$5,950,000 MIDDLETOWN UNIFIED SCHOOL DISTRICT (Lake County, California) 2016 General Obligation Refunding Bonds

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1 \NEW ISSUE BOOK-ENTRY ONLY BANK QUALIFIED RATINGS: S&P: AA (BAM-Insured) S&P: A+ (Underlying) See RATINGS herein. In the opinion of Quint & Thimmig LLP, Larkspur, California, Bond Counsel, subject to compliance by the District with certain covenants, under present law, interest on Bonds 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. It is also the opinion of Bond Counsel that the Bonds are qualified tax-exempt obligations under section 265(b)(3) of the Internal Revenue Code of In addition, in the opinion of Bond Counsel, interest on the Bonds is exempt from personal income taxation imposed by the State of California. See TAX MATTERS herein. $5,950,000 MIDDLETOWN UNIFIED SCHOOL DISTRICT (Lake County, California) 2016 General Obligation Refunding Bonds Dated: Date of Delivery Due: August 1, as shown below The $5,950,000 Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds (the Bonds ) are being issued by the Middletown Unified School District (the District ) pursuant to the provisions of Articles 9 and 11 of Chapter 3 (commencing with section 53550) of Division 2 of Title 5 of the California Government Code and a resolution of the Board of Education of the District. The Bonds are being issued to (a) refund, on an advance basis, (i) the current interest portion of the District s outstanding callable Middletown Unified School District (County of Lake, California) General Obligation Bonds, Election of 2006, Series 2007, maturing on and after August 1, 2018 (excluding the 2017 sinking fund installment of the 2007 Bonds maturing on August 1, 2018), and (ii) the current interest portion of the District s outstanding callable Middletown Unified School District (County of Lake, California) General Obligation Bonds, Election of 2006, Series 2009, and (b) pay for costs of issuance of the Bonds. The Bonds constitute general obligations of the District. The Board of Supervisors of Lake County is empowered and obligated to annually levy ad valorem taxes, without limitation as to rate or amount, for the payment of interest on, and principal of, the Bonds upon all property subject to taxation within the District (except certain personal property which is taxable at limited rates), all as more fully described herein under THE BONDS and SECURITY AND SOURCE OF PAYMENT FOR THE BONDS Property Taxation System. The Bonds are issuable in denominations of $5,000 and any integral multiple thereof. Interest on the Bonds is payable on February 1 and August 1 of each year, commencing February 1, See THE BONDS herein. The Bonds will be delivered in fully registered form only and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only. Principal of and interest on the Bonds will be paid by U.S. Bank National Association, as paying agent, to DTC or its nominee, which will in turn remit such payment to its participants for subsequent disbursement to the beneficial owners of the Bonds. See BOOK-ENTRY ONLY SYSTEM herein. The Bonds are subject to redemption prior to maturity as described herein. See THE BONDS Redemption herein. MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES AND YIELDS CUSIP Prefix: Maturity Principal Interest CUSIP Maturity Principal Interest CUSIP (August 1) Amount Rate Yield Suffix (August 1) Amount Rate Yield Suffix 2017 $115, % 0.820% DS $310, % 1.860% EB , DT , c EC , DU , c ED , DV , c EE , DW , EF , DX , EG , DY , EH , DZ , EJ , EA4 The scheduled payment of principal and interest with respect to the Bonds when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by BUILD AMERICA MUTUAL ASSURANCE COMPANY. See MUNICIPAL BOND INSURANCE herein. This cover page and the inside cover page contain information for quick reference only. They are not a summary of this issue. Potential purchasers must read the entire Official Statement to obtain information essential to making an informed investment decision. The following firm has served as municipal advisor to the District: The Bonds will be offered when, as and if issued, and received by the purchaser thereof, subject to the approval as to their validity by Quint & Thimmig LLP, Larkspur, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the District by Quint & Thimmig LLP, Larkspur, California, Disclosure Counsel, and for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California. It is anticipated that the Bonds will be available for delivery through the facilities of DTC on or about October 5, Copyright 2016, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, operated by Standard & Poor s. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers have been assigned by an independent company not affiliated with the District and are included solely for the convenience of the registered owners of the Bonds. Neither the District nor the Underwriter is responsible for the selection or uses of these CUSIP numbers and no representation is made as to their correctness on the Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. c Priced to the August 1, 2026, par call date.

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3 Use of Official Statement. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not a contract between any bond or note owner and the District or the Underwriter indicated in this Official Statement. No Offering Except by This Official Statement. No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriter. No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Information in Official Statement. Certain of the information set forth in this Official Statement has been furnished by sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness. Involvement of Underwriter. The Underwriter has provided the following statement for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Document Summaries. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents and qualified in their entirety to reference to such documents, and do not purport to be complete statements of any or all of such provisions. No Securities Laws Registration. The Bonds have not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exceptions therein for the issuance and sale of municipal securities. The Bonds have not been registered or qualified under the securities laws of any state. Estimates and Projections. When used in this Official Statement and in any continuing disclosure by the District, in any press release and in any oral statement made with the approval of an authorized officer of the District, the words or phrases will likely result, are expected to, will continue, is anticipated, estimate, project, forecast, expect, intend and similar expressions identify forward looking statements within the meaning of the Private Securities Litigation Reform Act of Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Bonds will, under any circumstances, give rise to any implication that there has been no change in the affairs of the District, the County, the other parties described in this Official Statement, or the condition of the property within the District since the date of this Official Statement. Website. The District maintains a website. Unless specifically indicated otherwise, the information presented on such website is not incorporated by reference as part of this Official Statement and should not be relied upon in making investment decisions with respect to the Bonds.

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5 TABLE OF CONTENTS INTRODUCTION... 1 The District... 1 Sources of Payment for the Bonds... 1 Municipal Bond Insurance Policy... 1 Authority for Issue; Purpose of Issue... 2 Description of the Bonds... 2 Tax Matters... 2 Offering and Delivery... 3 Continuing Disclosure... 3 Other Information... 3 THE BONDS... 4 Authority for Issuance... 4 Purposes of Issuance... 4 Security... 4 Description of the Bonds... 5 Payment... 6 Redemption... 6 Defeasance... 8 Registration, Transfer and Exchange of Bonds... 9 Estimated Sources and Uses of Funds Refunding Plan Debt Service Schedule PAYING AGENT BOOK-ENTRY ONLY SYSTEM THE DISTRICT General Information Board of Trustees and Administration MUNICIPAL BOND INSURANCE Municipal Bond Insurance Policy Build America Mutual Assurance Company SECURITY AND SOURCE OF PAYMENT FOR THE BONDS General Property Taxation System Method of Property Taxation Assessed Valuations Tax Rates Tax Levies and Delinquencies Teeter Plan Largest Property Owners Direct and Overlapping Debt INVESTMENT OF DISTRICT FUNDS LEGAL MATTERS TAX MATTERS MUNICIPAL ADVISOR VERIFICATION OF MATHEMATICAL COMPUTATIONS CONTINUING DISCLOSURE LEGALITY FOR INVESTMENT IN CALIFORNIA.. 32 ABSENCE OF MATERIAL LITIGATION RATINGS UNDERWRITING ADDITIONAL INFORMATION EXECUTION APPENDIX A: APPENDIX B: APPENDIX C: APPENDIX D: APPENDIX E: APPENDIX F: APPENDIX G: APPENDIX H: THE ECONOMY OF THE COUNTY DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2015 COUNTY INVESTMENT POLICY FORM OF OPINION OF BOND COUNSEL FORM OF CONTINUING DISCLOSURE CERTIFICATE BOOK-ENTRY SYSTEM SPECIMEN MUNICIPAL BOND INSURANCE POLICY

6 MIDDLETOWN UNIFIED SCHOOL DISTRICT Big Canyon Road Middletown, California (925) BOARD OF TRUSTEES Bill Wright, President Sandy Tucker, Clerk Jay Albertson, Board Member Lynette Carrillo, Board Member Kim Tangermann, Board Member DISTRICT ADMINISTRATION Catherine Stone, Superintendent Stella Bratsis, Director of Business Services PROFESSIONAL SERVICES BOND COUNSEL and DISCLOSURE COUNSEL Quint & Thimmig LLP Larkspur, California MUNICIPAL ADVISOR Caldwell Flores Winters, Inc. Emeryville, California PAYING AGENT U.S. Bank National Association San Francisco, California VERIFICATION AGENT Causey Demgen & Moore, P.C. Denver, Colorado *Information therein is not incorporated by reference into this Official Statement.

7 $5,950,000 MIDDLETOWN UNIFIED SCHOOL DISTRICT (Lake County, California) 2016 General Obligation Refunding Bonds INTRODUCTION This Official Statement, which includes the cover page, the inside cover page and appendices hereto, provides information in connection with the sale of the $5,950,000 Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds (the Bonds ). This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page, the inside cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement. The District The Middletown Unified School District (the District ) covers approximately 2,000 square miles in Lake County (the County ) and has a current K-12 enrollment of approximately 1,500 students. The District contains three elementary schools, one middle school, one high school, two charter schools and one continuation school. For more complete information concerning the District, including certain financial information, see THE DISTRICT and APPENDIX B DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION. The District s audited financial statements for the fiscal year ended June 30, 2015, are included as APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, Sources of Payment for the Bonds The Bonds constitute general obligations of the District payable solely from ad valorem property taxes levied and collected by the County. The Board of Supervisors of the County is empowered and is obligated to annually levy ad valorem taxes for the payment of the Bonds and the interest thereon upon all property in the District subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates). See SECURITY AND SOURCE OF PAYMENT FOR THE BONDS. Municipal Bond Insurance Policy The scheduled payment of principal and interest with respect to the Bonds when due will be guaranteed under a municipal bond insurance policy (the Municipal Bond Insurance Policy ) to be issued by Build America Mutual Assurance Company ( BAM ) simultaneously with the issuance of the Bonds. See MUNICIPAL BOND INSURANCE.

8 Authority for Issue; Purpose of Issue The Bonds are issued pursuant to the Constitution and laws of the State of California (the State ), including the provisions of Articles 9 and 11 of Chapter 3 (commencing with section 53550) of Division 2 of Title 5 of the California Government Code. The Bonds are authorized to be issued pursuant to a resolution (the Bond Resolution ), adopted by the Board of Education of the District (the District Board ) on September 7, The Bonds are being issued to (a) refund, on an advance basis, (i) the current interest portion of the District s outstanding callable Middletown Unified School District (County of Lake, California) General Obligation Bonds, Election of 2006, Series 2007 (the 2007 Bonds ), maturing on and after August 1, 2018 (excluding the 2017 sinking fund installment of the 2007 Bonds maturing on August 1, 2018), and (ii) the current interest portion of the District s outstanding callable Middletown Unified School District (County of Lake, California) General Obligation Bonds, Election of 2006, Series 2009 (the 2009 Bonds and, together with the 2007 Bonds, the Prior Bonds, ) and (b) pay for costs of issuance of the Bonds. See REFUNDING PLAN. Description of the Bonds The Bonds are being issued as current interest bonds. The Bonds will be dated as of their date of delivery, will be issued as fully registered bonds, without coupons, in the denominations of $5,000 or any integral multiple thereof. Interest on the Bonds accrues from their date of delivery and is payable semiannually on each February 1 and August 1 (each an Interest Payment Date ), commencing February 1, The Bonds will be issued in fully registered form only, registered in the name of Cede & Co. as nominee of The Depository Trust Company ( DTC ), and will be available to actual purchasers of the Bonds (the Beneficial Owners ) in the denominations set forth on the inside cover page hereof, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described herein. Beneficial Owners will not be entitled to receive physical delivery of the Bonds. See BOOK-ENTRY SYSTEM and APPENDIX G BOOK-ENTRY SYSTEM. In event that the book-entry system described below is no longer used with respect to the Bonds, the Bonds will be registered in accordance with the Bond Resolution as described herein. See THE BONDS Registration, Transfer and Exchange of Bonds. Individual purchases of interests in the Bonds will be available to purchasers of the Bonds in the denominations of $5,000 principal amount or any integral multiple thereof. Certain of the Bonds are subject to redemption prior to maturity. See THE BONDS Redemption. Tax Matters In the opinion of Quint & Thimmig LLP, Larkspur, California, Bond Counsel, subject to compliance by the District with certain covenants, under present law, interest on Bonds 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 and the Bonds are qualified tax-exempt obligations under section -2-

9 265(b)(3) of the Internal Revenue Code of In addition, in the opinion of Bond Counsel, interest on the Bonds is exempt from personal income taxation imposed by the State of California. See TAX MATTERS. Offering and Delivery The Bonds are offered when, as and if issued and received by the purchaser, subject to approval as to their legality by Bond Counsel. It is anticipated that the Bonds will be available for delivery through the facilities of DTC on or about October 5, Continuing Disclosure The District has covenanted for the benefit of the holders and Beneficial Owners of the Bonds 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 enumerated events is summarized below under the caption CONTINUING DISCLOSURE. Also, see APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of documents referred to herein and information concerning the Bonds are available for inspection at the office of the Superintendent, Middletown Unified School District, Big Canyon Road, Lafayette, CA 95461, telephone (925) The District may impose a charge for copying, mailing and handling. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The summaries and references to documents, statutes and constitutional provisions referred to herein do not purport to be comprehensive or definitive, and are qualified in their entireties by reference to each of such documents, statutes and constitutional provisions. The information set forth herein has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. -3-

10 THE BONDS Authority for Issuance The Bonds are issued pursuant to the Constitution and laws of the State, including the provisions of Articles 9 and 11 of Chapter 3 (commencing with section 53550) of Division 2 of Title 5 of the California Government Code. The Bonds are authorized pursuant to the Bond Resolution. Purposes of Issuance The Bonds are being issued to (a) refund, on an advance basis, the Prior Bonds, and (b) pay for costs of issuance of the Bonds. See Sources and Uses of Funds and Refunding Plan. The District has authorized and issued certain other general obligation bonds. See APPENDIX B DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION District Debt Structure. Security The Bonds constitute general obligations of the District payable solely from ad valorem property taxes levied and collected by the County. The Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxes for the payment of the Bonds, and the interest thereon, upon all property in the District subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates). Such taxes are required to be levied annually, in addition to all other taxes, during the period that the Bonds are outstanding in an amount sufficient to pay the principal of and interest on the Bonds when due. The levy may include an allowance for a reserve, established to avoid fluctuations in tax levies. Such taxes, when collected, will be deposited, with respect to the Bonds, into the Interest and Sinking Fund and which is required by the California Education Code to be applied for the payment of principal of and interest on the Bonds when due. Although the County is obligated to levy an ad valorem tax for the payment of the Bonds, and the County Treasurer-Tax Collector will maintain the Interest and Sinking Fund, the Bonds are a debt of the District, not the County. Moneys placed in the Interest and Sinking Fund of the District are irrevocably pledged for the payment of the principal of and interest on the Bonds when and as the same fall due. The property taxes and amounts held in the Interest and Sinking Fund of the District shall immediately be subject to this pledge, and the pledge shall constitute a lien and security interest which shall be effective, binding, and enforceable against the District, its successors, creditors and all others irrespective of whether those parties have notice of the pledge and without the need of any physical delivery, recordation, filing, or further act. The pledge is an agreement between the District and the Owners of the Bonds in addition to the statutory lien in accordance with section 53515(a) of the California Government Code, and the Bonds were issued to finance one or more projects and not to finance the general purposes of the District. In accordance with section 53515(a) of the California Government Code, the Bonds shall be secured by a statutory lien on all revenues received pursuant to the levy and collection of the tax for the 2000 Authorization. The lien shall automatically attach without further action or authorization by the District or the County. The lien shall be valid and binding from the time the Bonds are issued and delivered. The revenues received pursuant to the levy and collection of the tax shall be immediately subject to the lien, and the lien shall automatically attach to the revenues and be effective, binding, and enforceable against the District, its successors, transferees, and creditors, and all others asserting rights -4-

