s successor agency for payment of administrative costs; and (iv) to school entities and local taxing agencies any remaining balance. AB1X 26 contained language stating that agreements between an RDA and the city or county that created it were not enforceable obligations. However, Senate Bill 107, signed into law by the Governor on September 22, 2015, enacted to help give local governments more economic development tools to help improve struggling communities by streamlining the current dissolution process, enhance affordable housing by providing increased statewide funding and improving transparency, and expand types of loans for which cities and counties can seek reimbursement, defines the following agreements as enforceable obligations: (i) agreements between a city and RDA entered into at the time an indebtedness obligation to refund an obligation existing prior to January 1, 2011 is issued, or no later than June 27, 2011; (ii) agreements regarding certain highway infrastructure improvement projects entered into prior to June 28, 2011 or (iii) certain agreements regarding federal grants or loans. Some school districts receive pass-through payments during the dissolution process. See DISTRICT FINANCIAL INFORMATION Revenues herein. State Authority Over Local Government Funds Disbursement of State Funds Without Enacted Budget Jarvis v. Connell. In years in which the State Legislature has not been able to enact a budget by the 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 employees wages and State debts. In 1988, during such a budgetary impasse, a taxpayers' association sued the State Controller over these payments, arguing they 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. Local Property Tax Revenue May Not Be Diverted From Local Governments. 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 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 (the ERAF ) established in each county; conversely shifting costs for courts to the State, which reduced court costs for local governments. The passage of Proposition 1A (2004), amending Articles XI and XIII, reduced the State s authority over major local government revenue sources by preventing the State from reducing the property tax share allocated to cities, counties, and special districts changing the allocation of property tax revenues between local governments now required two-thirds approval of the State Legislature. However, Proposition 1A did not prevent the State from transferring property taxes to schools in the case of severe fiscal hardship and a two-thirds vote by the State Legislature. The passage of Proposition 22 (2010) amended Articles XIII and XIX of the State Constitution to prevent the State government, even during times of severe fiscal hardship, from taking revenue derived from locally imposed taxes, such as parcel taxes, hotel taxes, utility taxes, and sales taxes, the revenues of which are dedicated to local cities, counties, school districts or other special districts and are used to fund public safety, emergency response, and other local services, or from taking local public transit or transportation funds, such as funds from certain fuel taxes, for State uses. The measure also prevented the State from delaying distribution of tax revenues to local governments, redirecting redevelopment agency property tax revenue to other local

54 governments such as school districts, or shifting money to the school districts under the ERAF program. One objective of the measure was to stabilize local government revenue sources by restricting the State s control over local property taxes. As a result of Proposition 22, 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 current deferrals is budgeted to be complete in fiscal year Returning Control Over Revenues to Local School Districts. In the post-proposition 13 era of limited local tax revenue, the State s assumption of responsibility for school district funding also resulted in State control over how those revenues were to be spent. Although much of the funds were appropriated for general-purpose operating costs, an increasing proportion was funneled from the State to school districts through categorical programs, which were restricted as to how such funds could be spent, required complex paperwork and administration, and were inequitable, varying between school districts by thousands of dollars in per pupil spending. In a landmark effort to return local control over funding decisions to school districts, the State Legislature enacted Assembly Bill 97 (2013) introducing a new funding system called the Local Control Funding Formula (the LCFF ) which simplifies the funding stream and provides additional funding for the education of high-needs student populations. See STATE FUNDING OF PUBLIC EDUCATION Sources of Revenue For Public Education herein. State and School District Reserves Balanced Budget and State Reserves. Proposition 58 (2004) amended Article IV of the State Constitution to require that the State enact a balanced budget in which estimated revenues would meet or exceed estimated expenditures in each year, and that midyear adjustments be made if the budget falls out of balance if estimates are incorrect. The law also established the Budget Stabilization Account (the BSA ) in the State s general fund, which required a deposit of three percent of the general fund each year, although rules regarding how money would be deposited to the BSA and how such deposits may be spend were amended by Proposition 2, discussed below. New Formula to Build State Reserves and Repay Debt. The passage of Proposition 2 (2014) addressed the need for long-term financial stability in the State in the face of economic volatility by devoting funds to paying down the State s debt and changing the State s reserve policies, revising the rules for the State s existing BSA and creating a new budget reserve for K-14 school districts called the Public School System Stabilization Account (the PSSSA ). The law reduced legislative discretion over certain budget decisions regarding how quickly to repay State debts and when reserve funds are needed, requiring that 1.5 percent of the State general fund be deposited into the BSA annually, plus an additional amount when the State receives spikes in capital gains tax revenue exceeding eight percent of State general fund revenues. The PSSSA, which would also be funded with the capital gains spikes, would be drawn on when the State support required by Proposition 98 exceeded available general fund and property tax revenues. The new law requires that for the following 15 years, 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. After 15 years, half of the deposited amount must be saved, and the other half will be used to pay debt payments or for further savings. 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 of Propositions 98 and 2, a large amount of incremental gains in the State s general fund revenues are allocated to building reserves and repaying debt. The law also requires multi-year budgetary forecasting. However, these calculations depend largely on estimates of capital gains taxes, a variable that is largely unknown for two years after a budget is enacted for a fiscal year. The law also included trailing legislation providing that in the event of the PSSSA receiving large enough deposits, individual school districts would not be allowed to keep as much of their own funds set aside in reserves

55 Limits On School District Reserves Minimum and Maximum Amounts. 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. To prevent a school district from entering into a financial crisis that would require an emergency loan from the State, the State requires school districts to maintain a minimum reserve in its 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, 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, 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, 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, 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. However, Proposition 2 included trailing legislation that would cap the maximum amount a school district could keep in its reserve in a year following one in which the State makes a deposit into the PSSSA. The State would make a PSSSA deposit if all of the following conditions were met: in a Test 1 year, wherein Proposition 98 has not been suspended by a vote of the State Legislature, the Proposition 98 maintenance factor is completely restored and no new maintenance factor is created, and State capital gains tax revenue is more than eight percent of State general fund revenues. The State Budget (defined herein) provides for substantial restoration of the maintenance factor, and the maintenance factor could be eliminated as of fiscal year If the State s capital gains tax revenues continue to be substantial, the school district reserve cap could be triggered as early as fiscal year , but it is not possible to predict with certainty. In a year following a PSSSA deposit, a school district could not adopt a budget with total ending assigned and unassigned reserves of more than twice the applicable State minimums for reserves, with such minimums 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 that it faces extraordinary fiscal circumstances, including undertaking multi-year infrastructure or technology projects. In anticipation of a future maximum cap on reserves, some school districts may start to spend reserves on teacher pay, books, and other costs in the next few years. Other school districts may wait until after a PSSSA deposit occurs to either spend large amounts all at once or seek exemptions from county education officials to keep their reserves above the maximum levels. If a school district has a smaller reserve as a result, it could affect the school district s financial condition at the time of an economic downturn. Impact of Future Changes to the Law 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. STATE FUNDING OF PUBLIC EDUCATION 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. Besides the sources discussed below, no other source of general-purpose revenue is currently permitted for schools. 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 school districts may not charge fees for school-related activities, unless the charge is specifically authorized by law

56 for a particular program or activity. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES Government Taxation and Appropriation herein. State Funds. Many school districts in the State receive the majority of their funds from the State. In fiscal year , State funds are expected to account for approximately 61 percent of K-12 public education funding in the State. There are three sources of State funds for K-12 public education: a guaranteed minimum level under Proposition 98, comprised of a combination of State general fund revenues and local property tax revenues, representing the majority (88 percent in fiscal year ) of State funding; additional State funds for targeted programs such as facilities and the remaining categorical programs including 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 Process herein. More than sixty percent of the State s general fund revenue comes from personal income taxes, with capital gains taxes representing more than 10 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 attempted 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 State and School District Reserves and State Budget Process herein. Approximately 10 percent of school districts in the State receive more from local property tax revenue than their calculated State funding level. Such school districts are called basic aid districts. As discussed below, though these districts receive more from local property tax revenue than their calculated State funding level, they continue to receive State funding, called the Minimum State Aid or hold harmless funding provision (the MSA ). The State Revenue Limit. The State Revenue Limit was instituted in fiscal year to provide a mechanism to calculate the amount of general purpose revenue a school district, community college district or county office of education is entitled to receive from State and local sources. Each school district had its own target amount of funding from State funds and local property taxes per average daily attendance. This target was known as revenue limit, and the funding from this calculation formed the bulk of school districts income. The State Legislature usually granted annual cost-of-living adjustments ( COLAs ) to revenue limits. The exact amount of the COLA depended on whether the school district is an elementary, high school or a unified school district. The funding level set by the revenue limit for each school district or county office of education was funded first by the property tax revenue available to that district, and the remaining balance was filled by State funds. Basic aid districts, in which the revenue limit was completely paid for from local property tax revenue, were allowed to keep all excess property tax revenue from within their district, but they received no general purpose State revenue limit funding. However, such districts did receive the constitutionally required minimum funding, or basic aid, of a set amount per pupil. Basic aid districts also continued to receive the 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 the existing revenue limit allocation formula with a new formula, the Local Control Funding Formula. 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. Because the amount that school districts are entitled to receive under LCFF is greater than under the previous revenue limit allotment, some school districts that were basic aid districts under the previous system will no longer be if the property tax revenue available to the school district no longer funds or exceeds the amount the school district is entitled to receive under LCFF. The vast majority of school districts will receive more State aid than was received under the previous revenue limit system. Under the hold harmless provision, no school district will receive less State aid than it received in fiscal year While several calculations are involved in determining the amount a school district will receive each year under LCFF, the core components of the LCFF are the calculation of each school district s floor entitlement, MSA entitlement, LCFF target entitlement, and ERT entitlement, if eligible. 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. Most public education funding from the State is provided through the LCFF. In fiscal year , 79 percent of Proposition 98 funding for K-12 public education is provided through LCFF. Under LCFF, school districts across the State receive the same base grants for each

57 grade span, based on ADA. As under the previous system, school districts continue to receive funds based on the greater of prior year or current year ADA figures. In fiscal year , the base grants are $7,820 for grades K-3, $7,189 for grades 4-6, $7,403 for grades 7-8, and $8,801 for grades 9-12, which include adjustment increases for class size reduction and career technical education for grade spans K-3 and 9-12 receive, respectively. A school district s average K-3 class size target enrollment is not more than 24 students per teacher at each school site, as may be amended by union contract. Charter schools are not required to make progress towards or to meet this enrollment ratio goal. School districts receive a supplemental grant of 20 percent of the base grant for each unduplicated student in the school district, defined as low-income, 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 reducedprice meals, and are therefore not discussed separately). School districts with more than 55 percent enrollment of unduplicated students receive concentration funding. The concentration grant is an additional 50 percent of the base grant for each unduplicated student above the threshold. The concentration grants are intended to address the additional academic challenges faced by such students when their peers are similarly disadvantaged. The supplemental and concentration factors 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. For accounting purposes, all LCFF funds will be accounted for as an unrestricted resource. 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 sitewide. 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. 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. The ERT add-on will be paid incrementally over the LCFF implementation period. See DISTRICT FINANCIAL INFORMATION Revenues herein. Basic aid districts, defined as school districts that do not receive State aid to fund their floor entitlement for transition to LCFF or any portion of LCFF at full implementation because they receive the full amount from local property tax revenue, continue to receive State funding from fiscal year levels. The transition entitlement for such school districts is comprised of its floor entitlement, gap funding, ERT, and MSA funding amounts. The MSA allotted to a school district is at least the amount of funding received by the school district in fiscal year The MSA amount is calculated based on the categorical allocation net of 8.92 percent fair share reduction. However, the fair share reduction is limited by the school district s property taxes, including one-time redevelopment agency revenue, in excess of its fiscal year revenue limit, and by the total of all categorical funds enumerated by the LCFF. Basic aid school districts receive the $200 per ADA as additional revenue. In the case of a school district that transitions out of basic aid status because its State entitlement increased under LCFF, such school districts may receive a proportional offset for the $200 per ADA. See DISTRICT FINANCIAL INFORMATION Revenues herein. LCFF does not change the minimum required reserve that be kept by a school district for economic uncertainties. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND EXPENDITURES State and School District Reserves herein. LCFF does not change the minimum required reserve that be kept by a school district for economic uncertainties. The implementation of LCFF began in fiscal year , with full implementation planned within eight years, 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 and 30 percent of the gap in fiscal year ; the State is budgeted to fund 52 percent of the funding gap in fiscal year , the third year of implementation of LCFF. The LCFF does not alter the budget adoption process for school districts. 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

58 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, 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 Government Taxation and Appropriation 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 Funds. In fiscal year , federal revenues are expected to account for approximately 10 percent of K-12 public education funding within the State. Approximately 95 percent of these funds are designated for particular purposes such as special education, the No Child Left Behind Act, Drug Free Schools, and Title I programs for economically or otherwise disadvantaged students. Local Property Taxes. In fiscal year , local property taxes are expected to account for approximately 19 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. Approximately 10 percent of school districts in the State receive more from local property tax revenue than they would under the State formulas. These basic aid districts are allowed to keep any property tax revenue they receive above and beyond the amount of funding calculated under LCFF. Basic aid districts must still comply with the accountability requirements adopted with LCFF. The District is not a basic aid district. See DISTRICT FINANCIAL INFORMATION Revenues herein. Other Local Funds. In fiscal year , miscellaneous local sources are 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. In addition, a significant number of school districts have secured voter approval, with either a two-thirds vote or a 55 percent majority, to sell general obligation bonds or to establish special taxing districts for the construction of schools. Use of such taxes is restricted by law. Such taxes are expected to account for approximately five percent of K-12 public education funding in the State in fiscal year The State Budget Process Under the State Constitution, money may be drawn from the State Treasury only through 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, which can provide for projected expenditures only to the amount of projected revenues and balances available from prior fiscal years

59 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 24, 2015, the Governor signed the 2015 Budget Act and associated trailer bills to enact the fiscal year State budget (the State Budget ). The State Budget includes State general fund revenues of $115.0 billion, representing a 3.3 percent increase from fiscal year levels, and State general fund expenditures of $115.4 billion, representing a 0.8 percent increase from fiscal year levels. The State s general fund balance is budgeted to be $2.1 billion at the end of fiscal year , with total reserves of $4.6 billion, including $1.1 billion in the traditional general fund reserve and $3.5 billion in the BSA. The State Budget projects that State general fund tax revenues in fiscal years and will be $2 billion and $1 billion, respectively, more than projected in the prior year budget for fiscal year due to the strong economy and additional revenues from temporary taxes. Major features of the State Budget include paying down debt, funding reserves, counteracting the effects of poverty, increasing spending on education and health care, workforce development, drought assistance, and creating the State s first earned income tax credit. The State Budget also includes funding to address the State s significant continuing liabilities in deferred maintenance of infrastructure and retiree benefits. The following table from the State Legislative Analyst s Office identifies historical and budgeted State general fund revenues, expenditures and fund balances. State General Fund State Budget State Budget State Budget (Millions) (Millions) Prior-year Fund Balance $5,590 $2,423 Revenues and Transfers 111, ,033 Expenditures 114, ,370 Ending Fund Balance $2,423 $2,086 Encumbrances Special Reserve for Economic Uncertainties 1,453 1,116 Reserves Special Reserve for Economic Uncertainties $1,453 $1,116 Pre-Proposition 2 Budget Stabilization Account 1,606 1,606 Proposition 2 Budget Stabilization Account - 1,854 Total Reserves $3,059 $4,576 Totals may not foot due to rounding. Source: The State Legislative Analyst s Office.

60 Education Funding. The Proposition 98 minimum guarantee funding for K-14 education continues to increase, due to the rebounding economy, after reaching a low of $47.3 billion in fiscal year The State Budget provides a minimum guarantee for K-14 Proposition 98 funding of $68.4 billion. This figure is $2.1 billion (3.2 percent) more than the revised fiscal year level. The State Budget reduces the State s outstanding obligations to K-14 education by paying $3.8 billion on the K-14 mandates reimbursement backlog ($3.2 billion of which pays down K-12 mandates), reducing the total backlog to $1.5 billion, and retires all K-14 payment deferrals with a payment of $1 billion ($897 million of which pays K-12 deferrals), representing the first budget since fiscal year to make all K-14 payments on time. The State Budget also retires the $273 million owed under the terms of a legal settlement for the Emergency Repair Program ( ERP ) obligation. The Proposition 98 maintenance factor payment, adjusted annually for changes in K-12 attendance and per capita personal income, was an estimated $2.6 billion at the end of fiscal year Constitutionally obligated to make additional payments when State revenue grows more than per capita personal income, under the State Budget the State will make a large maintenance factor payment that will eliminate most of the maintenance factor obligation, leaving $772 million in outstanding maintenance factor obligation at the end of fiscal year Of the $68.4 billion minimum guarantee to K-14 school districts in the State, K-12 public education is budgeted to receive $59.5 billion, which is $5.3 billion (9.9 percent) more than the prior year budget for fiscal year , and $1.2 billion (2.1 percent) more than the revised fiscal year funding level. The State Budget provides an increase of $7.6 billion for K-12 LCFF spending, bringing total LCFF funding to $52 billion and closing approximately 52 percent of the remaining gap to full implementation. This equals a 13 percent year-over-year increase in LCFF funding, funding 90 percent of the estimated full LCFF implementation cost. Per-pupil spending for K-12 public education under Proposition 98 is budgeted to be $9,942 in fiscal year , an increase of $1,011 (11 percent) per-pupil from the prior year budget for fiscal year and more than $3,000 per pupil higher than fiscal year levels. The State Budget also provides $455 million for technical adjustments and changes to the fiscal year Proposition 98 funding levels for K-12 public education. In addition, the State Budget provides for Proposition 98 general funds for certain K-12 programs, as well as certain preschool and adult education programs listed below. Career Technical Education: $900 million in one-time funds to support a transitional CTE Incentive Grant Program spread over three years ($400 million in fiscal year , $300 million in fiscal year , and $200 million in fiscal year ). Educator Support: $500 million in one-time funds to promote teacher quality and effectiveness aligned with current content standards available for spending over three years. Special Education: $60 million ($50 million ongoing and $10 million one-time funds) for a package of measures for special education that emphasize early childhood education. Internet Infrastructure: $50 million for the second phase of ensuring Internet infrastructure for on-line academic testing. Quality Education Investment Act Transition Funding: $4.6 million in one-time expenditures to provide half of the final apportionment of Quality Education Investment Act funding to selected school districts in fiscal year that do not qualify for concentration grant funding under LCFF. Adult Education: $500 million for projects collaboratively developed by a consortium at the local level of school districts, county offices of education, community college districts, local workforce investment boards, social services agencies and employers to provide more effective education and workforce training. Child Care and State Preschool: $423 million (an 18 percent increase) for 7,000 additional full-day State preschool slots for children of low-income families and almost 3,000 part-day preschool slots

61 The following table identifies historical and proposed Proposition 98 funding. Proposition 98 Funding State Budget Revised Revised Budget Act (Millions) (Millions) (Millions) By Segment Schools General Fund $38,162 $43,888 $43,151 Local Property Tax Revenue 13,736 14,432 16,380 Subtotal $51,898 $58,321 $59,530 Community Colleges General Fund $4,248 $4,975 $5,301 Local Property Tax Revenue 2,182 2,263 2,613 Subtotal $6,431 $7,238 $7,914 Preschool $507 $664 $885 1 Other Total $58,914 $66,303 $68,409 By Fund Source General Fund $42,996 $49,608 $49,416 Local Property Tax Revenue 15,918 16,695 18,993 Total $58,914 $66,303 $68,409 1 Includes $145 million for existing wraparound childcare formerly funded with non-proposition 98 general fund. Excluding this accounting shift, growth is $75 million, or 11 percent. Source: The State Legislative Analyst s Office. The Proposed State Budget On January 7, 2016, the Governor released his proposed State budget for fiscal year (the Proposed Budget ). The Proposed Budget is a $122.6 billion plan to increase funding for education, health care and infrastructure, add to the State s Rainy Day Fund and pay down State debts and liabilities. The budget deficit and annual budgetary shortfalls have been eliminated; however, the Governor s proposed budget calls for fiscal restraint. Although the State s economy continues to be strong, the large percentage of the State s general fund revenues that comes from personal income tax revenues could rapidly decline in the event of a recession. General Fund. The Proposed Budget includes State general fund revenues of $120.6 billion, representing a 2.6 percent increase from revised fiscal year levels, and State general fund expenditures of $122.6 billion, representing a 5.6 percent increase from revised fiscal year levels. The State s general fund balance is budgeted to be $3.2 billion at the end of fiscal year , with total reserves of $10.2 billion, including $2.2 billion in the traditional general fund reserve and $8.0 billion in the BSA, 65 percent of its constitutional target. The budget proposes to increase funding for K-12 education to $10,591 per pupil, an increase of approximately $3,600 per pupil from fiscal year levels. The budget proposes an investment of $2.8 billion in the fourth year of implementation of the LCFF, bringing it to 95 percent of full implementation. Other specific provisions in the Proposed Budget include $36 billion over ten years to improve State infrastructure, $807 million ($500 million from the general fund) for deferred maintenance at various State-owned facilities, $3.1 billion to reduce greenhouse gas emissions, implementation of State minimum wage increase to $10 per hour, and $380 million for an earned income tax credit for low-income families

62 The Governor also seeks to develop a plan to eliminate the $72 billion unfunded liability for retiree health benefits, suggesting a plan similar to the new pension funding standards in which investment returns help pay for future benefits and State and employees share equally in prefunding retiree health benefits. The following table from the State Legislative Analyst s Office identifies historical and budgeted State general fund revenues and expenditures. Proposed Budget State General Fund Revised Revised Proposed (Millions) (Millions) (Millions) Prior-year Fund Balance $5,356 $3,699 $5,172 Revenues and Transfers 111, , ,633 Expenditures 112, , ,609 Ending Fund Balance $3,699 $5,172 $3,196 Encumbrances Special Reserve for Economic Uncertainties 2,733 4,206 2,230 Reserves Special Reserve for Economic Uncertainties $2,733 $4,206 $2,230 Budget Stabilization Account 1,606 4,455 8,011 Total Reserves $4,339 $8,661 $10,241 Totals may not foot due to rounding. Source: The State Legislative Analyst s Office. Education Funding. The Proposed Budget includes upwards revisions of the historical Proposition 98 minimum guarantees of the previous two budgets, revising the minimum guarantee for fiscal year to $66.7 billion, an increase of $387 million from the estimate in the State Budget, and revising the minimum guarantee for fiscal year to $69.2 billion, an increase of $766 million from the estimate in the State Budget, requiring a larger maintenance factor payment. Upon the payment of this maintenance factor, the State will have repaid all of the maintenance factor created during the last recession, leaving no maintenance factor outstanding for the first time since fiscal year The Proposed Budget s Proposition 98 minimum guarantee is $71.6 billion, an increase of $3.2 billion from the State Budget level and $2.4 billion from the revised fiscal year estimate. Under the proposal, Test 3 is operative in fiscal year because the funding increase is due to increased per capita State general fund revenue, creating a new maintenance factor of $548 million. The combined increases in the Proposition 98 minimum guarantee for the three-year period result in an increase in spending of $4.3 billion. In addition, the Proposed Budget provides for a $257 million settle-up payment related to meeting the fiscal year minimum guarantee, accounted for in the Proposed Budget under Proposition 2, leaving $1 billion in remaining settle-up obligations. The Proposed Budget would increase funding $368 per-pupil (a 3.6 percent increase from the revised fiscal year level of $10,237) to $10,605 in fiscal year Most of these increases would be allocated under LCFF

63 The following table identifies historical and budgeted Proposition 98 funding. Proposition 98 Funding Proposed Budget Revised Revised Proposed (Millions) (Millions) (Millions) By Segment Schools General Fund $44,496 $44,536 $45,442 Local Property Tax Revenue 14,834 16,560 17,802 Subtotal $59,330 $61,096 $63,244 Community Colleges 2 General Fund $4,979 $5,373 $5,447 Local Property Tax Revenue 2,302 2,624 2,812 Subtotal $7,281 $7,997 $8,259 Other Agencies 3 $80 $82 $83 Total $66,690 $69,175 $71,585 By Fund Source General Fund $49,554 $49,992 $50,972 Local Property Tax Revenue 17,136 19,183 20,613 Total $66,690 $69,175 $71,585 1 Includes State Preschool in fiscal year and proposed early education block grant in fiscal year Includes $500 million for adult education regional consortia in fiscal years and Consists entirely of State general fund. Totals may not foot due to rounding. Source: The State Legislative Analyst s Office. The Proposed Budget includes the following adjustments for K-12 education: LCFF: $2.8 billion increase (5.4 percent increase from fiscal year levels) for LCFF implementation, closing 49 percent of the remaining gap to full implementation, ahead of schedule, such that LCFF would be 95 percent funded in fiscal year Education Mandates Backlog: $1.2 billion in one-time funds to be used by school districts, county offices of education, and charter schools at local discretion. County Offices of Education: $1.7 million increase in funding to pay for cost-of-living and enrollment adjustments. Charter Schools: $61 million increase in funding to pay for increased enrollment; $20 million in one-time funds for charter school start-up grants. Preschool Programs: $1.7 billion in Proposition 98 funds to create a new block grant, redirecting all Proposition 98 funds currently allocated to separate programs including State Preschool and Transitional Kindergarten to a block grant to each local educational agency for greater local control over such spending, with further details regarding funding distribution to come in the Governor s upcoming May revision to the proposal. Education Mandates Backlog: $1.4 billion in one-time funds to pay down the K-14 mandate backlog ($1.3 billion for K-12 education), distributed to local educational agencies per pupil with discretion over spending; remaining mandate backlog of $1.8 billion

64 Workforce Programs: $48 million in ongoing funding to support CTE Pathways, which supports collaboration between schools, community colleges and local businesses. Special Education: $15.5 million decrease in funding due to declining enrollment in special education programs. Categorical Programs: $22.9 million increase to pay for a 0.47 percent cost-of-living increase for programs not covered by LCFF such as Special Education, Child Nutrition, Foster Youth, Preschool and American Indian education programs. Proposition 39 Energy Efficiency: $365.4 million in fiscal year for energy efficiency projects in State K-12 and charter schools. Proposition 39 requires that, from fiscal years through , half of the revenues from the increased State corporate tax is used to support energy efficiency. Proposition 47 School Funding: $7.3 million increase for services to prevent truancy and dropout from the K-12 system, a portion of the savings generated by savings from Proposition 47. Local Property Tax Adjustment: $149.4 million decrease for fiscal year and $1.2 billion decrease for fiscal year due to increased offsetting local property tax revenues. Declining Enrollment Adjustment: $150.1 million decrease for fiscal year and $34.1 million decrease for fiscal year for projected decline in enrollment in fiscal year The May Revision to the Proposed State Budget On May 13, 2016, the Governor released the May Revision to the Proposed Budget (the May Revision ). With forecasted tax revenues through fiscal year reduced by $1.9 billion and increased spending commitments enacted by the State Legislature since the Proposed Budget, the May Revision remains in balance through reductions in Proposition 2 s required contributions to debt payment and the Rainy Day Fund. The following table from the State Legislative Analyst s Office identifies historical and budgeted State general fund revenues and expenditures in the May Revision. May Revision State General Fund Revised Revised Proposed (Millions) (Millions) (Millions) Prior-year Fund Balance $5,103 $3,444 $4,829 Revenues and Transfers 111, , ,080 Expenditures 113, , ,155 Ending Fund Balance $3,444 $4,829 $2,754 Encumbrances Special Reserve for Economic Uncertainties 2,478 3,863 1,788 Reserves Special Reserve for Economic Uncertainties $2,478 $3,863 $1,788 Budget Stabilization Account 1,606 3,421 6,713 Total Reserves $4,084 $7,284 $8,501 Totals may not foot due to rounding. Source: The State Legislative Analyst s Office. The May Revision includes total funding for K-12 education of $87.6 billion ($51.5 billion from the State s general fund and $36.1 billion from other funds). Although the revised revenue estimates are lower than projected as of January, the revised Proposition 98 minimum guarantee estimate is higher, due to higher revised prior-year revenues, by a combined $626 million in fiscal years through The May Revision projects the Proposition 98 minimum guarantee for fiscal years , , and to be $67.2 billion, $69.1 billion, and $71.9 billion, respectively.