11 therein, irrespective of whether those parties have notice of the lien and without the need for any physical delivery, recordation, filing, or further act. The moneys in the Interest and Sinking Fund, to the extent necessary to pay the principal of and interest on the Bonds as the same become due and payable, will be transferred by County, through the County Treasurer-Tax Collector, to the Paying Agent (hereinafter defined) which, in turn, will pay such moneys to DTC to pay the principal of and interest on the Bonds. DTC will thereupon make payments of principal and interest on the Bonds to the DTC Participants who will thereupon make payments of principal and interest to the Beneficial Owners (as defined herein) of the Bonds. The amount of the annual ad valorem tax levied by the County to repay the Bonds will be determined by the relationship between the assessed valuation of taxable property in the District and the amount of debt service due on the Bonds in any year. Fluctuations in the annual debt service on the Bonds and the assessed value of taxable property in the District may cause the annual tax rate to fluctuate. Economic and other factors beyond the District s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemption for property owned by the State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, drought or toxic contamination, could cause a reduction in the assessed value of taxable property within the District and necessitate a corresponding increase in the annual tax rate. For further information regarding the District s assessed valuation, tax rates, overlapping debt, and other matters concerning taxation, see SECUTIY AND SOURCE OF PAYMENT FOR THE BONDS. Description of the Bonds The Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee for DTC. Beneficial Owners will not receive physical certificates representing their interest in the Bonds. See Book-Entry Only System and APPENDIX G BOOK- ENTRY SYSTEM. Interest on the Bonds accrues from their date of delivery and is payable semiannually on each Interest Payment Date. Interest on the Bonds accrues on the basis of a 360-day year comprised of twelve 30-day months. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless it is authenticated as of a day during the period from the 16th day of the month next preceding any Interest Payment Date to that Interest Payment Date, inclusive, in which event it will bear interest from such Interest Payment Date, or unless it is authenticated on or before January 15, 2017, in which event it will bear interest from its date of delivery. The Bonds are issuable in denominations of $5,000 principal amount or any integral multiple thereof. The Bonds mature on the dates, in the years and amounts set forth on the inside cover page hereof. The principal of and interest on the Bonds (including the final interest payment upon maturity or earlier redemption) is payable by check or draft of the Paying Agent mailed by first-class mail to the Owner at the Owner s address as it appears on the registration books maintained by the Paying Agent as of the close of business on the fifteenth day of the month next preceding such interest payment date (the Record Date ), or at such other address as the Owner may have filed with the Paying Agent for that purpose; provided however, that payment of interest may be by wire transfer in immediately available funds to an account in the United States of America to any Owner of Bonds in the aggregate principal -5-

12 amount of $1,000,000 or more who shall furnish written wire instructions to the Paying Agent at least five (5) days before the applicable Record Date. See also Book Entry Only System below. Payment See the maturity schedule on the inside cover page hereof and Debt Service Schedule. The redemption price, if any, on the Bonds will be payable upon maturity or redemption upon surrender of such Bonds at the principal office of the Paying Agent. The interest, principal and redemption price, if any, on the Bonds will be payable in lawful money of the United States of America. The Paying Agent is authorized to pay the Bonds when duly presented for payment at maturity, and to cancel all Bonds upon payment thereof. The Bonds are general obligations of the District and do not constitute obligations of the County. No part of any fund of the County is pledged or obligated to the payment of the Bonds. Redemption Optional Redemption. The Bonds maturing on and prior to August 1, 2026, are not callable for redemption prior to their stated maturity dates. The Bonds maturing on and after August 1, 2027, are callable for redemption prior to their stated maturity dates at the option of the District, in whole or in part on any date on or after August 1, 2026 (in inverse order of maturity and by lot with a maturity), from any source lawfully available therefor, at a redemption price equal to the principal amount of the Bonds called for redemption, together with accrued interest to the date fixed for redemption, without premium. Selection of Bonds for Redemption. If less than all of the Bonds are called for redemption, the particular Bonds or portions thereof to be redeemed shall be called in such order as shall be directed by the District and, in lieu of such direction, in inverse order of their maturity. Within a maturity, the Paying Agent shall select the Bonds for redemption by lot; provided, however, that the portion of any Bonds to be redeemed shall be in the principal amount of $5,000 or some integral multiple thereof and that, in selecting Bonds for redemption, the Paying Agent shall treat each Bonds as representing that number of Bonds which is obtained by dividing the principal amount of such Bonds by five thousand dollars. Notice of Redemption. The Paying Agent is required to mail (by first class mail) notice of any redemption to: (i) the respective Owners of any Bonds designated for redemption, at least thirty (30) but not more than sixty (60) days prior to the redemption date, at their respective addresses appearing on the Bond Register, and (ii) the Securities Depositories and to one or more Information Services, at least thirty (30) but not more than sixty (60) days prior to the redemption; provided, however, that neither failure to receive any such notice so mailed nor any defect therein shall affect the validity of the proceedings for the redemption of such Bonds or the cessation of the accrual of interest thereon. Such notice will state the date of the notice, the redemption date, the redemption place and the redemption price and shall designate the CUSIP numbers, the Bond numbers and the maturity or maturities (in the event of redemption of all of the Bonds of such maturity or maturities in whole) of the Bonds to be redeemed, and will require that such Bonds be then surrendered for redemption at the redemption price, giving notice also that further interest on such Bonds will not accrue from and after the redemption date. Notwithstanding the foregoing, in the case of any optional redemption of the Bonds, the notice of redemption will state that the redemption is conditioned upon receipt by the Paying Agent of sufficient moneys to redeem the Bonds on the scheduled redemption date, and that the optional redemption shall not occur if, by no later than the scheduled redemption date, sufficient moneys to redeem the Bonds have -6-

13 not been deposited with the Paying Agent. In the event that the Paying Agent does not receive sufficient funds by the scheduled optional redemption date to so redeem the Bonds to be optionally redeemed, the Paying Agent will send written notice to the Owners, to the Securities Depositories and to one or more of the Information Services to the effect that the redemption did not occur as anticipated, and the Bonds for which notice of optional redemption was given shall remain Outstanding for all purposes. Conditional Notice of Redemption. Any notice of optional redemption of the Bonds may be conditional and if any condition stated in the notice of redemption shall not have been satisfied on or prior to the redemption date, (i) said notice shall be of no force and effect, (ii) the District shall not be required to redeem such Bonds; (iii) the redemption shall be cancelled and (iv) the Paying Agent shall within a reasonable time thereafter give notice to the persons and in the manner in which the conditional notice of redemption was given, that such condition or conditions were not met and that the redemption was cancelled. The actual receipt by the owner of any Bonds of notice of such cancellation shall not be a condition precedent to cancellation, and failure to receive such notice or any defect in such notice shall not affect the validity of the cancellation. Rescission of Notice of Redemption. The District may rescind any optional redemption and notice thereof for any reason on any date on or prior to the date fixed for redemption by causing written notice of the rescission to be given to the owners of the Bonds so called for redemption. Any optional redemption and notice thereof will be rescinded if for any reason on the date fixed for redemption moneys are not available in the Interest and Sinking Fund or otherwise held in trust for such purpose in an amount sufficient to pay in full on said date the principal of, interest, and any premium due on the Bonds called for redemption. Notice of rescission of redemption will be given in the same manner in which the notice of redemption was originally given. The actual receipt by the owner of any Bonds of notice of such rescission will not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission. Partial Redemption of Bonds. In the event only a portion of any Bond is called for redemption, then upon surrender of such Bond the District will execute and the Paying Agent will authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond or Bonds of the same maturity date, of authorized denominations in aggregate principal amount equal to the unredeemed portion of the Bond to be redeemed. Bonds need not be presented for mandatory sinking fund redemptions. Effect of Redemption. Notice having been given as described above, and the moneys for the redemption (including the interest to the applicable date of redemption) having been set aside for such purpose, the Bonds to be redeemed will become due and payable on such date of redemption. If on such redemption date, money for the redemption of all the Bonds to be redeemed, together with interest to such redemption date, will be held by the Paying Agent so as to be available therefor on such redemption date, and if notice of redemption thereof will have been given as aforesaid, then from and after such redemption date, interest with respect to the Bonds to be redeemed will cease to accrue and become payable. All money held by or on behalf of the Paying Agent for the redemption of Bonds will be held in trust for the account of the registered owners of the Bonds so to be redeemed. Bonds (or portions thereof), which have been duly called for redemption prior to maturity, or with respect to which irrevocable instructions to call for redemption prior to maturity at the earliest redemption date have been given to the Paying Agent, and sufficient moneys are held by the Paying Agent irrevocably in trust for the payment of the redemption price of such Bonds or portions thereof, then such Bonds will no longer be deemed outstanding and shall be surrendered to the Paying Agent for cancellation. -7-

14 Defeasance Discharge of Resolution. Bonds may be paid by the District in any of the following ways, provided that the District also pays or causes to be paid any other sums payable hereunder by the District: (i) by paying or causing to be paid the principal or redemption price of and interest on Bonds Outstanding, as and when the same become due and payable; (ii) by depositing, in trust, at or before maturity, money or securities in the necessary amount (as provided in the Bond Resolution) to pay or redeem Bonds Outstanding; or (iii) by delivering to the Paying Agent, for cancellation by it, Bonds Outstanding. then and in that case, at the election of the District (evidenced by a certificate of a District Representative, filed with the Paying Agent, signifying the intention of the District to discharge all such indebtedness and the Bond Resolution), and notwithstanding that any Bonds shall not have been surrendered for payment, the Bond Resolution and all covenants, agreements and other obligations of the District under the Bond Resolution shall cease, terminate, become void and be completely discharged and satisfied, except only as provided in the Bond Resolution. In such event, upon request of the District, the Paying Agent shall cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the District and shall execute and deliver to the District all such instruments as may be necessary to evidence such discharge and satisfaction, and the Paying Agent shall pay over, transfer, assign or deliver to the District all moneys or securities or other property held by it pursuant to the Bond Resolution which are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption. Discharge of Liability on Bonds. Upon the deposit, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Bond Resolution to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Bond Resolution or provision satisfactory to the Paying Agent shall have been made for the giving of such notice, then all liability of the District in respect of such Bond shall cease and be completely discharged, except only that thereafter the Owner thereof shall be entitled only to payment of the principal of and interest on such Bond by the District, and the District shall remain liable for such payment, but only out of such money or securities deposited in trust with an escrow holder as aforesaid for such payment, provided further, however, that the provisions of the Bond Resolution shall apply in all events. The District may at any time surrender to the Paying Agent for cancellation by it any Bonds previously issued and delivered, which the District may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Deposit of Money or Securities with Paying Agent. Whenever in the Bond Resolution it is provided or permitted that there be deposited with or held in trust with an escrow holder money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Paying Agent in the funds and accounts established pursuant to the Bond Resolution and shall be: -8-

15 (i) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Bond Resolution or provision satisfactory to the Paying Agent will have been made for the giving of such notice, the amount to be deposited or held will be the principal amount or redemption price of such Bonds and all unpaid interest thereon to the redemption date; or (ii) Federal Securities (not callable by the issuer thereof prior to maturity) the principal of and interest on which when due, in the opinion of a certified public accountant delivered to the District, will provide money sufficient to pay the principal or redemption price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or redemption price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption will have been given provided in the Bond Resolution or provision satisfactory to the Paying Agent shall have been made for the giving of such notice; provided, in each case, that the Paying Agent shall have been irrevocably instructed (by the terms of the Bond Resolution or by request of the District) to apply such money to the payment of such principal or redemption price and interest with respect to such Bonds. Payment of Bonds After Discharge of Resolution. Notwithstanding any provisions of the Bond Resolution, any moneys held by an escrow holder in trust for the payment of the principal or redemption price of, or interest on, any Bonds and remaining unclaimed for one year after the principal of all of the Bonds has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in the Bond Resolution), if such moneys were so held at such date, or one year after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall, upon request of the District, be repaid to the District free from the trusts created by the Bond Resolution, and all liability of the escrow holder with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the District as aforesaid, the Paying Agent may (at the cost of the District) first mail to the Owners of all Bonds which have not been paid at the addresses shown on the registration books maintained by the Paying Agent a notice in such form as may be deemed appropriate by the Paying Agent, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the District of the moneys held for the payment thereof. Registration, Transfer and Exchange of Bonds So long as any of the Bonds remain outstanding, the District will cause the Paying Agent to maintain and keep at its principal office all books and records necessary for the registration, exchange and transfer of the Bonds as provided in the Bond Resolution (the Bond Register ). Subject to the provisions of the Resolution, the person in whose name a Bond is registered on the Bond Register will be regarded as the absolute owner of that Bond for all purposes of the Bond Resolution. Payment of or on account of the principal of any Bond will be made only to or upon the order of that person; neither the District, nor the Paying Agent will be affected by any notice to the contrary, but the registration may be changed as provided in the Bond Resolution. All such payments will be valid and effectual to satisfy and discharge the District s liability upon the Bonds, including interest, to the extent of the amount or amounts so paid. In the event that the book-entry system as described herein is no longer used with respect to the Bonds, the following provisions will govern the registration, transfer, and exchange of the Bonds. -9-

16 Any Bond may be exchanged for Bonds of like tenor, maturity, and outstanding principal amount or maturity value (the Transfer Amount ) upon presentation and surrender at the principal office of the Paying Agent, together with a request for exchange signed by the owner or by a person legally empowered to do so in a form satisfactory to the Paying Agent. A Bond may be transferred on the Bond Register only upon presentation and surrender of the Bond at the principal office of the Paying Agent together with an assignment executed by the owner or by a person legally empowered to do so in a form satisfactory to the Paying Agent. Upon exchange or transfer, the Paying Agent will complete, authenticate and deliver a new Bond or Bonds of like tenor and of any authorized denomination or denominations requested by the owner equal to the Transfer Amount of the Bond surrendered and bearing or accruing interest at the same rate and maturing on the same date. In all cases of exchanged or transferred Bonds, the District will sign and the Paying Agent will authenticate and deliver Bonds in accordance with the provisions of the Resolutions. All fees and costs of transfer will be paid by the requesting party. Those charges may be required to be paid before the procedure is begun for the exchange or transfer. All Bonds issued upon any exchange or transfer will be valid obligations of the District, evidencing the same debt, and entitled to the same security and benefit under the Resolutions as the Bonds surrendered upon that exchange or transfer. Any Bond surrendered to the Paying Agent for payment, retirement, exchange, replacement or transfer will be canceled by the Paying Agent. The District may at any time deliver to the Paying Agent for cancellation any previously authenticated and delivered Bonds that the District may have acquired in any manner whatsoever, and those Bonds will be promptly canceled by the Paying Agent. Written reports of the surrender and cancellation of Bonds will be made to the District by the Paying Agent. The canceled Bonds will be retained for a period of time, then returned to the District or destroyed by the Paying Agent as directed by the District. Neither the District nor the Paying Agent will be required (a) to issue or transfer any Bonds during a period beginning with the opening of business on the 16th business day next preceding either any interest payment date or any date of selection of Bonds to be redeemed and ending with the close of business on the interest payment date or any day on which the applicable notice of redemption is given or (b) to transfer any Bonds which have been selected or called for redemption in whole or in part. -10-