65 The May Revision also revises the Proposition 98 maintenance factor, which had been projected to be fully restored by the end of fiscal year Under the May Revision, the year-end maintenance factor is projected to be $155 million and $908 million for fiscal years and , respectively, as a result of reduced revenue estimates for fiscal year and increased growth in per capita personal income for fiscal year The May Revision provides for an additional $154 million in LCFF implementation funding, for a total of $2.9 billion in new funding, which would bring the implementation of LCFF to 96 percent. The May Revision also proposes an additional $134.8 million to add to the approximately $1.3 billion in one-time Proposition 98 funding for the implementation of State-adopted academic standards and resources for teacher training, infrastructure and technology. Other significant adjustments to the Proposed Budget in the May Revision include: Local Property Tax Adjustments: A decrease of $196.5 million Proposition 98 State general fund in fiscal year and $211.3 million in fiscal year for school districts, special education local plan areas, and county offices of education as a result of higher offsetting property tax revenues. Special Education Property Tax Adjustment: An increase of up to $28.5 million Proposition 98 State general fund in fiscal year , provided on a contingency basis, for an anticipated shortfall in redevelopment agency property taxes for special education local plan areas. Related language provides a mechanism to distribute up to $28.5 million based on a determination of property taxes reported for special education local plan areas as of the second principal apportionment certification in early June. Average Daily Attendance (ADA): An increase of $11.2 million in fiscal year and a decrease of $2 million in fiscal year for school districts, charter schools, and county offices of education under LCFF as a result of an increase in ADA in fiscal year which drives projections for fiscal year , and a decrease in ADA for fiscal year Proposition 39: The California Clean Energy Jobs Act was approved by voters in 2012 and increases State corporate tax revenues. For fiscal years through , the measure requires half of the increased revenues, up to $550 million per year, to be used to support energy efficiency projects. The May Revision increases the amount of energy efficiency funds available to K-12 schools in fiscal year by $33.3 million to $398.8 million to reflect increased revenue estimates. Categorical Program Growth: A decrease of $5.7 million Proposition 98 State general fund for selected categorical programs, based on updated estimates of projected ADA growth. Cost-of-Living Adjustments: A decrease of $18.6 million Proposition 98 State general fund to selected categorical programs for fiscal year to reflect a change in the cost-of-living factor from 0.47 percent at the Proposed Budget to 0.00 percent at the May Revision. K-12 Mandated Programs Block Grant: An increase of $131,000 Proposition 98 State general fund to maintain statutory block grant funding rates, assuming 100 percent program participation. 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 Legislative Analyst s Office s website at The District takes no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of the information presented therein, and such information is not incorporated herein by such reference

66 LEGAL MATTERS No Litigation There is no action, suit or proceeding known to be pending or threatened that seeks to restrain or enjoin the execution or delivery of the Certificates or the Legal Documents or in any way contesting or affecting the validity of the foregoing or any proceeding of the District taken with respect to the foregoing. There are no lawsuits or claims pending against the District that would impair the ability of the District to make Lease Payments or otherwise meet its outstanding lease or debt obligations. Legal Opinion Quint & Thimmig LLP, Special Counsel, will render its opinion with respect to the validity and enforceability of the Site and Facility, Lease Agreement, Assignment Agreement, and Trust Agreement. Copies of such approving opinion will be available at the time of delivery of the Certificates. The form of the legal opinion to be delivered by Special Counsel is included in this Official Statement. See APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL attached hereto. The opinion is based on existing laws, regulations, rulings and court decisions. Special Counsel has not undertaken a review of this Official Statement on behalf of Certificate owners and makes no representation as to the accuracy or completeness hereof. Tax Matters Federal tax law contains a number of requirements and restrictions which apply to the Certificates, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of bond proceeds and the facilities financed therewith, and certain other matters. The District has covenanted to comply with all requirements that must be satisfied in order for the interest with respect to the Certificates to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest with respect to the Certificates to become includable in gross income for federal income tax purposes retroactively to the date of delivery of the Certificates. Subject to the District s compliance with the above referenced covenants, under present law, in the opinion of Quint & Thimmig LLP, Special Counsel, interest with respect to the Certificates is excludable from the gross income of the owners thereof for federal income tax purposes, and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest with respect to the Certificates is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In rendering its opinion, Special Counsel will rely upon certifications of the District with respect to certain material facts within its knowledge. Special Counsel s opinion represents its legal judgment based upon its review of the law and the facts that it deems relevant to render such opinion and is not a guarantee of a result. The Code includes provisions for an alternative minimum tax ( AMT ) for corporations in addition to the corporate regular tax in certain cases. The AMT for a corporation, if any, depends upon the corporation s alternative minimum taxable income ( AMTI ), which is the corporations taxable income with certain adjustments. One of the adjustment items used in computing the AMTI of a corporation (with certain exceptions) is an amount equal to 75% of the excess of such corporation s adjusted current earnings over an amount equal to its AMTI (before such adjustment item and the alternative tax net operating loss deduction). Adjusted current earnings would generally include certain tax-exempt interest, but not interest with respect to the Certificates. Ownership of the Certificates may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Certificates should consult their tax advisors as to applicability of any such collateral consequences. The issue price (the Issue Price ) for each maturity of the Certificates is the price at which a substantial amount of such maturity of the Certificates is first sold to the public. The Issue Price of a maturity of the Certificates may be different from the price set forth, or the price corresponding to the yield set forth, on the cover page hereof

67 Owners of Certificates who dispose of Certificates prior to the stated maturity (whether by sale, redemption or otherwise), purchase Certificates in the initial public offering, but at a price different from the Issue Price, or purchase Certificates subsequent to the initial public offering, should consult their own tax advisors. If a Certificate is purchased at any time for a price that is less than the Certificate s stated redemption price at maturity (the Reduced Issue Price ), the purchaser will be treated as having purchased a Certificate with market discount subject to the market discount rules of the Code (unless a statutory de minimis rule applies). Accrued market discount is treated as taxable ordinary income and is recognized when a Certificate is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser s election, as it accrues. Such treatment would apply to any purchaser who purchases a Certificate for a price that is less than its Revised Issue Price. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Certificate. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. An investor may purchase a Certificate at a price in excess of its stated principal amount. Such excess is characterized for federal income tax purposes as bond premium and must be amortized by an investor on a constant yield basis over the remaining term of the Certificate in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a tax-exempt bond. The amortized bond premium is treated as a reduction in the tax-exempt interest received. As bond premium is amortized, it reduces the investor s basis in the Certificate. Investors who purchase a Certificate at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the Certificate s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Certificate. There are or may be pending in the Congress of the United States legislative proposals, including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the Certificates. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to certificates issued prior to enactment. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal tax legislation. Special Counsel expresses no opinion regarding any pending or proposed federal tax legislation. The Internal Revenue Service (the Service ) has an ongoing program of auditing tax exempt obligations to determine whether, in the view of the Service, interest on such tax exempt obligations is includable in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an audit of the Certificates. If an audit is commenced, under current procedures the Service may treat the Issuer as a taxpayer and the Owners may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the Certificates until the audit is concluded, regardless of the ultimate outcome. Payments of interest with respect to, and proceeds of the sale, redemption or maturity of, tax exempt obligations, including the Certificates, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Certificate owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Certificate owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes. In the further opinion of Special Counsel, interest with respect to the Certificates is exempt from California personal income taxes. Ownership of the Certificates may result in other state and local tax consequences to certain taxpayers. Special Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Certificates. Prospective purchasers of the Certificates should consult their tax advisors regarding the applicability of any such state and local taxes. The complete text of the final opinion that Special Counsel expects to deliver upon the delivery of the Certificates is set forth in APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL. Legality for Investment Under provisions of the State Financial Code, the Certificates are legal investments for commercial banks in the State to the extent that the Certificates, in the informed opinion of the investing bank, are prudent for the investment of funds of depositors. Under provisions of the State Government Code, the Certificates are eligible security deposits of public moneys in the State

68 RATINGS S&P is expected to assign its municipal bond rating of AA (stable outlook) to the Certificates with the understanding that upon delivery of the Certificates, a municipal bond insurance policy insuring the payment when due of the principal of and interest with respect to the Certificates will be issued by AGM. S&P has assigned an underlying municipal bond rating of A (stable outlook) to the Certificates. Such ratings reflect only the views of S&P, and an explanation of the significance of such ratings may be obtained from S&P. There is no assurance that any such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by S&P, if in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Certificates. 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 Certificates. 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 Certificates. Fees charged by Government Financial Strategies inc. are not contingent upon the sale of the Certificates. INDEPENDENT AUDITOR The financial statements of the District as of and for the year ending June 30, 2015 have been audited by Nigro & Nigro, PC, A Professional Accountancy Corporation, Murrieta, California. The audited financial statements of the District as of and for the year ended June 30, 2015, are set forth in APPENDIX B THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2015 attached hereto. The District has not requested nor did the District obtain permission from the Auditor to include the audited financial statements as an appendix to this Official Statement. 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 Certificates were sold to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the Underwriter ), pursuant to a certificate purchase agreement, at a price of $31,690,421.60, being the principal amount of the Certificates of $27,945,000.00, plus a net original issue premium of $3,960,745.30, less an underwriting discount of $215,323.70, at a true interest cost (TIC) to the District of percent. The Underwriter has certified the initial offering prices or yields stated on the inside cover page to this Official Statement. The Underwriter may offer and sell the Certificates to certain dealers (including dealers depositing Certificates into investment trusts), dealer banks, banks acting as agents and others at prices lower than such 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 Certificates to provide certain financial information and operating data relating to the District (the Annual Report ), by not later than eight months after the end of the fiscal year, commencing with the report for fiscal year due February 28, 2017, 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 EMMA. The specific nature of the information to be contained in the Annual Report or the notices are set forth in APPENDIX

69 C FORM OF CONTINUING DISCLOSURE CERTIFICATE attached hereto. These covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). In the past five years, the District has not complied in all respects with its obligations under the Rule. The annual reports for fiscal year , or relevant portions thereof, for the 1997A Refunding Bonds, the 2004 Refunding Bonds, the 2006A Bonds, the 2006B Bonds, the 2009 Refunding Bonds, and the 2009 BANs, each due March 1, 2012, were not filed until March 30, 2012, while the annual report for fiscal year for the 2007 COP, also due March 1, 2012, was not filed until September 18, In the past five years, the following significant event notices were not within 10 business days of their occurrence: On November 30, 2011, S&P downgraded the rating of the insurer of the 2006A Bonds, the 2006B Bonds, the 2007 COP, and the 2009 Refunding Bonds, resulting in a downgrade of the rating of the 2006A Bonds, the 2006B Bonds, the 2007 COP, and the 2009 Refunding Bonds. Notices of the downgrades were not filed until September 18, On December 21, 2011, S&P downgraded the short-term rating of the 2009 BANs. Notice of the downgrade was not filed until September 18, Procedures have been implemented to prevent the administrative oversight 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 Certificates or any other matters concerning the sale and delivery of the Certificates may be obtained from the District by contacting the Fontana Unified School District, 9680 Citrus Avenue, Fontana, California 92335, telephone (909) , Attention: Associate Superintendent, Business Services, 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 Certificates, the Legal Documents 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 Certificates, 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 Board. Fontana Unified School District By: /s/ Leslie Boozer, Ed.D., J.D. Leslie Boozer, Ed.D., J.D. Superintendent

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71 APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

72 APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of certain provisions of the Site and Facility Lease, the Lease Agreement, the Assignment Agreement and the Trust Agreement prepared for Certificates. The following also includes definitions of certain terms used therein and in this Official Statement. Such summary is not intended to be definitive. Reference is directed to said documents for the complete text thereof. Except as otherwise defined in this summary, the terms previously defined in this Official Statement have the respective meanings previously given. Copies of said documents are available from the District and from the Trustee. DEFINITIONS Additional Payments means the payments so designated and required to be paid by the District pursuant to the Lease Agreement. AGM means Assured Guaranty Municipal Corp., a New York stock insurance company, or any successor thereto or assigns thereof. Assignment Agreement means the Assignment Agreement, dated as of June 1, 2016, by and between the Authority and the Trustee, together with any duly authorized and executed amendments thereto. Authority means the Fontana Unified School District Public Financing Authority, a joint exercise of powers entity organized and existing under and by virtue of the laws of the State. Authority Representative means the Chair, the Executive Director, the Treasurer and the Secretary of the Authority, or the designee of any such official, or any other person authorized by resolution delivered to the Trustee to act on behalf of the Authority under or with respect to the Site and Facility Lease, the Lease Agreement, the Assignment Agreement and the Trust Agreement. Board means the Board of Education of the District. Bond Counsel means (a) Quint & Thimmig LLP, or (b) any other attorney or firm of attorneys appointed by or acceptable to the District of nationally-recognized experience in the issuance of obligations the interest on which is excludable from gross income for federal income tax purposes under the Code. Business Day means a day which is not a Saturday, Sunday or legal holiday on which banking institutions in the state in which the Principal Corporate Trust Office is located or in the State are closed or are required to close or a day on which the New York Stock Exchange is closed. Certificates means the certificates of participation to be executed and delivered pursuant to the Trust Agreement which evidence direct, undivided fractional Interests of the Owners thereof in Lease Payments. Closing Date means the date upon which there is a physical delivery of the Certificates in exchange for the amount representing the purchase price of the Certificates by the Original Purchaser. Code means the Internal Revenue Code of 1986 as in effect on the Closing Date or (except as otherwise referenced in the Lease Agreement or the Trust Agreement) as it may be amended to apply to obligations issued on the Closing Date, together with applicable temporary and final regulations promulgated under the Code. Appendix A Page 1

73 Continuing Disclosure Certificate shall mean that certain Continuing Disclosure Certificate executed by the District and dated the date of execution and delivery of the Certificates, as it may be amended from time to time in accordance with the terms thereof. County means San Bernardino County, a political subdivision of the State. Defeasance Obligations means (a) cash, (b) direct non-callable obligations of the United States of America, (c) securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, to which direct obligation or guarantee the full faith and credit of the United States of America has been pledged, (d) Refcorp interest strips, (e) CATS, TIGRS, STRPS, and (f) subject to the prior written consent of AGM, defeased municipal bonds rated AAA by S&P or Aaa by Moody s (or any combination of the foregoing). Delivery Costs means all items of expense directly or indirectly payable by or reimbursable to the District or the Authority relating to the execution and delivery of the Site and Facility Lease, the Lease Agreement, the Trust Agreement and the Assignment Agreement or the execution, sale and delivery of the Certificates, including but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, costs for statistical data, initial fees and charges of the Trustee (including the fees and expenses of its counsel), financing discounts, legal fees and charges, insurance fees and charges (including title insurance), financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for execution, transportation and safekeeping of the Certificates, the premiums for the Municipal Bond Insurance Policy and the Reserve Policy and charges and fees in connection with the foregoing. Delivery Costs Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. District means Fontana Unified School District, a unified school district, duly organized and existing under and by virtue of the laws of the State. District Representative means the President of the Board, the Superintendent, the Associate Superintendent Business Services, or the designee of any such official, or any other person authorized by resolution delivered to the Trustee to act on behalf of the District under or with respect to the Site and Facility Lease, the Lease Agreement and the Trust Agreement. Escrow Agreement means the Escrow Agreement, dated the Closing Date, by and between the District and the Escrow Bank, providing for the defeasance of the Refunded 2007 Certificates, together with any duly authorized and executed amendments thereto. Escrow Bank means U.S. Bank National Association, or any successor thereto, acting as escrow bank under the Escrow Agreement. Escrow Fund means the fund by that name established and held by the Escrow Bank pursuant to Section 3 of the Escrow Agreement. Event of Default means an event of default under the Lease Agreement. Facility means the District s Summit High School, more particularly described in Exhibit B to the Site and Facility Lease and in Exhibit B to the Lease Agreement. Federal Securities means (a) Cash (insured at all times by the Federal Deposit Insurance Corporation), and (b) obligations of, or obligations guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States including: (i) United States treasury obligations, (ii) all direct or fully guaranteed obligations, (iii) General Services Administra- Appendix A Page 2

74 tion, (iv) Guaranteed Title XI financing, (v) Government National Mortgage Association (GNMA), and (vi) State and Local Government Series. Fiscal Year means the twelve-month period beginning on July 1 of any year and ending on June 30 of the next succeeding year, or any other twelve-month period selected by the District as its fiscal year. Independent Counsel means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Authority, the District or the Trustee. Information Services means the Electronic Municipal Market Access System (referred to as EMMA ), a facility of the Municipal Securities Rulemaking Board (at or, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other national information services providing information or disseminating notices of redemption of obligations similar to the Certificates. Insurance and Condemnation Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Interest Payment Date means the first (1st) day of March and September in each year, commencing September 1, 2016, so long as any Certificates are Outstanding. Lease Agreement means that certain agreement for the lease of the Property by the Authority to the District, dated as of June 1, 2016, together with any duly authorized and executed amendments thereto. Lease Payment Date means the fifteenth (15th) day of February and August in each year during the Term of the Lease Agreement, commencing August 15, Lease Payment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Lease Payments means the total payments required to be paid by the District pursuant to the Lease Agreement, including any prepayment thereof pursuant to Article X of the Lease Agreement, which payments consist of an interest component and a principal component, as set forth in Exhibit C to the Lease Agreement. Moody s means Moody s Investors Service, New York, New York, or its successors. Municipal Bond Insurance Policy means the municipal bond insurance policy issued by AGM guaranteeing the payment, when due, of the principal and interest with respect to the Certificates. Net Proceeds, when used with respect to insurance or condemnation proceeds, means any insurance proceeds or condemnation award paid with respect to the Property, to the extent remaining after payment therefrom of all expenses incurred in the collection thereof. Original Purchaser means the first purchaser of the Certificates upon their delivery by the Trustee on the Closing Date. Outstanding, when used as of any particular time with respect to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except: (a) Certificates theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; Appendix A Page 3

75 (b) Certificates for the payment or redemption of which funds or Defeasance Obligations in the necessary amount shall have theretofore been deposited with the Trustee or an escrow holder (whether upon or prior to the maturity or redemption date of such Certificates), provided that, if such Certificates are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to the Trust Agreement. Owner or Certificate Owner or Owner of a Certificate, or any similar term, when used with respect to a Certificate means the person in whose name such Certificate shall be registered on the Registration Books. Participating Underwriter shall have the meaning ascribed thereto in the Continuing Disclosure Certificate. Permitted Encumbrances means, as of any particular time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the District may, pursuant to provisions of Article V of the Lease Agreement, permit to remain unpaid; (b) the Site and Facility Lease; (c) the Lease Agreement; (d) the Assignment Agreement; (e) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (f) easements, rights-of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the District certifies in writing will not materially impair the use of the Property; and (g) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and to which the Authority and the District agree in writing do not reduce the value of the Property. Permitted Investments means any of the following: (a) Federal Securities; (b) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including: (i) Export-Import Bank, (ii) Rural Economic Community Development Administration, (iii) U.S. Maritime Administration, (iv) Small Business Administration, (v) U.S. Department of Housing & Urban Development (PHAs), and (vi) Federal Housing Administration; (c) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: (i) senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC), (ii) obligations of the Resolution Funding Corporation (REFCORP), and (iii) senior debt obligations of the Federal Home Loan Bank System; (d) U.S. dollar denominated deposit accounts, bank deposit products, time deposits, certificates of deposit (including those placed by a third party pursuant to an agreement between the Trustee and the District), trust funds, trust accounts, interest bearing deposits, overnight bank deposits, interest bearing money market accounts, federal funds and bankers acceptances with domestic commercial banks, which may include the Trustee and its affiliates, which (i) have a rating on their short term certificates of deposit on the date of purchase of P-1 by Moody s and A-1 or A-1+ by S&P and maturing not more than 360 calendar days after the date of purchase or (ii) are insured by the Federal Deposit Insurance Corporation. (Ratings on holding companies are not considered as the rating of the bank); (e) Commercial paper which is rated at the time of purchase in the single highest classification, P-1 by Moody s and A-1+ by S&P and which matures not more than 270 calendar days after the date of purchase; Appendix A Page 4

76 (f) Investments in a money market mutual fund rated AAAm or AAAm-G or better by S&P, including funds for which the Trustee, its parent holding company, if any, or any affiliate or subsidiary of the Trustee receives sand retains a fee for services provided toi the fund, and provide investment advisory, investment management, custodial transfer agency or other management services; (g) Pre-refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (A) which are rated, based on an irrevocable escrow account or fund (the escrow ), in the highest rating category of Moody s or S&P or any successors thereto; or (B) (i) which are fully secured as to principal, interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph (a) above, which escrow may be applied only to the payment of such principal, interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal, interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate; (h) Municipal obligations rated Aaa/AAA or general obligations of states with a rating of A2/A or higher by both Moody s and S&P; (i) the Local Agency Investment Fund maintained by the State; (j) Shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 of the California Government Code which invests exclusively in investments permitted by section of Title 5, Division 2, Chapter 4 of the California Government Code, as it may be amended, including but not limited to the California Asset Management Program (CAMP); (k) Repurchase and reverse repurchase agreements collateralized with Federal Securities, including those of the Trustee or any of its affiliates; and (l) The San Bernardino County Investment Pool Principal Corporate Trust Office means the corporate trust office of the Trustee located at 400 South Hope Street, Suite 500, Los Angeles, CA 90071, Attention: Corporate Trust Department, or, solely for the purposes of the presentation of Certificates for payment, transfer or exchange, the designated corporate trust operations office of the Trustee or such other office designated by the Trustee from time to time. Proceeds, when used with reference to the Certificates, means the face amount of the Certificates, less original issue discount. Property means, collectively, the Site and the Facility. Rating Category means, with respect to any Permitted Investment, one of the generic categories of rating by Moody s or S&P applicable to such Permitted Investment, without regard to any refinement or graduation of such rating category by a plus or minus sign or a numeral. Refunded 2007 Certificates means the 2007 Certificates maturing on and after September 1, Registration Books means the records maintained by the Trustee pursuant to the Trust Agreement for registration of the ownership and transfer of ownership of the Certificates. Appendix A Page 5

77 Regular Record Date means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. Rental Period means each twelve-month period during the Term of the Lease Agreement commencing on September 2 in any year and ending on September 1 in the next succeeding year; provided, however, that the first Rental Period shall commence on the Closing Date and shall end on September 1, Reserve Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Reserve Policy means the Municipal Bond Insurance Policy issued by AGM for deposit in the Reserve Fund in an amount equal to the Reserve Requirement. Reserve Requirement means an amount equal to the least of maximum annual Installment Payments, 125% of average annual Installment Payments, and 10% of the principal amount of the Certificates. S&P means Standard & Poor s Ratings Services, a division of The McGraw-Hill Companies, Inc., New York, New York, or its successors. Securities Depositories means The Depository Trust Company, 55 Water Street, 50 th Floor, New York, NY Attention: Call Notification Department; or to such other addresses and/or such other registered securities depositories holding substantial amounts of obligations of types similar to the Certificates. Site means that certain real property more particularly described in Exhibit A to the Site and Facility Lease and in Exhibit A to the Lease Agreement. Site and Facility Lease means the Site and Facility Lease, dated as of June 1, 2016, by and between the District, as lessor, and the Authority, as lessee, together with any duly authorized and executed amendments thereto. State means the State of California. Term of the Lease Agreement means the time during which the Lease Agreement is in effect, as provided in the Lease Agreement. Trust Agreement means the Trust Agreement, dated as of June 1, 2016, by and among the District, the Authority and the Trustee, together with any duly authorized amendments thereto. Trustee means The Bank of New York Mellon Trust Company, N.A., or any successor thereto, acting as Trustee pursuant to the Trust Agreement Certificates means the 2007 certificates of participation evidencing the fractional interests of the owners thereof in lease payments to be made by the District as the rental for certain property pursuant to a lease agreement with the Authority. SITE AND FACILITY LEASE The Site and Facility Lease is entered into between the District and the Authority. The District agrees to lease the Site and the Facility to the Authority for a term continuous with the term of the Lease Agreement. The District and the Authority agree that the lease to the Authority of the District s right, title and interest in the Site and the Facility pursuant to the Site and Facility Lease serves the public purposes of the District by enabling the Authority to lease the Site and Facility back to the District. Appendix A Page 6

78 LEASE AGREEMENT Deposit of Money On the Closing Date, the Authority shall cause to be deposited with the Trustee the net proceeds of sale of the Certificates, net of amounts paid by the Original Purchaser to AGM as an accommodation to the District for the premiums relating to the Municipal Bond Insurance Policy and the Reserve Policy. Amounts estimated to be required to pay Delivery Costs shall be deposited in the Delivery Costs Fund and the amount estimated to be required to defease the Refunded 2007 Certificates shall be transferred to the Escrow Bank for deposit in the Escrow Fund. Payment of Delivery Costs Payment of Delivery Costs shall be made from the moneys deposited in the Delivery Costs Fund, which moneys shall be disbursed for such purpose in accordance and upon compliance with the Trust Agreement. Lease The Authority leases the Property to the District, and the District leases the Property from the Authority, upon the terms and conditions set forth in the Lease Agreement. The leasing of the Property by the District to the Authority pursuant to the Site and Facility Lease shall not affect or result in a merger of the District s leasehold estate pursuant to the Lease Agreement and its fee estate as lessor under the Site and Facility Lease. Term of Agreement; Possession The Term of the Lease Agreement shall commence on the Closing Date, and shall end on September 1, 2035, unless such term is extended. If, on September 1, 2035, the Trust Agreement shall not be discharged by its terms or if the Lease Payments payable under the Lease Agreement shall have been abated at any time and for any reason, then the Term of the Lease Agreement shall be extended without the need to execute any amendment to the Lease Agreement until there has been deposited with the Trustee an amount sufficient to pay all obligations due under the Lease Agreement, but in no event shall the Term of the Lease Agreement extend beyond September 1, If, prior to September 1, 2035, the Trust Agreement shall be discharged by its terms, the Term of the Lease Agreement shall thereupon end. The Trustee shall notify the Authority of the termination of the Lease Agreement pursuant to the Trust Agreement. Notwithstanding the foregoing, the Term of the Lease Agreement shall not end so long as any amounts are owed to AGM with respect to the Municipal Bond Insurance Policy or the Reserve Policy. The District agrees to accept and take possession of the Property on or prior to the date of recordation of the Lease Agreement. The first Lease Payment shall be due on August 15, Lease Payments Obligation to Pay. The District agrees to pay to the Authority, its successors and assigns, as rental for the use and occupancy of the Property during each Rental Period, the Lease Payments (denominated into components of principal and interest) in the respective amounts specified in the Lease Agreement, to be due and payable on the respective Lease Payment Dates specified in the Lease Agreement. Any amount held in the Lease Payment Fund on any Lease Payment Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole and other than amounts required for payment of Certificates not yet surrendered) shall be credited towards the Lease Payment then due and payable; and no Lease Payment need be made on any Lease Payment Date if the amounts then held in the Lease Payment Fund are at least equal to the Lease Payment then required to be paid. The Lease Payments for the Property payable in any Rental Period shall be for the use of the Property for such Rental Period. Appendix A Page 7

79 Effect of Prepayment. In the event that the District prepays all remaining Lease Payments and all additional payments due under the Lease Agreement in full, the District s obligations under the Lease Agreement shall thereupon cease and terminate including, but not limited to, the District s obligation to pay Lease Payments under the Lease Agreement; subject however, to the provisions of the Lease Agreement in the case of prepayment by application of a security deposit. In the event that the District optionally prepays the Lease Payments in part but not in whole, such prepayment shall be credited entirely towards the prepayment of the Lease Payments as follows: (i) the principal components of each remaining such Lease Payments shall be reduced in such order as shall be selected by the District in integral multiples of $5,000; and (ii) the interest component of each remaining Lease Payment shall be reduced by the aggregate corresponding amount of interest which would otherwise be payable with respect to the Certificates redeemed pursuant to the Trust Agreement. Rate on Overdue Payments. In the event the District should fail to make any of the payments required in the Lease Agreement, the payment in default shall continue as an obligation of the District until the amount in default shall have been fully paid and the District agrees to pay the same with interest thereon, to the extent permitted by law, from the date of default to the date of payment at the rate per annum payable with respect to the Certificates. Such interest, if received, shall be deposited in the Lease Payment Fund. Fair Rental Value. The Lease Payments for each Rental Period shall constitute the total rental for the Property for each such Rental Period and shall be paid by the District in each Rental Period for and in consideration of the right of the use and occupancy and the continued quiet use and enjoyment of the Property during each Rental Period. The parties to the Lease Agreement have agreed and determined that the total Lease Payments represent the fair rental value of the Property. In making such determination, consideration has been given to the obligations of the parties under the Lease Agreement, the uses and purposes which may be served by the Property and the benefits therefrom which will accrue to the District and the general public. Source of Payments; Budget and Appropriation. Lease Payments and Additional Payments shall be payable from any source of available funds of the District, subject to the provisions of the Lease Agreement. The District covenants to take such action as may be necessary to include all Lease Payments and Additional Payments due under the Lease Agreement in each of its budgets during the Term of the Lease Agreement and to make the necessary annual appropriations for all such Lease Payments and for Additional Payments due thereunder. To that end, the Board shall direct budgetary staff to include in each annual budget proposal to the Board an appropriation sufficient to pay Lease Payments and Additional Payments. The District expresses its present intent to appropriate Lease Payments and Additional Payments due under the Lease Agreement during the Term of the Lease Agreement. The covenants on the part of the District shall be deemed to be and shall be construed to be duties imposed by law and it shall be the duty of each and every public official of the District to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the District to carry out and perform the covenants and agreements in the Lease Agreement agreed to be carried out and performed by the District. The chief business official and all other officers charged with the duty of preparing and submitting the annual budget of the District to the Board are irrevocably directed, following any draw on the Reserve Policy because the value of the Property has been reduced below the total unpaid principal component of Lease Payments and the District is permitted to pay less than the total scheduled Lease Payment (an Abatement Period ), to include in the proposed budget and to request that the Board include in the final approved budget, and thereby appropriate, any amounts necessary to reinstate the Reserve Fund Policy, including interest due and any other amounts payable to AGM (collectively, the Reinstatement Amount ). Such officers shall use their best efforts to obtain such appropriations. The request for inclusion in the final approved budget and appropriation shall be made in each Fiscal Year following any Abatement Period so long as reimbursement amounts are owed to AGM. Failure by the chief business Appendix A Page 8

80 official and other officers to request such inclusion and appropriation shall constitute an Event of Default under the Lease Agreement and AGM may exercise remedies accordingly. The decision of the Board as to whether or not to approve and appropriate any Reinstatement Amount in any given Fiscal Year during any Abatement Period is in the sound discretion of the Board; the failure of the Board to approve and appropriate the Reinstatement Amount in any given Fiscal Year during any Abatement Period shall not constitute an Event of Default under the Lease Agreement or under the Trust Agreement. Assignment. The District understands and agrees that all Lease Payments have been assigned by the Authority to the Trustee in trust, pursuant to the Assignment Agreement, for the benefit of the Owners of the Certificates, and the District assents to such assignment. The Authority directs the District, and the District agrees to pay to the Trustee at the Principal Corporate Trust Office, all payments payable by the District pursuant to the Lease Agreement. Additional Payments In addition to the Lease Payments, the District shall pay when due the following additional payments: (a) Any fees and expenses incurred by the District in connection with or by reason of its leasehold estate in the Property as and when the same become due and payable; (b) Any amounts due to the Trustee pursuant to the Trust Agreement for all services rendered under the Trust Agreement and for all reasonable expenses, charges, costs, liabilities, legal fees and other disbursements incurred in and about the performance of its powers and duties under the Trust Agreement; (c) Any reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the District, the Authority or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Lease Agreement or the Trust Agreement; (d) Any reasonable out-of-pocket expenses of the District in connection with the execution and delivery of the Lease Agreement or the Trust Agreement, or in connection with the execution and delivery of the Certificates, including any and all expenses incurred in connection with the authorization, execution, sale and delivery of the Certificates, or incurred by the Authority in connection with any litigation which may at any time be instituted involving the Lease Agreement, the Trust Agreement, the Certificates or any of the other documents contemplated or thereby, or incurred by the Authority in connection with the Continuing Disclosure Certificate, or otherwise incurred in connection with the administration thereof. (e) The District agrees to pay (i) in trust, any Insurer Advances (as more fully described in the Trust Agreement), and (ii) any amounts payable to AGM pursuant to the Trust Agreement. The District s obligation to pay such amounts shall expressly survive payment in full of the Certificates. Title During the Term of the Lease Agreement, the Authority shall hold leasehold title to the Property and shall hold fee title to those portions of the Property which are newly acquired or constructed and any and all additions which comprise fixtures, repairs, replacements or modifications to the Property, except for those fixtures, repairs, replacements or modifications which are added to the Property by the District at its own expense and which may be removed without damaging the Property and except for any items added to the Property by the District pursuant to the Lease Agreement. If the District prepays the Lease Payments in full or makes the security deposit permitted by the Lease Agreement, or pays all Lease Payments during the Term of the Lease Agreement as the same become due and payable, all right, title and interest of the Authority in and to the Property shall be terminated. The Authority agrees to Appendix A Page 9