17 Estimated Sources and Uses of Funds The estimated sources and uses of funds in connection with the Bonds are as follows: Sources of Funds: Principal Amount of Bonds $5,950, Plus: Net Original Issue Premium 262, Total Sources of Funds $6,212, Uses of Funds: Deposit to Escrow Fund (1) $6,007, Costs of Issuance (2) 204, Total Uses of Funds $6,212, (1) The moneys deposited in the Escrow Fund will be applied to the defeasance and refunding of the Prior Bonds. See Refunding Plan. (2) Includes Underwriter s discount, Bond Counsel fees, Disclosure Counsel fees, municipal advisory fees, printing costs, rating agency fees and other miscellaneous expenses. Refunding Plan A portion of the proceeds of the Bonds will be used to purchase direct obligations of the United States of America (the Escrow Securities ), to be held in trust in a separate fund for the Prior Bonds (the Escrow Fund ), established under an escrow agreement (the Escrow Agreement ), by and between the District and U.S. Bank National Association, as escrow agent (the Escrow Bank ). See Sources and Uses of Funds. The maturing Escrow Securities, the interest income thereon and the uninvested cash in the Escrow Fund will be applied to (a) pay interest on the 2007 Bonds to and including August 1, 2017, and to redeem all 2007 Bonds in full on August 1, 2017, at a redemption price equal to 100% of the par amount thereof, and (b) pay interest on the 2009 Bonds to and including August 1, 2018, and to redeem all 2009 Bonds in full on August 1, 2018, at a redemption price equal to 100% of the par amount thereof. The sufficiency of the moneys, investment earnings and maturing Escrow Securities for such purposes will be verified by Casey Demgen & Moore, P.C. (the Verification Agent ). See VERIFICATION OF MATHEMATICAL COMPUTATIONS. Assuming the accuracy of the Verification Agent s computations, as a result of the deposit and application of funds as provided in the Escrow Agreement, the obligations of the District with respect to the Prior Bonds will be defeased and discharged. The maturing Escrow Securities, the interest income thereon and the uninvested cash in the Escrow Fund will be held in trust solely for the Prior Bonds and will not be available to pay principal of, or premium or interest on, the Bonds or any bonds other than the Prior Bonds. -11-

18 The Refunded 2007 Bonds are shown in the following table: Maturity Amount Interest Date Refunded Rate Call Date Call Price CUSIP 8/1/18 $150, % 8/1/ AL4 8/1/20 315, /1/ AN0 8/1/22 335, /1/ AQ3 8/1/27 970, /1/ AV2 8/1/31 920, /1/ AZ3 The Refunded 2009 Bonds are shown in the following table: Maturity Amount Interest Date Refunded Rate Call Date Call Price CUSIP 8/1/25 $ 260, % 8/1/ CP3 8/1/29 665, /1/ CT5 8/1/33 2,050, /1/ CX6 Copyright 2015, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, operated by Standard & Poor s. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers have been assigned by an independent company not affiliated with the District and are included solely for the convenience of the registered owners of the Bonds. -12-

19 Debt Service Schedule The following table shows the semi-annual debt service schedule with respect to the Bonds (assuming no optional redemptions). Interest Payment Date Principal Interest (1) Total 02/01/17 $ 53, $ 53, /01/17 $ 115,000 83, , /01/18 82, , /01/18 195,000 82, , /01/19 80, , /01/19 200,000 80, , /01/20 78, , /01/20 200,000 78, , /01/21 76, , /01/21 200,000 76, , /01/22 75, , /01/22 210,000 75, , /01/23 73, , /01/23 215,000 73, , /01/24 71, , /01/24 425,000 71, , /01/25 66, , /01/25 245,000 66, , /01/26 62, , /01/26 310,000 62, , /01/27 55, , /01/27 325,000 55, , /01/28 49, , /01/28 340,000 49, , /01/29 42, , /01/29 575,000 42, , /01/30 31, , /01/30 620,000 31, , /01/31 23, , /01/31 655,000 23, , /01/32 15, , /01/32 540,000 15, , /01/33 7, , /01/33 580,000 7, , TOTAL $5,950,000 $1,920, $7,870, (1) Interest on the Bonds is payable semiannually on each February 1 and August 1, commencing February 1, PAYING AGENT U.S. Bank National Association, San Francisco, California, will act as the paying agent for the Bonds (the Paying Agent ). As long as DTC is the registered owner of the Bonds and DTC s book-entry method is used for the Bonds, the Paying Agent will send any notice of prepayment or other notices to -13-

20 owners only to DTC. Any failure of DTC to advise any DTC Participant, or of any DTC Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings relating to the prepayment of the Bonds called for prepayment or of any other action premised on such notice. The Paying Agent, the District, the County and the Underwriter have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership, of interests for the Bonds. BOOK-ENTRY ONLY SYSTEM The Depository Trust Company, New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. See APPENDIX G BOOK-ENTRY SYSTEM. General Information THE DISTRICT The District covers approximately 2,000 square miles in the County and has a current K-12 enrollment of approximately 1,500 students. The District contains three elementary schools, one middle school, one high school, two charter schools and one continuation school. Board of Trustees and Administration The District is governed by a five-member District Board, each member of which is elected to a four-year term. Elections for positions to the District Board are held every two years, alternating between two and three available positions. District Board Member Office Current Term Expires (December) Bill Wright President 2016 Jay Albertson Clerk 2018 Lynette Carrillo Board Member 2018 Sandy Tucker Board Member 2016 Kim Tangermann Board Member 2018 The administrative staff of the District includes Superintendent Catherine Stone, and Stella Bratsis, Director of Business Services. -14-

21 Municipal Bond Insurance Policy MUNICIPAL BOND INSURANCE Concurrently with the issuance of the Bonds, BAM will issue the Municipal Bond Insurance Policy for the Bonds. The Municipal Bond Insurance Policy guarantees the scheduled payment of principal of and interest on the Bonds when due as set forth in the form of the Municipal Bond Insurance Policy included as APPENDIX H SPECIMEN MUNICIPAL BOND INSURANCE POLICY. The Municipal Bond Insurance Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Build America Mutual Assurance Company BAM is a New York domiciled mutual insurance corporation. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM. The address of the principal executive offices of BAM is: 200 Liberty Street, 27th Floor, New York, New York 10281, its telephone number is: , and its website is located at: BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law. BAM s financial strength is rated AA/Stable by S&P Global Ratings, a business unit of Standard & Poor's Financial Services LLC ( S&P ). An explanation of the significance of the rating and current reports may be obtained from S&P at The rating of BAM should be evaluated independently. The rating reflects the S&P s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Bonds, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Bonds. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Bonds 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 Municipal Bond Insurance Policy), and BAM does not guarantee the market price or liquidity of the Bonds, nor does it guarantee that the rating on the Bonds will not be revised or withdrawn. Capitalization of BAM BAM¹s total admitted assets, total liabilities, and total capital and surplus, as of June 30, 2016 and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York State Department of Financial Services were $485.9 million, $53.4 million and $432.5 million, respectively. -15-

22 BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions. BAM s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM s website at is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published. BAM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, BAM 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 BAM, supplied by BAM and presented under the heading BOND INSURANCE. Additional Information Available from BAM Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM's website at buildamerica.com/creditinsights/. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.) Credit Profiles. Prior to the pricing of bonds that BAM has been selected to insure, BAM may prepare a pre-sale Credit Profile for those bonds. These pre-sale Credit Profiles provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to closing, for any offering that includes bonds insured by BAM, any pre-sale Credit Profile will be updated and superseded by a final Credit Profile to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Credit Profiles are easily accessible on BAM's website at buildamerica.com/obligor/. BAM will produce a Credit Profile for all bonds insured by BAM, whether or not a pre-sale Credit Profile has been prepared for such bonds. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.) Disclaimers. The Credit Profiles and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Credit Profiles and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Credit Profiles and Credit Insight videos are prepared by BAM; they have not been reviewed or approved by the issuer of or the underwriter for the Bonds, and the issuer and underwriter assume no responsibility for their content. -16-

23 BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Bonds. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Bonds, whether at the initial offering or otherwise. SECURITY AND SOURCE OF PAYMENT FOR THE BONDS The information in this section describes ad valorem property taxation, assessed valuation, and other measures of the tax base of the District. The Bonds are payable solely from ad valorem taxes levied and collected by the County on taxable property in the District. The District s General Fund is not a source for the repayment of the Bonds. General In order to provide sufficient funds for repayment of principal and interest when due on the Bonds, the Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates). Such taxes are in addition to other taxes levied upon property within the District, including the countywide tax of 1% of taxable value. When collected, the tax revenues will be deposited by the County in the District s Interest and Sinking Fund, which is required to be maintained by the County and to be used solely for the payment of bonds of the District. Property Taxation System The collection of property taxes is significant to the District and the Owners of the Bonds in two respects. First, the County Board of Supervisors will levy and collect ad valorem taxes on all taxable parcels within the District, which are pledged specifically to the repayment of the Bonds. Second, the general ad valorem property tax levy levied in accordance with Article XIIIA of the California Constitution and its implementing legislation is taken into account in connection with the State s Local Control Funding Formula ( LCFF ) which determines the amount of funding received by the District from the State to operate the District s educational programs. The LCFF replaces revenue limit and most categorical program funding previously used to determine the amount of funding received by the District from the State with the LCFF which consists primarily of base, supplemental and concentration funding formulas that focus resources based on a school district s student demographic. See APPENDIX B-- DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION Allocation of State Funding to School Districts; Restructuring of the K-12 Funding System and State Budget Provisions Specific to K thru 12 Education below. As described below, the general ad valorem property tax levy and the additional ad valorem property tax levy pledged to repay the Bonds will be collected on the annual tax bills distributed by the County to the owners of parcels within the boundaries of the District. The District received approximately 26% of its total general fund operating revenues from local property taxes in fiscal year , excluding parcel tax revenues. Local property taxation is the responsibility of various County officers. For each school district located in a county, the county assessor computes the value of locally assessed taxable property. Based on the 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 -17-

24 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 according to the approved tax rolls. In addition, the 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 the county in which the property is located. The State Board of Equalization also assesses certain special classes of property, as described later in this section. Method of Property Taxation Under Proposition 13, an amendment to the California Constitution adopted in 1978 that added Article XIIIA of the California Constitution, 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 2% 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 that of similar properties more recently sold, and may be lower than its own market value. Likewise, changes in ownership of property and reassessment of such property to market value commonly will lead to increases in aggregate assessed value even when the rate of inflation or consumer price index would not permit the full 2% increase on any property that has not changed ownership. See APPENDIX B-DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION. Taxes are levied by the County for each fiscal year on taxable real and personal property which is situated in the County as of the preceding January 1. Real property which changes ownership or is newly constructed is revalued at the time the change in ownership occurs or the new construction is completed. The current year property tax rate will be applied to the reassessment, and the taxes will then be adjusted by a proration factor to reflect the portion of the remaining tax year for which taxes are due. Local agencies and schools will share the growth of base sources from the tax rate area. Each year s growth allocation becomes part of each local agency s allocation in the following year. The availability of revenue from growth in the tax bases in such tax rate areas may be affected by the existence of redevelopment agencies (including their successor agencies) which, under certain circumstances, may be entitled to sources resulting from the increase in certain property values. State law exempts $7,000 of the assessed valuation of an owner-occupied principal residence. This exemption does not result in any loss of revenue to local agencies since an amount equivalent to the taxes that would have been payable on such exempt values is supplemented by the State. For assessment and tax collection purposes, property is classified either as secured or unsecured, and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing 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. Secured property -18-

25 assessed by the State Board of Equalization is commonly identified for taxation purposes as utility property. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year, and if unpaid become delinquent on December 10 and April 10, respectively. A penalty of 10% attaches immediately to any delinquent payment. Property on the secured roll, with respect to which taxes are delinquent, becomes tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of delinquent taxes and the delinquency penalty, plus costs and redemption penalty of one and one-half percent per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to sale by the County Treasurer. Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A 10% penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5 p.m. on October 31, an additional penalty of one and one-half percent per month attaches to such taxes on the first day of each month until paid. A county has four ways of collecting delinquent unsecured personal property taxes: (1) bringing a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Clerk and County Recorder s office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements, or possessory interests belonging or assessed to the delinquent taxpayer. -19-

26 Assessed Valuations The assessed valuation of property in the District is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full value of the property, as defined in Article XIIIA of the California Constitution. Certain classes of property, such as churches, colleges, not-for-profit hospitals and charitable institutions, are exempt from property taxation and do not appear on the tax rolls. No reimbursement is made by the State for such exemptions. Both the general ad valorem property tax levy and the additional ad valorem levy for the Bonds are based upon the assessed valuation of the parcels of taxable property in the District. Property taxes allocated to the District are collected by the County at the same time and on the same tax rolls as are county, city and special district taxes. The assessed valuation of each parcel of property is the same for both District and county taxing purposes. The valuation of secured property by the County Assessor is established as of January 1, and is subsequently equalized in September of each year. The greater the assessed value of taxable property in the District, the lower the tax rate necessary to generate taxes sufficient to pay scheduled debt service on the Bonds. The table below shows the assessed valuation of taxable property in the District for the five most recent fiscal years. HISTORIC ASSESSED VALUATIONS Fiscal Years to Fiscal Year Local Secured Utility Unsecured Total Valuation $1,495,485,864 $1,062,873 $28,106,472 $1,524,655, $1,464,661,092 $1,062,873 $28,433,129 $1,494,157, $1,463,584,233 $1,062,873 $28,636,362 $1,493,283, $1,467,856,979 $1,062,873 $28,933,660 $1,497,853, (1) $1,318,490,272 $1,062,873 $29,307,987 $1,348,861,132 Source: California Municipal Statistics, Inc. (1) The approximate 9.9% decline in assessed valuation in is attributed by the District to losses incurred in connection with the 2015 Valley Fire. See 2015 Valley Fire below. As indicated above, assessments may be adjusted during the course of the year when real property changes ownership or new construction is completed. Assessments may also be appealed by taxpayers seeking a reduction as a result of economic and other factors beyond the District s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc. When necessitated by changes in assessed value in the course of a year, taxes are prorated for each portion of the tax year. Appeals of Assessed Valuation; Blanket Reductions of Assessed Values. There are two basic types of property tax assessment appeals provided for under State law. The first type of appeal, commonly referred to as a base year assessment appeal, involves a dispute on the valuation assigned by the assessor immediately subsequent to an instance of a change in ownership or completion of new construction. If the -20-

27 base year value assigned by the assessor is reduced, the valuation of the property cannot increase in subsequent years more than 2% annually unless and until another change in ownership and/or additional new construction activity occurs. The second type of appeal, commonly referred to as a Proposition 8 appeal (which Proposition 8 was approved by the voters in 1978), can result if factors occur causing a decline in the market value of the property to a level below the property s then current taxable value (escalated base year value). Pursuant to State law, a property owner may apply for a Proposition 8 reduction of the property tax assessment for such owner s property by filing a written application, in the form prescribed by the State Board of Equalization, with the appropriate county board of equalization or assessment appeals board. A property owner desiring a Proposition 8 reduction of the assessed value of such owner s property in any one year must submit an application to the county assessment appeals board (the Appeals Board ). Following a review of the application by the county assessor s office, the county assessor may offer to the property owner the opportunity to stipulate to a reduced assessment, or may confirm the assessment. If no stipulation is agreed to, and the applicant elects to pursue the appeal, the matter is brought before the Appeals Board (or, in some cases, a hearing examiner) for a hearing and decision. The Appeals Board generally is required to determine the outcome of appeals within two years of each appeal s filing date. Any reduction in the assessment ultimately granted applies only to the year for which application is made and during which the written application is filed. The assessed value increases to its pre-reduction level (escalated to the inflation rate of no more than 2%) following the year for which the reduction application is filed. However, the county assessor has the power to grant a reduction not only for the year for which application was originally made, but also for the then current year and any intervening years as well. In practice, such a reduced assessment may and often does remain in effect beyond the year in which it is granted. In addition, Article XIIIA of the State Constitution provides that the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a 2% increase for any given year, or may be reduced to reflect a reduction in the consumer price index or comparable local data. This measure is computed on a calendar year basis. Risk of Decline in Property Values; Fire; Earthquake Risk. Property values could be reduced by factors beyond the District s control, including fire, earthquake and a depressed real estate market due to general economic conditions in the County, the region and the State. The District attributes an approximately 9.9% decline in assessed valuation in to losses incurred in connection with the 2015 Valley Fire. See 2015 Valley Fire below. Other possible causes for a reduction in assessed values include the complete or partial destruction of taxable property caused by other natural or manmade disasters, such as flood, fire, drought, toxic dumping, acts of terrorism, etc., or reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes). Lower assessed values could necessitate a corresponding increase in the annual tax rate to be levied to pay the principal of and interest on the Bonds. Issuance of additional bonds in the future might also cause the tax rate to increase. No assurance can be given that property tax appeals and/or blanket reductions of assessed property values will not significantly reduce the assessed valuation of property within the District in the future. -21-