81 take any and all steps and execute and record any and all documents reasonably required by the District to consummate any such transfer of title. Maintenance, Utilities, Taxes and Assessments Throughout the Term of the Lease Agreement, as part of the consideration for the rental of the Property, all improvement, repair and maintenance of the Property shall be the responsibility of the District and the District shall pay, or otherwise arrange, for the payment of all utility services supplied to the Property which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, water and all other utility services, and shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Property resulting from ordinary wear and tear or want of care on the part of the District or any assignee or sublessee thereof. In exchange for the Lease Payments, the Authority agrees to provide only the Property. The District waives the benefits of subsections 1 and 2 of section 1932 of the California Civil Code, but such waiver shall not limit any of the rights of the District under the terms of the Lease Agreement. The District shall also pay or cause to be paid all taxes and assessments of any type or nature, if any, charged to the Authority or the District affecting the Property or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the District shall be obligated to pay only such installments as are required to be paid during the Term of the Lease Agreement as and when the same become due. The District may, at the District s expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Authority or AGM shall notify the District that, in the opinion of Independent Counsel, by nonpayment of any such items, the interest of the Authority in the Property will be materially endangered or the Property or any part thereof will be subject to loss or forfeiture, in which event the District shall promptly pay such taxes, assessments or charges or provide the Authority and AGM with full security against any loss which may result from nonpayment, in form satisfactory to the Authority. The District shall provide the Authority and AGM with written notice of any such contest and shall provide such updates on the contest as the Authority or AGM may reasonably request. Modification of Property The District shall, at its own expense, have the right to remodel the Property or to make additions, modifications and improvements to the Property. All additions, modifications and improvements to the Property shall thereafter comprise part of the Property and be subject to the provisions of the Lease Agreement. Such additions, modifications and improvements shall not in any way damage the Property, substantially alter its nature, cause the interest component of Lease Payments to be subject to federal income taxes or cause the Property to be used for purposes other than those authorized under the provisions of State and federal law; and the Property, upon completion of any additions, modifications and improvements made thereto pursuant to the Lease Agreement, shall be of a value which is not substantially less than the value of the Property immediately prior to the making of such additions, modifications and improvements. The District will not permit any mechanic s or other lien to be established or remain against the Property for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the District pursuant to the Lease Agreement; provided that if any such lien is established and the District shall first notify the Authority of the District s intention to do so, the District may in good faith contest any lien filed or established against the Property, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Authority with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Authority. The Authority will cooperate fully in any such contest, upon the request and at the expense of the District. Appendix A Page 10

82 Insurance Public Liability and Property Damage Insurance. The District shall maintain or cause to be maintained, throughout the Term of the Lease Agreement, insurance policies, including a standard comprehensive general insurance policy or policies in protection of the Authority, the District, the Trustee and AGM and their respective members, officers, agents and employees. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the District, and may be maintained through a joint exercise of powers authority created for such purpose or, with the prior written consent of AGM, in the form of self-insurance by the District. Said policy or policies shall provide for indemnification of said parties against direct or consequential loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the Property. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $100,000 (subject to a deductible clause of not to exceed $5,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the District and may be maintained in the form of insurance maintained through a joint exercise of powers authority created for such purpose or, with the prior written consent of AGM, in the form of self-insurance by the District. The Net Proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid. Fire and Extended Coverage Insurance; No Earthquake Insurance. The District shall maintain, or cause to be maintained throughout the Term of the Lease Agreement, insurance against loss or damage to any part of the Property constituting structures, if any, by fire and lightning, with extended coverage and vandalism and malicious mischief insurance; provided, however, that the District shall not be required to maintain earthquake insurance with respect to the Property. Said extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. Such insurance shall be in an amount equal to one hundred percent (100%) of the replacement cost of such portion of the Property, if any. Such insurance may be subject to deductible clauses of not to exceed $100,000 for any one loss. Such insurance may be maintained as part of or in conjunction with any other fire and extended coverage insurance carried by the District and with the prior written consent of AGM, may be maintained in whole or in part in the form of insurance maintained through a joint exercise of powers authority created for such purpose. The Net Proceeds of such insurance shall be applied as provided in the Lease Agreement. The District may not satisfy the requirements of the Lease Agreement for fire and extended coverage insurance with self-insurance, except with the prior written consent of AGM. Rental Interruption Insurance. The District shall maintain, or cause to be maintained, throughout the Term of the Lease Agreement rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of any part of the Property during the Term of the Lease Agreement as a result of any of the hazards covered in the insurance required by the Lease Agreement, if any, in an amount at least equal to two times maximum annual Lease Payments. The Net Proceeds of such insurance shall be paid to the Trustee and deposited in the Lease Payment Fund and shall be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable. Such insurance may be maintained as part of or in conjunction with any other insurance carried by the District and may be maintained in whole or in part in the form of insurance maintained through a joint exercise of powers authority created for such purpose. The District may not satisfy the requirements of the Lease Agreement for rental interruption insurance with self-insurance. Title Insurance. The District shall provide, from moneys in the Delivery Costs Fund or at its own expense, on the Closing Date, an CLTA title insurance policy in the amount of not less than the principal amount of the Certificates, insuring the District s fee and leasehold estate in the Property, subject only to Permitted Encumbrances. Insurance Net Proceeds; Form of Policies Each policy or other evidence of insurance required by the Lease Agreement shall provide that all proceeds thereunder shall be payable to the Trustee as and to the extent required Appendix A Page 11

83 under the Lease Agreement, shall name the Trustee and AGM as additional insureds and shall be applied as provided in the Lease Agreement. Insurance must be provided by an insurer rated A or better by S&P or A.M. Best Company, unless waived by AGM. The District shall pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement. All policies evidencing required insurance shall provide thirty (30) days prior written notice to the Authority, the District, the Trustee and AGM of any cancellation, reduction in amount or material change in coverage. The Trustee shall not be responsible for the sufficiency of any insurance required in the Lease Agreement, including any forms of self-insurance and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. The District shall cause to be delivered annually on or before each September 1 to the Trustee and AGM a certification, signed by a District Representative, stating compliance with the provisions of the Lease Agreement. The Trustee shall be entitled to rely on such certification without independent investigation. The District shall have the adequacy of any insurance reserves maintained by the District or by a joint exercise of powers authority, if applicable, for purposes of the insurance required by the Lease Agreement reviewed at least annually, on or before each September 1, by an independent insurance consultant and shall maintain reserves in accordance with the recommendations of such consultant to the extent moneys are available for such purpose and not otherwise appropriated. Tax Covenants Private Activity Bond Limitation. The District shall assure that proceeds of the Certificates are not so used as to cause the Certificates or the Lease Agreement to satisfy the private business tests of section 141(b) of the Code or the private loan financing test of section 141(c) of the Code. Federal Guarantee Prohibition. The District shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Certificates or the Lease Agreement to be federally guaranteed within the meaning of section 149(b) of the Code. Rebate Requirement. The District shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the Certificates and the Lease Agreement. No Arbitrage. The District shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Certificates which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Certificates or the Lease Agreement to be arbitrage bonds within the meaning of section 148 of the Code. Maintenance of Tax-Exemption. The District shall take all actions necessary to assure the exclusion of interest with respect to the Certificates from the gross income of the Owners of the Certificates to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the Closing Date. No Condemnation The District covenants and agrees, to the extent it may lawfully do so, that so long as any of the Certificates remain outstanding and unpaid, the District will not exercise the power of condemnation with respect to the Property. The District further covenants and agrees, to the extent it may lawfully do so, that if for any reason the foregoing covenant is determined to be unenforceable or if the District should fall or refuse to abide by such covenant and condemns the Property, the appraised value of the Property shall not be less than the greater of (i) if the Certificates are then subject to redemption, the principal and interest components of the Certificates Outstanding through the date of their redemption, or (ii) if the Certificates are not then subject to redemption, the amount necessary to defease the Certificates to the first available redemption date in accordance with the Trust Agreement. Appendix A Page 12

84 Eminent Domain If all of the Property shall be taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Term of the Lease Agreement shall cease as of the day possession shall be so taken. If less than all of the Property shall be taken permanently, or if all of the Property or any part thereof shall be taken temporarily under the power of eminent domain, (1) the Lease Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (2) there shall be a partial abatement of Lease Payments as a result of the application of the Net Proceeds of any eminent domain award to the prepayment of the Lease Payments, in an amount to be agreed upon by the District and the Authority and communicated to the Trustee such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Property, except to the extent of special funds available for the payment of Lease Payments. Application of Net Proceeds From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or destruction of any portion of the Property constituting structures, if any, by fire or other casualty shall be paid by the District to the Trustee, as assignee of the Authority under the Assignment Agreement, deposited in the Insurance and Condemnation Fund held by the Trustee and applied as set forth in the Trust Agreement. From Eminent Domain Award. The Net Proceeds of any eminent domain award shall be paid by the District to the Trustee, as assignee of the Authority under the Assignment Agreement, deposited in the Insurance and Condemnation Fund and applied as set forth in the Trust Agreement. From Title Insurance. The Net Proceeds of any title insurance award shall be paid to the Trustee, as assignee of the Authority under the Assignment Agreement, deposited in the Insurance and Condemnation Fund and applied as set forth in the Trust Agreement. Abatement of Lease Payments in the Event of Damage or Destruction Lease Payments shall be abated during any period in which, by reason of damage or destruction, there is substantial interference with the use and occupancy by the District of the Property or any portion thereof to the extent to be agreed upon by the District and the Authority and communicated by a City Representative to the Trustee. The parties agree that the amounts of the Lease Payments under such circumstances shall not be less than the amounts of the unpaid Lease Payments as are then set forth in the Lease Agreement, unless such unpaid amounts are determined to be greater than the fair rental value of the portions of the Property not damaged or destroyed, based upon the opinion of an MAI appraiser with expertise in valuing such properties, or other appropriate method of valuation, in which event the Lease Payments shall be abated such that they represent said fair rental value. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction as communicated by a City Representative to the Trustee. In the event of any such damage or destruction, the Lease Agreement shall continue in full force and effect and the District waives any right to terminate the Lease Agreement by virtue of any such damage and destruction. Notwithstanding the foregoing, there shall be no abatement of Lease Payments to the extent that (a) the proceeds of rental interruption insurance or (b) amounts in the Insurance and Condemnation Fund and/or the Lease Payment Fund are available to pay Lease Payments which would otherwise be abated, it being declared that such proceeds and amounts constitute special funds for the payment of the Lease Payments. Access to the Property The District agrees that the Authority and any District Representative, and the Authority s successors or assigns, and AGM, shall have the right at all reasonable times to enter upon and to examine and inspect the Property. The District further agrees that the Authority, any District Representative, and the Authority s successors or assigns, and AGM, shall have such rights of access to the Property as may be reasonably necessary to cause the proper Appendix A Page 13

85 maintenance of the Property in the event of failure by the District to perform its obligations under the Lease Agreement. Release and Indemnification Covenants The District shall and agrees to indemnify and save the Authority, the Trustee and AGM and their officers, agents, directors, employees, successors and assigns harmless from and against all claims, losses and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on the Property by the District, (ii) any breach or default on the part of the District in the performance of any of its obligations under the Lease Agreement or the Trust Agreement, (iii) any act or omission of the District or of any of its agents, contractors, servants, employees or licensees with respect to the Property, (iv) any act or omission of any sublessee of the District with respect to the Property, or (v) the authorization of payment of the Delivery Costs. Such indemnification shall include the costs and expenses of defending any claim or liability arising under the Lease Agreement or the Trust Agreement and the transactions contemplated thereby. No indemnification is made in the Lease Agreement for willful misconduct, negligence or breach of duty under the Lease Agreement by the Authority, its officers, agents, directors, employees, successors or assigns. Assignment by the Authority The Authority s rights under the Lease Agreement, including the right to receive and enforce payment of the Lease Payments to be made by the District under the Lease Agreement, have been assigned to the Trustee pursuant to the Assignment Agreement. Assignment and Subleasing by the District The Lease Agreement may not be assigned by the District. The District may sublease the Property or any portion thereof, but only with the written consent of the Authority and AGM and subject to, and delivery to the Authority of a certificate as to, all of the following conditions: (a) The Lease Agreement and the obligation of the District to make Lease Payments shall remain obligations of the District; (b) The District shall, within thirty (30) days after the delivery thereof, furnish or cause to be furnished to the Authority, the Trustee and AGM a true and complete copy of such sublease; (c) No such sublease by the District shall cause the Property to be used for a purpose other than as may be authorized under the provisions of the Constitution and laws of the State; and (d) The District shall furnish the Authority, the Trustee and AGM with a written opinion of Bond Counsel, which shall be an Independent Counsel, stating that such sublease does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes. Notwithstanding the foregoing and provided the District has received the prior written consent of AGM, the District may sublease the Property to the Authority in connection with a future certificates of participation or lease revenue bond financing without the necessity to comply with any of the foregoing conditions, so long as the total of the unpaid principal component of the Lease Payments and the principal component of the lease payments to be paid with respect to such future certificates of participation or lease revenue bond financing does not exceed the value of the Property. Amendment of Lease Agreement (a) Substitution of Site or Facility. The District shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to substitute other land (a Substitute Site ) and/or a substi- Appendix A Page 14

86 tute facility (a Substitute Facility ) for the Site (the Former Site ), or a portion thereof, and/or the Facility (the Former Facility ), or a portion thereof, provided that the District shall satisfy all of the following requirements (to the extent applicable) which are declared to be conditions precedent to such substitution: (i) If a substitution of the Site, the District shall file with the Authority, the Trustee and AGM an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (ii) If a substitution of the Site, the District shall file with the Authority, the Trustee and AGM an amendment to the Lease Agreement which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (iii) If a substitution of the Facility, the District shall file with the Authority, the Trustee and AGM an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (iv) If a substitution of the Facility, the District shall file with the Authority, the Trustee and AGM an amendment to the Lease Agreement which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (v) The District shall certify in writing to the Authority, the Trustee and AGM that such Substitute Site and/or Substitute Facility serve the purposes of the District, constitutes property that is unencumbered, subject to Permitted Encumbrances, and constitutes property which the District is permitted to lease under the laws of the State; (vi) The District delivers to the Authority, the Trustee and AGM evidence (which may be insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Property following such substitution is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee that the indemnification provided pursuant to the Trust Agreement applies with respect to the Substitute Site and/or Substitute Facility; (vii) The Substitute Site and/or Substitute Facility shall not cause the District to violate any of its covenants, representations and warranties made in the Lease Agreement and in the Trust Agreement; (viii) The District shall obtain an amendment to the title insurance policy required pursuant to the Lease Agreement which adds thereto a description of the Substitute Site and deletes therefrom the description of the Former Site; (ix) The District shall certify that the Substitute Site and/or the Substitute Facility is of the same or greater essentiality to the District as was the Former Site and/or the Former Facility; (x) The District shall provide notice of the substitution to any rating agency then rating the Certificates which rating was provided at the request of the District or the Authority; (xi) The District shall furnish the Authority, the Trustee and AGM with a written opinion of Bond Counsel, which shall be an Independent Counsel, stating that such substitution does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes; and (xii) AGM shall provide written consent to such substitution. Appendix A Page 15

87 (b) Release of Site. The District shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to release any portion of the Site, provided that the District shall satisfy all of the following requirements which are declared to be conditions precedent to such release: (i) The District shall file with the Authority, the Trustee and AGM an amendment to the Site and Facility Lease which describes the Site, as revised by such release; (ii) The District delivers to the Authority, the Trustee and AGM evidence (which may be insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Site, as revised by such release, is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee and the Authority that the indemnification provided pursuant to the Trust Agreement applies with respect to the Site, as revised by such release; (iii) Such release shall not cause the District to violate any of its covenants, representations and warranties made in the Lease Agreement and in the Trust Agreement; (iv) The District shall provide notice of the release to any rating agency then rating the Certificates which rating was provided at the request of the District or the Authority; and (v) AGM shall provide written consent to such release. (c) Generally. The Authority and the District may at any time amend or modify any of the provisions of the Lease Agreement, but only (i) with the prior written consent of the Owners of a majority in aggregate principal amount of the Outstanding Certificates and AGM, or (ii) without the consent of any of the Owners, but with the prior written consent of AGM, but only if such amendment or modification is for any one or more of the following purposes: (i) to add to the covenants and agreements of the District contained in the Lease Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power reserved to or conferred upon the District; (ii) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Lease Agreement, or in any other respect whatsoever as the Authority and the District may deem necessary or desirable, provided that, in the opinion of Bond Counsel, such modifications or amendments will not materially adversely affect the interests of the Owners; or (iii) to amend any provision thereof relating to the Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest with respect to the Certificates under the Code, in the opinion of Bond Counsel. Events of Default and Remedies Events of Default. The following shall be events of default under the Lease Agreement and the terms Events of Default and Default shall mean, whenever they are used in the Lease Agreement, any one or more of the following events: (a) Failure by the District to pay any Lease Payment or other payment required to be paid at the time specified. (b) Failure by the District to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Lease Agreement or under the Trust Agreement, for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the District by the Author- Appendix A Page 16

88 ity, the Trustee or the Owners of not less than five percent (5%) in aggregate principal amount of Certificates then outstanding; provided, however, if the failure stated in the notice can be corrected, but not within the applicable period, the Authority, the Trustee and such Owners shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the District within the applicable period and diligently pursued until the default is corrected. (c) The filing by the District of a voluntary petition in bankruptcy, or failure by the District promptly to lift any execution, garnishment or attachment, or adjudication of the District as a bankrupt, or assignment by the District for the benefit of creditors, or the entry by the District into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the District in any proceedings instituted under the provisions of the Federal Bankruptcy Act, as amended, or under any similar acts which may hereafter be enacted. Remedies on Default. AGM shall have the right to control all remedies for default under both the Lease Agreement and the Trust Agreement. The Trustee shall have the right to re-enter and re-let the Property and to terminate the Lease Agreement. Whenever any Event of Default shall have happened and be continuing, it shall be lawful for the Authority to exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything in the Lease Agreement or in the Trust Agreement to the contrary, there shall be no right under any circumstances to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable. Each and every covenant in the Lease Agreement to be kept and performed by the District is expressly made a condition and upon the breach thereof, the Authority may exercise any and all rights of entry and re-entry upon the Property, and also, at its option, with or without such entry, may terminate the Lease Agreement; provided, that no such termination shall be effected either by operation of law or acts of the parties to the Lease Agreement, except only in the manner expressly provided in the Lease Agreement. In the event of such default and notwithstanding any re-entry by the Authority, the District shall, as expressly provided in the Lease Agreement, continue to remain liable for the payment of the Lease Payments and/or damages for breach of the Lease Agreement and the performance of all conditions therein contained and, in any event such rent and/or damages shall be payable to the Authority at the time and in the manner as provided in the Lease Agreement, to wit: (a) In the event the Authority or the Trustee does not elect to terminate the Lease Agreement in the manner above or hereinafter provided for in subparagraph (b) below, the District agrees to and shall remain liable for the payment of all Lease Payments and Additional Payments and the performance of all conditions contained in the Lease Agreement and shall reimburse the Authority for any deficiency arising out of the re-leasing of the Property, or, in the event the Authority is unable to re-lease the Property, then for the full amount of all Lease Payments and Additional Payments to the end of the Term of the Lease Agreement, but said Lease Payments and Additional Payments and/or deficiency shall be payable only at the same time and in the same manner as hereinabove provided for the payment of Lease Payments and Additional Payments under the Lease Agreement, notwithstanding such entry or re-entry by the Authority or any suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property or the exercise of any other remedy by the Authority. The District irrevocably appoints the Authority as the agent and attorney-in-fact of the District to enter upon and re-lease the Property in the event of default by the District in the performance of any covenants to be performed by the District and to remove all personal property whatsoever situated upon the Property, to place such property in storage or other suitable place within San Bernardino County, for the account of and at the expense of the District, and the District exempts and agrees to save harmless the Authority from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re-leasing of the Property and the removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The District waives any and all claims for damages caused or which may be caused by the Authority in reentering and taking possession of the Property as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Property and all claims for damages to or loss of any property belonging to the District that may be in or upon the Property. The District agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Authority to re-lease the Property in the event of such re- Appendix A Page 17

89 entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Authority in effecting such re-leasing shall constitute a surrender or termination of the Lease Agreement irrespective of the term for which such re-leasing is made or the terms and conditions of such re-leasing, or otherwise, but that, on the contrary, in the event of such default by the District the right to terminate the Lease Agreement shall vest in the Authority to be effected in the sole and exclusive manner hereinafter provided for in paragraph (b) below. (b) In an Event of Default, the Authority, with the consent of AGM, may terminate the Lease Agreement and re-lease all or any portion of the Property. In the event of the termination of the Lease Agreement by the Authority at its option and in the manner provided in the Lease Agreement on account of default by the District (and notwithstanding any re-entry upon the Property by the Authority in any manner whatsoever or the re-leasing of the Property), the District nevertheless agrees to pay to the Authority all costs, loss or damages howsoever arising or occurring payable at the same time and in the same manner as is provided in the Lease Agreement in the case of payment of Lease Payments. Any surplus received by the Authority from such re-leasing shall be credited towards the Lease Payments next coming due and payable. Neither notice to pay rent or to deliver up possession of the premises given pursuant to law nor any proceeding in unlawful detainer taken by the Authority shall of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the District shall be or become effective by operation of law, or otherwise, unless and until the Authority shall have given written notice to the District of the election on the part of the Authority to terminate the Lease Agreement. The District covenants and agrees that no surrender of the Property and/or of the remainder of the Term of the Lease Agreement or any termination of the Lease Agreement shall be valid in any manner or for any purpose whatsoever unless stated or accepted by the Authority by such written notice. No Remedy Exclusive. No remedy is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Lease Agreement now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority to exercise any remedy reserved to it in the Lease Agreement, it shall not be necessary to give any notice, other than such notice as may be required in the Lease Agreement or by law. Security Deposit Notwithstanding any other provision of the Lease Agreement, the District may, on any date, secure the payment of all or a portion of the Lease Payments remaining due by an irrevocable deposit with the Trustee or an escrow holder under an escrow deposit and trust agreement as referenced in the Trust Agreement, of: (a) in the case of a security deposit relating to all Lease Payments, either (i) cash in an amount which, together with amounts on deposit in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, is sufficient to pay all unpaid Lease Payments, including the principal and interest components thereof, in accordance with the Lease Payment schedule set forth in the Lease Agreement, or (ii) Defeasance Obligations in such amount as will, in the written opinion of an independent certified public accountant or other firm of recognized experts in such matters (addressed to AGM), together with interest to accrue thereon and, if required, all or a portion of moneys or Defeasance Obligations or cash then on deposit and interest earnings thereon in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, be fully sufficient to pay all unpaid Lease Payments on their respective Lease Payment Dates; or (b) in the case of a security deposit relating to a portion of the Lease Payments, a certificate executed by a District Representative designating the portion of the Lease Payments to which the deposit pertains, and either (i) cash in an amount which is sufficient to pay the portion of the Lease Payments designated in such District Representative s certificate, including the principal and interest components thereof, or (ii) Defeasance Obligations in such amount as will, together with interest to be received thereon, if any, in the written opinion of an independent certified public accountant or other firm of recognized experts in such matters (addressed to AGM), be fully sufficient to pay the portion of the Lease Payments designated in the aforesaid District Representative s certificate. Appendix A Page 18

90 In the event of a deposit pursuant as to all Lease Payments and the payment of all fees, expenses and indemnifications owed to the Trustee, all obligations of the District under the Lease Agreement shall cease and terminate, excepting only the obligation of the District to make, or cause to be made, all payments from the deposit made by the District and the obligations of the District pursuant to the Lease Agreement and title to the Property shall vest in the District on the date of said deposit automatically and without further action by the District or the Authority. Said deposit and interest earnings thereon shall be deemed to be and shall constitute a special fund for the payments and said obligation shall thereafter be deemed to be and shall constitute the installment purchase obligation of the District for the Property. Upon said deposit, the Authority will execute or cause to be executed any and all documents as may be necessary to confirm title to the Property in accordance with the provisions of the Lease Agreement. In addition, the Authority appoints the District as its agent to prepare, execute and file or record, in appropriate offices, such documents as may be necessary to place record title to the Property in the District. Prepayment Optional Prepayment. The Authority grants an option to the District to prepay the principal component of the Lease Payments in full, by paying the aggregate unpaid principal components of the Lease Payments, or in part, in a prepayment amount equal to the principal amount of Lease Payments to be prepaid, together with accrued interest to the date fixed for prepayment, without premium. Said option may be exercised commencing August 1, 2025,. Said option shall be exercised by the District by giving written notice to the Authority, the Trustee and AGM of the exercise of such option at least forty-five (45) days prior to said prepayment date. In the event of prepayment in part, the partial prepayment shall be applied against Lease Payments in such order of payment date as shall be selected by the District. Lease Payments due after any such partial prepayment shall be in the amounts set forth in a revised Lease Payment schedule which shall be provided by, or caused to be provided by, the District to the Trustee and which shall represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. The Trustee agrees to notify the Authority in the event of any prepayment of Lease Payments, as provided in the Trust Agreement. Notwithstanding the foregoing, the District shall not be permitted to prepay any Lease Payments if any amounts are owed to AGM with respect to the Municipal Bond Insurance Policy. Mandatory Prepayment From Net Proceeds of Insurance, Title Insurance or Eminent Domain. The District shall be obligated to prepay the Lease Payments, in whole on any date or in part on any Lease Payment Date, from and to the extent of any Net Proceeds of an insurance, title insurance or condemnation award with respect to the Property theretofore deposited in the Lease Payment Fund for such purpose. The District and the Authority agree that such Net Proceeds shall be applied first to the payment of any delinquent Lease Payments, and thereafter shall be credited towards the District s obligations under the Lease Agreement. Lease Payments due after any such partial prepayment shall be in the amounts set forth in a revised Lease Payment schedule which shall be provided by, or caused to be provided by, the District to the Trustee and which shall represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. ASSIGNMENT AGREEMENT The Assignment Agreement is entered into between the Authority and the Trustee, pursuant to which the Authority assigns and transfers to the Trustee, for the benefit of the Owners, certain of the rights of the Authority under the Lease Agreement, including the right to receive Lease Payments under the Lease Agreement and the rights and remedies of the Authority under the Lease Agreement to enforce payment of Lease Payments or otherwise to protect and enforce the Lease Agreement in the event of default by the District. Certain rights of the Authority to payment of advances, indemnification and attorneys fees and expenses are not assigned. Appendix A Page 19

91 Delivery Costs Fund; Payment of Delivery Costs TRUST AGREEMENT There shall be deposited in the Delivery Costs Fund the proceeds of sale of the Certificates required to be deposited therein pursuant to the Trust Agreement and any other funds from time to time deposited with the Trustee for such purpose and identified in writing to the Trustee. The moneys in the Delivery Costs Fund shall be disbursed by the Trustee to pay the Delivery Costs. Disbursements from the Delivery Costs Fund shall be made by the Trustee on receipt of a sequentially numbered requisition, signed by a City Representative. The Trustee shall be responsible for the safekeeping and investment (in accordance with the Trust Agreement) of the moneys held in the Delivery Costs Fund and the payment thereof in accordance with the Trust Agreement, but the Trustee shall not be responsible for the truth or accuracy of such requisitions, may rely conclusively thereon and shall be under no duty to investigate or verify any statements made therein. Upon written notice from a City Representative that all Delivery Costs have been paid, the Trustee shall transfer any moneys then remaining in the Delivery Costs Fund to the Lease Payment Fund and applied for the purposes of such fund, the Delivery Costs Fund shall be closed, the Trustee shall no longer be obligated to make payments for Delivery Costs and all further Delivery Costs shall be paid by the District. Assignment of Rights in Lease Agreement The Authority has, in the Assignment Agreement, transferred, assigned and set over to the Trustee certain of its rights but none of its obligations set forth in the Lease Agreement, including but not limited to all of the Authority s rights to receive and collect Lease Payments and all other amounts required to be deposited in the Lease Payment Fund pursuant to the Lease Agreement or pursuant to the Trust Agreement. All Lease Payments and such other amounts to which the Authority may at any time be entitled shall be paid directly to the Trustee and all of the Lease Payments collected or received by the Authority shall be deemed to be held and to have been collected or received by the Authority as the agent of the Trustee, and if received by the Authority at any time shall be deposited by the Authority with the Trustee within one Business Day after the receipt thereof, and all such Lease Payments and such other amounts shall be forthwith deposited by the Trustee upon the receipt thereof in the Lease Payment Fund. Lease Payment Fund All moneys at any time deposited by the Trustee in the Lease Payment Fund shall be held by the Trustee in trust for the benefit of the Owners of the Certificates. So long as any Certificates are Outstanding, neither the District nor the Authority shall have any beneficial right or interest in the Lease Payment Fund or the moneys deposited therein, except only as provided in the Trust Agreement. There shall be deposited in the Lease Payment Fund all Lease Payments received by the Trustee, including any moneys received by the Trustee for deposit therein pursuant to the Trust Agreement or the Lease Agreement, and any other moneys required to be deposited therein pursuant to the Lease Agreement or the Trust Agreement. All amounts in the Lease Payment Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal and interest with respect to the Certificates as the same shall become due and payable in accordance with the provisions of the Trust Agreement. Any surplus remaining in the Lease Payment Fund after redemption and/or payment of all Certificates, including accrued interest (if any) and payment of any applicable fees and expenses to the Trustee and payment of any amounts owed to AGM, or provision for such redemption or payment having been made to the satisfaction of the Trustee, shall be withdrawn by the Trustee and remitted to the District. Appendix A Page 20