28 State-Assessed Property. Under the 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 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 Board of Equalization is allocated by a formula to local jurisdictions in the county, including school districts, and taxed by the local county tax officials in the same manner as for locally assessed property. Taxes on privately owned railway cars, however, are levied and collected directly by the 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 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 California, affects how those assets are assessed, and which local agencies benefit from the property taxes derived. In general, the transfer of State-assessed property located in the District to non-utility companies will increase the assessed value of property in the District, since the property s value will no longer be divided among all taxing jurisdictions in the County. The transfer of property located and taxed in the District to a State-assessed utility will have the opposite effect, generally reducing the assessed value in the 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 and 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 Valley Fire. In September 2015, a wildfire occurred (the Valley Fire ) in and around the County and the District that spread to over 76,000 acres. The Valley Fire spread to property in the District and required the temporary evacuation of a substantial portion of the residents of the District until the Valley Fire was subdued. District schools sustained minor damage, mostly smoke and soot infiltration, and all schools reopened two weeks after the fire. Numerous homes (1,280) burned in the fire and many have already begun rebuilding. The damage caused by the Valley Fire lead to property tax appeals for affected parcels and such appeals resulted in assessed value decline of approximately 10% District-wide. Lower assessed values necessitated a corresponding increase in the annual tax rate levied to pay the principal of and interest on the Bonds and other outstanding District bonds. At the same time, the District expects that assessed values will rebound, and even exceed prior levels, once rebuilding is complete (in two to three years). Currently, stock of available houses is low due to the fire and housing prices have increased due to this shortage. Concentration of Property Ownership. Based on fiscal year locally assessed taxable valuations, the top ten taxable property owners in the District represent approximately 33.87% of the total fiscal year taxable value. The largest single property owner in the District represents approximately 26.18% of the total fiscal year taxable value. Bankruptcy, termination of operations or departure from the District by one of the largest property owners could adversely impact the availability of tax revenues to pay debt service on the Bonds. See Largest Property Owners below. -22-

29 The following table shows the assessed valuation of each jurisdiction within the boundaries of the District: ASSESSED VALUATION BY JURISDICTION (1) Fiscal Year Assessed Value in District Assessed Value of Jurisdiction % of Jurisdiction In District % of Jurisdiction District Unincorporated Lake County $1,348,861, % $5,371,814, % Total District $1,348,861, % Lake County $1,348,861, % 20.46% Source: California Municipal Statistics, Inc. (1) Before deduction of redevelopment incremental valuation. The following table gives a distribution of taxable real property located in the District by principal purpose for which the land is used, and the assessed valuation and number of parcels for each use. ASSESSED VALUATION AND PARCELS BY LAND USE Fiscal Year Assessed Valuation (1) % of Total No. of Parcels % of Total Non Residential: Agricultural $ 62,816, % % Commercial 41,725, Vacant Commercial 4,344, Industrial 1,358, Power Generation 383,880, Government/Social/Institutional 10,868, Subtotal Non-Residential $ 504,993, % % Residential: Single Family Residence $ 672,712, % 4, Mobile Home 38,173, Mobile Home Park 570, Residential Units/Apartments 40,534, Miscellaneous Residential Improvements 5,203, Vacant Residential 55,301, , Subtotal Residential $ 813,496, % 6, % Total $1,318,490, % 7, % Source: California Municipal Statistics, Inc. (1) Total Secured Assessed Valuation, excluding tax-exempt property. -23-

30 The following table shows the assessed valuations of single-family homes for the District. ASSESSED VALUATION OF SINGLE FAMILY HOMES Fiscal Year No. of Parcels Assessed Valuation Average Assessed Valuation Median Assessed Valuation Single Family Residential 4,155 $672,712,653 $161,904 $153, Assessed Valuation No. of Parcels (1) % of Total Cumulative % of Total Total Valuation % of Total Cumulative % of Total $0 - $24, % 5.054% $ 3,427, % 0.509% $25,000 - $49, ,971, $50,000 - $74, ,442, $75,000 - $99, ,422, $100,000 - $124, ,920, $125,000 - $149, ,566, $150,000 - $174, ,303, $175,000 - $199, ,787, $200,000 - $224, ,030, $225,000 - $249, ,789, $250,000 - $274, ,175, $275,000 - $299, ,260, $300,000 - $324, ,660, $325,000 - $349, ,839, $350,000 - $374, ,260, $375,000 - $399, ,210, $400,000 - $424, ,481, $425,000 - $449, ,669, $450,000 - $474, ,338, $475,000 - $499, ,364, $500,000 and greater ,792, Total 4, % $672,712, % Source: California Municipal Statistics, Inc. (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Tax Rates The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed 1% of the full cash value of the property, and State law requires the full 1% tax to be levied. The levy of special ad valorem property taxes in excess of the 1% levy is permitted as necessary to provide for debt service payments on school bonds and other voter-approved indebtedness. The rate of tax necessary to pay fixed debt service on the Bonds in a given year depends on the assessed value of taxable property in that year. (The rate of tax imposed on unsecured property for repayment of the Bonds is the prior year s secured property tax rate.) Economic and other factors beyond the District s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc., could cause a reduction in the assessed value of taxable property within the District and necessitate a corresponding increase in the annual tax rate to be levied to -24-

31 pay the principal of and interest on the Bonds. Issuance of additional authorized bonds in the future might also cause the tax rate to increase. The table below summarizes the total ad valorem tax rates levied by all taxing entities in the principal Tax Rate Area ( TRA ) within the District for the past five fiscal years. TRA comprises approximately 30% of the total assessed value of property in the District. TYPICAL AD VALOREM TAX RATES Fiscal Years to Total Tax Rates (TRA Assessed Valuation: $446,145,043) (1) General % % % % % Middletown Unified School District Yuba Joint Community College District Total Tax Rates % % % % % Source: California Municipal Statistics, Inc. (1) Last available data. Tax Levies and Delinquencies Beginning in , Article XIIIA and its implementing legislation shifted the function of property taxation primarily to the counties, except for levies to support prior-voted debt, and prescribed how levies on county-wide property values are to be shared with local taxing entities within each County. Beginning in , Proposition 13 and its implementing legislation provided for each county to levy ad collect all property taxes and prescribed how levies on a county-wide property values (Except for levies to support voter-approved indebtedness) are to be shared with local taxing entitied within each county. Teeter Plan The Board of Supervisors of the County has approved the implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in section 4701 et seq. of the California Revenue and Taxation Code. The Teeter Plan guarantees distribution of 100% of the general taxes levied to the taxing entities within the County, with the County retaining all penalties and interest penalties affixed upon delinquent properties and redemptions of subsequent collections. Under the Teeter Plan, the County apportions secured property taxes on a cash basis to local political subdivisions, including the District, for which the County acts as the tax-levying or tax-collecting agency. At the conclusion of each fiscal year, the County distributes 100% of any taxes delinquent as of June 30th to the respective taxing entities. The Teeter Plan is applicable to secured property tax levies, including for the Bonds. The Teeter Plan is not applicable to unsecured property tax levies. As adopted by the County, the Teeter Plan excludes Mello-Roos Community Facilities Districts, special assessment districts, and benefit assessment districts. The County cash position 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 -25-

32 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 orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the County Board receives a petition for its discontinuance joined in by resolutions adopted by at least twothirds of the participating revenue districts in the County, in which event the County Board is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. The County Board may also, after holding a public hearing on the matter, discontinue the Teeter Plan with respect to any tax levying agency or assessment levying agency in the County if the rate of secured tax delinquency in that agency in any year exceeds 3% of the total of all taxes and assessments levied on the secured roll in that agency. If the Teeter Plan is discontinued subsequent to its implementation, only those secured property taxes actually collected would be allocated to political subdivisions (including the District) for which the County acts as the tax-levying or tax-collecting agency, but penalties and interest would be credited to the political subdivisions. The District is not aware of any petitions for the discontinuance of the Teeter Plan in the County. Largest Property Owners The following table shows the 10 largest owners of taxable property in the District as determined by secured assessed valuation in fiscal year , representing 33.87% of the District s total assessed valuation. LARGEST LOCAL SECURED TAXPAYERS Fiscal Year Assessed Valuation % of Total (1) Property Owner Primary Land Use 1. Geysers Power Company Power Generation $345,180, % 2. Bottle Rock Power Company Power Generation 33,830, Heart Consciousness Church Inc. Retreat Center 20,896, Guenoc Winery Inc. Agricultural 14,012, Lily s Reach LLC Agricultural 8,289, GR Hardester LLC Commercial 6,721, Michael J. Browning Trustee Agricultural 5,572, BRE Georesource LLC Power Generation 4,868, Glen and Amy J. Marks Commercial 4,373, Sutter Home Winery Agricultural 2,882, Total Top 10 $446,628, % Source: California Municipal Statistics, Inc. (1) Local secured assessed valuation: $1,318,490,

33 Direct and Overlapping Debt Direct and Overlapping Debt. Set forth below is a schedule of direct and overlapping debt prepared by California Municipal Statistics Inc. The table is included for general information purposes only. The District has not reviewed this table for completeness or accuracy and makes no representations in connection therewith. The first column in the table names each public agency which has outstanding debt as of September 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. 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, longterm obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT Assessed Valuation: $1,348,861,132 MIDDLETOWN UNIFIED SCHOOL DISTRICT DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 9/1/16 Yuba Joint Community College District 5.421% $ 8,740,431 Middletown Unified School District ,580,799 (2) Callayomi County Water District ,000 Hidden Valley Lake Community Services District, Assessment District No ,650,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $25,066,230 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Yuba Joint Community College District 5.421% $ 806,845 Middletown Unified School District Qualified Zone Academy Bonds ,012,000 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $2,818,845 COMBINED TOTAL DEBT $27,885,075 (3) Ratios to Assessed Valuation: Direct Debt ($12,580,799) % Total Direct and Overlapping Tax and Assessment Debt % Combined Direct Debt ($14,592,799) % Combined Total Debt % Source: California Municipal Statistics, Inc. (1) ratios. (2) Excludes general obligation bonds to be sold. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. -27-

34 INVESTMENT OF DISTRICT FUNDS In accordance with Section of the California Education Code, each California public school district maintains substantially all of its operating funds in the county treasury of the county in which it is located, and each county treasurer-tax collector serves as ex officio treasurer for those school districts located within the county. Each treasurer-tax collector has the authority to invest school district funds held in the county treasury. Generally, the treasurer-tax collector pools county funds with school district funds and funds from certain other public agencies and invests the cash. These pooled funds are carried at cost. Interest earnings are accounted for on either a cash or accrual basis and apportioned to pool participants on a regular basis. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code. See APPENDIX D COUNTY INVESTMENT POLICY. LEGAL MATTERS The proceedings in connection with the issuance of the Bonds are subject to the approval as to their legality of Quint & Thimmig LLP, Larkspur, California, Bond Counsel for the District. Certain legal matters will also be passed upon for the District by Quint & Thimmig LLP, Larkspur, California, as Disclosure Counsel. Certain legal matters will be passed upon for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California, as Underwriter s counsel. The fees of Bond Counsel, Disclosure Counsel and Underwriter s counsel are contingent upon the issuance and delivery of the Bonds. TAX MATTERS Federal tax law contains a number of requirements and restrictions which apply to the Bonds, 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 on the Bonds to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest on the Bonds to become includible in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds. Subject to the District s compliance with the above referenced covenants, under present law, in the opinion of Quint & Thimmig LLP, Larkspur, California, Bond Counsel, interest on the Bonds 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 on the Bonds is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. Subject to the District s compliance with certain covenants, in the opinion of Bond Counsel, the Bonds are qualified tax exempt obligations under the small District exception provided under Section 265(b)(3) of the Internal Revenue Code of 1986, as amended (the Code ), which affords banks and certain other financial institutions more favorable treatment of their deduction for interest expense than would otherwise be allowed under Section 265(b)(2) of the Code. -28-

35 In rendering its opinion, Bond Counsel will rely upon certifications of the District with respect to certain material facts within the District s knowledge. Bond 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, if any, depends upon the corporation s alternative minimum taxable income ( AMTI ), which is the corporation s 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 include certain tax exempt interest, including interest on the Bonds. Ownership of the Bonds 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 Bonds should consult their tax advisors as to applicability of any such collateral consequences. The issue price (the Issue Price ) for the Bonds is the price at which a substantial amount of the Bonds is first sold to the public. The Issue Price of the Bonds may be different from the price set forth, or the price corresponding to the yield set forth, on the inside cover page hereof. Owners of Bonds who dispose of Bonds prior to the stated maturity (whether by sale, redemption or otherwise), purchase Bonds in the initial public offering, but at a price different from the Issue Price or purchase Bonds subsequent to the initial public offering should consult their own tax advisors. If a Bond is purchased at any time for a price that is less than the Bond s stated redemption price at maturity, the purchaser will be treated as having purchased a Bond 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 Bond is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser s election, as it accrues. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Bond. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Bonds. An investor may purchase a Bond 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 Bond 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 Bonds. Investors who purchase a Bond at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the Bond s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Bonds. -29-

36 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 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to bonds issued prior to enactment. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Bond 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 includible 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 Bonds. If an audit is commenced, under current procedures the Service may treat the District as a taxpayer and the Bond 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 Bonds until the audit is concluded, regardless of the ultimate outcome. Payments of interest on, and proceeds of the sale, redemption or maturity of, tax exempt obligations, including the Bonds, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Bond 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 Bond 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 Bond Counsel, interest on the Bonds is exempt from California personal income taxes. Ownership of the Bonds may result in other state and local tax consequences to certain taxpayers. Bond Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Bonds. Prospective purchasers of the Bonds should consult their tax advisors regarding the applicability of any such state and local taxes. If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes original issue discount for purposes of federal income taxes and State of California personal income taxes. If the initial offering price to the public (excluding bond houses and brokers) at which each Certificate is sold is greater than the amount payable at maturity thereof, then such difference constitutes original issue premium for purposes of federal income taxes and State of California personal income taxes. De minimis original issue discount and original issue premium is disregarded. Owners of Bonds with original issue discount or original issue premium, including purchasers who do not purchase in the original offering, should consult their own tax advisors with respect to federal income tax and State of California personal income tax consequences of owning such Bonds. The complete text of the final opinion that Bond Counsel expects to deliver upon the issuance of the Bonds is set forth in APPENDIX E FORM OF OPINION OF BOND COUNSEL. -30-