92 Reserve Fund In lieu of a cash deposit to the Reserve Fund the Reserve Policy shall be delivered to the Trustee on the Closing Date. The prior written consent of AGM shall be a condition precedent to the deposit of any credit instrument (other than the Reserve Policy) provided in lieu of a cash deposit into the Reserve Fund. Notwithstanding anything to the contrary set forth in the Trust Agreement, amounts on deposit in the Reserve Fund shall be applied solely to the payment of principal and interest due with respect to the Certificates. The Trustee shall, on or before each March 15 and September 15, value investments in the Reserve Fund at market value and transfer any moneys in the Reserve Fund then in excess of the Reserve Requirement; provided, however, that the Trustee shall not liquidate an investment to make such transfer of excess unless so directed in writing by a City Representative. If, on any Interest Payment Date, the moneys available in the Lease Payment Fund do not equal the amount of the principal, interest and redemption premium (if any) with respect to the Certificates then coming due and payable, the Trustee shall apply the moneys available in the Reserve Fund to make delinquent Lease Payments by transferring the amount necessary for this purpose to the Lease Payment Fund or shall draw on the Reserve Policy and apply amounts received from such draw to make delinquent Lease Payments by transferring the amount necessary for this purpose to the Lease Payment Fund. To the extent there is cash or investments on deposit in the Reserve Fund, such cash or investments shall be applied first before there is any draw on the Reserve Policy or any other credit facility credited to the Reserve Fund in lieu of cash (a Credit Facility ). Payment of any Reserve Policy Costs shall be made prior to replenishment of any such cash amounts. Draws on all Credit Facilities (including the Reserve Policy) on which there is available coverage shall be made on a pro rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Reserve Fund. Payment of Reserve Policy Costs and reimbursement of amounts with respect to other Credit Facilities shall be made on a pro rata basis prior to replenishment of any cash drawn from the Reserve Fund. For the avoidance of doubt, available coverage means the coverage then available for disbursement pursuant to the terms of the applicable alternative credit instrument without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provider to honor any such claim or draw. Upon receipt of any delinquent Lease Payment with respect to which moneys have been advanced from the Reserve Fund or there has been a draw on the Reserve Policy, such Lease Payment shall be deposited in the Reserve Fund to the extent of such advance and first applied to reimburse a draw on the Reserve Policy and then to replenish any cash drawn therefrom. If the interest provisions of this paragraph shall result in an effective rate of interest which, for any period, exceeds the limit of the usury or any other laws applicable to the indebtedness created in the Trust Agreement, then all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice between or by any party to the Trust Agreement, be applied as additional interest for any later periods of time when amounts are outstanding under the Trust Agreement to the extent that interest otherwise due under the Trust Agreement for such periods plus such additional interest would not exceed the limit of the usury or such other laws, and any excess shall be applied upon principal immediately upon receipt of such moneys by AGM, with the same force and effect as if the District had specifically designated such extra sums to be so applied and AGM had agreed to accept such extra payment(s) as additional interest for such later periods. In no event shall any agreed-to or actual exaction as consideration for the indebtedness created in the Trust Agreement exceed the limits imposed or provided by the law applicable to this transaction for the use or detention of money or for forbearance in seeking its collection The Trustee shall ascertain the necessity for a claim upon the Reserve Policy and to provide notice to AGM in accordance with the terms of the Reserve Policy at least five (5) business days prior to each date upon which interest or principal is due with respect to the Certificates. The District agrees to repay any draws under the Reserve Policy and pay all related reasonable expenses incurred by AGM. Interest shall accrue and be payable on such draws and expenses from the date of payment by AGM at the Late Payment Rate. Late Payment Rate means the lesser of (a) the greater of (i) the per annum rate of inter- Appendix A Page 21

93 est, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ( Prime Rate ) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Certificates and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as AGM shall specify. Repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, Reserve Policy Costs ) shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Reserve Policy Costs related to such draw. Amounts in respect of Reserve Policy Costs paid to AGM shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to AGM on account of principal due, the coverage under the Reserve Policy will be increased by a like amount, subject to the terms of the Reserve Policy. If the District shall fail to pay any Reserve Policy Costs in accordance with the requirements of the Trust Agreement, AGM shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Trust Agreement, other than (i) acceleration of the maturity of the Certificates, or (ii) remedies which would adversely affect Owners. Neither the Trust Agreement nor the Lease Agreement shall be discharged until all amounts due to AGM shall have been paid in full. The District s obligation to pay such amounts shall expressly survive payment in full of the Certificates. If, on any Interest Payment Date, the moneys on deposit in the Reserve Fund and the Lease Payment Fund (excluding amounts required for payment of principal and interest with respect to Certificates not presented for payment) are sufficient to pay all Outstanding Certificates, including all principal and interest, the Trustee shall transfer all amounts then on deposit in the Reserve Fund to the Lease Payment Fund to be applied to the payment of the Lease Payments, and such moneys shall be distributed to the Owners of Certificates in accordance with the Trust Agreement. Any amounts remaining in the Reserve Fund upon payment in full of all Outstanding Certificates and all amounts due AGM and the Trustee under the Trust Agreement, or upon provision for such payment as provided in the Trust Agreement, shall be withdrawn by the Trustee and paid to the District. Insurance and Condemnation Fund; Application of Net Proceeds of Insurance Award (a) Any Net Proceeds of insurance against damage to or destruction of any part of the Property collected by the District in the event of any such damage or destruction shall be paid to the Trustee by the District pursuant to the Lease Agreement and deposited by the Trustee promptly upon receipt thereof in a special fund designated as the Insurance and Condemnation Fund to be established by the Trustee when deposits are required to be made therein. (b) Within ninety (90) days following the date of such deposit, the District shall determine and notify the Trustee in writing of its determination either (i) that the replacement, repair, restoration, modification or improvement of the Property is not economically feasible or in the best interest of the District, or (ii) that all or a portion of such Net Proceeds are to be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Property. (c) In the event the District s determination is as set forth in clause (i) of paragraph (b) above, such Net Proceeds shall be promptly transferred by the Trustee to the Lease Payment Fund, applied to the prepayment of Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates as provided in the Trust Agreement; provided, however, that in the event of damage or destruction of the Property in full, such Net Pro- Appendix A Page 22

94 ceeds may be transferred to the Lease Payment Fund only if sufficient, together with other moneys available therefor, to cause the prepayment of the principal components of all unpaid Lease Payments pursuant to the Lease Agreement, otherwise such Net Proceeds shall be applied to the replacement, repair, restoration, modification or improvement of the Property; provided further, however, that in the event of damage or destruction of the Property in part, such Net Proceeds may be transferred to the Lease Payment Fund and applied to the prepayment of Lease Payments only if the resulting Lease Payments represent fair consideration for the remaining portions of the Property, evidenced by a certificate signed by a District Representative and an Authority Representative. (d) In the event the District s determination is as set forth in clause (ii) of paragraph (b) above, Net Proceeds deposited in the Insurance and Condemnation Fund shall be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Property by the District, and disbursed by the Trustee upon receipt of requisitions signed by a District Representative stating with respect to each payment to be made (i) the requisition number, (ii) the name and address of the person, firm or Authority to whom payment is due, (iii) the amount to be paid and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of the obligation, accompanied by a bill or a statement of account for such obligation. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein. Any balance of the Net Proceeds remaining after such work has been completed shall be paid to the District. Application of Net Proceeds of Eminent Domain Award If all or any part of the Property shall be taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain), the Net Proceeds therefrom shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Lease Agreement and shall be applied and disbursed by the Trustee as follows: (a) If the District has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Property or the ability of the District to meet any of its obligations with respect to the Property under the Lease Agreement, and (ii) such proceeds are not needed for repair or rehabilitation of the Property, the District shall so certify to the Trustee and the Trustee, at the District s written request, shall transfer such proceeds to the Lease Payment Fund to be credited towards the prepayment of the Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. (b) If the District has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Property or the ability of the District to meet any of its obligations with respect to the Property under the Lease Agreement, and (ii) such proceeds are needed for repair, rehabilitation or replacement of the Property, the District shall so certify to the Trustee and the Trustee, at the District s written request, shall pay to the District, or to its order, from said proceeds such amounts as the District may expend for such repair or rehabilitation, upon the filing with the Trustee of requisitions of the District Representative in the form and containing the provisions set forth in the Trust Agreement. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein. (c) If (i) less than all of the Property shall have been taken in such eminent domain proceedings or sold to a government threatening the use of eminent domain powers, and if the District has given written notice to the Trustee of its determination that such eminent domain proceedings have materially affected the operation of the Property or the ability of the District to meet any of its obligations with respect to the Property under the Lease Agreement or (ii) all of the Property shall have been taken in such eminent domain proceedings, then the Trustee shall transfer such proceeds to the Lease Payment Fund to be credited toward the prepayment of the Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. Appendix A Page 23

95 Application of Net Proceeds of Title Insurance Award The Net Proceeds from a title insurance award shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Lease Agreement and shall be transferred to the Lease Payment Fund to be credited towards the prepayment of Lease Payments required to be paid pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. Moneys in Funds; Investment Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement are irrevocably held in trust for the benefit of the Owners of the Certificates and for the purposes specified in the Trust Agreement and such moneys, and any income or interest earned thereon, shall be expended only as provided in the Trust Agreement and shall not be subject to levy, attachment or lien by or for the benefit of any creditor of the Authority, the Trustee, the District or any Owner of Certificates. Investments Authorized. Moneys held by the Trustee under the Trust Agreement shall, upon written order of a District Representative, be invested and reinvested by the Trustee in Permitted Investments. The Trustee may deem all investments directed by a District Representative as Permitted Investments without independent investigation thereof. If a District Representative shall fail to so direct investments, the Trustee shall hold such moneys uninvested. Such investments, if registrable, shall be registered in the name of and held by the Trustee or its nominee. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by the Trust Agreement. Such investments and reinvestments shall be made giving full consideration to the time at which funds are required to be available. The Trustee may act as principal or agent in the making or disposing of any investment and make or dispose of any investment through its investment department or that of an affiliate and shall be entitled to its customary fees therefor. The Trustee is authorized, in making or disposing of any investment permitted by the Trust Agreement, to deal with itself (in its individual capacity) or with one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account. The Trustee may rely on the investment directions of the District Representative as to both the suitability and legality of the directed investments. Unless otherwise consented to by AGM, so long as any Certificates remain outstanding or any amounts are owed to AGM by the District, the District shall not enter into any interest rate exchange agreement, cap, collar, floor, ceiling or other agreement or instrument involving reciprocal payment obligations between the District and a counterparty based on interest rates applied to a notional amount of principal. Allocation of Earnings. Unless and until otherwise directed by the District to the Trustee in writing, all interest or income received by the Trustee on investment of the Lease Payment Fund shall be retained in the Lease Payment Fund. Amounts retained or deposited in the Lease Payment Fund pursuant to the Trust Agreement shall be applied as a credit against the Lease Payment due by the District pursuant to the Lease Agreement on the Lease Payment Date following the date of deposit. All interest received by the Trustee on investment of the Reserve Fund shall be retained in the Reserve Fund in the event that amounts on deposit in the Reserve Fund are less than the Reserve Requirement. Reserve Fund investments may not have maturities extending beyond five years. In the event that amounts then on deposit in the Reserve Fund on the valuation date described in the Trust Agreement equal or exceed the Reserve Requirement, such excess shall be transferred to the Lease Payment Fund. Transfers to the Lease Payment Fund from the Reserve Fund shall be made by the Trustee on or prior to each February 1 and August 1. All interest or income in the Delivery Costs Fund shall be retained in the Delivery Costs Fund until the Delivery Costs Fund is closed pursuant to the Trust Agreement. Such investments shall be valued by the Trustee not less often than quarterly, at the market value thereof, exclusive of accrued interest. Deficiencies in the amount on deposit in any fund or account resulting from a decline in market value shall be restored no later than the succeeding valuation date. Investments purchased with funds on deposit in the Reserve Fund shall have a term to maturity of not greater than five years. Appendix A Page 24

96 Amendments The Trust Agreement and the rights and obligations of the Owners of the Certificates, the Lease Agreement and the rights and obligations of the parties thereto, the Site and Facility Lease and the rights and obligations of the parties thereto and the Assignment Agreement and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement which shall become effective when the written consent of the Owners of at least sixty percent (60%) in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in the Trust Agreement, shall have been filed with the Trustee. No such modification or amendment shall (1) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof, without the express consent of the Owner of such Certificate, or (2) reduce or have the effect of reducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of a Lease Agreement, or (3) modify any of the rights or obligations of the Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in the Trust Agreement. The Trust Agreement and the rights and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the respective parties thereto, and the Assignment Agreement and the rights and obligations of the parties thereto, may (with the prior written consent of AGM) be modified or amended at any time by a supplemental agreement, without the consent of any such Owners, but only to the extent permitted by law and only (1) to add to the covenants and agreements of the Authority or the District; (2) to cure, correct or supplement any ambiguous or defective provision contained therein and which shall not, in the opinion of nationally recognized bond counsel, materially adversely affect the interests of the Owners of the Certificates; (3) in regard to questions arising thereunder, as the parties thereto may deem necessary or desirable and which shall not, in the opinion of nationally recognized bond counsel, materially adversely affect the interests of the Owners of the Certificates; (4) to make such additions, deletions or modifications as may be necessary or appropriate in the opinion of bond counsel to assure the exclusion from gross income for federal income tax purposes of the interest component of Lease Payments and the interest payable with respect to the Certificates; (5) to add to the rights of the Trustee; or (6) to maintain the rating or ratings assigned to the Certificates. Any such supplemental agreement shall become effective upon execution and delivery by the parties thereto, as the case may be. The Trust Agreement and the Lease Agreement may not be modified or amended at any time by a supplemental agreement which would modify any of the rights and obligations of the Trustee without its written assent thereto. Certain Covenants Compliance With and Enforcement of Lease Agreement. The District covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The Authority covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The District will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of their respective Lease Agreement by the Authority thereunder. The Authority and the District, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective estates, or either of them, in the Property, which may or can in any manner affect such estate of the District or the Authority, will deliver the same, or a copy thereof, to the Trustee. Observance of Laws and Regulations. The District and the Authority will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the District or the Authority, respectively, including its right to exist and carry on business as a public enti- Appendix A Page 25

97 ty, to the end that such rights, privileges and franchises shall be maintained and preserved, and shall not become abandoned, forfeited or in any manner impaired. Budgets. The District shall supply to the Trustee as soon as practicable, but not later than September 15 in each year, a written determination by a District Representative that the District has made adequate provision in its annual budget for the payment of Lease Payments due under the Lease Agreement in the Fiscal Year covered by such budget. The determination given by the District to the Trustee shall be that the amounts so budgeted are fully adequate for the payment of all Lease Payments and Additional Payments due under the Lease Agreement in the annual period covered by such budget. Continuing Disclosure. The District covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Trust Agreement, failure of the District to comply with the Continuing Disclosure Certificate shall not be considered an Event of Default; however, the Trustee may, upon payment of its fees and expenses, including counsel fees, and receipt of indemnity satisfactory to it, at the request of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Certificates, shall or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. Limitation of Liability Limited Liability of District. Except for the payment of Lease Payments when due in accordance with the Lease Agreement and the performance of the other covenants and agreements of the District contained in the Lease Agreement and the Trust Agreement, the District shall have no pecuniary obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee, except as expressly set forth in the Trust Agreement. No Liability of District or Authority for Trustee Performance. Neither the District nor the Authority shall have any obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. Indemnification of Trustee. The District shall to the extent permitted by law indemnify and save the Trustee, its officers, employees, directors, affiliates and agents harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses (including allocated costs of internal counsel), arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Property by the Authority or the District; (ii) any breach or default on the part of the Authority or the District the performance of any of their respective obligations under the Lease Agreement, the Assignment Agreement, the Trust Agreement and any other agreement made and entered into for purposes of the Property; (iii) any act of the Authority or the District or of any of their respective agents, contractors, servants, employees, licensees with respect to the Property; (iv) any act of any assignee of, or purchaser from the Authority or the District or of any of its or their respective agents, contractors, servants, employees or licensees with respect to the Property; (v) the authorization of payment of Delivery Costs; (vi) the actions of any other party, including but not limited to the ownership, operation or use of the Property by the Authority or the District including, without limitation, the use, storage, presence, disposal or release of any Hazardous Substances on or about the Property; (vii) the Trustee s exercise and performance of its powers and duties under the Trust Agreement or as assigned to it under the Assignment Agreement; (viii) the offering and sale of the Certificates; (ix) the presence under or about or release from the Property, or any portion thereof, of any substance, material or waste which is or becomes regulated or classified as hazardous or toxic under State, local or federal law, or the violation of any such law by the District; or (x) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, in any official statement or other offering document utilized in connection with the sale of the Certificates. Such indemnification shall include the costs and expenses of defending against any claim or liability arising under the Trust Agreement. No indemnification will be Appendix A Page 26

98 made under the Trust Agreement for willful misconduct or negligence under the Trust Agreement by the Trustee, its officers, affiliates or employees. The District s obligations under the Trust Agreement shall remain valid and binding notwithstanding maturity and payment of the Certificates or resignation or removal of the Trustee. Assignment of Rights; Remedies. Pursuant to the Assignment Agreement, the Authority has transferred, assigned and set over to the Trustee certain of the Authority s rights in and to the Lease Agreement, including without limitation all of the Authority s rights to exercise such rights and remedies conferred on the Authority pursuant to the Lease Agreement as may be necessary or convenient (i) to enforce payment of the Lease Payments and any other amounts required to be deposited in the Lease Payment Fund or the Insurance and Condemnation Fund, and (ii) otherwise to exercise the Authority s rights and take any action to protect the interests of the Trustee or the Certificate Owners in an Event of Default. If an Event of Default shall happen, then and in each and every such case during the continuance of such Event of Default, the Trustee shall, upon request of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, and upon payment of its fees and expenses, including counsel fees, and being indemnified to its satisfaction therefor shall, exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything in the Trust Agreement or in the Lease Agreement to the contrary, there shall be no right under any circumstances to accelerate the maturities of the Certificates or otherwise to declare any Lease Payment not then in default to be immediately due and payable. Certain Provisions relating to AGM and the Municipal Bond Insurance Policy Defeasance. In the event that the principal and/or interest due with respect to the Certificates shall be paid by AGM pursuant to the Municipal Bond Insurance Policy, the Certificates shall remain outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid, and the assignment and pledge of the trust estate and all covenants, agreements and other obligations of the District to the Owners shall continue to exist and shall run to the benefit of the municipal bond insurer and the municipal bond insurer shall be subrogated to the rights of such Owners, including, without limitation, any rights that such owners may have in respect of securities law violations arising from the offer and sale of the Certificates. Trustee-Related Provisions. the municipal bond insurer shall receive prior written notice of any name change of the Trustee or the resignation, removal or termination of the Trustee. No resignation, removal or termination of the Trustee shall take effect until a successor, acceptable to AGM, shall be appointed. The Trustee may be removed at any time at the request of AGM for any breach of its obligations under the Trust Agreement. Amendments and Supplements. With respect to any amendments or supplements to the Trust Agreement, the Site and Facility Lease or the Lease Agreement, AGM s prior written consent shall be required. Copies of any amendments or supplements to the Trust Agreement or the Lease Agreement which are consented to by AGM shall be sent to the rating agencies that have assigned a rating to the Certificates. Notwithstanding any other provision of the Trust Agreement or the Lease Agreement, in determining whether the rights of Owners will be adversely affected by any action taken pursuant to the terms and provisions thereof, the effect on the Owners shall be considered as if there was no Municipal Bond Insurance Policy. AGM shall be deemed to be the sole holder of the Certificates for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Owners are entitled to take pursuant the provisions of the Trust Agreement pertaining to (i) defaults and remedies and (ii) the duties and obligations of the Trustee. AGM as Third Party Beneficiary. To the extent that the Trust Agreement or the Lease Agreement confer upon or give or grant to AGM any right, remedy or claim under or by reason of the Trust Agreement or the Lease Appendix A Page 27

99 Agreement, AGM is explicitly recognized as being a third party beneficiary under the Trust Agreement and may enforce any such right, remedy or claim conferred, given or granted under the Trust Agreement. Control Rights. (a) AGM shall be deemed to be the sole holder of the Certificates for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Owners are entitled to take pursuant the provisions of the Trust Agreement. pertaining to (i) defaults and remedies and (ii) the duties and obligations of the Trustee. In furtherance thereof, the Trustee and each Owner appoint AGM as their agent and attorney-in-fact and agree that AGM may at any time during the continuation of any proceeding by or against the District under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an "Insolvency Proceeding") direct all matters relating to such Insolvency Proceeding, including without limitation, (A) all matters relating to any claim or enforcement proceeding in connection with an Insolvency Proceeding (a "Claim"), (B) the direction of any appeal of any order relating to any Claim, (C) the posting of any surety, supersedeas or performance bond pending any such appeal, and (D) the right to vote to accept or reject any plan of adjustment. In addition, the Trustee and each Owner delegate and assign to AGM, to the fullest extent permitted by law, the rights of the Trustee and each Owner in the conduct of any Insolvency Proceeding, including, without limitation, all rights of any party to an adversary proceeding or action with respect to any court order issued in connection with any such Insolvency Proceeding. Remedies granted to the Owners shall expressly include mandamus. The rights granted to AGM under the Lease Agreement, the Assignment Agreement and/or the Trust Agreement to request, consent to or direct any action are rights granted to AGM in consideration of its issuance of the Municipal Bond Insurance Policy. Any exercise by AGM of such rights is merely an exercise of AGM s contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the Owners and such action does not evidence any position of AGM, affirmative or negative, as to whether the consent of the Owners or any other person is required in addition to the consent of AGM. Consent Rights of AGM. Any provision of the Trust Agreement or the Lease Agreement expressly recognizing or granting rights in or to AGM may not be amended in any manner that affect the rights of AGM thereunder without the prior written consent of AGM. Wherever the Trust Agreement or the Lease Agreement require the consent of Owners, AGM s consent shall also be required. Any reorganization or liquidation plan with respect to the District must be acceptable to AGM. In the event of any reorganization or liquidation, AGM shall have the right to vote on behalf of all Owners who hold Certificates guaranteed by AGM, absent a default by AGM under the Municipal Bond Insurance Policy. Payment Procedure Under the Municipal Bond Insurance Policy. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date ( Payment Date ) there is not on deposit with the Trustee, after making all transfers and deposits required under the Trust Agreement, moneys sufficient to pay the principal and interest with respect to the Certificates due on such Payment Date, the Trustee shall give notice to AGM and to its designated agent (if any) (the Insurer s Fiscal Agent ) by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal and interest with respect to the Certificates due on such Payment Date, the Trustee shall make a claim under the Municipal Bond Insurance Policy and give notice to AGM and AGM s Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest with respect to the Certificates and the amount required to pay principal with respect to the Certificates, confirmed in writing to AGM and AGM s Fiscal Agent by 12:00 noon, New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Municipal Bond Insurance Policy. The Trustee shall designate any portion of payment of principal with respect to Certificates paid by AGM, whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as Appendix A Page 28

100 a reduction in the principal amount of Certificates registered to the then current Owners, and shall issue a replacement Certificate to AGM, registered in the name of Assured Guaranty Municipal Corp., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided that the Trustee s failure to so designate any payment or issue any replacement Certificate shall have no effect on the amount of principal or interest payable by the District with respect to any Certificate or the subrogation rights of AGM. The Trustee shall keep a complete and accurate record of all funds deposited by AGM into the Municipal Bond Insurance Policy Payments Account (defined below) and the allocation of such funds to payment of interest on and principal with respect to any Certificate. AGM shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. Upon payment of a claim under the Municipal Bond Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of Owners referred to as the Municipal Bond Insurance Policy Payments Account and over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under the Municipal Bond Insurance Policy in trust on behalf of Owners and shall deposit any such amount in the Municipal Bond Insurance Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to Owners in the same manner as principal and interest payments are to be made with respect to the Certificates under the sections of the Trust Agreement regarding payment of Certificates. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything in the Trust Agreement to the contrary, the District agrees to pay to AGM (i) a sum equal to the total of all amounts paid by AGM under the Municipal Bond Insurance Policy (the Insurer Advances ); and (ii) interest on such Insurer Advances from the date paid by AGM until payment thereof in full, payable to AGM at the Late Payment Rate per annum (collectively, the Insurer Reimbursement Amounts ). Late Payment Rate means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in The City of New York, as its prime or base lending rate (any change in such rate of interest to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest with respect to the Certificates; and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The District covenants and agrees that AGM Reimbursement Amounts are secured on a parity with amounts due under the Lease Agreement. Funds held in the Municipal Bond Insurance Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. Any funds remaining in the Municipal Bond Insurance Policy Payments Account following a Payment Date shall promptly be remitted to AGM. AGM shall, to the extent it makes any payment of principal or interest with respect to the Certificates, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Municipal Bond Insurance Policy. Each obligation of the District to AGM under the Lease Agreement or the Trust Agreement shall survive discharge or termination of the Lease Agreement or the Trust Agreement. The District shall pay or reimburse AGM any and all charges, fees, costs and expenses that AGM may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security in the Lease Agreement, the Assignment Agreement or the Trust Agreement; (ii) the pursuit of any remedies under the Lease Agreement, the Assignment Agreement or the Trust Agreement or otherwise afforded by law or equity; (iii) any amendment, waiver or other action with respect to, or related to, the Lease Agreement, the Assignment Agreement or the Trust Agreement whether or not executed or completed; or (iv) any litigation or other dispute in connection with the Lease Agreement, the Assignment Agreement or the Trust Agreement or the transactions contemplated thereby, other than costs resulting from the failure of AGM to honor its obligations under the Municipal Bond Insurance Policy. AGM reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Lease Agreement, the Assignment Agreement or the Trust Agreement. Appendix A Page 29

101 After payment of reasonable expenses of the Trustee, the application of funds realized upon default shall be applied to the payment of expenses of the District or rebate only after the payment of past due and current debt service on the Certificates and amounts required to restore the Reserve Fund to the Reserve Requirement. AGM shall be entitled to pay principal or interest with respect to the Certificates that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer (as such terms are defined in the Municipal Bond Insurance Policy), whether or not AGM has received a Notice of Nonpayment (as such terms are defined in the Municipal Bond Insurance Policy) or a claim upon the Municipal Bond Insurance Policy. Swap Agreements. Any interest rate exchange agreement ( Swap Agreement ) entered into by the District or the Authority, secured by and payable from Lease Payments, shall meet the following conditions: (i) the Swap Agreement must be entered into to manage interest costs related to, or a hedge against (a) assets then held, or (b) debt then outstanding, or (iii) debt reasonably expected to be issued within the next twelve (12) months, and (ii) the Swap Agreement shall not contain any leverage element or multiplier component greater than 1.0x unless there is a matching hedge arrangement which effectively off-sets the exposure from any such element or component. Unless otherwise consented to in writing by the Insurer, any uninsured net settlement, breakage or other termination amount then in effect shall be subordinate to debt service with respect to the Certificates and on any debt on parity with the Lease Payments. The District shall not terminate a Swap Agreement unless it demonstrates to the satisfaction of the Insurer prior to the payment of any such termination amount that such payment will not cause the District to be in default under the Related Documents, including but not limited to, any monetary obligations thereunder. All counterparties or guarantors to any Swap Agreement must have a rating of at least A- and A3 by Standard & Poor s ( S&P ) and Moody s Investors Service ( Moody s ). If the counterparty or guarantor s rating falls below A- or A3 by either S&P or Moody s, the counterparty or guarantor shall execute a credit support annex to the Swap Agreement, which credit support annex shall be acceptable to the Insurer. If the counterparty or the guarantor s long term unsecured rating falls below Baa1 or BBB+ by either Moody s or S&P, a replacement counterparty or guarantor, acceptable to the Insurer, shall be required. Appendix A Page 30

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103 APPENDIX B THE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2015

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105 FONTANA UNIFIED SCHOOL DISTRICT AUDIT REPORT For the Fiscal Year Ended June 30, 2015

106 FONTANA UNIFIED SCHOOL DISTRICT For the Fiscal Year Ended June 30, 2015 Table of Contents FINANCIAL SECTION Page Independent Auditors Report... 1 Management s Discussion and Analysis... 3 Basic Financial Statements: Government wide Financial Statements: Statement of Net Position Statement of Activities Governmental Funds Financial Statements: Balance Sheet Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position Statement of Revenues, Expenditures, and Changes in Fund Balances Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Proprietary Fund Financial Statements: Statement of Net Position Statement of Revenues, Expenses, and Changes in Net Position Statement of Cash Flows Fiduciary Funds Financial Statements: Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Budgetary Comparison Schedule General Fund Budgetary Comparison Schedule Cafeteria Fund Schedule of Funding Progress Schedule of Proportionate Share of the Net Pension Liability Schedule of Contributions Notes to the Required Supplementary Information SUPPLEMENTARY INFORMATION Local Educational Agency Organization Structure Schedule of Average Daily Attendance Schedule of Instructional Time Schedule of Financial Trends and Analysis Reconciliation of Annual Financial and Budget Report with Audited Financial Statements Schedule of Expenditures of Federal Awards Note to the Supplementary Information... 67

107 FONTANA UNIFIED SCHOOL DISTRICT For the Fiscal Year Ended June 30, 2015 Table of Contents OTHER INDEPENDENT AUDITORS REPORTS Page Independent Auditors' 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 Independent Auditors Report on State Compliance Independent Auditors' Report on Compliance For Each Major Federal Program and on Internal Control Over Compliance Required by OMB Circular A FINDINGS AND QUESTIONED COSTS Schedule of Audit Findings and Questioned Costs: Summary of Auditors Results Current Year Audit Findings and Questioned Costs Summary Schedule of Prior Audit Findings Management Letter... 80

108 Financial Section

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110 INDEPENDENT AUDITORS REPORT Board of Education Fontana Unified School District Fontana, 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 Fontana Unified School District, as of and for the fiscal year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. 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, 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. 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 entity 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 entity 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. 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 Fontana Unified School District, as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America. 1

111 Emphasis of Matter As discussed in Note 1.I. to the basic financial statements, the District has changed its method for accounting and reporting for pensions during fiscal year due to the adoption of Governmental Accounting Standards Board Statement No. 68, "Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27" and No. 71, "Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68". The adoption of these standards required retrospective application resulting in a $284,669,037 reduction of previously reported net position at July 1, 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 on pages 3 through 11, budgetary comparison information on pages 54 and 55, schedule of funding progress on page 56, schedule of proportionate share of the net pension liability on page 57, and schedule of contributions on page 58 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 District s basic financial statements. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A 133, Audits of States, Local Governments, and Non Profit Organizations, and is also not a required part of the basic financial statements. The supplementary information on pages 62 to 65 and the schedule of expenditures of federal awards on page 66 are the responsibility of management and were derived from and relate 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 information is fairly stated in all material respects in relation to the basic financial statements as a whole. The information on page 61 has not been subjected to the auditing procedures applied in the audit of the basic financial statements and accordingly, we do not express an opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 16, 2015 on our consideration of the 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 the District's internal control over financial reporting and compliance. Murrieta, California November 16,