37 MUNICIPAL ADVISOR Caldwell Flores Winters, Inc., Emeryville, California ( CFW ), is an independent financial advisory firm registered as a Municipal Advisor with the Securities Exchange Commission and Municipal Securities Rulemaking Board. CFW does not underwrite, trade or distribute municipal or other public securities. CFW has assisted the District in connection with the planning, structuring, sale and issuance of the Bonds. CFW is not obligated to undertake, and has not undertaken to make, an independent verification of or to assume responsibilities for the accuracy, completeness or fairness of the information contained in this Official Statement not provided by CFW. The fees of CFW in respect to the Bonds are contingent upon their sale and delivery. VERIFICATION OF MATHEMATICAL COMPUTATIONS The Verification Agent will verify, from the information provided to it, the mathematical accuracy as of the date of the closing on the Bonds of computations relating to the adequacy of the proceeds of the Bonds to be deposited in the Escrow Fund for the defeasance of the Prior Bonds. The Verification Agent will also verify the yield of the Bonds and on the Escrow Securities to be deposited in the Escrow Fund upon the delivery of the Bonds. The Verification Agent will restrict its procedures to examining the arithmetical accuracy of certain computations and will not make a study or evaluation of the information and assumptions on which such computations are based and, accordingly, will not express an opinion on the data used, the reasonableness of the assumptions or the achievability of the forecasted outcome. CONTINUING DISCLOSURE The District has covenanted for the benefit of holders and Beneficial Owners of the Bonds to provide certain financial information and operating data relating to the District (the Annual Report ) by not later than March 31 after the end of the District s fiscal year (the current end of the District s fiscal year is on June 30), commencing with the report for the fiscal year, and to provide notices of the occurrence of certain events listed in the District s Continuing Disclosure Certificate, the form of which is in APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE. The Annual Report and notices of listed events will be filed by the District with the Municipal Securities Rulemaking Board (the MSRB ), by posting on the MSRB s Electronic Municipal Market Access or EMMA system (website: These continuing disclosure covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). Within the last five years, the District has, with two exceptions, made all filings required under the Rule although it has consistently made its filings up to 32 days late and, in one case, 56 days late. For the exception noted above, (1) the District failed to file 2011 assessed values as part of its 2012 annual report but has since made a remedial filing in December 2015, and (2) the District failed to file its budget with respect to the annual reports for fiscal years ending June 30, 2011 through The District did not file specific notices of late annual financial information except for a late filing notice in December 2015 related to the missing assessed values information. Within the last five years, the District has, with one exception, made all filings of enumerated events. The District failed to file a notice of a rating change relating to the bond insurer for its 2007 general obligation bonds but has since made a remedial filing. The District has retained Caldwell Flores Winters, Inc. to assist it with the preparation and timely filing of future annual reports and event notices required under its existing continuing disclosure -31-

38 obligations with respect to the District s outstanding bonds as well as for the District s continuing disclosure obligations related to the Bonds. LEGALITY FOR INVESTMENT IN CALIFORNIA Under provisions of the California Financial Code, the Bonds are legal investments for commercial banks in California to the extent that the Bonds, in the informed opinion of the bank, are prudent for the investment of funds of depositors, and under provisions of the California Government Code, are eligible for security for deposits of public moneys in California. ABSENCE OF MATERIAL LITIGATION No litigation is pending or threatened concerning the validity of the Bonds, and a certificate to that effect will be furnished by the District to the Underwriter at the time of the original delivery of the Bonds. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the District s ability to receive ad valorem taxes or contesting the District s ability to issue and retire the Bonds. RATINGS S&P is expected to assign the rating of AA (stable outlook) to the Bonds based on the issuance of the Municipal Bond Insurance Policy by BAM at the time of delivery of the Bonds. See MUNICIPAL BOND INSURANCE. In addition, S&P has assigned the underlying rating of A+ to the Bonds without regard to the issuance of the Municipal Bond Insurance Policy. These 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 such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by S&P, if in the judgment of the 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 Bonds. The District has covenanted in the Continuing Disclosure Certificate to file on the EMMA website notices of any rating changes on the Bonds. See APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE. Notwithstanding such covenant, information relating to rating changes on the Bonds may be publicly available from S&P prior to such information being provided to the District and prior to the date the District is obligated to file a notice of a rating change on EMMA. Purchasers of the Bonds are directed to S&P, its website and official media outlets for the most current rating changes with respect to the Bonds after the initial issuance of the Bonds. UNDERWRITING The Bonds were purchased by Stifel, Nicolaus & Company, Incorporated (the Underwriter ). The Underwriter has agreed to purchase the Bonds at a purchase price of $6,170, (being equal to the aggregate principal amount of the 2016 Refunding Bonds ($5,950,000.00), plus a net original issue premium of $262,419.55, less an Underwriter s discount of $41,650.00). The purchase agreement relating to the Bonds provides that the Underwriter will purchase all of the Bonds if any are purchased, the -32-

39 obligation to make such purchase being subject to certain terms and conditions set forth in said agreement, the approval of certain legal matters by counsel and certain other conditions. The Underwriter may offer and sell Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. The offering prices may be changed from time to time by the Underwriter. ADDITIONAL INFORMATION Quotations from and summaries and explanations of the Bonds, the Bond Resolution, the Continuing Disclosure Certificate of the District and the constitutional provisions, statutes and other documents referenced herein, do not purport to be complete, and reference is made to said documents, constitutional provisions and statutes for full and complete statements of their provisions. All data contained herein has been taken or constructed from District records. Appropriate District officials, acting in their official capacities, have reviewed this Official Statement and have determined that, as of the date hereof, the information contained herein is, to the best of their knowledge and belief, true and correct in all material respects and does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they were made, not misleading. This Official Statement has been approved by the District Board. EXECUTION Execution and delivery of this Official Statement have been duly authorized by the District. MIDDLETOWN UNIFIED SCHOOL DISTRICT By /s/ Catherine Stone Catherine Stone, Superintendent -33-

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41 APPENDIX A THE ECONOMY OF THE COUNTY While the economics of the County and surrounding region influence the economics within the District, only property within the District is subject to an unlimited ad valorem tax levy to pay debt service on the Bonds. Introduction The County. The District is located in Lake County (the County ). Founded in 1861, Lake County is located in the north central portion of the state of California. The County is located a 2 hour drive time from the San Francisco Bay area and the Sacramento metropolitan area. It is approximately 127 road miles north of San Francisco, 126 road miles west of Sacramento, and 80 road miles east of the Pacific Coast. Lake County is bordered by the counties of Napa, Sonoma, Mendocino, Glenn, Colusa and Yolo. The County has a total area of 1,329 square miles (3,440 km 2 ), of which 1,256 square miles (3,250 km 2 ) is land and 73 square miles (190 km 2 ) (5.5%) is water. The County seat is Lakeport. The County takes its name from Clear Lake, the dominant geographic feature in the county and the largest natural lake wholly within California. The County has long been known as a farming community and the local economy is based primarily on agriculture, tourism, and the geothermal power industry. The County is a wine grape-growing area and also is famous for its pears and walnuts. Population The table below summarizes population figures of the County and the State of California for the past five years. LAKE COUNTY and CALIFORNIA Population Year Lake County State of California ,347 37,881, ,389 38,239, ,428 38,567, ,669 38,907, ,306 39,255,883 Source: California Department of Finance, E-4 Population Estimate for Cities, Counties, and the State, , with 2010 Census Benchmark. Appendix A Page 1

42 Employment The following table summarizes the historical numbers of workers by industry in the County for the last five years: LAKE COUNTY Labor Force and Industry Employment Annual Averages by Industry (1) Total, All Industries 14,610 14,890 15,230 15,700 15,820 Total Farm 1,150 1,120 1,090 1,070 1,070 Mining, Logging and Construction Manufacturing Wholesale Trade Retail Trade 1,940 1,930 2,030 2,140 2,180 Transportation, Warehousing & Utilities Information Financial Activities Professional & Business Services Educational & Health Services 3,580 3,760 4,030 4,260 4,400 Leisure & Hospitality 1,110 1,110 1,030 1,050 1,070 Other Services Government 3,910 3,950 4,010 4,060 4,110 Source: California Employment Development Department, based on February 2015 benchmark. Note: Does not include proprietors, self-employed, unpaid volunteers or family workers, domestic workers in households, and persons involved in labor/management trade disputes. Employment reported by place of work. Items may not add to totals due to independent rounding. (1) Last available full year data. Appendix A Page 2

43 The following table summarizes historical employment and unemployment for the County, the State of California and the United States: LAKE COUNTY, CALIFORNIA, and UNITED STATES Civilian Labor Force, Employment, and Unemployment (Annual Averages) Unemployment Year Area Labor Force Employment Unemployment Rate (1) 2011 Lake County 29,610 25,310 4, % California 18,419,500 16,260,100 2,159, United States 153,617, ,869,000 13,747, Lake County 29,560 25,780 3, California 18,554,800 16,630,100 1,924, United States 154,975, ,469,000 12,506, Lake County 29,330 26,130 3, California 18,671,600 17,002,900 1,668, United States 155,389, ,929,000 11,460, Lake County 29,450 26,820 2, California 18,811,400 17,397,100 1,414, United States 155,922, ,305,000 9,617, (2) Lake County 29,140 26,910 2, California 18,981,800 17,798,600 1,183, United States 157,130, ,834, ,411, Source: California Employment Development Department, Monthly Labor Force Data for Counties, Annual Average , and US Department of Labor. (1) The unemployment rate is computed from unrounded data, therefore, it may differ from rates computed from rounded figures available in this table. (2) Latest available full-year data. Appendix A Page 3

44 Major Employers The following table lists the top 10 employers within the County as of June 30, Source: Lake County 2015 CAFR. Construction Activity LAKE COUNTY Top 10 Employers as of June 30, 2015 Employer Employees % of Total County Employment Lake County % St. Helena Hospital Clearlake Sutter Lakeside Hospital Konocti Unified School District Robinson Rancheria Resort & Casino Calpine Corp Twin Pine Casino Wal-Mart Harbin Hot Springs Kelseyville Unified School District Total Top 10 3, The following table reflects the five-year history of building permit valuation for the County: LAKE COUNTY Building Permits and Valuation (Dollars in Thousands) Permit Valuation: New Single-family 7,173 7,872 8,421 7,847 14,162 New Multi-family - 5, Res. Alterations/Additions 6,898 3,862 4,543 7,551 4,781 Total Residential 14,071 17,321 12,965 15,399 19,293 Total Nonresidential 6,692 6,471 22,616 12,676 9,971 Total All Building 20,764 23,793 35,581 28,076 29,265 New Dwelling Units: Single Family Multiple Family Total Source: Note: Construction Industry Research Board: Building Permit Summary. Totals may not add due to independent rounding. Appendix A Page 4

45 Commercial Activity Taxable sales in the County for the five most recent calendar years are shown below. Beginning in 2009, reports summarize taxable sales and permits using the NAICS codes. LAKE COUNTY Taxable Sales (dollars in thousands) (1) Retail and Food Services Motor Vehicles and Parts Dealers 34,111 35,724 37,716 38,453 39,252 Home Furnishings and Appliance Stores 12,093 13,052 11,017 13,113 11,830 Bldg. Matrl. and Garden Equip. and Supplies 37,179 42,868 46,441 45,720 45,819 Food and Beverage Stores 55,447 58,688 58,614 61,134 61,376 Gasoline Stations 55,114 61,891 62,432 63,189 63,227 Clothing and Clothing Accessories Stores 2,743 2,747 3,241 3,786 4,061 General Merchandise Stores 66,252 64,849 64,628 66,294 66,624 Food Services and Drinking Places 39,902 42,211 43,894 45,489 46,707 Other Retail Group 31,838 34,339 35,761 41,716 43,431 Total Retail and Food Services 334, , , , ,325 All Other Outlets 129, , , , ,680 Totals All Outlets (2) 464, , , , ,006 Source: California Board of Equalization, Taxable Sales in California (Sales & Use Tax). Note: Totals may not add up due to independent rounding. (1) Last available full year data. Appendix A Page 5

46 Median Household Income The following table summarizes the total effective buying income and the median household effective buying income for the County, the State of California and the nation for the past five years. LAKE COUNTY, STATE OF CALIFORNIA AND UNITED STATES Median Household Effective Buying Income Year Area Total Effective Buying Income (000 s Omitted) Median Household Effective Buying Income 2011 Lake County 1,129,693 32,147 California 814,578,457 47,062 United States 6,438,704,663 41, Lake County 916,418 27,622 California 864,088,827 47,307 United States 6,737,867,730 41, Lake County 1,124,535 33,344 California 858,676,636 48,340 United States 6,982,757,379 43, Lake County 1,103,588 32,481 California 901,189,699 50,072 United States 7,357,153,421 45, Lake County 1,252,733 35,350 California 981,231,666 53,589 United States 7,757,960,399 46,738 Source: Nielsen, Inc. Appendix A Page 6

47 APPENDIX B DISTRICT AND GENERAL SCHOOL DISTRICT FINANCIAL INFORMATION The information in this appendix concerning the operations of the District, the District s finances, and State funding of education, is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of and interest on the Bonds is payable from the general fund of the District or from State revenues. The Bonds are payable solely from the proceeds of an ad valorem tax approved by the voters of the District pursuant to all applicable laws and State Constitutional requirements, and required to be levied by the County on property within the District in an amount sufficient for the timely payment of principal and interest on the Bonds. See SECURITY AND SOURCE OF PAYMENT FOR THE BONDS in the Official Statement. Allocation of State Funding to School Districts; Restructuring of the K-12 Funding System California school districts receive a significant portion of their funding from State appropriations. As a result, changes in State revenues may affect appropriations made by the Legislature to school districts. Commencing with the Fiscal Year , the State budget restructured the manner in which the State allocates funding for K-12 education. In Fiscal Year , State legislation replaced the majority of revenue limit and categorical funding formulas with a new set of funding formulas. The new formula for school funding is known as the Local Control Funding Formula (the Local Control Funding Formula or LCFF ). The State budget provided funding in Fiscal Year to begin implementing the new formulas. Under the prior funding system, school districts received different perpupil funding rates based on historical factors and varying participation in categorical programs. The new system provides a more uniform base per-pupil rate for each of several grade levels. The base rates are augmented by several funding supplements such as for (1) students needing additional services, defined as English learners, students from lower income families, and foster youth; and (2) school districts with high concentrations of English learners and lower income families. The new funding system requires school districts to develop local control and accountability plans describing how the school district intends to educate its students and achieve annual education goals to be achieved in state-mandated areas of priority. Under the prior system, California Education Code Section and following, each school district was determined to have a target funding level: a base revenue limit per student multiplied by the school district s student enrollment measured in units of average daily attendance ( ADA ). The base revenue limit was calculated from the school district s prior-year funding level, as adjusted for a number of factors, such as inflation, special or increased instructional needs and costs, employee retirement costs, especially low enrollment, increased pupil transportation costs, etc. Generally, the amount of State funding allocated to each school district was the amount needed to reach that district s base revenue limit after taking into account certain other revenues, in particular, locally generated property taxes. This was referred to as State equalization aid. To the extent local tax revenues increased due to growth in local property assessed valuation, the additional revenue was offset by a decline in the State s contribution. A school district whose local property tax revenues exceed its base revenue limit is entitled to receive no State equalization aid, and receives only its special categorical aid, which is deemed to include the basic aid of $120 per student per year guaranteed by Article IX, Section 6 of the Constitution. Such school districts were known as basic aid districts. School districts that received some equalization aid were commonly referred to as revenue limit districts. Appendix B Page 1

48 The District had been a revenue limit district. The State budget implemented the new Local Control Funding Formula school funding allocation system. The Local Control Funding Formula replaced revenue limit and most categorical program funding. The Local Control Funding Formula is also based on enrollment. Enrollment can fluctuate due to factors such as population growth or decline, 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. Average Daily Attendance In the past, annual State apportionments of basic and equalization aid to school districts were computed based on a revenue limit per unit of ADA. Prior to Fiscal Year , daily attendance numbers included students who were absent from school for an excused absence, such as illness. Effective in Fiscal Year , only actual attendance is counted in the calculation of ADA. This change was essentially fiscally neutral for school districts which maintain the same excused absence rate. The rate per student was recalculated to provide the same total funding to school districts in the base year as would have been received under the old system. After Fiscal Year , school districts which improved their actual attendance rate received additional funding. As indicated above, commencing with the Fiscal Year , the State budget restructured the manner in which the State allocates funding for K-12 education using the Local Control Funding Formula. Under the prior funding system, school districts received different per-pupil funding rates based on historical factors and varying participation in categorical programs. The following table shows the District s enrollment, ADA and revenue limit per ADA for under the historical funding program and for , through under the Local Control Funding Formula. Appendix B Page 2