112 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 This discussion and analysis of Fontana Unified School District s financial performance provides an overview of the District s financial activities for the fiscal year ended June 30, Please read it in conjunction with the District s financial statements, which immediately follow this section. FINANCIAL HIGHLIGHTS The District s financial status increased overall as a result of this year s operations. Net position of governmental activities increased by $13.7 million, or 10.6%. Governmental expenses were about $429.3 million. Revenues were about $443.0 million. The District acquired over $11.6 million in new capital assets during the year. These expenditures were incurred primarily from construction in progress and equipment purchases. The District decreased its outstanding long term debt by $59.9 million. This was primarily due to reduction of general obligation bonds and net pension liability. Grades K 12 average daily attendance (ADA) decreased by 536, or 1.4%. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts management 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 district 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 of the District, reporting the District s operations in more detail than the district wide 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. Short and long term financial information about the activities of the District that operate like businesses (self insurance funds) are provided in the proprietary funds statements. Fiduciary funds statement provides 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. Figure A 1. Organization of Fontana Unified School District s Annual Financial Report The financial statements also include notes that explain some of the information in the statements and provide more detailed data. Figure A 1 shows how the various parts of this annual report are arranged and related to one another. Management s Discussion and Analysis District Wide Financial Statements Basic Financial Information Fund Financial Statements Required Supplementary Information Notes to Financial Statements SUMMARY DETAIL 3

113 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 OVERVIEW OF THE FINANCIAL STATEMENTS (continued) Figure A 2 summarizes the major features of the District s financial statements, including the portion of the District s activities they cover and the types of information they contain. Figure A 2. Major Features of the District Wide and Fund Financial Statements Type of Statements District Wide Governmental Funds Proprietary Funds Fiduciary Funds Scope Required financial statements Accounting basis and measurement focus Type of asset/liability information Type of inflow/outflow information Entire District, except fiduciary activities Statement of Net Position Statement of Activities Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, short term and longterm All revenues and expenses during year, regardless of when cash is received or paid The activities of the District that are not proprietary or fiduciary, such as special education and building maintenance Balance Sheet Statement of Revenues, Expenditures & Changes in Fund Balances Modified accrual accounting and current financial resources focus Only assets expected to be used up and liabilities that come due during the year or soon thereafter; no capital assets included Revenues for which cash is received during or soon after the end of the year; expenditures when goods or services have been received and payment is due during the year or soon thereafter Activities of the District that operate like a business, such as selfinsurance funds Statement of Net Position Statement of Revenues, Expenses, & Changes in Net Position Statement of Cash Flows Accrual accounting and economic resources focus All assets and liabilities, both short term and long term; The District s funds do not currently contain nonfinancial assets, though they can All revenues and expenses during the year, regardless of when cash is received or paid Instances in which the District administers resources on behalf of someone else, such as scholarship programs and student activities monies Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Accrual accounting and economic resources focus All assets and liabilities, both shortterm and long term; The District s funds do not currently contain nonfinancial assets, though they can All revenues and expenses during the year, regardless of when cash is received or paid 4

114 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 OVERVIEW OF THE FINANCIAL STATEMENTS (continued) The remainder of this overview section of management s discussion and analysis highlights the structure and contents of each of the statements. District Wide Statements The district 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 district wide statements report the District s net position and how it has changed. Net position the difference between the District s assets and deferred outflows of resources and liabilities and deferred inflows of resources is one way to measure the District s financial health, or position. Over time, increases and decreases in the District s net position are an indicator of whether its financial position is improving or deteriorating, respectively. To assess the overall health of the District, you need to consider additional nonfinancial factors such as changes in the District s demographics and the condition of school buildings and other facilities. In the district wide financial statements, the District s activities are categorized as Governmental Activities. Most of the District s basic services are included here, such as regular and special education, transportation, and administration. Property taxes and state aid finance most of these activities. 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 is properly using certain revenues. The District has three kinds of funds: 1) 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 that can readily be converted to cash flow in and out and (2) the balances left at year end that are available for spending. Consequently, the governmental funds statements provide a detailed short term view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the District s programs. Because this information does not encompass the additional long term focus of the districtwide statements, we provide additional information on a separate reconciliation page that explains the relationship (or differences) between them. 5

115 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 Fund Financial Statements (continued) 2) Proprietary funds When the District charges other District funds for the services it provides, these services are reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Position and Statement of Activities. In fact, the District s internal service fund is included within the governmental activities reported in the district wide statements but provide more detail and additional information, such as cash flows. The District uses the internal service fund to report activities that relate to the District s self insured program for workers compensation claims. 3) Fiduciary funds The District is the trustee, or fiduciary, for assets that belong to others, such as the student activities funds and retiree benefits fund. 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. We exclude these activities 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 District s combined net position was higher on June 30, 2015, than it was the year before increasing 10.6% to $142.5 million (See Table A 1). Table A 1 Governmental Activities (In millions) Variance Increase * (Decrease) Current assets $ $ $ 24.7 Capital assets (11.6) Total assets Total deferred outflows Current liabilities Long term liabilities (59.9) Total liabilities (50.3) Total deferred inflows Net position Net investment in capital assets (3.9) Restricted (6.2) Unrestricted (265.4) (289.2) 23.8 Total net position $ $ $ 13.7 * As restated Changes in net position, governmental activities. The District s total revenues increased 11.9% to $443.0 million (See Table A 2). The increase is due primarily to federal and state funding. The total cost of all programs and services increased 10.2% to $429.3 million. The District s expenses are predominantly related to educating and caring for students, 78%. The purely administrative activities of the District accounted for just 3.1% of total costs. A significant contributor to the increase in costs was an increase in instruction materials, supplies, and services purchased. 6

116 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (continued) Table A 2 Governmental Activities (In millions) Variance Increase (Decrease) Total Revenues $ $ $ 47.2 Total Expenses Increase (decrease) in net position $ 13.7 $ 6.4 $ 7.3 FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS The financial performance of the District as a whole is reflected in its governmental funds as well. As the District completed this year, its governmental funds reported a combined fund balance of $205.3 million, which is above last year s ending fund balance of $190.5 million. The primary cause of the increased fund balance is an increase in state and federal revenue. General Fund Budgetary Highlights Over the course of the year, the District revised the annual operating budget several times. The major budget amendments fall into these categories: Revenues increased by $15.1 million primarily to reflect federal and state budget actions. Salaries and benefits costs increased $9.7 million due to labor negotiation settlements. Other non personnel expenses increased $24.6 million to re budget carryover funds and revise operational cost estimates. While the District s final budget for the General Fund anticipated that expenditures would exceed revenues by about $12.7 million, the actual results for the year show that revenues exceeded expenditures by roughly $17.7 million. Actual revenues were $9.2 million more than anticipated, and expenditures were $21.2 million less than budgeted. That amount consists primarily of restricted categorical program dollars that were not spent as of June 30, 2015, that will be carried over into the budget. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets By the end of the District had invested $11.6 million in new capital assets, related to construction in progress, site improvements, and equipment purchases. (More detailed information about capital assets can be found in Note 6 to the financial statements). Total depreciation expense for the year exceeded $23.2 million. 7

117 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 CAPITAL ASSET AND DEBT ADMINISTRATION (continued) Table A 3: Capital Assets at Year End, net of Depreciation Governmental Activities (In millions) Variance Increase (Decrease) Land $ 58.9 $ 58.9 $ Improvement of sites (3.3) Buildings (14.2) Equipment (1.0) Construction in progress Total $ $ $ (11.6) Long Term Debt At year end the District had $587.6 million in general obligation bonds, certificates of participation, QZABs, net pension liability, and employment benefits a decrease of 9.3% from last year as shown in Table A 4. (More detailed information about the District s long term liabilities is presented in Note 7 to the financial statements). Table A 4: Outstanding Long Term Debt at Year End Governmental Activities (In millions) Variance Increase * (Decrease) General obligation bonds $ $ $ (4.6) Certificates of participation (1.4) QZABs (0.3) Compensated absences Supplemental retirement 0.9 (0.9) Other postemployment benefits Net pension liability (58.7) Total $ $ $ (59.9) * As restated FACTORS BEARING ON THE DISTRICT S FUTURE Overview On June 16, 2015, the Governor, the Senate President pro Tempore, and the Speaker of the Assembly announced a budget agreement. The Legislature passed the budget bill and related legislation on Friday, June 19. The budget agreement relies on the administration s May 2015 estimates of (1) General Fund revenues, (2) the Proposition 98 minimum guarantee for schools and community colleges, and (3) budget reserve and debt payment requirements under Proposition 2. School and community college funding is the centerpiece of the agreement, as administration estimates of the Proposition 98 minimum guarantee have increased substantially over June 2014 levels. With savings resulting from (1) rejection of various administration proposals, (2) an error in the administration s Medi Cal estimates, (3) legislative changes made to the Middle Class Scholarship Program, and (4) other legislative actions, the agreement makes modest augmentations outside of Proposition 98 above May Revision levels. 8

118 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 FACTORS BEARING ON THE DISTRICT S FUTURE (continued) Overview (continued) to End With $4.6 Billion in Estimated Total Reserves The budget agreement assumes $115 billion in revenues, a 3.3 percent increase over (This total is net of the $1.9 billion deposit in the Proposition 2 Budget Stabilization Account [BSA].) The state s big three General Fund taxes the personal income tax, sales and use tax, and corporation tax are estimated to increase at a slightly higher rate (4 percent). General Fund revenue growth was much higher in , increasing at a very healthy 7.7 percent rate. General Fund spending is largely flat across and , increasing at only 0.8 percent. Growth in ongoing programmatic spending, however, is masked by various one time actions, including one time spending in on debt payments and mandate backlog claims, and the end of the triple flip mechanism used to finance the state s prior deficit financing bonds. The budget ends with $4.6 billion in estimated total reserves, including $1.1 billion in the Special Fund for Economic Uncertainties the state s traditional budget reserve and $3.5 billion in the BSA. Proposition 98 Substantial Upward Revisions to Estimates of Proposition 98 Minimum Guarantee State budgeting for preschool, elementary and secondary schools, and the California Community Colleges (CCC) is based primarily on Proposition 98, approved by voters in Proposition 98 established a minimum funding requirement commonly called the minimum guarantee. The estimate of the and minimum guarantees have increased $612 million and $5.4 billion, respectively from the June 2014 estimates. The estimate of the minimum guarantee is $7.6 billion (12 percent) higher than the Budget Act level. These increases in the guarantee are due primarily to state revenues being higher than assumed in last year s budget package. The budget package funds at these latest estimates of the minimum guarantees. Large Upward Adjustments Result in Relatively Modest Year Over Year Growth Growth from the revised level to is $2.1 billion (3 percent). This relatively modest growth is due to the large upward revision to noted above. In , total Proposition 98 funding is $68.4 billion. Of this amount, $49.4 billion is General Fund and $19 billion is local property tax revenue. The notable increase in local property tax revenue from to ($2.3 billion, 14 percent) is due in large part to the end of the triple flip and the shift of associated local property tax revenue back from cities, counties, and special districts to school and community college districts. Growth in local property tax revenue is slightly greater than growth in the Proposition 98 minimum guarantee, resulting in a slight reduction in Proposition 98 General Fund from to Per Student Funding Increases Significantly Under the budget package, K 12 per student funding increases from the Budget Act level of $8,931 to $9,942 in an increase of $1,011 (11 percent). Budget Package Contains Many Spending Changes For , the budget accounts for higher Local Control Funding Formula (LCFF) costs and uses the remaining funding increase for paying down the K 14 mandate backlog. In addition to these changes, the budget package includes a $256 million settle up payment related to meeting the Proposition 98 minimum guarantee for and and $207 million in unspent prior year Proposition 98 funds that have been repurposed. 9

119 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 FACTORS BEARING ON THE DISTRICT S FUTURE (continued) Proposition 98 (continued) Package Notably Reduces Outstanding K 14 Obligations The budget package includes the following K 14 actions, all of which reduce the state s outstanding K 14 obligations. Pays Down Mandate Backlog. The budget package includes $3.8 billion to pay down the K 14 mandate backlog ($3.2 billion is for the K 12 backlog and $632 million for the CCC backlog). After accounting for these payments, the LAO estimates the outstanding K 14 mandate backlog to be $1.5 billion ($1.2 billion for schools and about $300 million for community colleges). Retires All K 14 Payment Deferrals. As required by trailer legislation enacted last year, the budget package provides $992 million to eliminate all remaining K 14 payment deferrals. The budget year will be the first fiscal year since that the state is set to make all K 14 payments on time. Pays Off Emergency Repair Program (ERP) Obligation. The budget includes $273 million for the final ERP payment. Statute requires the state to provide a total of $800 million to school districts for emergency facility repairs, and the state has provided $527 million to date. (Of the $273 million, $145 million comes from a settle up payment and $128 million comes from unspent prior year Proposition 98 funds.) K 12 Education Large Increase for Local Control Funding Formula (LCFF) The largest single augmentation in the state budget is $6.0 billion for implementing the LCFF for school districts and charter schools bringing total LCFF funding to $52 billion. This reflects a 13 percent year overyear increase in LCFF funding. The administration estimates this funding will close 52 percent of the remaining gap to LCFF target rates. The budget funds 90 percent of the estimated statewide full LCFF implementation cost. School districts and charter schools may use LCFF monies for any educational purpose, including implementation of their Local Control and Accountability Plans. New Secondary School Career Technical Education (CTE) Competitive Grant Program The budget package includes $900 million in one time funding for a three year competitive grant program to promote high quality CTE. Of this amount, $400 million is provided in , $300 million in , and $200 million in School districts, county offices of education (COEs), charter schools, and Regional Occupational Centers and Programs operated by joint powers agencies (JPAs) may apply for grants, individually or in consortia. The program provides separate pools of funding for large, medium sized, and small applicants, based on applicants average daily attendance (ADA) in grades Specifically, 88 percent of the funding is reserved for applicants with ADA greater than 550, 8 percent is reserved for applicants with ADA between 140 and 550, and 4 percent is reserved for applicants with less than 140 ADA. The Superintendent of Public Instruction (SPI), in collaboration with the executive director of the State Board of Education (SBE), will determine the number of grants to be awarded and specific grant amounts. Package of Special Education Actions The budget includes $67 million for a package of special education related activities. Of the $67 million, $52 million is ongoing and $15 million is one time. The largest ongoing augmentation in this package is for expanding services for infants, toddlers, and preschoolers with disabilities as well as requiring preschool staff training and parent education relating to identifying and meeting preschoolers special needs. The largest one time augmentation is for one or two COEs to develop statewide resources and training opportunities for addressing students diverse instructional and behavioral needs. 10

120 FONTANA UNIFIED SCHOOL DISTRICT Management s Discussion and Analysis (Unaudited) For the Fiscal Year Ended June 30, 2015 FACTORS BEARING ON THE DISTRICT S FUTURE (continued) K 12 Education (continued) Second Round of Internet Infrastructure Grants The budget includes $50 million in one time funding for the second round of Broadband Internet Infrastructure Grants. The K 12 High Speed Network is to award grants to schools that cannot administer online tests or can only administer the tests by shutting down other essential online activities such as . Grants may be used to purchase Internet infrastructure. The Department of Finance (DOF) must approve projects resulting in costs exceeding $1,000 per test taking pupil. All of these factors were considered in preparing the Fontana Unified School District budget for the fiscal year. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have any questions about this report or need additional financial information, contact the District s Fiscal Services Office at (909)

121 FONTANA UNIFIED SCHOOL DISTRICT Statement of Net Position June 30, 2015 Total Governmental Activities ASSETS Cash $ 197,674,355 Investments 27,501,530 Accounts receivable 23,625,292 Inventories 133,887 Prepaid expenses 244,192 Non depreciable assets 78,308,579 Depreciable assets 742,582,598 Less accumulated depreciation (267,773,790) Total assets 802,296,643 DEFERRED OUTFLOWS OF RESOURCES Deferred amounts on refunding 4,188,706 Adjustment due to differences in proportions 3,437,391 Amounts contributed to the pension plan subsequent to the measurement date 30,609,053 Total deferred outflows of resources 38,235,150 LIABILITIES Accounts payable 44,118,306 Unearned revenue 521,762 Long term debt: Portion due or payable within one year 12,923,118 Portion due or payable after one year 574,726,190 Total liabilities 632,289,376 DEFERRED INFLOWS OF RESOURCES Net differences between projected and actual earnings on pension plan investments 65,753,213 NET POSITION Net investment in capital assets 316,453,152 Restricted for: Capital projects 41,160,225 Debt service 21,259,290 Educational programs 29,007,916 Unrestricted (265,391,379) Total net position $ 142,489,204 The notes to financial statements are an integral part of this statement. 12

122 FONTANA UNIFIED SCHOOL DISTRICT Statement of Activities For the Fiscal Year Ended June 30, 2015 Functions/Programs Program Revenues Net (Expense) Operating Capital Revenue and Charges for Grants and Grants and Changes in Expenses Services Contributions Contributions Net Position Governmental Activities Instructional Services: Instruction $ 239,039,358 $ 703,179 $ 52,128,511 $ (2,274,842) $ (188,482,510) Instruction Related Services: Supervision of instruction 21,735, ,654 9,985,761 (11,610,437) Instructional library, media and technology 4,031, ,779 (3,824,172) School site administration 22,190,122 43, ,347 (21,568,150) Pupil Support Services: Home to school transportation 3,960,016 (3,960,016) Food services 22,515,920 1,737,917 19,543,628 (1,234,375) All other pupil services 22,239,446 24,005 5,401,191 (16,814,250) General Administration Services: Data processing services 6,442,931 (6,442,931) Other general administration 6,761,023 92,193 2,814,682 (3,854,148) Plant services 42,617, , ,437 (41,737,089) Ancillary services 31,158 (31,158) Community services 1,026, ,954 26,752 (720,081) Enterprise activities 26,292 (26,292) Interest on long term debt 13,056,338 (13,056,338) Other outgo 383,339 6,180,407 87,414 5,884,482 Depreciation (unallocated) 23,236,735 (23,236,735) Total Governmental Activities $ 429,294,878 $ 9,426,018 $ 91,429,502 $ (2,274,842) (330,714,200) General Revenues: Property taxes 49,051,047 Federal and state aid not restricted to specific purpose 290,894,890 Interest and investment earnings 430,522 Interagency revenues 927,437 Miscellaneous 3,092,758 Total general revenues 344,396,654 Change in net position 13,682,454 Net position July 1, 2014, as originally stated 413,475,787 Adjustment for restatement (Note 1.I) (284,669,037) Net position July 1, 2014, as restated 128,806,750 Net position June 30, 2015 $ 142,489,204 The notes to financial statements are an integral part of this statement. 13

123 FONTANA UNIFIED SCHOOL DISTRICT Balance Sheet Governmental Funds June 30, 2015 General Fund Cafeteria Fund Capital Projects Fund for Blended Component Units Non Major Governmental Funds Total Governmental Funds ASSETS Cash $ 100,939,233 $ 13,362,651 $ 11,049,196 $ 66,593,713 $ 191,944,793 Investments 27,501,530 27,501,530 Accounts receivable 17,594,703 4,716,572 10,033 1,297,892 23,619,200 Due from other funds 3,617,093 8,752 1,255,685 4,881,530 Inventories , ,887 Prepaid expenditures 244, ,192 Total Assets $ 122,396,011 $ 18,220,934 $ 38,560,759 $ 69,147,428 $ 248,325,132 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 31,231,895 $ 278,555 $ 139,461 $ 3,234,197 $ 34,884,108 Due to other funds 3,601,777 2,982,351 1,022,636 7,606,764 Unearned revenue 42, , ,762 Total Liabilities 34,875,776 3,260, ,461 4,736,491 43,012,634 Fund Balances Nonspendable 319, , ,049 Restricted 13,949,374 14,817,099 38,421,298 62,660, ,848,729 Committed 1,689,529 1,689,529 Assigned 17,664,066 60,312 17,724,378 Unassigned 55,586,813 55,586,813 Total Fund Balances 87,520,235 14,960,028 38,421,298 64,410, ,312,498 Total Liabilities and Fund Balances $ 122,396,011 $ 18,220,934 $ 38,560,759 $ 69,147,428 $ 248,325,132 The notes to financial statements are an integral part of this statement. 14

124 FONTANA UNIFIED SCHOOL DISTRICT Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position June 30, 2015 Total fund balances governmental funds $ 205,312,498 Amounts reported for assets and liabilities for governmental activities in the statement of net position are different from amounts reported in governmental funds because: In governmental funds, only current assets are reported. In the statement of net position, all assets are reported, including capital assets and accumulated depreciation. Capital assets at historical cost: 820,891,177 Accumulated depreciation: (267,773,790) Net: 553,117,387 Deferred amounts on refunding represent amounts paid to an escrow agent in excess of the outstanding debt at the time of the payment for refunded bonds which have been defeased. In the government wide statements it is recognized as a deferred outflow of resources. The remaining deferred amounts on refunding at the end of the period were: 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 owing at the end of the period was: 4,188,706 (3,489,201) In governmental funds, only current liabilities are reported. In the statement of net position, all liabilities, including long term liabilities, are reported. Long term liabilities relating to government wide statements, consist of: General obligation bonds payable 249,029,081 Net pension liability 243,517,899 Certificates of participation payable 41,516,301 QZAB bonds payable 2,158,446 Compensated absences 1,983,702 Other postemployment benefits payable 49,443,879 Total (587,649,308) In governmental funds, deferred outflows and inflows of resources relating to pensions are not reported because they are applicable to future periods. In the statement of net position, deferred outflows and inflows of resources relating to pensions are reported. Deferred outflows of resources relating to pensions 34,046,444 Deferred inflows of resources relating to pensions (65,753,213) Net: (31,706,769) 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 position. Net position for the internal service fund is: 2,715,891 Total net position governmental activities $ 142,489,204 The notes to financial statements are an integral part of this statement. 15

125 FONTANA UNIFIED SCHOOL DISTRICT Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Fiscal Year Ended June 30, 2015 REVENUES General Fund Cafeteria Fund Capital Projects Fund for Blended Component Units Non Major Governmental Funds Total Governmental Funds LCFF sources $ 304,478,927 $ $ $ 400,000 $ 304,878,927 Federal sources 22,478,789 19,174,309 1,394,999 43,048,097 Other state sources 49,746,535 1,473,925 3,708,065 54,928,525 Other local sources 6,110,676 1,881,345 5,062,600 25,437,345 38,491,966 Total Revenues 382,814,927 22,529,579 5,062,600 30,940, ,347,515 EXPENDITURES Current: Instruction 234,719,405 5,817, ,536,530 Instruction related services: Supervision of instruction 20,655,572 1,592,660 22,248,232 Instructional library, media and technology 3,744,775 3,744,775 School site administration 21,955, ,596 22,257,637 Pupil support services: Home to school transportation 3,942,629 3,942,629 Food services 199,198 22,248,430 17,235 22,464,863 All other pupil services 22,525, ,432 22,765,286 Ancillary services 31,158 31,158 Community services 1,048,505 1,048,505 General administration services: Data processing services 6,428,856 6,428,856 Other general administration 7,935, ,594 8,079,726 Plant services 40,759,822 37,788 34,398 2,124,316 42,956,324 Transfers of indirect costs (1,239,262) 928, ,913 Intergovernmental 383, ,078 Capital outlay 1,791, ,670 1,894,186 6,538,923 10,719,791 Debt service: Issuance costs Principal 1,365,000 5,465,144 6,830,144 Interest 1,922,466 10,221,199 12,143,665 Total Expenditures 364,880,775 23,710,237 5,216,311 32,774, ,581,460 Excess (Deficiency) of Revenues Over (Under) Expenditures 17,934,152 (1,180,658) (153,711) (1,833,728) 14,766,055 OTHER FINANCING SOURCES (USES) Interfund transfers in 206, ,521 Interfund transfers out (206,521) (206,521) Total Other Financing Sources and Uses (206,521) 206,521 Net Change in Fund Balances 17,727,631 (974,137) (153,711) (1,833,728) 14,766,055 Fund Balances, July 1, ,792,604 15,934,165 38,575,009 66,244, ,546,443 Fund Balances, June 30, 2015 $ 87,520,235 $ 14,960,028 $ 38,421,298 $ 64,410,937 $ 205,312,498 The notes to financial statements are an integral part of this statement. 16

126 FONTANA UNIFIED SCHOOL DISTRICT Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities For the Fiscal Year Ended June 30, 2015 Total net change in fund balances governmental funds Amounts reported for governmental activities in the statement of activities are different because: $ 14,766,055 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 was: Expenditures for capital outlay 10,719,792 Depreciation expense (23,236,735) Net: (12,516,943) In governmental funds, donated capital assets are not reported because they do not affect current financial resources. In the governmentwide statements, donated capital assets are reported as a revenue and as increases to capital assets at their fair market value on the date of donation. The fair market value of capital assets donated during the year was: 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 a reduction of liabilities. Expenditures for repayment of the principal portion of long term debt were: Deferred amounts on refunding represent amounts paid to an escrow agent in excess of the outstanding debt at the time of the payment for refunded bonds which have been defeased. In the governmental funds these charges are recognized as an expenditure. However, in the statement of activities, these amounts are amortized over the life of the refunded debt. The difference between the current year amounts and current year amortization is: In governmental funds, if debt is issued at a premium or at a discount, the premium is recognized as an Other Financing Source in the period it is incurred. In the government wide statements, the premium is amortized as interest over the life of the debt. Amortization of premium for the period was: In governmental funds, accreted interest on capital appreciation bonds is not recorded as an expenditure from current resources. In the government wide statement of activities, however, this is recorded as interest expense for the period. Accreted interest earned less accreted interest paid during the year was: In governmental funds, interest on long term debt is recognized in the period 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, was: In governmental funds, compensated absences are measured by the amounts paid during the period. In the statements of activities, compensated absences are measured by the amounts earned. The difference between compensated absences paid and compensated absences earned was: In the government wide statements, expenses must be accrued in connection with any liabilities incurred during the period that are not expected to be liquidated with current financial resources, in addition to compensated absences and long term debt. Examples include special termination benefits such as retirement incentives financed over time. This year, such liabilities decreased by: In government funds, pension costs are recognized when employer contributions are made in the statement of activities, pension costs are recognized on the accrual basis. This year, the difference between accrual basis and actual employer contributions was: In governmental funds, OPEB costs are recognized when employer contributions are made. In the statements of activities costs are measured and recognized in relation to the annual required contribution. The annual required contribution is the normal cost related to the current period plus a calculated amount necessary to systematically amortize any unfunded liability in accordance with generally accepted accounting principles. This year, the difference between the annual required contribution and amounts actually funded was: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full 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 increase or decrease in internal service funds was: 891,324 6,906,224 (261,762) 944,614 (1,577,679) (93,925) (33,963) 920,426 9,444,371 (6,008,494) 302,206 Change in net position of governmental activities $ 13,682,454 The notes to financial statements are an integral part of this statement. 17

127 FONTANA UNIFIED SCHOOL DISTRICT Statement of Net Position Proprietary Fund June 30, 2015 Governmental Activities Internal Service Fund ASSETS Cash $ 5,729,562 Accounts receivable 6,092 Due from other funds 2,787,372 Total assets 8,523,026 LIABILITIES Estimated liability for open claims and IBNRs 5,541,156 Accounts payable 203,841 Due to other funds 62,138 Total liabilities 5,807,135 NET POSITION Restricted $ 2,715,891 The notes to financial statements are an integral part of this statement. 18

128 FONTANA UNIFIED SCHOOL DISTRICT Statement of Revenues, Expenses, and Changes in Fund Net Position Proprietary Fund For the Fiscal Year Ended June 30, 2015 Governmental Activities Internal Service Fund OPERATING REVENUES Self insurance premiums $ 2,790,283 Other local revenues 65,004 Total operating revenues 2,855,287 OPERATING EXPENSES Payments for personnel costs 291,304 Payments for materials and supplies 1,059 Payments for claims and other operating expenses 2,285,840 Total operating expenses 2,578,203 OPERATING INCOME (LOSS) 277,084 NON OPERATING REVENUES Interest income 25,122 Change in net position 302,206 Net position, July 1, ,413,685 Net position, June 30, 2015 $ 2,715,891 The notes to financial statements are an integral part of this statement. 19

129 FONTANA UNIFIED SCHOOL DISTRICT Statement of Cash Flows Proprietary Fund For the Fiscal Year Ended June 30, 2015 Governmental Activities Internal Service Fund CASH FLOWS FROM OPERATING ACTIVITIES Self insurance premiums $ 2,790,283 Cash received from other local sources 65,004 Other operating transfers (1,916,342) Cash paid for operating expenses (1,950,056) Net cash used by operating activities (1,011,111) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 25,008 Net decrease in cash (986,103) Cash, July 1, ,715,665 Cash, June 30, 2015 $ 5,729,562 Reconciliation of operating income (loss) to net cash used by operating activities: Operating income (loss) $ 277,084 Adjustments to reconcile operating income (loss) to net cash used by operating activities: Changes in operating assets and liabilities: Increase in amounts due from other funds (1,923,344) Increase in accounts payable and estimated claims liability 628,147 Increase in amounts due to other funds 7,002 Net cash used by operating activities $ (1,011,111) The notes to financial statements are an integral part of this statement. 20

130 FONTANA UNIFIED SCHOOL DISTRICT Statement of Fiduciary Net Position June 30, 2015 Agency Trust Funds Fund Student Retiree Body Benefits ASSETS Funds Fund Total Cash $ 1,444,442 $ 1 $ 1,444,443 Investments 11,184,877 11,184,877 Accounts receivable 7,934 7,934 Miscellaneous 6,747 6,747 Inventories supplies and materials 110, ,470 Prepaid expenses 9,544 9,544 Scholarship funds 102, ,141 Total assets $ 1,681,278 11,184,878 12,866,156 LIABILITIES Accounts payable $ 179,636 5,339,289 5,518,925 Due to student groups 1,501,642 1,501,642 Total liabilities $ 1,681,278 5,339,289 7,020,567 NET POSITION Restricted $ 5,845,589 $ 5,845,589 The notes to financial statements are an integral part of this statement. 21