49 AVERAGE DAILY ATTENDANCE, REVENUE LIMIT/LCFF AND ENROLLMENT Fiscal Years to Average Daily Attendance (1) Appendix B Page 3 Revenue Limit/LCFF Revenues (2) Enrollment (3) Fiscal Year , ,001,345 1, , ,026,486 1, , ,672,539 1, (4) 1, ,741,203 1, (4) 12,220,284 1,444 Source: Middletown Unified School District (1) Except for fiscal year , reflects ADA as of the second principal reporting period (P-2 ADA), ending on or before the last attendance month prior to April 15 of each school year. (2) Deficit revenue limit funding, when provided for in State budgetary legislation, reduced the revenue limit allocations received by school districts by applying a deficit factor to the base revenue limit for the given fiscal year, and resulted from an insufficiency of appropriation funds in the State budget to provide for State aid owed to school districts. The State s practice of deficit revenue limit funding was most recently reinstated beginning in Fiscal Year , and discontinued following the implementation of the LCFF. (3) Except for fiscal year , enrollment as of October report submitted to the California Basic Educational Data System ( CBEDS ) in each school year. (4) As projected in the District s Budget, adopted June 29, District Budget The District is required by the provisions of the State Education Code to maintain a balanced budget each year, in which the sum of expenditures and the ending fund balance cannot exceed the sum of revenues and the carry-over fund balance from the previous year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. The budget process for school districts was substantially amended by Assembly Bill 1200 ( AB 1200 ), which became State law on October 14, Portions of AB 1200 are summarized below. The budget process has been further amended by subsequent amendments, including Senate Bill 97, which became law on September 26, 2013 (requiring budgets to include sufficient funds to implement local control and accountability plans), Senate Bill 858, which became law on June 20, 2014 (requiring budgets ending fund balances to exceed the minimum recommended reserve for economic uncertainties), and Assembly Bill 2585, which became State law on September 9, 2014 (eliminating the dual budget cycle option for school districts). School districts must adopt a 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 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, and will determine if the budget allows the district to meet its current obligations, if the budget is consistent with a financial plan that will enable the district to meet its multi-year financial commitments, whether the budget includes the expenditures necessary to implement a local control and accountability plan, and whether the budget s ending fund balance exceeds the minimum recommended reserve for economic uncertainties. On or before August 15, the county superintendent will approve, conditionally approve or disapprove the adopted budget for each school district. Budgets will be disapproved if they fail the above standards. The district boards must be notified by August 15 of the county superintendent s

50 recommendations. The committee must report its findings no later than August 20. Any recommendations made by the county superintendent must be made available by the district for public inspection. No later than September 22, the county superintendent must notify the State Superintendent of Public Instruction of all school districts whose budget may be disapproved. For districts whose budgets have been disapproved, the district must revise and readopt its budget by September 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 district budgets and not later than October 8, will approve or disapprove the revised budgets. If the budget is disapproved, the county superintendent will call for the formation of a budget review committee pursuant to Education Code Section No later than October 8, the county superintendent must notify the State Superintendent of Public Instruction of all school districts whose budget has been disapproved. Until a district s budget is approved, the district will operate on the lesser of its proposed budget for the current fiscal year or the last budget adopted and reviewed for the prior fiscal year. Under the provisions of AB 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. 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 the subsequent fiscal year. A qualified certification is assigned to any school district that may not meets its financial obligations for the current fiscal year or two subsequent fiscal years. The District s Second Interim Report for fiscal year , adopted March 9, 2016, was certified as Positive. The District has not received a qualified or negative certification in any of the last five years. The District adopted it s budget on June 29, Appendix B Page 4

51 The following table shows a breakdown of the District s ADA by grade span, total enrollment, and the percentage of EL/LI student enrollment, for fiscal years through ADA, ENROLLMENT AND EL/LI ENROLLMENT PERCENTAGE Fiscal Years through (Estimated Actuals) Total Total Fiscal Average Daily Attendance District District % of EL/LI Year K ADA Enrollment (2) Enrollment (3) , , % , , (4) ,393 1, (4) 1,444 Source: Middletown Unified School District (1) Reflects P-2 ADA. (2) Reflects CBEDS enrollment. (3) For purposes of calculating Supplemental and Concentration Grants, a school district s fiscal year percentage of unduplicated EL/LI students will be expressed solely as a percentage of its total fiscal year total enrollment. For fiscal year , the percentage of unduplicated EL/LI enrollment will be based on the two-year average of EL/LI enrollment in fiscal years and Beginning in fiscal year , a school district s percentage of unduplicated EL/LI students will be based on a rolling average of such district s EL/LI enrollment for the then-current fiscal year and the two immediately preceding fiscal years. (4) As projected in the District s Budget, adopted June 29, Accounting Practices The accounting practices of the District conform to generally accepted accounting principles in accordance with policies and procedures of the California School Accounting Manual. This manual, according to section of the California Education Code, is to be followed by all California school districts. The District s expenditures are accrued at the end of the fiscal year to reflect the receipt of goods and services in that year. Revenues generally are recorded on a cash basis, except for items that are susceptible to accrual (measurable and/or available to finance operations). Current taxes are considered susceptible to accrual. Delinquent taxes not received after the fiscal year end are not recorded as revenue until received. Revenues from specific state and federally funded projects are recognized when qualified expenditures have been incurred. State block grant apportionments are accrued to the extent that they are measurable and predictable. The State Department of Education sends the District updated information from time to time explaining the acceptable accounting treatment of revenue and expenditure categories. The District s accounting is organized on the basis of fund groups, with each group consisting of a separate set of self-balancing accounts containing assets, liabilities, fund balances, revenues and expenditures. The major fund classification is the general fund which accounts for all financial resources not requiring a special type of fund. The District s fiscal year begins on July 1 and ends on June 30. Financial Statements The District s general fund finances the basic operating activities of the District. General fund revenues are derived from such sources as State school fund apportionments, taxes, use of money and property, and aid from other governmental agencies. Audited financial statements for the District for the fiscal year ended June 30, 2015, and prior fiscal years are on file with the District and available for public Appendix B Page 5

52 inspection at the office of the Superintendent of the District, Big Canyon Road, Middletown, California 95461, telephone number (925) Copies of such financial statements will be mailed to prospective investors and their representatives upon request directed to the District at such address. For further information, see also APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, The following table shows the District s audited revenues, expenditures and changes in fund balances for the past three fiscal years as well as unaudited actuals for fiscal year and budgeted projections for GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES Fiscal Years to Audited (1) Audited Fiscal Year (1) Audited (1)(2)(3) Actuals (1)(2) Budget REVENUES Revenue Limit/LCFF Sources (1) 8,501,392 10,036,837 10,680,942 11,676,921 12,252,669 Federal Sources 759, , , , ,384 Other State Sources 1,899, , ,596 1,416, ,214 Other Local Sources 1,280,478 1,348,389 1,347,375 3,319,604 1,023,719 Total Revenues 12,440,434 13,146,568 13,558,657 17,241,877 14,833,986 EXPENDITURES Certificated Salaries 6,106,717 6,033,943 6,235,412 6,041,754 6,294,645 Classified Salaries 2,151,454 2,211,568 2,407,342 2,633,610 2,472,010 Employee Benefits 3,038,323 3,007,689 3,608,154 3,486,360 3,706,552 Books and Supplies 372, , ,370 1,232, ,784 Contract Services 952, ,561 1,026,950 3,549,693 1,587,121 Capital Outlay 13,855-80,612 97,818 - Other Outgo (26,185) (12,749) (14,750) (14,750) (14,750) Debt Service Principal Debt Service - Interest Total Expenditures 12,609,199 13,305,784 14,030,090 17,027,242 14,576,362 Excess (Deficiency) of Revenues over Expenditures (168,765) (159,216) (471,433) 214, ,624 OTHER FINANCING SOURCES Operating transfers in ,000 20,000 Operating transfers out (7,561) (88,989) (132,156) (239,529) (172,359) Other sources Total financing sources (uses) (7,561) (88,989) (132,156) (149,529) (152,359) Net change in fund balances (176,326) (248,205) (603,589) 65, ,265 Fund Balance, July 1 2,405,922 2,229,596 1,981,391 1,104,205 1,169,311 Fund Balance, June 30 2,229,596 1,981,391 1,377,802 1,169,311 1,274,576 Source: Middletown Unified School District audited financial statements and Budget. (1) Beginning in FY the Local Control Funding Formula (LCFF) has replaced the prior revenue limit system of funding. (2) From the District s Budget, adopted June 29, Appendix B Page 6

53 (3) The higher amounts from Other Local Sources represent insurance proceeds from claims made in connection with the Valley Fire. The higher amounts for Books and Supplies and Contract Services relate to expenditures required to replace fire-related losses to the continuation school and the maintenance building. Summary of District Revenues and Expenditures The District s audited financial statements for the year ending June 30, 2015, are reproduced in Appendix C. The final (unaudited) statement of receipts and expenditures for each fiscal year ending June 30 is required by State law to be approved by the District Board by September 15, and the audit report must be filed with the County Superintendent of Schools and State officials by December 15 of each year. The District is required by State law and regulation to maintain various reserves. The District is generally required to maintain a reserve for economic uncertainties in the amount of 3% of its total general fund expenditures, based on total student attendance below 30,000. For fiscal year , the District has budgeted an unrestricted general fund reserve of 3%, or approximately $517,478. Substantially all funds of the District are required by law to be deposited with and invested by the County Treasurer-Tax Collector on behalf of the District, pursuant to law and the investment policy of the County. See COUNTY POOLED INVESTMENT FUND in the front portion of this Official Statement. Local Control Funding Formula. The State Constitution requires that from all State revenues there will be funds set aside to be allocated by the State for support of the public school system and public institutions of higher education. As discussed below, school districts in the State receive a significant portion of their funding from these State allocations. The general operating income of school districts in California is comprised of two major components: (i) a State portion funded from the State s general fund, and (ii) a local portion derived from the School District s share of the 1% local ad valorem tax authorized by the State Constitution. School districts may also be eligible for special categorical and grant funding from State and federal government programs. As part of the State Budget for Fiscal Year (the State Budget ), State Assembly Bill 97 (Stats. 2013, Chapter 47) ( AB 97 ) was enacted to establish a new system for funding State school districts, charter schools and county offices of education by the implementation of the Local Control Funding Formula or LCFF. This formula replaced the 40-year revenue limit funding system for determining State apportionments and the majority of categorical programs. Subsequently, AB 97 was amended and clarified by Senate Bill 91 (Stats Chapter 49). The LCFF consists primarily of base, supplemental and concentration funding formulas that focus resources based on a school district s student demographic. Each school district and charter school will receive a per pupil base grant used to support the basic costs of instruction and operations. The implementation of the LCFF is to occur over a period of several years. Beginning in fiscal year an annual transition adjustment has been calculated for each individual school district, equal to such district s proportionate share of appropriations included in the State Budget. The Governor s Department of Finance estimates the LCFF funding targets could be achieved in eight years, with LCFF being fully implemented by The LCFF includes the following components: An average base grant for each local education agency equivalent to $7,643 per unit of ADA (by the end of the implementation period). This amount includes an adjustment of 10.4% to the base grant to support lowering class sizes in grades K-3, and an adjustment of 2.6% to reflect the cost of operating career technical education programs in high schools. It should be noted that the authorizing LCFF statute, AB 97, provides for a differentiated base grant amount according to Appendix B Page 7

54 four different grade spans: K-3, 4-6, 7-8, and Unless otherwise collectively bargained for, following full implementation of the LCFF, school districts must maintain an average class enrollment of 24 or fewer students in grades K-3 at each school site by the target year so as to continue receiving its adjustment to the K-3 base grant. A 20% supplemental grant for students classified as English learners ( EL ), those eligible to receive a free or reduced price meal ( FRPM ) and foster youth, to reflect increased costs associated with educating those students. These supplemental grants are only attributed to each eligible student once, and the total student population eligible for the additional funding is known as an unduplicated count. An additional concentration grant equal to 50% of a local education agency s base grant, based on the number of unduplicated EL, FRPM and foster youth served by the local agency that comprise more than 55% of the school district s or charter school s total enrollment. Of the more than $25 billion in funding to be invested through the LCFF over the next eight years, the vast majority of new funding will be provided for base grants. Specifically, of every dollar invested through the LCFF, 84 cents will go to base grants, 10 cents will go to supplemental grants, and 6 cents will go to concentration grants. Under the State Budget, the target average base grant was $7,643, which was an increase of $2,375 from the prior year s average revenue limit. Base grants are adjusted for cost-of-living increases by applying the implicit price deflator for government goods and services. Following full implementation of the LCFF, the provision of COLAs will be subject to appropriation for such adjustment in the annual State budget. The differences among base grants are linked to differentials in Statewide average revenue limit rates by district type, and are intended to recognize the generally higher costs of education at higher grade levels. For certain school districts that would have received greater funding levels under the prior revenue limit system, the LCFF provides for a permanent economic recovery target ( ERT ) add-on, equal to the difference between the revenue limit allocations such districts would have received under the prior system in Fiscal Year , and the target LCFF allocations owed to such districts in the same year. To derive the projected funding levels, the LCFF assumes the discontinuance of deficit revenue limit funding and restoration of categorical funding to pre- recession levels. The sum of a school district s adjusted base, supplemental and concentration grants will be multiplied by such district s Second Principal Apportionment (P-2) ADA for the current or prior year, whichever is greater (with certain adjustments applicable to small school districts). This funding amount, together with categorical block grant add-ons, will yield a school district s total LCFF allocation. Generally, the amount of annual State apportionments received by a school district will amount to the difference between such total LCFF allocation and the individual school district s share of applicable local property taxes allocations. Most school districts receive a significant portion of their funding from such State apportionments. As a result, decreases in State revenues in a particular year may significantly affect appropriations made by the State Legislature to school districts. The new legislation includes a hold harmless provision which provides that a school district or charter school will maintain total revenue limit and categorical funding at its Fiscal Year level, unadjusted for changes in ADA, or cost of living adjustments. A summary of the target LCFF funding amounts for California school districts and charter schools based on grade levels and targeted students classified as English learners, those eligible to receive a free or reduced price meal, foster youth, or any combination of these factors ( unduplicated count) is shown below: Appendix B Page 8

55 CALIFORNIA SCHOOL DISTRICTS AND CHARTER SCHOOLS GRADE SPAN FUNDING AT FULL LCFF IMPLEMENTATION LOCAL CONTROL TARGET FUNDING FORMULA Grade Levels Base Grants per ADA COLA (1.02%) Grant/Adjusted Base Grant per ADA Grade Span Adjustments TK-3 $ 7,011 $72 $737 $7, $7,116 $73 $7, $7,328 $75 $7, $8,491 $87 $223 $8,801 Source: California Department of Education Beginning July 1, 2015, school districts are required to develop a three-year Local Control and Accountability Plan (each, a LCAP ). County Superintendent of Schools and the State Superintendent of Public Instruction will review and provide support to school districts and county offices of education under their jurisdiction. In addition, the State budget created the California Collaborative for Education Excellence (the Collaborative ) to advise and assist school districts, county offices of education, and charter schools in achieving the goals identified in their plans. The State Superintendent of Public Instruction may direct the Collaborative to provide additional assistance to any district, county office, or charter school. For those entities that continue to struggle in meeting their goals, and when the Collaborative indicates that additional intervention is needed, the State Superintendent of Public Instruction has authority to make changes to school district or county office s local plan. For charter schools, the charter authorizer will be required to consider revocation of a charter if the Collaborative finds that the inadequate performance is so persistent and acute as to warrant revocation. The State will continue to measure student achievement through statewide assessments, produce an Academic Performance Index for schools and subgroups of students, determine the contents of the school accountability report card, and establish policies to implement the federal accountability system. Federal Sources. The federal government provides funding for several District programs, including special education programs, programs under the Educational Consolidation and Improvement Act, and specialized programs such as Education for Economic Security, and the free and reduced lunch program. Other State Sources. In addition to LCFF revenues, the District receives substantial other State revenues. The LCFF replaced most of the State categorical program funding that existed prior to Fiscal Year Categorical funding for certain programs was excluded from the LCFF, and school districts continue to receive restricted State revenues to fund these programs. These other State revenues are primarily restricted revenue funding items such as the Special Education Master Plan, Economic Impact Aid, and Tier 3 Funding. Other State revenues include the California State Lottery (the Lottery ), which was established by a constitutional amendment approved in the November 1984 general election. Lottery revenues must be used for the education of students and cannot be used for non-instructional purposes such as real property acquisition, facility construction, or the financing of research. Appendix B Page 9