131 FONTANA UNIFIED SCHOOL DISTRICT Statement of Changes in Fiduciary Net Position For the Fiscal Year Ended June 30, 2015 Trust Fund Retiree Benefits Fund ADDITIONS Interest $ 378,706 Decrease in fair value of investments (148,595) In district contributions 7,375,000 Total Additions 7,605,111 DEDUCTIONS Operating expenses 5,668,849 Change in net position 1,936,262 Net position July 1, ,909,327 Net position June 30, 2015 $ 5,845,589 The notes to financial statements are an integral part of this statement. 22

132 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fontana Unified School District (the "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 accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board. The following is a summary of the more significant policies: A. Reporting Entity A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, and agencies that are not legally separate from the District. For Fontana Unified School District, this includes general operations, food service, and student related activities of the District. Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. For financial reporting purposes, the component units have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are included in the financial statements using the blended presentation method as if they were part of the District's operations because the governing board of the component units is essentially the same as the governing board of the District and because their purpose is to finance the construction of facilities to be used for the direct benefit of the District. The Fontana Unified School District Public Financing Authority (the Authority) financial activity is presented in the financial statements as the Capital Projects for Blended Component Units Fund and the Debt Service for Blended Component Units Fund. Certificates of participation and other debt issued by the Authority are included as long term liabilities in the government wide financial statements. Individually prepared financial statements are not prepared for the Authority. The Fontana Unified School District Community Facilities Districts (CFDs) financial activity is presented in the financial statements as the Capital Projects Fund for Blended Component Units and in the Fiduciary Funds Statement as the Debt Service Fund for Special Tax Bonds. Special Tax Bonds issued by the CFDs are not included in the long term obligations of the Statement of Net Position as they are not obligations of the District. Individually prepared financial statements are not prepared for each of the CFDs. 23

133 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B. Basis of Presentation, Basis of Accounting 1. Basis of Presentation Government Wide Financial Statements The statement of net position and the statement of activities display information about the primary government (the District) and its component units. These statements include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. The statement of activities presents a comparison between direct expenses and program revenues for each function of the District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include (a) fees, fines, and charges paid by the recipients of goods or services offered by the programs and (b) 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, including all taxes, are presented as general revenues. Fund Financial Statements The fund financial statements provide information about the District's funds, including its fiduciary funds (and blended component units). Separate statements for each fund category governmental, proprietary, and fiduciary are presented. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities. Major Governmental Funds The District reports the following major governmental funds: General Fund: This fund is the general operating fund of the District. It is used to account for all financial resources except those required to be accounted for in another fund. The District also maintains a Special Reserve Fund for Other Than Capital Outlay Projects which does not currently meet the definition of a special revenue fund as it is not primarily composed of restricted or committed revenue sources. Because this fund does not meet the definition of a special revenue fund under GASB 54, the activity in the fund is being reported within the General Fund. Cafeteria Fund: This fund is used to account for revenues received and expenditures made to operate the District's food service operations. Capital Projects Fund for Blended Component Units: This fund is used to account for the activity of the certificates of participation and the Community Facilities Districts. 24

134 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B. Basis of Presentation, Basis of Accounting (continued) 1. Basis of Presentation (continued) Non Major Governmental Funds The District reports the following non major governmental funds: Special Revenue Funds: Adult Education Fund: This fund is used to account for resources committed to adult education programs maintained by the District. Child Development Fund: This fund is used to account for resources committed to child development programs maintained by the District. Deferred Maintenance Fund: This fund is used to account for resources committed to major repair or replacement of District property. Capital Projects Funds: Building Fund: This fund is used to account for the acquisition of major governmental capital facilities and buildings from the sale of general obligation bonds and bond anticipation notes. Capital Facilities Fund: This fund is used to account for resources received from developer impact fees assessed under provisions of the California Environmental Quality Act. County School Facilities Fund: This fund is used to account for state apportionments provided for modernization of school facilities under SB50. Special Reserve Fund for Capital Outlay Projects: This fund is used to account for funds set aside for Board designated construction projects. Debt Service Fund: Bond Interest and Redemption Fund: This Fund is used to account for the accumulation of resources for, and the repayment of, District bonds, interest, and related costs. Proprietary Funds Proprietary fund reporting focuses on the determination of operating income, changes in net position, financial position, and cash flows. Proprietary funds are classified as enterprise or internal service. The District has the following proprietary fund: Self Insurance Fund: This fund may be used to account for any activity for which goods or services are provided to other funds of the District in return for a fee to cover the cost of operations. The District operates a workers compensation program that is accounted for in a self insurance service fund. 25

135 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B. Basis of Presentation, Basis of Accounting (continued) 1. Basis of Presentation (continued) Fiduciary Funds Fiduciary fund reporting focuses on net position and changes in net position. Fiduciary funds are used to report assets held in a trustee or agency capacity for others and therefore cannot be used to support the District s own programs. The fiduciary fund category includes pension (and other employee benefit) trust funds, investment trust funds, private purpose trust funds, and agency funds. The District maintains the following fiduciary funds: Agency Funds: The District maintains a separate agency fund for each school that operates an Associated Student Body (ASB) Fund, whether it is organized or not. Retiree Benefits Fund: This fund is used to account separately for amounts held in trust from salary reduction agreements, other irrevocable contributions for employees retirement benefit payments or both. 2. Measurement Focus, Basis of Accounting Government Wide, Proprietary, and Fiduciary Fund Financial Statements The government wide, proprietary, and fiduciary fund financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the District gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, entitlements, and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental Fund Financial Statements Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. Capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long term debt and financing from capital leases are reported as other financing sources. 3. Revenues Exchange and Non Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year. Generally, available is defined as collectible within 60 days. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to state aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year end: State apportionments, interest, certain grants, and other local sources. 26

136 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B. Basis of Presentation, Basis of Accounting (continued) 3. Revenues Exchange and Non Exchange Transactions (continued) Non exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non exchange transactions must also be available before it can be recognized. C. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes, on behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles. D. Encumbrances Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated when the commitments are paid. All encumbrances are liquidated as of June 30. E. Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources, and Net Position 1. Cash and Cash Equivalents The District considers cash and cash equivalents to be cash on hand and demand deposits. In addition, because the Treasury Pool is sufficiently liquid to permit withdrawal of cash at any time without prior notice or penalty, equity in the pool is also deemed to be a cash equivalent. 2. Inventories and Prepaid Items Inventories are valued at cost using the first in/first out (FIFO) method. The costs of governmental fund type inventories are recorded as expenditures when consumed rather than when purchased. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. 3. Capital Assets Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated fixed assets are recorded at their estimated fair value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. 27

137 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources, and Net Position (continued) 3. Capital Assets (continued) Capital assets are depreciated using the straight line method over the following estimated useful lives: Description Buildings and Improvements Furniture and Equipment Vehicles Estimated Lives years years 8 years 4. Unearned Revenue Unearned revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for unearned revenue is removed from the combined balance sheet and revenue is recognized. Certain grants received that have not met eligibility requirements are recorded as unearned revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as unearned revenue. 5. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (expense/expenditure) until then. The District has three items that qualify for reporting in this category. The first item is to recognize contributions made to the pension plan after the measurement date of the net pension liability. The second item is to recognize the deferred amount due to differences in proportions related to pensions. The third is deferred amount on refunding, which resulted from the difference in the carrying value of refunded debt and its reacquisition price. This amount is shown as deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period and will not be recognized as an inflow of resources (revenue) until that time. The District has one item that is reported as deferred inflows of resources. That item is to recognize the District's proportionate share of the deferred inflows of resources related to its pension plans as more fully described in the footnote entitled "Pension Plans". 6. Compensated Absences The liability for compensated absences reported in the government wide statements consists of unpaid, accumulated annual and vacation leave balances. The liability has been calculated using the vesting method, in which leave amounts for both employees who currently are eligible to receive termination payments and other employees who are expected to become eligible in the future to receive such payments upon termination are included. 28

138 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources, and Net Position (continued) 7. Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the District's California State Teachers Retirement System (CalSTRS) and California Public Employees' Retirement System (CalPERS) plans and addition 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. Investments are reported at fair value. 8. Fund Balances The fund balance for governmental funds is reported in classifications based on the extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent. Nonspendable: Fund balance is reported as nonspendable when the resources cannot be spent because they are either in a nonspendable form or legally or contractually required to be maintained intact. Resources in nonspendable form include inventories and prepaid assets. Restricted: Fund balance is reported as restricted when the constraints placed on the use of resources are either externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or imposed by law through constitutional provision or by enabling legislation. Committed: The District's highest decision making level of authority rests with the District's Board. Fund balance is reported as committed when the Board passes a resolution that places specified constraints on how resources may be used. The Board can modify or rescind a commitment of resources through passage of a new resolution. Assigned: Resources that are constrained by the District's intent to use them for a specific purpose, but are neither restricted nor committed, are reported as assigned fund balance. Intent may be expressed by either the Board, committees (such as budget or finance), or officials to which the Board has delegated authority. Unassigned: Unassigned fund balance represents fund balance that has not been restricted, committed, or assigned and may be utilized by the District for any purpose. When expenditures are incurred, and both restricted and unrestricted resources are available, it is the District's policy to use restricted resources first, then unrestricted resources in the order of committed, assigned, and then unassigned, as they are needed. 9. Net Position Net position is classified into three components: net investment in capital assets; restricted; and unrestricted. These classifications are defined as follows: Net investment in capital assets This component of net position consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. 29

139 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources, and Net Position (continued) 9. Net Position (continued) Net investment in capital assets (continued) If there are significant unspent related debt proceeds at year end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of net investment in capital assets. Rather, that portion of the debt Restricted This component of net position consists of constraints placed on net position use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted net position This component of net position consists of net position that does not meet the definition of "net investment in capital assets" or "restricted". 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. Minimum Fund Balance Policy Fund balance measures the net financial resources available to finance expenditures of future periods. The District's Unassigned General Fund Balance will be maintained to provide the District with sufficient working capital and a margin of safety to address local and regional emergencies without borrowing. The Unassigned General Fund Balance may only be appropriated by resolution of the Board of Education. Fund Balance of the District may be committed for a specific source by formal action of the Board of Education. Amendments or modification to the committed fund balance must also be approved by formal action of the Board of Education. Committed fund balance does not lapse at year end. The formal action required to commit fund balance shall be by board resolution or majority vote. The Board of Education delegates authority to assign fund balance for a specific purpose to the Associate Superintendent, Business Services of the District with notification at the next scheduled Board Meeting to the Board of Education. For purposes of fund balance classification, expenditures are to be spent from restricted fund balance first and then unrestricted. Expenditures incurred in the unrestricted fund balances shall be reduced first from the committed fund balance, then from the assigned fund balance and lastly, the unassigned fund balance. The District currently adheres to the state mandated minimal level of fund balance as outlined in Title V of the California Code of Regulations Section 15443, Reserve. from those estimates. G. Property Tax Calendar The County is responsible for the assessment, collection, and apportionment of property taxes for all jurisdictions including the schools and special districts within the County. The Board of Supervisors levies property taxes as of September 1 on property values assessed on July 1. Secured property tax payments are due in two equal installments. The first is generally due November 1 and is delinquent with penalties on December 10, and the second is generally due on February 1 and is delinquent with penalties on April 10. Secured property taxes become a lien on the property on January 1. 30

140 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) H. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reported period. Actual results could differ I. New GASB Pronouncements During the fiscal year, the following GASB Pronouncements became effective: 1. Statement No. 68, Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27 (Issued 06/12) The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision useful information, supporting assessments of accountability and interperiod equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Cost Sharing Employers In financial statements prepared using the economic resources measurement focus and accrual basis of accounting, a cost sharing employer that does not have a special funding situation is required to recognize a liability for its proportionate share of the net pension liability (of all employers for benefits provided through the pension plan) the collective net pension liability. An employer s proportion is required to be determined on a basis that is consistent with the manner in which contributions to the pension plan are determined, and consideration should be given to separate rates, if any, related to separate portions of the collective net pension liability. The use of the employer s projected long term contribution effort as compared to the total projected long term contribution effort of all employers as the basis for determining an employer s proportion is encouraged. A cost sharing employer is required to recognize pension expense and report deferred outflows of resources and deferred inflows of resources related to pensions for its proportionate shares of collective pension expense and collective deferred outflows of resources and deferred inflows of resources related to pensions. 31

141 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) I. New GASB Pronouncements (continued) 2. Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68 (Issued 11/13) The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government's beginning net pension liability. Statement 68 requires a state or local government employer (or nonemployer contributing entity in a special funding situation) to recognize a net position liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. If a state or local government employer or nonemployer contributing entity makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government's reporting period, Statement 68 requires that the government recognize its contribution as a deferred outflow of resources. In addition, Statement 68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer or nonemployer contributing entity that arise from other types of events. At transition to Statement 68, if it is not practical for an employer or nonemployer contributing entity to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, paragraph 137 of Statement 68 required that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported. Consequently, if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, contributions made after the measurement date of the beginning net pension liability could not have been reported as deferred outflows of resources at transition. This could have resulted in a significant understatement of an employer or nonemployer contributing entity's beginning net position and expense in the initial period of implementation. This Statement amends paragraph 137 of Statement 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. Statement 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. The provisions of this Statement are required to be applied simultaneously with the provisions of Statement Cumulative Effect of Change in Accounting Principle Accounting changes adopted to conform to the provisions of these statements should be applied retroactively. The result of the implementation of these standards was to decrease the net position at July 1, 2013, by $284,669,037, which is the amount of net pension liability, net of the deferred outflows of resources related to pensions at July 1,

142 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 2 CASH AND INVESTMENTS Cash and investments at June 30, 2015, are reported at fair value and consisted of the following: Governmental Funds Governmental Activities Proprietary Fund Fiduciary Funds Rating Total Pooled Funds: Cash in County Treasury $ 191,069,837 $ 5,579,562 $ 196,649,399 $ 1 Deposits: Cash on hand and in banks 789, ,986 1,444,442 Cash in revolving fund 84, , ,970 Total Deposits 874, ,000 1,024,956 1,444,442 Total Cash $ 191,944,793 $ 5,729,562 $ 197,674,355 $ 1,444,443 Investments: US Bank Money Market A 1+ $ 27,501,530 $ $ 27,501,530 $ Benefit Trust: Fixed Income: BlackRock Total Return I 931,367 BlackRock Strategic Income Opportunities 466,006 Delaware Diversified Income 932,710 Hartford World Bond I 464,360 Legg Mason BW Global Opportunities Bond 461,705 Leff mason BW Alternative Credit 345,298 Prudential Total Return Bond Q 1,042,880 Templeton Global Bond Fund 691,529 Western Asset Core Plus Bond I 1,038,210 Equities: Alger Spectra Z 548,150 Columbia Contrarian Core Y 446,920 Oakmark Select FD CL I 436,095 Brandes Institutional International Equity I 421,136 Vanguard Mid Cap Index Fund Institutional 320,223 Hartford International Value I 324,178 Cohen & Steers Real Estate Securities I 262,624 Prudential Global Real Estate Q 316,021 Thornburg Investment Income Builder I 318,106 American Funds New Perspective 223,506 Brandes International Small Cap Equity I 215,756 Clearbridge International Small Cap I 223,987 Royce Special Equity Institutional 217,716 Brandes Emerging Markets I 154,234 Hartford Midcap Y 218,499 American Funds New World F2 163,661 Total Investments $ 11,184,877 Investment security ratings reported as of June 30, 2015, are defined by Standard and Poors. 33

143 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 2 CASH AND INVESTMENTS (continued) Pooled Funds In accordance with Education Code Section 41001, the District maintains substantially all of its cash in the County Treasury. The County pools and invests the cash. These pooled funds are carried at cost which approximates fair value. Interest earned is deposited annually to participating funds. Any investment losses are proportionately shared by all funds in the pool. Because 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 District, no disclosure of the individual deposits and investments or related custodial credit risk classifications is required. In accordance with applicable state laws, the County Treasurer may invest in derivative securities with the State of California. However, at June 30, 2015, the County Treasurer has represented that the Pooled Investment Fund contained no derivatives or other investments with similar risk profiles. Custodial Credit Risk Deposits Custodial credit risk is the risk that in the event of a bank failure, the District s deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. Cash balances held in banks are insured up to $250,000 by the Federal Depository Insurance Corporation (FDIC) and are collateralized by the respective financial institutions. In addition, the California Government Code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2015, $2,007,241 of the District s bank balance was exposed to custodial credit risk because it was uninsured and collateralized with securities held by the pledging financial institution s trust department or agency, but not in the name of the District. Investments Interest Rate Risk The District's investment policy limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The District's investment policy limits investment purchases to investments with a term not to exceed three years. Investments purchased with maturity terms greater than three years require approval by the Board of Education. Investments purchased with maturities greater than one year require written approval by the Superintendent prior to commitment. 34

144 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 2 CASH AND INVESTMENTS (continued) Maturities of investments held at June 30, 2015, consisted of the following: Fair Value Less Than One Year Maturity One Year Through Five Years Investment maturities: US Bank Money Market $ 27,501,530 $ 27,501,530 $ Benefit Trust: Fixed Income: BlackRock Total Return I 931, ,367 BlackRock Strategic Income Opportunities 466, ,006 Delaware Diversified Income 932, ,710 Hartford World Bond I 464, ,360 Legg Mason BW Global Opportunities Bond 461, ,705 Leff mason BW Alternative Credit 345, ,298 Prudential Total Return Bond Q 1,042,880 1,042,880 Templeton Global Bond Fund 691, ,529 Western Asset Core Plus Bond I 1,038,210 1,038,210 Equities: Alger Spectra Z 548, ,150 Columbia Contrarian Core Y 446, ,920 Oakmark Select FD CL I 436, ,095 Brandes Institutional International Equity I 421, ,136 Vanguard Mid Cap Index Fund Institutional 320, ,223 Hartford International Value I 324, ,178 Cohen & Steers Real Estate Securities I 262, ,624 Prudential Global Real Estate Q 316, ,021 Thornburg Investment Income Builder I 318, ,106 American Funds New Perspective 223, ,506 Brandes International Small Cap Equity I 215, ,756 Clearbridge International Small Cap I 223, ,987 Royce Special Equity Institutional 217, ,716 Brandes Emerging Markets I 154, ,234 Hartford Midcap Y 218, ,499 American Funds New World F2 163, ,661 Total $ 38,686,407 $ 38,686,407 $ Investments Credit Risk The District's investment policy limits investment choices to obligations of local, state and federal agencies, commercial paper, certificates of deposit, repurchase agreements, corporate notes, banker acceptances, and other securities allowed by State Government Code Section At June 30, 2015, all investments represented governmental securities which were issued, registered and held by the District's agent in the District's name. 35

145 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 2 CASH AND INVESTMENTS (continued) Investments Concentration of Credit Risk The District does not place limits on the amount it may invest in any one issuer. At June 30, 2015, the District had the following investment that represented more than five percent of the District's net investments. US Bank Money Market 71.1% NOTE 3 ACCOUNTS RECEIVABLE Accounts receivable as of June 30, 2015, consisted of the following: Proprietary Governmental Funds Fund General Fund Cafeteria Fund Capital Projects Fund for Blended Component Units Non Major Governmental Funds Totals Self Insurance Fund Federal Government: Categorical aid programs $ 6,030,510 $ 4,359,309 $ $ 314,076 $ 10,703,895 $ State Government: Education Protection Account 4,538 4,538 Lottery 3,510,010 3,510,010 Special education 886, , ,495 2,169,900 Categorical aid programs 194, ,659 Local: Interest 10,476 9,770 10,033 23,421 53,700 6,092 Trust reimbursement 5,339,289 5,339,289 Miscellaneous 19,101 19,101 Other local resources 1,618,963 2,346 2,799 1,624,108 Total $ 17,594,703 $ 4,716,572 $ 10,033 $ 1,297,892 $ 23,619,200 $ 6,092 NOTE 4 INTERFUND TRANSACTIONS A. Balances Due To/From Other Funds Balances due to/from other funds at June 30, 2015, consisted of the following: Due From Other Funds Non Major General Cafeteria Governmental Proprietary Fund Fund Funds Fund Total General Fund $ $ 3,844 $ 951,689 $ 2,646,244 $ 3,601,777 Cafeteria Fund 2,902, ,468 2,982,351 Non Major Governmental Funds 659,747 1, ,000 61,660 1,022,636 Self Insurance Fund 54,471 3,679 3,988 62,138 Total $ 3,617,093 $ 8,752 $ 1,255,685 $ 2,787,372 $ 7,668,902 Cafeteria Fund due to General Fund for vehicle repairs, fuel costs, year end suspense transfers, PERS reduction, and indirect costs 2,902,875 General Fund due to Self Insurance Fund for premiums 2,646,244 General Fund due to Special Reserve Fund for Capital Outlay Projects for RDA funds distribution 951,561 Child Development Fund due to General Fund for year end suspense transfers, indirect costs, and 4th quarter indirect costs 387,752 All other interfund receivables/payables 780,470 Total $ 7,668,902 36

146 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 4 INTERFUND TRANSACTIONS (continued) B. Transfers To/From Other Funds Transfers to/from other funds for the fiscal year ended June 30, 2015, consisted of the following: General Fund to Cafeteria Fund for reimbursement of disallowed costs in prior year $ 206,521 NOTE 5 FUND BALANCES At June 30, 2015, fund balances of the District s governmental funds were classified as follows: Capital Projects Non Major General Cafeteria Fund for Blended Governmental Fund Fund Component Units Funds Total Nonspendable: Revolving cash $ 75,000 $ 9,970 $ $ $ 84,970 Inventories , ,887 Prepaid expenditures 244, ,192 Total Nonspendable 319, , ,049 Restricted: Categorical programs 13,949, ,443 14,190,817 Food service porgram 14,817,099 14,817,099 Capital projects 38,421,298 41,160,225 79,581,523 Debt service 21,259,290 21,259,290 Total Restricted 13,949,374 14,817,099 38,421,298 62,660, ,848,729 Committed: Adult education program 200, ,348 Deferred maintenance program 1,489,181 1,489,181 Total Committed 1,689,529 1,689,529 Assigned: Other assignments 17,664,066 60,312 17,724,378 Total Assigned 17,664,066 60,312 17,724,378 Unassigned: Reserve for economic uncertainties 14,077,605 14,077,605 Remaining unassigned balances 41,509,208 41,509,208 Total Unassigned 55,586,813 55,586,813 Total $ 87,520,235 $ 14,960,028 $ 38,421,298 $ 64,410,937 $ 205,312,498 37

147 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 6 CAPITAL ASSETS AND DEPRECIATION Capital asset activity for the year ended June 30, 2015, was as follows: Balance, Balance, July 1, 2014 Additions Retirements June 30, 2015 Capital assets not being depreciated: Land $ 58,877,302 $ $ $ 58,877,302 Construction in progress 12,558,677 6,872,600 19,431,277 Total capital assets not being depreciated 71,435,979 6,872,600 78,308,579 Capital assets being depreciated: Improvement of sites 68,715, ,163 69,093,332 Buildings 623,538,696 1,220, ,758,976 Equipment 45,623,643 3,140,073 33,426 48,730,290 Total capital assets being depreciated 737,877,508 4,738,516 33, ,582,598 Accumulated depreciation for: Improvement of sites (33,032,926) (3,691,624) (36,724,550) Buildings (178,186,823) (15,478,263) (193,665,086) Equipment (33,350,732) (4,066,848) (33,426) (37,384,154) Total accumulated depreciation (244,570,481) (23,236,735) (33,426) (267,773,790) Total capital assets being depreciated, net 493,307,027 (18,498,219) 474,808,808 Governmental activity capital assets, net $ 564,743,006 $ (11,625,619) $ $ 553,117,387 NOTE 7 GENERAL LONG TERM DEBT Changes in long term debt for the year ended June 30, 2015, were as follows: Balance, Balance, Amount Due July 1, 2014 * Additions Deductions June 30, 2015 Within One Year General Obligation Bonds: Principal repayments $ 221,589,935 $ $ 5,217,517 $ 216,372,418 $ 8,457,184 Accreted interest component 16,040,616 4,710,162 3,132,483 17,618,295 1,752,816 Unamortized issuance premium 15,957, ,548 15,038, ,548 Total Bonds 253,588,467 4,710,162 9,269, ,029,081 11,129,548 Certificates of Participation: Principal repayments 42,380,000 1,365,000 41,015,000 1,435,000 Unamortized issuance premium 526,366 25, ,301 25,065 Total Certificates of Participation 42,906,366 1,390,065 41,516,301 1,460,065 Qualified Zone Academy Bond Scheduled deposits 1,733, ,628 1,485, ,628 Accumulated interest 748,759 76, ,680 85,877 Total Qualified Zone Academy Bond 2,482, ,707 2,158, ,505 Compensated Absences 1,949,739 33,963 1,983,702 Supplemental Early Retirement 920, ,426 Other Postemployment Benefits 43,435,385 6,008,494 49,443,879 Net Pension Liability 302,173,666 58,655, ,517,899 Totals $ 647,456,202 $ 10,752,619 $ 70,559,513 $ 587,649,308 $ 12,923,118 * Beginning balance was restated to reflect the retroactive implementation of GASB Statement No. 68 for the net pension liability. 38

148 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 7 GENERAL LONG TERM DEBT (continued) Payments for general obligation bonds are made by the Bond Interest and Redemption Fund. Certificates of Participation payments are made by the Capital Projects Fund for Blended Component Units. QZAB payments are made by the Special Reserve Fund for Capital Outlay Projects. SERP liabilities are paid from the General Fund. Accumulated vacation will be paid for by the fund for which the employee worked. A. General Obligation Bonds Election of 2006 On June 6, 2006, an election was held where the registered voters in the District approved by a fifty five percent majority the issuance and sale of $275 million principal amount of general obligation bonds. The bonds are being issued to acquire, construct, renovate and equip certain District facilities. As of June 30, 2015, there are three bond issuances outstanding from this authorization: the Series A, Series B, and Series C Bonds. The Bonds are general obligations of the District, and the County is empowered and obligated to levy ad valorem taxes upon all property within the District subject to taxation for the payment of interest on and principal of the Bonds when due. Prior Years Refunding Bonds In prior years the District has issued refunding bonds for the purposes of defeasing previously issued bonds. The previously issued refunding bonds are the 1992 Refunding Bonds, the 1997 Refunding Bonds, Series A, the 2004 Refunding Bonds, and the 2009 Refunding Bonds. The net proceeds of these bonds were used to purchase U.S. government securities, which were deposited into an irrevocable trust with an escrow agent to provide for future debt service payments on the refunded bonds. As a result, the refunded bonds are considered to be defeased, and the related liability for the bonds has been removed from the District's liabilities. As of June 30, 2015, the principal balance outstanding on the previously defeased debt has been fully paid Refunding General Obligation Bonds On October 25, 2012, the District issued $78,115,000 of General Obligation Refunding Bonds. The bonds bear fixed interest rates ranging between 2.0% and 5.0% with annual maturities from August 1, 2013 through August 1, The net proceeds of $86,108,447 (after premiums of $9,340,249 and issuance costs of $1,346,802) were used to prepay a portion of the District s outstanding General Obligation Bonds Series 2006 A. The net proceeds were used to purchase U.S. government securities. Those securities were deposited into an irrevocable trust with an escrow agent to provide for future debt service payments on the refunded bonds. As a result, the refunded bonds are considered to be defeased, and the related liability for the bonds has been removed from the District's liabilities. Amounts paid to the escrow agent in excess of the outstanding debt at the time of payment are recorded as deferred amounts on refunding on the statement of net position and are amortized to interest expense over the life of the liability. Deferred amounts on refunding as of June 30, 2015 of $4,179,855 remain to be amortized. As of June 30, 2015, the principal balance outstanding on the defeased debt has been fully paid Refunding General Obligation Bonds On May 22, 2014, the District issued $12,975,000 of General Obligation Refunding Bonds. The bonds bear fixed interest rates ranging between 2.25% and 5.0% with annual maturities from August 1, 2024 through August 1, The net proceeds of $14,052,411 (after premiums of $1,245,978 and issuance costs of $168,567) were used to prepay a portion of the District s outstanding General Obligation Bonds Series 2006 A and the 2004 refunding. 39

149 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 8 GENERAL LONG TERM DEBT (continued) A. General Obligation Bonds (continued) 2014 Refunding General Obligation Bonds (continued) The net proceeds were used to purchase U.S. government securities. Those securities were deposited into an irrevocable trust with an escrow agent to provide for future debt service payments on the refunded bonds. As a result, the refunded bonds are considered to be defeased, and the related liability for the bonds has been removed from the District's liabilities. Amounts paid to the escrow agent in excess of the outstanding debt at the time of payment are recorded as deferred amounts on refunding on the statement of net position and are amortized to interest expense over the life of the liability. Deferred amounts on refunding as of June 30, 2015, of $8,851 remain to be amortized. As of June 30, 2015, the principal balance outstanding on the defeased debt has been fully paid. A summary of outstanding general obligation bonds issued is presented below: Issue Maturity Interest Original Balance, Balance, Series Date Date Rate Issue July 1, 2014 Additions Deductions June 30, 2015 Refunding Bonds 1992R 8/1/ % 5.4% $ 23,668,126 $ 445,805 $ $ 445,805 $ 1997R 6/18/ % 5.95% 18,670,227 3,088, ,712 2,387, R 2/11/ % 5.25% 18,110,000 12,735,000 1,235,000 11,500, R 10/25/ % 5.0% 78,115,000 76,015,000 1,035,000 74,980, R 5/22/ % 5.0% 12,975,000 12,975,000 12,975,000 Subtotal Refunding Bonds 105,259,586 3,417, ,842, Series 2006A 8/10/ % 5.25% 90,000, , , B 3/11/ % 5.25% 70,585,909 68,345,909 1,075,000 67,270, C 10/25/ % 5.75% 47,259,440 47,259,440 47,259,440 Subtotal 2006 Series 116,330,349 1,800, ,530,349 Total $ 221,589,935 $ $ 5,217,517 $ 216,372,418 Accreted Interest 1992R $ 1,319,404 $ 114,791 $ 1,434,195 $ 1997R 6,343, ,985 1,698,288 5,278, B 4,988,600 1,082,151 6,070, C 3,389,505 2,879,235 6,268,740 $ 16,040,616 $ 4,710,162 $ 3,132,483 $ 17,618,295 40

150 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 8 GENERAL LONG TERM DEBT (continued) A. General Obligation Bonds (continued) The annual requirements to amortize general obligation bonds outstanding at June 30, 2015, are as follows: Fiscal Year Principal Interest Total $ 8,457,184 $ 8,822,460 $ 17,279, ,576,175 8,662,525 16,238, ,331,800 8,430,044 16,761, ,226,910 8,182,309 17,409, ,740,000 5,682,344 15,422, ,115,000 21,833,019 70,948, ,975,305 14,149,835 82,125, ,728,428 56,766,085 76,494, ,836,158 60,763,842 81,600, ,385,458 65,714,542 81,100,000 Total $ 216,372,418 $ 259,007,005 $ 475,379,423 B. Certificates of Participation On April 25, 2007, the District issued $49,910,000 in certificates of participation through the Fontana Unified School District Public Financing Authority for the purpose of providing funds for the construction and improvement of certain school facilities. Payments will be financed through CFD resources. The annual requirements to amortize all certificates are as follows: Fiscal Year Principal Interest Total $ 1,435,000 $ 1,870,819 $ 3,305, ,505,000 1,811,931 3,316, ,595,000 1,740,075 3,335, ,695,000 1,657,825 3,352, ,800,000 1,570,450 3,370, ,505,000 6,364,075 16,869, ,175,000 3,744,338 14,919, ,655,000 1,797,412 8,452, ,650, ,625 4,754,625 Total $ 41,015,000 $ 20,661,550 $ 61,676,550 41

151 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 8 GENERAL LONG TERM DEBT (continued) C. Qualified Zone Academy Bond On April 1, 2005, the District entered into a site lease agreement with the California School Boards Association Finance Corporation. The purpose of the agreement is to provide financing for the cost of purchasing equipment and certain improvements to property. The financing for the improvements is provided by the issuance of Qualified Zone Academy Bonds (QZABs), pursuant to Section 1397E of the Internal Revenue Code. Lease payments will be required as follows: Fiscal Scheduled Accumulated Year Deposit Interest Total $ 247,628 $ 85,877 $ 333, ,627 95, , , , , , , , , , , , , ,046 Total $ 1,485,766 $ 672,680 $ 2,158,446 NOTE 9 JOINT VENTURES The Fontana Unified School District participates in joint ventures under joint powers agreements with the Midwest Claims Employees Workers Comp Excess, Southern California ReLiEF, Riverside Employee/Employer Partnership (REEP), and Statewide Educational Wrap Up Program (SEWUP) for benefits. The relationships between the District and the JPAs are such that the JPAs are not a component unit of the District for financial reporting purposes. The JPAs provide property and liability insurance coverage as well as health and welfare benefits coverage. The JPAs are governed by a board consisting of a representative from each member district. The governing board controls the operations of its JPAs independent of any influence by the member districts beyond their representation on the governing board. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionately to its participation in the JPAs. Condensed audited financial information for the year ended June 30, 2014, for the JPAs are as follows: REEP ReLiEF SEWUP Assets $ 30,171,457 $ 51,710,199 $ 16,962,655 Liabilities 10,701,715 38,808,629 13,988,830 Net Assets $ 19,469,742 $ 12,901,570 $ 2,973,825 Revenues $ 132,806,932 $ 17,316,994 $ 9,269,254 Expenses 131,725,589 26,459,776 10,378,711 Operating Income 1,081,343 (9,142,782) (1,109,457) Non Operating Income 35, , ,063 Change in Net Assets $ 1,116,501 $ (8,760,928) $ (885,394) 42

152 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 10 COMMITMENTS AND CONTINGENCIES A. State and Federal Allowances, Awards and Grants The District has received state and federal funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believed that any required reimbursement will not be material. B. Construction Commitments As of June 30, 2015, the District had commitments with respect to unfinished capital projects of approximately $24,982,989 to be paid from a combination of State and local funds. C. Litigation The District is involved in certain legal matters that arose out of the normal course of business. The District has not accrued a liability for any potential litigation against it because it does not meet the criteria to be considered a liability at June 30, NOTE 11 RISK MANAGEMENT Property and Liability The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions. During fiscal year ending June 30, 2015, the District participated in the Southern California ReLiEF public entity risk pool for property and liability insurance coverage above the self insured retention amounts of $25,000 for liability claims and $10,000 for property claims. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year. Workers Compensation For fiscal year , the District was self funded for workers compensation for the first $750,000 of a claim, with excess coverage provided by Mid West Employers (a fully insured program). Employee Medical Benefits The District has contracted with Kaiser, Express Scripts, Blue Shield HMO, and Blue Shield POS to provide employee medical, prescription and surgical benefits, Delta Dental, MetLife Dental and Safe Guard for dental benefits, and MES Vision for vision benefits. Claims Liability The District records an estimated liability for workers compensation claims against the District. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred but not reported based on historical experience. 43

153 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 11 RISK MANAGEMENT (continued) Unpaid Claims Liabilities The District establishes a liability for both reported and unreported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District s workers compensation from July 1, 2013 to June 30, 2015: Workers' Compensation Liability Balance, July 1, 2013 $ 5,219,728 Claims and changes in estimates 930,776 Claims payments (1,162,227) Liability Balance, June 30, ,988,277 Claims and changes in estimates 2,838,719 Claims payments (2,285,840) Liability Balance, June 30, 2015 $ 5,541,156 Assets available to pay claims at June 30, 2015 $ 8,523,026 NOTE 12 PENSION PLANS Qualified employees are covered under multiple employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the California State Teachers Retirement System (CalSTRS), and classified employees are members of California Public Employees Retirement System (CalPERS). A. General Information about the Pension Plans Plan Descriptions The District contributes to the California State Teachers Retirement System (CalSTRS), a cost sharing multiple employer public employee retirement system defined benefit pension plan administered by CalSTRS. Benefit provisions under the Plan are established by State statute and District resolution. CalSTRS issues publicly available reports that include a full description of the pension plan regarding benefit provisions, assumptions, and membership information that can be found on the CalSTRS website. The District also contributes to the School Employer Pool under the California Public Employees Retirement System (CalPERS), a cost sharing multiple employer public employee retirement system defined benefit pension plan administered by CalPERS. Benefit provisions under the Plan are established by State statute and District resolution. CalPERS issues publicly available reports that include a full description of the pension plan regarding benefit provisions, assumptions, and membership information that can be found on the CalPERS website. 44

154 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) A. General Information about the Pension Plans (continued) Benefits Provided CalSTRS provides retirement, disability, and death benefits. Retirement benefits are determined as 2 percent of final compensation for each year of credited service at age 60 for members under CalSTRS 2% at 60, or age 62 for members under CalSTRS 2% at 62, increasing to a maximum of 2.4 percent at age 63 for members under CalSTRS 2% at 60, or age 65 for members under CalSTRS 2% at 62. The normal retirement eligibility requirements are age 60 for members under CalSTRS 2% at 60, or age 62 for members under CalSTRS 2% at 62, with a minimum of five years of service credited under the Defined Benefit Program, which can include service purchased from teaching in an out of state or foreign public school. Employees are eligible for service related disability benefits after five years of service, unless the member is disabled due to an unlawful act of bodily injury committed by another person while working in CalSTRS covered employment, in which case the minimum is one year. Disability benefits are equal to fifty percent of final compensation regardless of age and service credit. Designated recipients of CalSTRS retired members receive a $6,163 lump sum death payment. There is a 2 percent simple increase each September 1 following the first anniversary of the date on which the monthly benefit began to accrue. The annual 2 percent increase is applied to all continuing benefits other than Defined Benefit Supplement annuities. However, if the member retires with a Reduced Benefit Election, the increase does not begin to accrue until the member reaches age 60 and is not payable until the member receives the full benefit. This increase is also known as the improvement factor. CalPERS also provides retirement, disability, and death benefits. Retirement benefits are determined as 1.1 percent of final compensation for each year of credited service at age 50 for members under 2% at 55, or 1.0 percent at age 52 for members under 2% at 62, increasing to a maximum of 2.5 percent at age 63 for members under 2% at 55, or age 67 for members under 2% at 62. To be eligible for service retirement, members must be at least age 50 and have a minimum of five years of CalPERS credited service. Members joining on or after January 1, 2013 must be at least age 52. Disability retirement has no minimum age requirement and the disability does not have to be job related. However, members must have a minimum of five years of CalPERS service credit. Pre retirement death benefits range from a simple return of member contributions plus interest to a monthly allowance equal to half of what the member would have received at retirement paid to a spouse or domestic partner. To be eligible for any type of monthly pre retirement death benefit, a spouse or domestic partner must have been either married to the member or legally registered before the occurrence of the injury or the onset of the illness that resulted in death, or for at least one year prior to death. Cost of living adjustments are provided by law and are based on the Consumer Price Index for all United States cities. Cost of living adjustments are paid the second calendar year of the member s retirement on the May 1 check and then every year thereafter. The standard cost of living adjustment is a maximum of 2 percent per year. Contributions Active CalSTRS plan members were required to contribute 8.15% of their salary in The required employer contribution rate for fiscal year was 8.88% of annual payroll. The contribution requirements of the plan members are established by State statute. Active CalPERS plan members are required to contribute 7.0% of their salary and the District is required to contribute an actuarially determined rate. 45

155 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) A. General Information about the Pension Plans (continued) Contributions (continued) 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 required employer contribution for fiscal year was %. The contribution requirements of the plan members are established by State statute. For the fiscal year ended June 30, 2015, the contributions recognized as part of pension expense for each Plan were as follows: CalSTRS CalPERS Employer contributions $ 23,809,596 $ 6,799,457 Employee contributions paid by employer $ $ B. Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions As of June 30, 2015, the District reported net pension liabilities for its proportionate shares of the net pension liability of each Plan as follows: Proportionate Share of Net Pension Liability CalSTRS $ 184,076,550 CalPERS $ 59,441,349 Total Net Pension Liability $ 243,517,899 The District s net pension liability for each Plan is measured as the proportionate share of the net pension liability. The net pension liability of each of the Plans is measured as of June 30, 2014, and the total pension liability for each Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2013, rolled forward to June 30, 2014 using standard update procedures. 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 plans relative to the projected contributions of all participating employers, actuarially determined. The District s proportionate share of the net pension liability for each Plan as of June 30, 2013 and 2014 was as follows: CalSTRS* CalPERS Proportion June 30, % % Proportion June 30, % % Change Increase (Decrease) % % * The District's proportionate share percentage was not separately determined for June 30, 2013, so the June 30, 2014 percentage was used to calculate the beginning amounts. 46

156 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) B. Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions (continued) For the year ended June 30, 2015, the District recognized pension expense of $21,174,872. At June 30, 2015, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows Deferred Inflows of Resources of Resources Pension contributions subsequent to measurement date $ 30,609,053 $ Adjustment due to differences in proportions 3,437,391 Net differences between projected and actual earnings on plan investments (65,753,213) $ 34,046,444 $ (65,753,213) The total amount of $30,609,053 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows: Year Ended June 30, Amount 2016 $ (13,312,531) 2017 (13,312,531) 2018 (13,312,531) Thereafter Actuarial Assumptions The total pension liabilities in the June 30, 2013, actuarial valuations were determined using the following actuarial assumptions: CalSTRS CalPERS Valuation Date June 30, 2013 June 30, 2013 Measurement Date June 30, 2014 June 30, 2014 Actuarial Cost Method Entry age normal Entry age normal Actuarial Assumptions: Discount Rate 7.60% 7.50% Inflation 3.00% 2.75% Wage Growth 3.75% 3.00% Post retirement Benefit Increase 2.00% Investment Rate of Return 7.60% 7.50% 47

157 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) B. Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions (continued) Actuarial Assumptions (continued) 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. RP2000 series tables are an industry standard set of mortality rates published by the Society of Actuaries. See CalSTRS July 1, 2006 June 30, 2010 Experience Analysis for more information. The underlying mortality assumptions and all other actuarial assumptions used in the CalPERS June 30, 2013 valuation were based on the results of a January 2014 actuarial experience study for the period 1997 to Further details of the Experience Study can found on the CalPERS website. Discount Rate for CalSTRS 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 that contributions from plan members and employers will be made at statutory contribution rates in accordance with the rate increase per Assembly Bill 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 occur midyear. Based on those 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 the total pension liability. Discount Rate for CalPERS The discount rate used to measure the total pension liability was 7.50% for CalPERS. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. he long term expected discount rate of 7.50 percent will be applied to all plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed report that can be obtained from the CalPERS website. According to Paragraph 30 of Statement 68, the long term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher Total Pension Liability and Net Pension Liability. CalPERS checked the materiality threshold for the difference in calculation and did not find it to be a material difference. CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management (ALM) review cycle that is scheduled to be completed in February Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. 48

158 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) B. Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions (continued) Discount Rate for CalPERS (continued) The long term expected rate of return on pension plan investments was determined using a buildingblock 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 bestestimate ranges were developed using capital market assumptions from CalSTRS general investment consultant (Pension Consulting Alliance PCA) as an input to the process. Based on the model from CalSTRS consulting actuary's (Milliman) investment practice, a best estimate range was determined by assuming the portfolio is re balanced annually and that annual returns are lognormally distributed and independent from year to year to develop expected percentiles for the long term distribution of annualized returns. The assumed asset allocation by PCA is based on board policy for target asset allocation in effect on February 2, 2012, the date the current experience study was approved by the board. 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 10 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 longterm 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 table below reflects the long term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These rates of return are net of administrative expenses. Long Term Expected Target Allocation Rate of Return Asset Class CalSTRS CalPERS CalSTRS CalPERS Global Equity 47% 47% 4.5% 5.7% Global Fixed Income N/A 19% N/A 2.4% Inflation Sensitive 5% 6% 3.2% 3.4% Private Equity 12% 12% 6.2% 7.0% Real Estate 15% 11% 4.4% 5.1% Infrastructure and Forestland N/A 3% N/A 5.1% Fixed Income 20% N/A 0.2% N/A Liquidity 1% 2% 0.0% 1.1% 100% 100% 49

159 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 12 PENSION PLANS (continued) B. Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions (continued) Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in the Discount Rate The following presents the District s proportionate share of the net pension liability for each Plan, calculated using the discount rate for each Plan, as well as what the District s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower or 1 percentage point higher than the current rate: CalSTRS CalPERS 1% Decrease 6.60% 6.50% Net Pension Liability $ 286,927,200 $ 104,273,695 Current Discount Rate 7.60% 7.50% Net Pension Liability $ 184,076,550 $ 59,441,349 1% Increase 8.60% 8.50% Net Pension Liability $ 98,317,800 $ 21,979,404 Pension Plan Fiduciary Net Position Detailed information about each pension plan s fiduciary net position is available in the separately issued CalSTRS and CalPERS financial reports. C. Payable to the Pension Plans At June 30, 2015, the District reported a payable of $1,304,610 and $38,367 for the outstanding amount of contributions to the CalSTRS and CalPERS pension plans, respectively, required for the fiscal year ended June 30, NOTE 13 OTHER POSTEMPLOYMENT BENEFITS Fontana Unified School District administers a defined benefit postemployment plan, where plan assets may be used only for the payment of benefits to the members of that plan. The plan assets are accounted for in the Retiree Benefit Fund. The District implemented Governmental Accounting Standards Board Statement #45, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, in A. Summary of Significant Accounting Policies Basis of Accounting The Retiree Benefit Fund s financial statements are prepared using the accrual basis of accounting. Fontana Unified School District has a retirement board of authority to oversee the Retiree Benefit Fund. Employer contributions to the plan are recognized when due and the employer has made a formal commitment to provide the contributions. Benefits are recognized when due and payable in accordance with the terms of the plan. 50

160 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 13 OTHER POSTEMPLOYMENT BENEFITS (continued) A. Summary of Significant Accounting Policies (continued) Method Used to Value Investments Investments are reported at fair value. The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District s investment in the pool is reported in the accounting financial statements at amounts based upon the District s pro rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The District also has an investment of $11,184,877 in Blue Ridge Trust Bank as described in Note 2. B. Plan Descriptions and Contribution Information Membership of the plan consisted of the following at April 1, 2014, the date of the latest actuarial valuation: Retirees and beneficiaries receiving benefits 565 Active plan members 3,500 Total 4,065 Number of participating employers One Plan Description Following is a description of the current retiree plan: Certificated Classified and Police Management Benefit types provided Medical, dental and vision* Medical, dental and vision* Medical, dental and vision* Duration of benefits 6 years* 6 years* 6 years* Required service 15 years* 15 years* 15 years* Minimum age Dependent coverage Yes Yes Yes District contribution % 100% 100% 100% District cap None None None * Retirees may elect 8 years of medical only coverage. Employees with at least 35 years of service receive lifetime coverage. Married employees may elect to receive benefits consecutively subject to certain restrictions. Certain retirees may defer receipt of retiree benefits subject to certain restrictions. Contributions Retired plan members and beneficiaries currently receiving benefits are not required to contribute toward the cost of health insurance premiums. The District contributes 100% of the current premium cost, which amounted to approximately $7.4 million in

161 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 13 OTHER POSTEMPLOYMENT BENEFITS (continued) B. Plan Descriptions and Contribution Information (continued) Contributions (continued) The funded status of the plan as of the three most recent actuarial valuation dates is as follows: Annual required contribution (ARC) $ 13,135,612 Interest on net OPEB obligation 2,171,770 Adjustment to ARC (1,923,888) Annual OPEB cost 13,383,494 Contributions made: Contributions from governmental funds to Retiree Benefits Fund (7,375,000) Pay as you go costs Total contributions made (7,375,000) Increase in net OPEB liability 6,008,494 Net OPEB liability July 1, ,435,385 Net OPEB liability June 30, 2015 $ 49,443,879 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Actuarially determined amounts are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedules of funding progress present multiyear trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. C. Funded Status and Funding Progress OPEB Plans The accompanying schedules of employer contributions present trend information about the amounts contributed to the plan by the employer in comparison to the ARC, an amount that is actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost for each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for and the preceding two years are as follows: Net Year Ended Annual Percentage OPEB June 30, OPEB Cost Contributed Liability 2013 $ 11,437,470 46% $ 35,298, $ 13,337,056 39% $ 43,435, $ 13,383,494 55% $ 49,443,879 52

162 FONTANA UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2015 NOTE 13 OTHER POSTEMPLOYMENT BENEFITS (continued) D. 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 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 designated 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. Valuation Date April 1, 2014 Actuarial Cost Method Entry Age Normal Amortization Method Level Percentage of Payroll Remaining Amortization Period 30 years Asset Valuation Provided by District Actuarial Assumptions: Discount rate 5.0% Long term healthcare cost trend rate 4.0% Inflation 2.75% 53

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166 FONTANA UNIFIED SCHOOL DISTRICT Budgetary Comparison Schedule General Fund For the Fiscal Year Ended June 30, 2015 Budgeted Amounts Variance with Actual* Final Budget Original Final (Budgetary Basis) Pos (Neg) Revenues LCFF sources $ 298,661,286 $ 302,549,600 $ 304,478,927 $ 1,929,327 Federal sources 21,552,960 28,052,372 22,478,789 (5,573,583) Other state sources 35,224,733 38,349,084 49,746,535 11,397,451 Other local sources 3,002,662 4,571,361 6,065,054 1,493,693 Total Revenues 358,441, ,522, ,769,305 9,246,888 Expenditures Current: Certificated salaries 159,409, ,270, ,695, ,758 Classified salaries 48,981,004 51,029,913 51,355,783 (325,870) Employee benefits 82,914,471 80,687,347 89,141,819 (8,454,472) Books and supplies 30,465,178 41,093,138 20,485,901 20,607,237 Services and other operating expenditures 31,023,577 40,059,559 34,266,559 5,793,000 Transfers of indirect costs (1,176,035) (969,845) (856,184) (113,661) Capital outlay 322,807 4,935,020 1,791,012 3,144,008 Intergovernmental 160, ,521 (45,700) Total Expenditures 351,940, ,266, ,087,296 21,179,300 Excess (Deficiency) of Revenues Over (Under) Expenditures 6,501,533 (12,744,179) 17,682,009 30,426,188 Fund Balances, July 1, ,080,045 58,080,045 58,080,045 Fund Balances, June 30, 2015 $ 64,581,578 $ 45,335,866 $ 75,762,054 $ 30,426,188 * The actual amounts reported in this schedule are for the General Fund only, and do not agree with the amounts reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances because the amounts on that schedule include the financial activity of the Special Reserve Fund for Other Than Capital Outlay Projects, in accordance with the fund type definitions promulgated by GASB Statement No. 54. On behalf payments of $8,857,723 are included in the actual revenues and expenditures, but have not been included in the budgeted amounts. See accompanying notes to required supplementary information. 54

167 FONTANA UNIFIED SCHOOL DISTRICT Budgetary Comparison Schedule Cafeteria Fund For the Fiscal Year Ended June 30, 2015 Budgeted Amounts Actual Variance with Final Budget Original Final (Budgetary Basis) Pos (Neg) Revenues Federal sources $ 17,986,057 $ 18,152,052 $ 19,174,309 $ 1,022,257 Other state sources 1,462,783 1,463,960 1,473,925 9,965 Other local sources 2,008,215 2,118,215 1,881,345 (236,870) Total Revenues 21,457,055 21,734,227 22,529, ,352 Expenditures Current: Classified Salaries 6,375,633 6,529,096 6,532,077 (2,981) Employee Benefits 3,704,470 3,112,102 3,117,790 (5,688) Books and Supplies 9,494,817 11,940,915 11,959,246 (18,331) Services and Other Operating Expenditures 353,300 14,147, ,105 13,470,634 Transfers of indirect costs 878, , ,349 (48,649) Capital Outlay 650, , , ,830 Total Expenditures 21,457,055 37,514,052 23,710,237 13,803,815 Excess (Deficiency) of Revenues Over (Under) Expenditures (15,779,825) (1,180,658) 14,599,167 Other Financing Sources and Uses Interfund Transfers In 160, ,521 45,700 Excess (Deficiency) of Revenues Over (Under) Expenditures (15,619,004) (974,137) 14,644,867 Fund Balances, July 1, ,934,165 15,934,165 15,934,165 Fund Balances, June 30, 2015 $ 15,934,165 $ 315,161 $ 14,960,028 $ 14,644,867 See accompanying notes to required supplementary information. 55

168 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Funding Progress For the Fiscal Year Ended June 30, 2015 Actuarial UAAL as a Actuarial Accrued Unfunded Percentage of Valuation Value of Liability AAL Funded Covered Covered Date Assets (AAL) (UAAL) Ratio Payroll Payroll April 1, 2010 $ 1,262,983 $ 95,413,658 $ 94,150, % $ 195,421,055 48% April 1, 2012 $ 11,273,568 $ 116,435,068 $ 76,176, % $ 187,339,962 41% April 1, 2014 $ 3,768,344 $ 151,970,067 $ 75,702, % $ 209,587,696 36% See accompanying notes to required supplementary information. 56

169 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Proportionate Share of the Net Pension Liability For the Fiscal Year Ended June 30, 2015 Last Ten Fiscal Years* 2014 District's proportion of the net pension liability (asset): CalSTRS % CalPERS % District's proportionate share of the net pension liability (asset): CalSTRS $ 184,076,550 CalPERS $ 59,441,349 District's covered employee payroll: CalSTRS $ 156,232,242 CalPERS $ 53,355,454 District's proportionate share of the net pension liability (asset) as a percentage of its covered employee payroll: CalSTRS 117.8% CalPERS 111.4% Plan fiduciary net position as a percentage of the total pension liability: CalSTRS 76.5% CalPERS 83.4% * This schedule is required to show information for ten years; however, until a full ten year trend is compiled, information is presented for those years for which information is available. See accompanying notes to required supplementary information. 57

170 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Contributions For the Fiscal Year Ended June 30, 2015 Last Ten Fiscal Years* 2014 Actuarially determined contribution: CalSTRS $ 12,889,160 CalPERS $ 6,104,931 Contributions in relation to the actuarially determined contribution: CalSTRS $ 12,889,160 CalPERS $ 6,104,931 Contribution deficiency (excess): CalSTRS $ CalPERS $ District's covered employee payroll: CalSTRS $ 156,232,242 CalPERS $ 53,355,454 Contributions as a percentage of covered employee payroll: CalSTRS 8.25% CalPERS % * This schedule is required to show information for ten years; however, until a full ten year trend is compiled, information is presented for those years for which information is available. See accompanying notes to required supplementary information. 58

171 FONTANA UNIFIED SCHOOL DISTRICT Notes to the Required Supplementary Information For the Fiscal Year Ended June 30, 2015 NOTE 1 PURPOSE OF SCHEDULES Budgetary Comparison Schedules These schedules are required by GASB Statement No. 34 as required supplementary information (RSI) for the General Fund and for each major special revenue fund that has a legally adopted annual budget. The budgetary comparison schedules present both (a) the original and (b) the final appropriated budgets for the reporting period as well as (c) actual inflows, outflows, and balances, stated on the District s budgetary basis. A separate column to report the variance between the final budget and actual amounts is also presented, although not required. Schedule of Funding Progress This schedule is required by GASB Statement No. 45 for all sole and agent employers that provide other postemployment benefits (OPEB). The schedule presents, for the most recent actuarial valuation and the two preceding valuations, information about the funding progress of the plan, including, for each valuation, the actuarial valuation date, the actuarial value of assets, the actuarial accrued liability, the total unfunded actuarial liability (or funding excess), the actuarial value of assets as a percentage of the actuarial accrued liability (funded ratio), the annual covered payroll, and the ratio of the total unfunded actuarial liability (or funding excess) to annual covered payroll. Schedule of Proportionate Share of the Net Pension Liability This schedule is required by GASB Statement No. 68 and is required for all employers in a cost sharing pension plan. The schedule reports the following information: The proportion (percentage) of the collective net pension liability (similar to the note disclosure) The proportionate share (amount) of the collective net pension liability The employer's covered employee payroll The proportionate share (amount) of the collective net pension liability as a percentage of the employer's covered employee payroll The pension plan's fiduciary net position as a percentage of the total pension liability Schedule of Contributions This schedule is required by GASB Statement No. 68 and is required for all employers in a cost sharing pension plan. The schedule reports the following information: If an employer's contributions to the plan are actuarially determined or based on statutory or contractual requirements: the employer's actuarially determined contribution to the pension plan (or, if applicable, its statutorily or contractually required contribution), the employer's actual contributions, the difference between the actual and actuarially determined contributions (or statutorily or contractually required), and a ration of the actual contributions divided by coveredemployee payroll. 59

172 FONTANA UNIFIED SCHOOL DISTRICT Notes to the Required Supplementary Information For the Fiscal Year Ended June 30, 2015 NOTE 2 EXCESS OF EXPENDITURES OVER APPROPRIATIONS At June 30, 2015, the District incurred the following excess of expenditures over appropriations in individual major funds presented in the Budgetary Comparison Schedule: Excess Appropriations Category Expenditures General Fund: Classified salaries $ 325,870 Employee benefits 8,454,472 Transfers of indirect costs 113,661 Intergovernmental 45,700 Cafeteria Fund: Classified salaries 2,981 Employee benefits 5,688 Books and Supplies 18,331 Transfers of indirect costs 48,649 60

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174 Supplementary Information

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176 FONTANA UNIFIED SCHOOL DISTRICT Local Educational Agency Organization Structure June 30, 2015 The Fontana Unified School District was established in The District boundaries encompass an area of approximately 55 square miles. The District boundaries include the city of Fontana and portions of the cities of Rialto and Rancho Cucamonga, as well as unincorporated areas of the County of San Bernardino. There were no changes to the District s boundaries during the year. The District currently operates 29 elementary schools, seven intermediate schools, five high schools, two continuation high schools, and an adult education and child development program. GOVERNING BOARD Member Office Term Expires BarBara L. Chavez President 2016 Lorena Corona Vice President / Clerk 2016 Jesse Armendarez Member 2018 Mary Sandoval Member 2018 Matt Slowik, MVRP, MPA Member 2018 DISTRICT ADMINISTRATORS Leslie Boozer, Ed.D., J.D., Superintendent Randal Bassett, Associate Superintendent, Business Services Oscar Duen as, Associate Superintendent, Student Services David Creswell, Associate Superintendent, Human Resources Antonio J. Cediel, Ed.D., Associate Superintendent, Teaching & Learning 61

177 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Average Daily Attendance For the Fiscal Year Ended June 30, 2015 Second Period Annual Report Report Certificate No. Certificate No. (27F91899) (77EE2A2D) Regular ADA & Extended Year: Transitional Kindergarten through Third 11, , Fourth through Sixth 8, , Seventh through Eighth 5, , Ninth through Twelfth 12, , Total Regular ADA 38, , Special Education, Nonpublic, Nonsectarian Schools: Transitional Kindergarten through Third Fourth through Sixth Seventh through Eighth Ninth through Twelfth Total Special Education, Nonpublic, Nonsectarian Schools Total ADA 38, ,

178 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Instructional Time For the Fiscal Year Ended June 30, Minutes Number of Days Previously Actual Traditional Grade Level Required Reduced* Minutes Calendar Status Kindergarten 36,000 35,000 36, Complied Grade 1 50,400 49,000 53, Complied Grade 2 50,400 49,000 53, Complied Grade 3 50,400 49,000 53, Complied Grade 4 54,000 52,500 54, Complied Grade 5 54,000 52,500 54, Complied Grade 6 54,000 52,500 54, Complied Grade 7 54,000 52,500 57, Complied Grade 8 54,000 52,500 57, Complied Grade 9 64,800 63,000 65, Complied Grade 10 64,800 63,000 65, Complied Grade 11 64,800 63,000 65, Complied Grade 12 64,800 63,000 65, Complied * Amounts reduced as permitted by Education Code Section (a). See accompanying note to supplementary information. 63