56 Other Local Sources. In addition to property taxes, the District receives additional local revenues from items such as leases and rentals, interest earnings, transportation fees, interagency services, and other local sources. District Expenditures The largest part of each school district s general fund budget is used to pay salaries and benefits of certificated (credentialed teaching) and classified (non-instructional) employees. 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. Labor Relations. Currently the District employs full-time equivalent (FTE) certificated employees and FTE classified employees. There are 2 formal bargaining organizations operating in the District which are described in the table below. LABOR ORGANIZATIONS FTE Number of Employees In Organization Contract Expiration Date Labor Organization Teacher s Association June 30, 2018 California School Employees Association June 30, 2018 Source: Middletown Unified School District State Budget Information regarding the State Budget is regularly available at various State-maintained websites. The Fiscal Year State Budget further described below may be found at the website of the Department of Finance, under the heading California Budget. Additionally, an impartial analysis of the State s Budgets is posted by the Office of the Legislative Analyst at The information referred to is prepared by the respective State agency maintaining each website and not by the District, and the District takes no responsibility for the continued accuracy of the internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. Fiscal Year Budget. Governor Edmund G. Brown Jr. signed the fiscal year State budget (the State Budget ) on June 27, The State Budget proposes a multiyear plan that is balanced, while paying off budgetary debt from past years and setting aside reserves. The State Budget projects general fund revenues in the amount of $117 billion in fiscal year and $120 billion in fiscal year According to the State Budget, the primary reason for such additional revenues is the higher forecast for the personal income tax. Under the State Budget, general fund expenditures for fiscal year are $122 billion. The State Budget focuses new spending on one-time activities, such as repairing and replacing aged infrastructure, building affordable housing, and addressing the effects of the drought. The State Budget begins implementation of raising the state minimum wage to $15 per hour by providing funding for an increase to $10.50 per hour. It implements the managed care financing package Appendix B Page 10

57 passed earlier in 2016, including rate adjustments for community-based providers serving individuals with developmental disabilities. Rainy Day Fund. The passage of Proposition 2 in 2014 gave the State an opportunity to mitigate the boom-and-bust budget cycles of the past two decades. Recent budget shortfalls had been driven by making ongoing commitments based upon temporary spikes in revenues, primarily from capital gains. Under Proposition 2, spikes in capital gains are used to save money for the next recession and to pay down the state s debts and liabilities. Proposition 2 established a constitutional goal of having 10 percent of tax revenues in the Rainy Day Fund. The State Budget funded the constitutionally required deposit into the Rainy Day Fund ($1.3 billion) and supplements this with an additional $2 billion deposit bringing the fund s balance to $6.7 billion in fiscal year , or 54 percent of its goal. The State Budget also pays down debts and liabilities by a total of $1.3 billion from Proposition 2 funds. Education. State funding for education has been at all-time highs since and is expected to grow to $71.9 billion in fiscal year , an increase of $24.6 billion in five years (52 percent). For K-12 schools, funding levels will increase by over $3,600 per student in over levels. This reinvestment has given the state an opportunity to correct historical inequities in school district funding with continued implementation of the Local Control Funding Formula. The State Budget provides $2.9 billion in new funding, bringing the formula s implementation to 96 percent complete. The State Budget also invests in the State s higher education system to maintain the quality and affordability of one of California s greatest strengths. The State Budget keeps tuition at levels. It also provides significant new one-time and ongoing funds for the University of California and the California State University. Counteracting the Effects of Poverty. The State has an extensive safety net for the State s neediest residents who live in poverty. Since 2012, the General Fund has incurred new poverty-focused obligations totaling about $20 billion ($10.8 billion of which will be paid for through Proposition 98 funds). The State Budget includes the following new State efforts: The implementation of a $10.50 per hour minimum wage beginning on January 1, The first state cost-of-living increase for Supplemental Security Income/State Supplementary Payment (SSI/SSP) recipients since The repeal of the maximum family grant rule in CalWORKs, which denied aid to children who were born while their parents were receiving aid. Limiting asset recovery from the estates of deceased Medi-Cal recipients to the extent federally required. Strengthening Infrastructure. The State Budget includes over $2 billion in funds for various infrastructure improvements, including $1.3 billion General Fund for improving Sacramento office buildings including the State Capitol Annex. The State Budget also includes $688 million ($485 Appendix B Page 11

58 million General Fund) for critical deferred maintenance at levees, state parks, universities, community colleges, prisons, state hospitals, and other state facilities, as well as $270 million in lease-revenue bond authority for local jail facilities. Reducing the Cost of Housing. The State Budget reflects $3.6 billion in state and federal funding and award authority for various affordable housing and homelessness programs, including increased funding for CalWORKs rapid rehousing and emergency homeless shelters. Of this amount, the Budget sets aside $400 million General Fund for allocation later in the legislative session for affordable housing programs. The funding will be coupled with the Administration s proposed legislation requiring ministerial by right land use entitlements for multifamily in infill housing developments that include affordable housing. This will help constrain development costs, improve the pace of housing production, and encourage an increase in housing supply. In addition, legislation will authorize a $2 billion bond from a portion of future Proposition 63 mental health revenues to develop and administer homelessness and affordable housing programs for the mentally ill. Addressing Climate Change. The California Global Warming Solutions Act of 2006 (AB 32) set California s initial greenhouse gas emission reduction goals, and directed the state to maintain and continue reductions beyond California adopted several ambitious policies in 2015 that will further advance clean energy reduce greenhouse gas emissions. Over multiple years, the Cap and Trade program will help the state transform its communities particularly those disadvantaged ones into innovative, sustainable economic centers State Budget Provisions Specific to K thru 12 Education The State Budget includes total funding of $88.3 billion ($51.6 billion General Fund and $36.7 billion other funds) for all K-12 education programs. Proposition 98. Proposition 98 is a voter-approved constitutional amendment that guarantees minimum funding levels for K-12 schools and community colleges. The guarantee, which went into effect in the fiscal year, determines funding levels according to multiple factors including the level of funding in , General Fund revenues, per capita personal income, and school attendance growth or decline. The Local Control Funding Formula is the primary mechanism for distributing funding to support all students attending K-12 public schools in California. The State Budget includes Proposition 98 funding of $71.9 billion for , an increase of $3.5 billion over the State Budget level. When combined with increases of $1.5 billion in and as well as other one-time savings and adjustments in those years, the State Budget provides a $5.9 billion increased investment in K-14 education. Since , Proposition 98 funding for K-12 education has grown by more than $21.7 billion, representing an increase of more than $3,600 per student. The Proposition 98 maintenance factor an indicator of past reductions made to schools and community colleges totaled nearly $11 billion as recently as The State Budget reduces this obligation to $908 million. Significant K-12 Budget Adjustments in the State Budget. Appendix B Page 12

59 Local Control Funding Formula An increase of more than $2.9 billion Proposition 98 General Fund to continue the State s landmark transition to the Local Control Funding Formula. This formula commits most new funding to districts serving English language learners, students from low-income families, and youth in foster care. This increase will bring the formula to 96 percent of full implementation. College Readiness Block Grant An increase of $200 million one-time Proposition 98 General Fund for grants to school districts and charter schools serving high school students to provide additional services that support access and successful transition to higher education. These funds can be spent over the next three years. Allocation of the funding will be based on the number of students in grades 9 through 12 that are English-learners, low-income, or foster youth, with no school district or charter school receiving less than $75,000. The University of California will work to increase admissions of students who were enrolled in schools in which enrollment of English-learners, low-income students, or foster youth is greater than 75 percent of total enrollment. Teacher Workforce A combined increase of $35 million one-time General Fund ($10 million non-proposition 98 and $25 million Proposition 98) to fund several programs aimed at recruiting additional teachers and streamlining teacher preparation programs: o o Integrated Teacher Preparation Grant Program An increase of $10 million one-time non-proposition 98 General Fund for the Integrated Teacher Preparation Grant Program to provide competitive grants to colleges and universities to develop or improve four-year integrated teacher credential programs enabling credential candidates to receive both a teaching credential and a bachelor s degree. Classified School Employees Credentialing Program An increase of $20 million one-time Proposition 98, available for five years, to establish the California Classified School Employees Credentialing Program, and provide grants to K-12 local educational agencies to support recruitment of non-certificated school employees to participate in a teacher preparation program and become certificated classroom teachers in California public schools. o California Center on Teacher Careers An increase of $5 million one-time Proposition 98 General Fund for a multi-year competitive grant to a local educational agency to establish and operate the California Center on Teaching Careers to recruit qualified and capable individuals to the teaching profession. The center will host a referral database for teachers seeking employment, develop and distribute recruitment publications; conduct outreach activities to high school and college students; provide statewide public service announcements related to teacher recruitment; and provide prospective teachers information on credential requirements, financial aid, and loan assistance programs. Charter School Start Up Grants An increase of $20 million one-time Proposition 98 General Fund to support operational startup costs for new charter schools in 2016 and 2017, which will help offset the loss of federal funding previously available for this purpose. These funds will be available for distribution after all current federal funding for startup costs has been exhausted. Appendix B Page 13

60 California Collaborative for Educational Excellence An increase of $24 million one-time Proposition 98 General Fund for the California Collaborative for Educational Excellence to: (1) support statewide professional development training on use of the evaluation rubrics by local educational agencies, and (2) implement a pilot program to inform the Collaborative s long-term efforts related to advising and assisting local educational agencies in improving pupil outcomes. This funding will build local and state capacity to implement a system of continuous improvement in the eight state priority areas upon which the Local Control Funding Formula is based. Multi-Tiered Systems of Support An increase of $20 million one-time Proposition 98 General Fund to allow local educational agencies to provide services that assist and encourage multi-tiered systems of supports. These services support academic, behavioral, social, and emotional needs and have been successful in improving outcomes for all students. This funding builds upon the $10 million included in the 2015 Budget Act, which was awarded to the Orange County Office of Education to develop guidance and supportive services for schools statewide in implementing these systems. Restorative Justice Grants An increase of $18 million one-time Proposition 98 General Fund for truancy and dropout prevention grants, consistent with Proposition 47, the Safe Neighborhoods and School Act. Safe Drinking Water in Schools An increase of $9.5 million one-time Proposition 98 General Fund to create a grant program to improve access to safe drinking water for schools located in isolated and economically disadvantaged areas. The program will be developed and administered by the Water Resources Control Board in consultation with the State Department of Education. K-12 Mandates An increase of $1.3 billion one-time Proposition 98 General Fund to reimburse K-12 local educational agencies for the costs of state-mandated programs. These funds, combined with previous years investments, will substantially reduce outstanding mandate debt owed to schools, while providing school districts, county offices of education, and charter schools with discretionary resources to support critical investments at the local level. These funds can be used for activities such as deferred maintenance, professional development, induction for beginning teachers, instructional materials, technology, and the implementation of new educational standards. The full summary of the State Budget can be viewed at or Such websites are not incorporated herein by reference. Future State Budgets. The District receives a significant portion of its funding from the State. Changes in the revenues received by the State can affect the amount of funding, if any, to be received from the State by the District and other school districts in the State. The District cannot predict the extent of the budgetary problems the State will encounter in this Fiscal Year or in any future fiscal years, and, it is not clear what measures would be taken by the State to balance its budget, as required by law. In addition, the District cannot predict the final outcome of current and future State budget negotiations, the impact that such budgets will have on its finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State Appendix B Page 14

61 economic conditions and other factors, including the current economic downturn, over which the District has no control. Supplemental Information Concerning Litigation Against the State of California In June 1998, a complaint was filed in Los Angeles County Superior Court challenging the authority of the State Controller to make payments in the absence of a final, approved State Budget. The Superior Court judge issued a preliminary injunction preventing the State Controller from making payments including those made pursuant to continuing appropriations prior to the enactment of the State s annual budget. As permitted by the State Constitution, the Legislature immediately enacted and the Governor signed an emergency appropriations bill that allowed continued payment of various State obligations, including debt service, and the injunction was stayed by the California Court of Appeal, pending its decision. On May 29, 2003, the California Court of Appeal for the Second District decided the case of Steven White, et al. v. Gray Davis (as Governor of the State of California), et al. The Court of Appeal concluded that, absent an emergency appropriation, the State Controller may authorize the payment of state funds during a budget impasse only when payment is either (i) authorized by a continuing appropriation enacted by the Legislature, (ii) authorized by a self-executing provision of the California Constitution, or (iii) mandated by federal law. The Court of Appeal specifically concluded that the provisions of Article XVI, Section 8 of the California Constitution the provision establishing minimum funding of K-14 education enacted as part of Proposition 98 did not constitute a self-executing authorization to disburse funds, stating that such provisions merely provide formulas for determining the minimum funding to be appropriated every budget year but do not appropriate funds. The State Controller has concluded that the provisions of the Education Code establishing K-12 and county office revenue limit funding do constitute continuing appropriations enacted by the Legislature and, therefore, the State Controller has indicated that State payments of such amounts would continue during a budget impasse. However, no similar continuing appropriation has been cited with respect to K-12 categorical programs and revenue limit funding for community college districts, and the State Controller has concluded that such payments are not authorized pursuant to a continuing appropriation enacted by the Legislature and, therefore, cannot be paid during a budget impasse. The California Supreme Court granted the State Controller s Petition for Review on a procedural issue unrelated to continuous appropriations and on the substantive question as to whether the State Controller is authorized to pay State employees their full and regular salaries during a budget impasse. No other aspect of the Court of Appeal s decision was addressed by the State Supreme Court. On May 1, 2003, with respect to the substantive question, the California Supreme Court concluded that the State Controller is required, notwithstanding a budget impasse and the limitations imposed by State law, to timely pay those state employees who are subject to the minimum wage and overtime compensation provisions of the federal Fair Labor Standards Act. The Supreme Court also remanded the preliminary injunction issue to the Court of Appeal with instructions to set aside the preliminary injunction in its entirety. Retirement Programs Information set forth below regarding the District s retirement programs has been obtained from the District s most recent audited financial statements, included here as APPENDIX C. The information regarding Appendix B Page 15