179 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Financial Trends and Analysis For the Fiscal Year Ended June 30, 2015 (Budget) General Fund * Revenues and other financing sources $ 423,378,591 $ 374,049,524 $ 333,797,923 $ 308,252,107 Expenditures 396,986, ,160, ,890, ,535,174 Other uses and transfers out 206,521 11,705,204 1,397 Total outgo 396,986, ,367, ,595, ,536,571 Change in fund balance (deficit) 26,391,896 17,682,010 5,202,005 (6,284,464) Ending fund balance $ 102,153,951 $ 75,762,055 $ 58,080,045 $ 52,878,040 Available reserves 1 $ 88,143,919 $ 55,586,813 $ 33,765,708 $ 35,840,426 Available reserves as a percentage of total outgo 22.2% 15.6% 10.3% 11.4% Total long term debt $ 574,726,190 $ 587,649,308 $ 345,282,536 $ 346,862,677 Average daily attendance at P 2 37,492 38,106 38,642 38,975 The General Fund balance has increased overall over the past two years by $22,884,015. The fiscal year adopted budget projects an increase of $26,391,896. For a district of this size, the state recommends available reserves of at least 2% of total general fund expenditures, transfers out, and other uses (total outgo). The District has incurred an operating deficit in only one of the past three years, and does not anticipate incurring an operating deficit during the fiscal year. Long term debt has increased by $240,786,631 over the past two years. Average daily attendance has decreased by 869 over the past two years. A decrease of 614 ADA is anticipated during fiscal year Available reserves consist of all unassigned fund balances in the General Fund. 2 Revised Final Budget August, * The actual amounts reported in this schedule are for the General Fund only, and do not agree with the amounts reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances because the amounts on that schedule include the financial activity of the Special Reserve Fund for Other than Capital Outlay Projects, in accordance with the fund type definitions promulgated by GASB Statement No. 54. On behalf payments of $8,857,723 are not included in the actual revenues and expenditures. See accompanying note to supplementary information. 64

180 FONTANA UNIFIED SCHOOL DISTRICT Reconciliation of Annual Financial and Budget Report with Audited Financial Statements For the Fiscal Year Ended June 30, 2015 There were no differences between the Annual Financial and Budget Report and the Audited Financial Statements in any funds. See accompanying note to supplementary information. 65

181 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2015 Federal Pass Through Federal Grantor/Pass Through CFDA Entity Identifying Cluster Federal Grantor/Program or Cluster Title Number Number Expenditures Expenditures Federal Programs: U.S. Department of Agriculture: Passed through California Dept. of Education (CDE): Child Nutrition Cluster School Breakfast Program Especially Needy $ 3,170,391 National School Lunch Program ,768,700 USDA Donated Foods N/A 1,235,218 Total Child Nutrition Cluster $ 19,174,309 Total U.S. Department of Agriculture 19,174,309 U.S. Department of Education: Passed through California Dept. of Education (CDE): Adult Basic Education (ABE): Adult Education Cluster Adult Secondary Education ,973 Adult Basic Education & ESL A ,257 English Literacy & Civics Education A ,230 Total Adult Education Cluster 419,460 No Child Left Behind (NCLB): Title I, Part A Cluster Title I, Part A, Basic Grants Low Income and Neglected ,540,326 Title I, Part D, Local Delinquent Programs ,363 Total Title I, Part A Cluster 10,546,689 Title I, Part G, Advanced Placement (AP) Test Fee Reimbursement ,360 Title II, Part A, Improving Teacher Quality Local Grants ,525,638 Title III, Limited English Proficiency ,360,920 Carl Perkins Act Secondary ,246 Safe & Supportive Schools, Programmatic Intervention ,051 Individuals with Disabilities Education Act (IDEA): Special Education Cluster Local Assistance Entitlement ,377,615 Local Assistance, Part B, Sec 611, Private School ISPs ,640 Preschool Grants, Part B, Sec ,162 Preschool Local Entitlement, Part B, Sec A ,420 Mental Health Allocation Plan, Part B, Sec A ,852 Preschool Staff Development A ,307 Quality Assurance & Focused Monitoring A ,037 Total Special Education Cluster 7,227,033 Early Intervention Grants, Part C ,885 Workability II, Transition ,351 Total U.S. Department of Education 22,161,633 U.S. Department of Health & Human Services: Passed through California Dept. of Education: Child Care Development Fund Cluster Federal Child Care, Center Based ,662 Head Start Cluster Head Start ,278 Early Head Start ,600 Total Head Start Cluster 384,878 Medicaid Cluster Medi Cal Billing Option ,616 Total U.S. Department of Health & Human Services 1,712,156 Total Expenditures of Federal Awards $ 43,048,098 See accompanying note to supplementary information. 66

182 FONTANA UNIFIED SCHOOL DISTRICT Note to the Supplementary Information June 30, 2015 NOTE 1 PURPOSE OF SCHEDULES 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 participated in the Incentives for Longer Instructional Day and Longer Instructional Year. The District has not met its target funding. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through Districts must maintain their instructional minutes at the requirement, as reduced by Education Code section (a). 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. Reconciliation of Annual Financial and Budget Report with Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Unaudited Actual financial report to the audited financial statements. Schedule of Expenditures of Federal Awards The schedule of expenditures of Federal awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A 133, Audits of States, Local Governments, and Non Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of the financial statements. Subrecipients Of the Federal expenditures presented in the schedule, the District provided no Federal awards to subrecipients. 67

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184 Other Independent Auditors' Reports

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186 INDEPENDENT AUDITORS' 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 Board of Education Fontana Unified School District Fontana, 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 Fontana Unified School District as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise Fontana Unified School District's basic financial statements, and have issued our report thereon dated November 16, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Fontana 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 the Fontana Unified School District s internal control. Accordingly, we do not express an opinion on the effectiveness of the Fontana Unified School District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 68

187 Compliance and Other Matters As part of obtaining reasonable assurance about whether Fontana Unified School District s financial statements are free of 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 an instance of noncompliance or other matters that is required to be reported under Government Auditing Standards and which is described in the accompanying schedule of findings and questioned costs as Finding Fontana Unified School District s Response to Finding Fontana Unified School District s response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. Fontana 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 results of that testing, and not to provide an opinion on the effectiveness of the District's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Murrieta, California November 16,

188 INDEPENDENT AUDITORS REPORT ON STATE COMPLIANCE Board of Education Fontana Unified School District Fontana, California Report on State Compliance We have audited Fontana Unified School District's compliance with the types of compliance requirements described 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 Fontana Unified School District's state government programs as noted on the following page for the fiscal year ended June 30, Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its State programs. Auditors' Responsibility Our responsibility is to express an opinion on compliance for each of Fontana Unified School District's State programs based on our audit of the types of compliance requirements referred to below. 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 Guide for Annual Audits of K 12 Local Education Agencies and State Compliance Reporting. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to below occurred. An audit includes examining, on a test basis, evidence about Fontana 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 State program. However, our audit does not provide a legal determination of Fontana Unified School District s compliance. 70

189 In connection with the audit referred to on the prior page, we selected and tested transactions and records to determine the District's compliance with the State laws and regulations applicable to the following items: Procedures Description Performed Attendance Yes Teacher Certification and Misassignments Yes Kindergarten Continuance Yes Independent Study No (see below) Continuation Education Yes Instructional Time Yes Instructional Materials Yes Ratio of Administrative Employees to Teachers Yes Classroom Teacher Salaries Yes Early Retirement Incentive Not Applicable Gann Limit Calculation Yes School Accountability Report Card Yes Juvenile Court Schools Not Applicable Middle or Early College High Schools Not Applicable K 3 Grade Span Adjustment Yes Transportation Maintenance of Effort Yes Regional Occupation Centers or Programs Maintenance of Effort Not Applicable Adult Education Maintenance of Effort Yes California Clean Energy Jobs Act Yes After School Education and Safety Program Yes Proper Expenditure of Education Protection Account Funds Yes Common Core Implementation Funds Yes Unduplicated Local Control Funding Formula Pupil Counts Yes Local Control and Accountability Plan Yes Charter Schools: Attendance Not Applicable Mode of Instruction Not Applicable Nonclassroom Based Instruction/Independent Study Not Applicable Determination of Funding for Nonclassroom Based Instruction Not Applicable Annual Instructional Minutes Classroom Based Not Applicable Charter School Facility Grant Program Not Applicable We did not perform testing for independent study because the ADA was under the level that requires testing. Unmodified Opinion on Compliance with State Programs In our opinion, Fontana Unified School District complied, in all material respects, with the types of compliance requirements referred to above for the year ended June 30, Murrieta, California November 16,

190 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A 133 Board of Education Fontana Unified School District Fontana, California Report on Compliance for Each Major Federal Program We have audited Fontana Unified School District's compliance with the types of compliance requirements described in the OMB Circular A 133 Compliance Supplement that could have a direct and material effect on each of Fontana Unified School District's major federal programs for the year ended June 30, Fontana Unified School District s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors' Responsibility Our responsibility is to express an opinion on compliance for each of Fontana Unified School District's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A 133, Audits of States, Local Governments, and Non Profit Organizations. Those standards and OMB Circular A 133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Fontana 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 Fontana Unified School District s compliance. Opinion on Each Major Federal Program In our opinion, Fontana 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,

191 Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which is required to be reported in accordance with OMB Circular A 133 and which is described in the accompanying schedule of findings and questioned costs as Finding Our opinion on each major federal program is not modified with respect to these matters. Report on Internal Control Over Compliance Management of Fontana 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 Fontana Unified School District s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A 133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the 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 a 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, as defined above. Fontana Unified School District's response to the compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. Fontana Unified School District's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A 133. Accordingly, this report is not suitable for any other purpose. Murrieta, California November 16,

192 Findings and Questioned Costs

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194 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Audit Findings and Questioned Costs For the Fiscal Year Ended June 30, 2015 SECTION I SUMMARY OF AUDITORS' RESULTS Financial Statements Type of auditors' report issued Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(s) identified not considered to be material weaknesses? Noncompliance material to financial statements noted? Unmodified No None reported No Federal Awards Internal control over major programs: Material weakness(es) identified? Significant deficiency(s) identified not considered to be material weaknesses? Type of auditors' report issued on compliance for major programs: Any audit findings disclosed that are required to be reported in accordance with Circular A 133, Section.510(a) Identification of major programs: CFDA Numbers Name of Federal Program or Cluster , Child Nutrition Cluster , Special Education Cluster No None reported Unmodified Dollar threshold used to distinguish between Type A and Type B programs: $ 1,291,443 Auditee qualified as low risk auditee? Yes State Awards Yes Type of auditors' report issued on compliance for state programs: Unmodified 74

195 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Audit Findings and Questioned Costs For the Fiscal Year Ended June 30, 2015 SECTION II FINANCIAL STATEMENT FINDINGS This section identifies the significant deficiencies, material weaknesses, and instances of noncompliance related to the financial statements that are required to be reported in accordance with Government Auditing Standards. Pursuant to Assembly Bill (AB) 3627, all audit findings must be identified as one or more of the following categories: Five Digit Code AB 3627 Finding Types Attendance Inventory of Equipment Internal Control State Compliance Charter School Facilities Programs Federal Compliance Miscellaneous Classroom Teacher Salaries Local Control Accountability Plan Instructional Materials Teacher Misassignments School Accountability Report Card There were no financial statement findings in

196 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Audit Findings and Questioned Costs For the Fiscal Year Ended June 30, 2015 SECTION III FEDERAL AWARD FINDINGS AND QUESTIONED COSTS This section identifies the audit findings required to be reported by Circular A 133, Section.510(a) (e.g., significant deficiencies, material weaknesses, and instances of noncompliance, including questioned costs). Finding : National School Lunch Program Cash Reserves (50000) Program Identification: Child Nutrition Cluster Federal Agency: U.S. Department of Agriculture Pass through Entity: California Department of Education Program Names: School Breakfast Program (CFDA No ) National School Lunch Program (CFDA No ) Criteria: The school food authority (SFA) should limit its net cash resources to an amount that does not exceed three months average expenditures in accordance with 7 CFR Section (b). Condition: At June 30, 2015, the cash balance in the Cafeteria Fund was $12,562,695. Three months average expenditures are $5,618,755. The excess cash reserves are $6,943,941. Questioned Costs: None. Context: None. Effect: The District will need to continue identifying ways to spend down the excess reserves to bring them into compliance. Cause: The District had an excessive yearly fund balance in the food service account because of increasing revenues and transfers over expenditures. The District has created a multi year spending plan to get into compliance. Recommendation: We recommend the District continue following the spending plan submitted to the CDE. District Response: The California Department of Education approved the District's School Nutrition Program Spending plan on November 4, The District has been implementing the plan by offering expanded services and improved equipment. Some of the examples of these expenditures include increased positions, redesign of kitchens, and the addition of delivery vehicles dedicated to supporting the program. The District anticipates the excess to be eliminated in a timely yet prudent timeframe. 76

197 FONTANA UNIFIED SCHOOL DISTRICT Schedule of Audit Findings and Questioned Costs For the Fiscal Year Ended June 30, 2015 SECTION IV STATE AWARD FINDINGS AND QUESTIONED COSTS This section identifies the audit findings pertaining to noncompliance with state program rules and regulations. There were no state award findings or questioned costs in

198 FONTANA UNIFIED SCHOOL DISTRICT Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2015 Original Finding No. Finding Code Recommendation Current Status Finding : National School Lunch Program OPEB Cost Allocations Expenditures for other postemployment benefits (OPEB) relating to previously retired employees represent costs that were not funded during the employees' years of service and those that cannot be identified with any program objective currently. These costs represent an obligation for which the District is liable but from which current programs derive no direct benefit. Federal programs may absorb a share of OPEB costs relating to retirees only if the costs are allocated to all activities and only if the allocation base is as broad as possible We recommend the District allocate retiree OPEB costs across all activities broadly. Implemented. The District charged retirees who worked under the Food service program directly to the National School Lunch Program. Finding : National School Lunch Program Cash Reserves The school food authority (SFA) should limit its net cash resources to an amount that does not exceed three months average expenditures in accordance with 7 CFR Section (b) We recommend the District submit a spending plan to CDE and obtain approval in spending the excess of allowable funds. Partially Implemented. See Finding At June 30, 2014, the fund balance in the Cafeteria Fund was $15,619,004. Three months average expenditures are $5,078,340. The excess cash reserves are $10,540,664. Finding : National School Lunch Program Expenditures School Food Authorities participating in the Federal School Nutrition Program must observe both State and Federal limitations on the use of cafeteria funds. The District should ensure that all expenditures are in accordance with 7 CFR parts 210, 220, 3015, 3016, and 3019, and 2 CFR parts 225 and 230 (formerly Office of Management and Budgets Circulars A 87 and A 122 respectively) The District should place the proper procedures and policies in place to ensure that expenditures are made in accordance with State and Federal Guidelines. Implemented. 78

199 FONTANA UNIFIED SCHOOL DISTRICT Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2015 Original Finding No. Finding Code Recommendation Current Status Finding : National School Lunch Program Expenditures (continued) The District charged unallowable expenditures to cafeteria fund. Two exceptions were for custom kitchen staff apparel. As per the U.S. Department of Labor, the cost of maintenance of uniforms when required by the employer is allowable and considered to be a business expense and allowable, however, customizable apparel to promote the governmental unit is unallowable. Two exceptions were for promotional items for students and staff. As per 2 CFR, Part 225, Appendix B, Item 1, Advertising and Public Relations Costs, Section f(3) Costs of promotional items and memorabilia, including models, gifts, and souvenirs are not allowable. 79

200 To the Board of Education Fontana Unified School District Fontana, California In planning and performing our audit of the basic financial statements of Fontana Unified School District for the fiscal year ending June 30, 2015, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements and not to provide assurance on the internal control structure. However, during our audit we noted matters that are an opportunity for strengthening internal controls and operating efficiency. The following items represent conditions noted by our audit that we consider important enough to bring to your attention. This letter does not affect our report dated November 16, 2015, on the financial statements of Fontana Unified School District. DISTRICT OFFICE Observation: During our audit of the compensated absences liability, we reviewed the collective bargaining unit agreement for classified staff and identified that the maximum carryover of vacation for these employees is 96 hours. After reviewing the schedule of compensated absences, we noted 315 employees that have accrued vacation exceeding this carryover limit. The cost of this excess carryover is estimated to be approximately $0.4 million as of June 30, Recommendation: The District should begin monitoring the balances and enforcing the carryover limitations in accordance with the collective bargaining agreement. Observation: During our review of disbursements, we noted that some of the payments selected in our sample were not approved prior to incurring the expenditure. Additionally, we noted one disbursement which did not have sufficient supporting documentation. Recommendation: We recommend that all disbursements be approved prior to receiving goods or services to ensure their necessity by the appropriate level of management before the District is obligated to pay. Additionally, we recommend that all disbursements be supported by complete and sufficient documentation. ASSOCIATED STUDENT BODY (ASB) FUNDS Observation: In our testing of cash receipts at school sites, we found that some deposits tested lacked sufficient supporting documentation. Without supporting documentation, we could not verify whether all cash collected had been deposited intact and into the correct ASB account. Recommendation: Sound internal controls for handling cash discourage theft of ASB funds and protect those who handle the cash. It is important to tie all proceeds to the specific fundraiser from which they were generated and to ensure that all proceeds from an event are turned in and properly accounted for. We recommend that before any events are held, control procedures should be established that will allow for the reconciliation between money collected and fundraiser sales. 80

201 ASSOCIATED STUDENT BODY (ASB) FUNDS (continued) Observation: During our tests of cash disbursements, we noted one disbursement at Almeria Middle and one disbursement at Ruble Middle that was lacking any supporting documentation. Issuing payment for expenditures without proper supporting documentation such as invoices or receipts can create the opportunity for the misappropriation of student funds. Recommendation: We advise the District to follow up on the noted exceptions to ensure that the disbursements were for a legitimate transaction. In addition, we recommend that the sites require all approvals and appropriate supporting documentation prior to issuing disbursements to ensure that student funds are being properly spent. Observation: During our review of disbursements at Ruble Middle, we noted that some of the disbursements selected in our sample were not approved by a District representative, the ASB advisor, and a student representative prior to incurring the expense. Education Code Section 48933(b) requires all disbursements from ASB funds be authorized by a student representative, an advisor, and a district representative (usually a principal or vice principal) prior to disbursing the funds. As a best practice, approval by required parties should be obtained before the actual commitment to purchase the items in order to ensure the expense is a proper use of student body funds and falls within budgetary guidelines. Recommendation: We recommend that the site adopt a procedure for compliance with the Education Code in obtaining the required approvals. Observation: During our review of disbursements at Fontana High, Kaiser High, and A.B. Miller High, we noted that there were accounts named FUSD, District Fees, and District Charges, respectively, which serve as clearing accounts for the District and are not clubs which are operated by students. ASB accounts are not and should not be used as pass through or clearing accounts for District funds. Accepting the District funds into the ASB account is also considered commingling of funds. Recommendation: We recommend that the site forward all District funds to the District for receipt or open a separate clearing account for funds to be transferred to the District on a monthly basis. We will review the status of the current year comments during our next audit engagement. Murrieta, California November 16,

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203 APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE

204 APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE This CONTINUING DISCLOSURE CERTIFICATE (the Disclosure Certificate ) is executed and delivered by the FONTANA UNIFIED SCHOOL DISTRICT (the District ) in connection with the execution and delivery of $27,945,000 Fontana Unified School District Certificates of Participation (2016 Refinancing Project) (the Certificates ). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of June 1, 2016, by and among The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), the District and the Fontana Unified School District Public Financing Authority (the Trust Agreement ). Pursuant to Section of the Trust Agreement, the District covenants and agree as follows: Section 1. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate, unless otherwise defined in this Section 1, the following capitalized terms shall have the following meanings when used in this Disclosure Certificate: Annual Report shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. Beneficial Owner shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes. Dissemination Agent shall mean the Government Financial Strategies inc. or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. In the absence of such a designation, the District shall act as the Dissemination Agent. EMMA or Electronic Municipal Market Access means the centralized on-line repository for documents to be filed with the MSRB, such as official statements and disclosure information relating to municipal bonds, notes and other securities as issued by state and local governments. Listed Events shall mean any of the events listed in Section 5(a) or 5(b) 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. Participating Underwriter shall mean any original underwriter of the Certificates required to comply with the Rule in connection with offering of the Certificates. Rule shall mean Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. Section 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the owners and Beneficial Owners of the Certificates and in order to assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). Appendix C Page 1

205 Section 3. Provision of Annual Reports. (a) Delivery of Annual Report. The District shall, or shall cause the Dissemination Agent to, not later than eight months after the end of the District s fiscal year (which currently ends on June 30), commencing with the report for the Fiscal Year, which is due not later than February 28, 2017, file with EMMA, in a readable PDF or other electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package and may cross-reference other information as provided in Section 4 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(b), and subsequent Annual Report filings shall be made no later than nine months after the end of such new fiscal year end. (c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen (15) Business Days prior to the date specified in subsection (a) (or, if applicable, subsection (b)) of this Section 3 for providing the Annual Report to EMMA, 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 the Dissemination Agent and is unable to file an Annual Report by the date required in subsection (a) (or, if applicable, subsection (b)) of this Section 3, the District shall send a notice to EMMA substantially in the form attached hereto as Exhibit A. If the District is not the Dissemination Agent and is unable to provide an Annual Report to the Dissemination Agent by the date required in subsection (c) of this Section 3, the Dissemination Agent shall send a notice to EMMA in substantially the form attached hereto 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 filed with EMMA pursuant to Section 3 of this Disclosure Certificate, stating the date it was so provided and filed. Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by reference the following: (a) Financial Statements. Audited financial statements of the District for the preceding fiscal year, prepared in accordance 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), the Annual Report shall contain unaudited financial statements and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) Other Annual Information. To the extent not included in the audited final statements of the District, the Annual Report shall also include financial and operating data with respect to the District for preceding fiscal year, as follows, substantially similar to that provided in the corresponding tables and charts in the official statement for the Certificates: (i) (ii) (iii) (iv) State funding received by the District for the last completed fiscal year; Average daily attendance of the District for the last completed fiscal year; Outstanding District indebtedness; and Summary financial information on revenues, expenditures and fund balances for the District's general fund reflecting adopted budget for the current fiscal year. Appendix C Page 2

206 (c) Cross References. 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, which are available to the public on EMMA. The District shall clearly identify each such other document so included by reference. If the document included by reference is a final official statement, it must be available from EMMA. (d) Further Information. In addition to any of the information expressly required to be provided under paragraph (b) of this Section 4, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. Section 5. Reporting of Listed Events. (a) Reportable Events. The District shall, or shall cause the Dissemination Agent (if not the District) to, give notice of the occurrence of any of the following events with respect to the Certificates: (1) Principal and interest payment delinquencies. (2) Unscheduled draws on debt service reserves reflecting financial difficulties. (3) Unscheduled draws on credit enhancements reflecting financial difficulties. (4) Substitution of credit or liquidity providers, or their failure to perform. (5) Defeasances. (6) Rating changes. (7) Tender offers. (8) Bankruptcy, insolvency, receivership or similar event of the obligated person. (9) 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 security, or other material events affecting the tax status of the security. Note: For the purposes of the event identified in subparagraph (8), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) Material Reportable Events. The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) Non-payment related defaults. (2) Modifications to rights of security holders. (3) Bond calls. (4) The release, substitution, or sale of property securing repayment of the securities. (5) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than Appendix C Page 3

207 in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms. (6) Appointment of a successor or additional trustee, or the change of name of a trustee. (c) Time to Disclose. The District shall, or shall cause the Dissemination Agent (if not the District) to, file a notice of such occurrence with EMMA, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of any Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(5) and (b)(3) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected Certificates under the Trust Agreement. Section 6. Identifying Information for Filings with EMMA. All documents provided to EMMA under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB. Section 7. Termination of Reporting Obligation. The District s obligations under this Disclosure Certificate shall terminate upon the defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(c). 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. It is understood and agreed that any information that the Dissemination Agent may be instructed to file with EMMA shall be prepared and provided to it by the District. The Dissemination Agent has undertaken no responsibility with respect to the content of any reports, notices or disclosures provided to it under this Disclosure Certificate and has no liability to any person, including any Certificate owner, with respect to any such reports, notices or disclosures. The fact that the Dissemination Agent or any affiliate thereof may have any fiduciary or banking relationship with the District shall not be construed to mean that the Dissemination Agent has actual knowledge of any event or condition, except as may be provided by written notice from the District. (b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid reasonable 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 reasonable expenses, legal fees and expenses and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the District, owners or Beneficial Owners, 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 nationally recognized bond counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to the District. The Dissemination Agent shall not be liable hereunder except for its negligence or willful misconduct. 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 all of the following conditions are satisfied: (a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a) or (b), it may only be made in connection with a change in circumstances that arises from a change in legal Appendix C Page 4

208 requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Certificates, or the type of business conducted. (b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver, would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances. (c) Consent of Holders; Non-impairment Opinion. The amendment or waiver either (i) is approved by the Certificate owners in the same manner as provided in the Trust Agreement for amendments to the Trust Agreement with the consent of Certificate owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Certificate owners or Beneficial Owners. 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(c), 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. Section 11. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate, any Certificate owner or Beneficial Owner 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. The sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance. Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and no implied covenants or obligations shall be read into this Disclosure Certificate against the Dissemination Agent, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the reasonable costs and expenses (including attorneys fees and expenses) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The Dissemination Agent shall have the same rights, privileges and immunities hereunder as are afforded to the Trustee under the Trust Agreement. The obligations of the District under this Section 12 shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Appendix C Page 5

209 Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and the owners and Beneficial Owners from time to time of the Certificates, and shall create no rights in any other person or entity. Date: [Closing Date] FONTANA UNIFIED SCHOOL DISTRICT ACKNOWLEDGED: GOVERNMENT FINANCIAL STRATEGIES INC., as Dissemination Agent By Authorized Signatory By Authorized Signatory Appendix C Page 6

210 EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Obligor: Fontana Unified School District Name of Issue: Certificates of Participation (2016 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be made by the Fontana Unified School District, as the Rental for Certain Property Pursuant to a Lease Agreement with the Fontana Unified School District Public Financing Authority Date of Issuance: [Closing Date] NOTICE IS HEREBY GIVEN that the Obligor has not provided an Annual Report with respect to the above-named Issue as required by the Continuing Disclosure Certificate, dated [Closing Date], furnished by the Obligor in connection with the Issue. The Obligor anticipates that the Annual Report will be filed by. Date: GOVERNMENT FINANCIAL STRATEGIES INC., as Dissemination Agent By Authorized Officer Appendix C Page 7

211 APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL

212 APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL [Letterhead of Quint & Thimmig LLP] [Closing Date] Board of Education of the Fontana Unified School District 9680 Citrus Avenue Fontana, California OPINION: $27,945,000 Certificates of Participation (2016 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the Fontana Unified School District, as the Rental for Certain Property Pursuant to a Lease Agreement with the Fontana Unified School District Public Financing Authority Members of the Board of Education: We have acted as special counsel in connection with the delivery by the Fontana Unified School District (the District ), of its $27,945,000 Lease Agreement, dated as of June 1, 2016, by and between the Fontana Unified School District Public Financing Authority (the Authority ) and the District (the Lease Agreement ), pursuant to the California Education Code. The Authority has, pursuant to the Assignment Agreement, dated as of June 1, 2016 (the Assignment Agreement ), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), assigned certain of its rights under the Lease Agreement, including its right to receive a portion of the lease payments made by the District thereunder (the Lease Payments ), to the Trustee. Pursuant to the Trust Agreement, dated as of June 1, 2016, by and among the Trustee, the Authority and the District (the Trust Agreement ), the Trustee has executed and delivered certificates of participation (the Certificates ) evidencing direct, undivided fractional interests of the owners thereof in the Lease Payments. We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the District contained in the Lease Agreement and in the certified proceedings and certifications of public officials and others furnished to us without undertaking to verify the same by independent investigation. Based upon our examination, we are of the opinion, under existing law, as follows: 1. The District is duly created and validly existing as a unified school district organized and existing under the laws of the State of California with the power to enter into the Lease Agreement and the Trust Agreement and to perform the agreements on its part contained therein. 2. The Lease Agreement and the Trust Agreement have been duly authorized, executed and delivered by the District and are obligations of the District valid, binding and enforceable against the District in accordance with their respective terms. 3. The Assignment Agreement is valid, binding and enforceable in accordance with their terms. Appendix D Page 1

213 4. Subject to the terms and provisions of the Lease Agreement, the Lease Payments to be made by the District are payable from general funds of the District lawfully available therefor. By virtue of the Assignment Agreement, the owners of the Certificates are entitled to receive their fractional share of the Lease Payments in accordance with the terms and provisions of the Trust Agreement. 5. Subject to the District s compliance with certain covenants, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended, but is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. Failure to comply with certain of such covenants could cause interest with respect to the Certificates to be includable in gross income for federal income tax purposes retroactively to the date of delivery of the Certificates. 6. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California. Ownership of the Certificates may result in other tax consequences to certain taxpayers, and we express no opinion regarding any such collateral consequences arising with respect to the Certificates. The rights of the owners of the Certificates and the enforceability of the Lease Agreement, the Assignment Agreement and the Trust Agreement may be subject to the Bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights heretofore or hereafter enacted and also may be subject to the exercise of judicial discretion in accordance with general principles of equity. Our opinion represents our legal judgment based upon such review of the law and the facts that we deem relevant to render our opinion and is not a guarantee of a result. 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. Respectfully submitted, Appendix D Page 2

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215 APPENDIX E SPECIMEN MUNICIPAL BOND INSURANCE POLICY

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

217 Page 2 of 2 Policy No. -N United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. "Notice" means telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to AGM which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner" shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. AGM may appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer's Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to AGM pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to AGM and shall not be deemed received until received by both and (b) all payments required to be made by AGM under this Policy may be made directly by AGM or by the Insurer's Fiscal Agent on behalf of AGM. The Insurer's Fiscal Agent is the agent of AGM only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of AGM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, AGM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to AGM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy sets forth in full the undertaking of AGM, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In witness whereof, ASSURED GUARANTY MUNICIPAL CORP. has caused this Policy to be executed on its behalf by its Authorized Officer. ASSURED GUARANTY MUNICIPAL CORP. By Authorized Officer A subsidiary of Assured Guaranty Municipal Holdings Inc. 31 West 52nd Street, New York, N.Y (212) Form 500NY (5/90)

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219 APPENDIX F BOOK-ENTRY SYSTEM

220 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 Certificates payment of principal and interest, other payments with respect to the Certificates to Direct Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in such Certificates, 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. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for the Certificates, in the aggregate principal amount of such issue, 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 Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC s records. The ownership interest of each actual purchaser of each Certificate ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC s records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Certificates, such as prepayments, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee - 1 -

221 and request that copies of the notices be provided directly to them. Prepayment notices shall be sent to DTC. If less than all of the Certificates 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 Certificates unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Prepayment proceeds, distributions, and dividend payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Trustee or the District, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Direct and Indirect 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 Direct or Indirect Participant and not of DTC, the Trustee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment 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 Trustee, 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 Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, certificated securities representing the Certificates will be printed and delivered

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223 1228 N Street, Suite 13 Sacramento, CA (916)

224