62 the District s retirement programs are believed to be reliable but are not guaranteed as to accuracy or completeness, and should not be constructed as a representation by either the District or the Underwriter. Qualified employees are covered under multiple-employer contributory retirement 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 the California Public Employees Retirement System (CalPERS). California State Teachers Retirement System (CalSTRS) Plan Description. Teaching-certified employees of the District are provided with pensions through the State Teachers Retirement Plan (STRP) a cost-sharing multiple employer defined benefit pension plan administered by the California State Teachers Retirement System (CalSTRS). The Teachers Retirement Law (California Education Code Section et seq.), as enacted and amended by the California Legislature, established this plan and CalSTRS as the administrator. The benefit terms of the plans may be amended through legislation. CalSTRS issues a publicly available financial report that can be obtained at The information presented on such website, however, is not incorporated herein by reference. Benefits Provided. The STRP Defined Benefit Program has two benefit formulas: CalSTRS 2% at 60 (certified employees hired on or before December 31, 2012) - Eligible for normal retirement at age 60, with a minimum of five years of credited service. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service. Early retirement options are available at age 55 with five years of credited service or as early as age 50 with 30 years of credited service. The age factor for retirements after age 60 increases with each quarter year of age to 2.4 percent at age 63 or older. Members who have 30 years or more of credited service receive an additional increase of up to 0.2 percent to the age factor, known as the career factor. The maximum benefit with the career factor is 2.4 percent of final compensation. CalSTRS calculates retirement benefits based on a one-year final compensation for members who retired on or after January 1, 2001, with 25 or more years of credited service, or for classroom teachers with less than 25 years of credited service if the employer elected to pay the additional benefit cost prior to January 1, One-year final compensation means a member's highest average annual compensation earnable for 12 consecutive months calculated by taking the creditable compensation that a member could earn in a school year while employed on a fulltime basis, for a position in which the person worked. For members with less than 25 years of credited service, final compensation is the highest average annual compensation earnable for any three consecutive years of credited service. CalSTRS 2% at 62 (certified employees hired on or after January 1, 2013) - Eligible for normal retirement at age 62, with a minimum of five years of credited service. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service. An early retirement option is available at age 55. The age factor for retirement after age 62 increases with each quarter year of age to 2.4 percent at age 65 or older. Appendix B Page 16

63 All CalSTRS 2% at 62 members have their final compensation based on their highest average annual compensation earnable for three consecutive years of credited service. Contributions. Required member, employer and state contribution rates are set by the California Legislature and Governor and detailed in Teachers' Retirement Law. Contribution rates are expressed as a level percentage of payroll using the entry age normal actuarial cost method. A summary of statutory contribution rates and other sources of contributions to the Defined Benefit Program are as follows: Members - Under CalSTRS 2% at 60, the member contribution rate was 8.15 percent of applicable member earnings for fiscal year Under CalSTRS 2% at 62, members contribute 50 percent of the normal cost of their retirement plan, which resulted in a contribution rate of 8.15 percent of applicable member earnings for fiscal year In general, member contributions cannot increase unless members are provided with some type of "comparable advantage" in exchange for such increases. Under previous law, the Legislature could reduce or eliminate the 2 percent annual increase to retirement benefits. As a result of AB 1469, effective July 1, 2014, the Legislature cannot reduce the 2 percent annual benefit adjustment for members who retire on or after January 1, 2014, and in exchange for this "comparable advantage," the member contribution rates have been increased by an amount that covers a portion of the cost of the 2 percent annual benefit adjustment. Effective July 1, 2014, with the passage of AB 1469, member contributions for those under the 2% at 60 benefit structure increase from 8.0 percent to a total of percent of applicable member earnings, phased in over the next three years. For members under the 2% at 62 benefit structure, contributions will increase from 8.0 percent to percent of applicable member earnings, again phased in over three years, if there is no change to normal cost. Employers percent of applicable member earnings. In accordance with AB 1469, employer contributions will increase from 8.25 percent to a total of 19.1 percent of applicable member earnings phased in over seven years starting in The new legislation also gives the board limited authority to adjust employer contribution rates from July 1, 2021 through June 2046 in order to eliminate the remaining unfunded actuarial obligation related to service credited to members prior to July 1, The board cannot adjust the rate by more than 1 percent in a fiscal year, and the total contribution rate in addition to the 8.25 percent cannot exceed 12 percent. Appendix B Page 17

64 The CalSTRS employer contribution rate increases effective for fiscal year through fiscal year are summarized in the table below: CALSTRS EMPLOYER CONTRIBUTION RATE SUMMARY Fiscal Years to Source: CALSTRS (1) Increase from prior rate ceases in fiscal year Fiscal Year Prior Rate Increase Total FY % 2.48% 10.73% FY FY FY FY FY FY n/a (1) The District contributed $541,702 to the plan for the fiscal year ended June 30, State percent of the members' creditable earnings from the fiscal year ending in the prior calendar year. Additionally, beginning October 1, 1998, a statutory contribution rate of percent, adjustable annually in 0.25 percent increments up to a maximum of percent, of the creditable earnings from the fiscal year ending in the prior calendar year per Education Code Section 22955(b). This contribution is reduced to zero if there is no unfunded actuarial obligation and no normal cost deficit for benefits in place as of July 1, Based on the actuarial valuation, as of June 30, 2012 there was no normal cost deficit, but there was an unfunded obligation for benefits in place as of July 1, As a result, the state was required to make quarterly payments starting October 1, 2013, at an additional contribution rate of percent. As of June 30, 2014, the state contributed $200.7 million of the $267.6 million total amount for fiscal year As a result of AB 1469, the fourth quarterly payment of $66.9 million was included in an increased first quarter payment of $94 million for the fiscal year, which was transferred on July 1, In accordance with AB 1469, the portion of the state appropriation under Education Code Section 22955(b) that is in addition to the percent has been replaced by section (b) in order to fully fund the benefits in effect as of 1990 by The additional state contribution will increase from percent in to percent in The increased contributions end as of fiscal year Appendix B Page 18

65 The CalSTRS state contribution rates effective for fiscal year and beyond are summarized in the table below: CALSTRS STATE CONTRIBUTION RATE SUMMARY Fiscal Years to AV 1469 Increase For 1990 Benefit Structure Total State Appropriation to DB Program SBMA Effective Date Prior Rate Funding FY % 2.874% 2.50% 7.391% FY FY to FY (1) 2.50 (1) (1) FY and thereafter (1) (1) Source: CALSTRS (1) The new legislation also gives CalSTRS limited authority to adjust state contribution rates from July 1, 2017, through June 2046 in order to eliminate the remaining unfunded actuarial obligation associated with the 1990 benefit structure. The board cannot increase the rate by more than 0.50 percent in a fiscal year, and if there is no unfunded actuarial obligation, the contribution rate imposed to pay for the 1990 benefit structure shall be reduced to O percent. Rates in effect prior to July 1, 2014, are reinstated if necessary to address any remaining 1990 unfunded actuarial obligation from July 1, 2046, and thereafter. Appendix B Page 19

66 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions. At June 30, 2015 the District reported a liability of $7,571,388 for its proportionate share of the net pension liability for CalSTRS. The net pension liability was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by applying update procedures to an actuarial valuation as of June 30, The District's proportion of the net pension liability was based on a projection of the District's and the State of California s (non-employer contributing entity) long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts and the state, actuarially determined. At June 30, 2014, the District's proportion of contributions was percent. For the year ended June 30, 2015, the District recognized pension expense of $1,726,648. At June 30, 2015, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: CALSTRS DEFERRED FLOW OF RESOURCES Fiscal Year Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual earnings on plan investments $ - $ 2,650,865 Amortization of differences in earnings and proportions - - Net differences between projected and actual earnings on investments - - Changes in proportion and differences between District contributions and - - proportionate share of contributions Contributions made subsequent to measurement date 809,382 - Total 809,382 2,650,865 Source: Middletown Unified School District Audited Financial Statements. Differences between expected and actual experience and changes in assumptions are amortized over a closed period equal to the average remaining service life of plan members, which is 7 years as of June 30, The STRP net pension liability as of June 30, 2013 and the STRP net pension liability as of June 30, 2014 are based on the June 30, 2013 actuarial valuation for the first year of implementation. As a result, there are no differences between expected and actual experience or changes in assumptions subject to amortization. Deferred outflows and inflows related to differences between projected and actual earnings on plan investments are netted and amortized over a closed 5-year period. Additional Information Concerning CalSTRS, Actuarial Methods and Assumptions, Discount Rate. For information concerning CalSTRS, descriptions of the actuarial methods and assumptions, and an explanation of the discount rate used by CalSTRS please See APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2015, Note 13. California Public Employees Retirement System (CalPERS) Plan Description. The schools cost-sharing multiple-employer defined benefit pension plan Public Employer's Retirement Fund B (PERF B) is administered by the California Public Employees' Retirement System (CalPERS). Plan membership consists of non-teaching and non-certified employees of public Appendix B Page 20

67 schools (K-12), community college districts, offices of education, charter and private schools (elective) in the State of California. The Plan was established to provide retirement, death and disability benefits to non-teaching and noncertified employees in schools. The benefit provisions for Plan employees are established by statute. CalPERS issues a publicly available financial report that can be obtained at The information presented on such website, however, is not incorporated herein by reference. Benefits Provided. The benefits for the defined benefit plans are based on members' years of service, age, final compensation, and benefit formula. Benefits are provided for disability, death, and survivors of eligible members or beneficiaries. Members become fully vested in their retirement benefits earned to date after five years (10 years for State Second Tier members) of credited service. Contributions. The benefits for the defined benefit pension plans are funded by contributions from members and employers, and earnings from investments. Member and employer contributions are a percentage of applicable member compensation. Member contribution rates are defined by law and depend on the respective employer's benefit formulas. Employer contribution rates are determined by periodic actuarial valuations or by state statute. Actuarial valuations are based on the benefit formulas and employee groups of each employer. Employer contributions, including lump sum contributions made when agencies first join the PERF, are credited with a market value adjustment in determining contribution rates. The required contribution rates of most active plan members are based on a percentage of salary in excess of a base compensation amount ranging from zero dollars to $863 monthly. Required contribution rates for active plan members and employers as a percentage of payroll for the year ended June 30, 2015 were as follows: Members - The member contribution rate was 6.0 or 7.0 percent of applicable member earnings for fiscal year Employers - The employer contribution rate was percent of applicable member earnings. The District contributed $267,680 to the plan for the fiscal year ended June 30, Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions. At June 30, 2015, the District reported a liability of $2,270,487 for its proportionate share of the net pension liability. The net pension liability was measured as of June 30, The District's proportion of the net pension liability was based on the District's share of contributions to the pension plan relative to the contributions of all participating school Districts. At June 30, 2015, the District's proportion was percent. Additional Information Concerning CalPERS, Actuarial Methods and Assumptions, Discount Rate. For information concerning CalPERS, descriptions of the actuarial methods and assumptions, and an explanation of the discount rate used by CalPERS please See APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2015, Note 13. Appendix B Page 21

68 Recent Actions by CalPERS. On February 14, 2012, the CalPERS Board of Administration voted to reduce its discount rate, which is attributable to its expected price inflation and investment rate of return (net of administrative expenses), from 7.75% to 7.5%. As a result of such discount rate decrease, among other things, (i) the amounts of CalPERS member state and schools employer contributions will increase by 1.2 to 1.6% for Miscellaneous plans and 2.2 to 2.4% for Safety plans beginning fiscal year and (ii) the amounts of CalPERS member public agency contributions will increase by 1 to 2% for Miscellaneous plans and 2 to 3% for Safety plans beginning fiscal year The CalPERS Board adjustment has been undertaken in order to address underfunding of the CalPERS funds, which arose from significant losses incurred as a result of the economic crisis arising in 2008 and persists due to a slower than anticipated, subsequent economic recovery. The City is unable to predict what the amount of CalPERS liabilities will be in the future, or the amount of the CalPERS contributions which the City may be required to make. At its April 17, 2013 meeting, the CalPERS Board of Administration approved a recommendation to change the CalPERS amortization and smoothing policies. Prior to this change, CalPERS employed an amortization and smoothing policy which spread investment returns over a 15-year period with experience gains and losses paid for over a rolling 30-year period. After this change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period. The new amortization and smoothing policy were used for the first time in the June 30, 2013 actuarial valuations. These valuations were performed in the fall of 2014 and set employer contribution rates for the fiscal year On February 20, 2014, the CalPERS Board of Administration adopted new mortality and retirement assumptions as part of a regular review of demographic experience. Key assumption changes included longer post-retirement life expectancy and earlier retirement ages. The impact of the assumption changes will be phased in over five years, with a twenty-year amortization, beginning in the Fiscal Year. According to CalPERS, the current amortization and smoothing policy was designed to reduce volatility in employer contribution rates, and, although the policy accomplished this goal fairly well since its adoption, a number of concerns have developed: The use of an actuarial value of assets corridor can lead to significant single year increases to rates in years when there are large investment losses. The use of long asset smoothing periods and long rolling amortization periods result in slow progress toward full funding. The use of an actuarial value of assets requires the disclosure of two different funded statuses and unfunded liability numbers in actuarial valuation reports. This adds confusion and inhibits transparency. The use of rolling amortization and long asset smoothing periods makes it difficult for employers to predict when contribution rates will peak and how high that peak will be. Appendix B Page 22

69 The use of rolling amortization and asset smoothing periods may result in additional calculations for the new accounting standards. These calculations would be avoided with a quicker funded status recovery. According to CalPERS, the adoption of the new smoothing and amortization policies will change future employer contribution rates, as follows: Funding levels will improve, which will reduce the funding level risk. Local agencies plans will experience more rate volatility in normal years, but a much reduced chance of very large rate increases in years when there are large investment losses. Contribution rates in the near term will increase. Long-term contribution rates will be lower. There will be greater transparency about the timing and impact of future employer contribution rate changes. The new policy eliminates the need for an actuarial value of assets. As a result, there will be only one funded status and unfunded liability in actuarial reports. There will be less confusion when the new accounting standards are implemented since there will be no need for extra liability calculations. California Public Employees Pension Reform Act of On September 12, 2012, the Governor signed into law the California Public Employees Pension Reform Act of 2013 ( PEPRA ), which impacted various aspects of public retirement systems in the State, including the STRS and PERS programs. In general, PEPRA (i) increased the retirement age for public employees depending on job function, (ii) capped the annual pension benefit payouts for public employees hired after January 1, 2013, (iii) required public employees hired after January 1, 2013 to pay at least 50% of the costs of their pension benefits (as described in more detail below), (iv) required final compensation for public employees hired after January 1, 2013 to be determined based on the highest average annual pensionable compensation earned over a period of at least 36 consecutive months, and (v) attempted to address other perceived abuses in the public retirement systems in the State. PEPRA applies to all public employee retirement systems in the State, except the retirement systems of the University of California, and charter cities and charter counties whose pension plans are not governed by State law. PEPRA s provisions went into effect on January 1, 2013 with respect to new State, school, and city and local agency employees hired on or after that date; existing employees who are members of employee associations, including employee associations of the District, have a five-year window to negotiate compliance with PEPRA through collective bargaining. PERS has predicted that the impact of PEPRA on employees and employers, including the District and other employers in the PERS system, will vary, based on each employer s current level of benefits. As a result of the implementation of PEPRA, new members must pay at least 50% of the normal costs of the plan, which can fluctuate from year to year. To the extent that the new formulas lower retirement benefits, employer contribution rates could decrease over time as current employees retire and employees subject to the new formulas make up a larger percentage of the workforce. This change would, in some circumstances, result in a lower retirement benefit for employees than they currently earn. Appendix B Page 23

70 With respect to the STRS pension program, employees hired after January 1, 2013 will pay the greater of either (1) fifty percent of the normal cost of their retirement plan, rounded to the nearest onequarter percent, or (2) the contribution rate paid by then-current members (i.e., employees in the STRS plan as of January 1, 2013). The member contribution rate could be increased from this level through collective bargaining or may be adjusted based on other factors. Employers will pay at least the normal cost rate, after subtracting the member s contribution. The District is unable to predict the amount of future contributions it will have to make to PERS and STRS as a result of the implementation of PEPRA, and as a result of negotiations with its employee associations, or, notwithstanding the adoption of PEPRA, resulting from any legislative changes regarding the PERS and STRS employer contributions that may be adopted in the future. Postemployment Benefits Other Than Pension Benefits Plan Description. The Postemployment Benefit Plan (the Plan ) is a single-employer defined benefit healthcare plan administered by the Middletown Unified School District. The Plan provides medical, dental and vision insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 16 retirees and beneficiaries currently receiving benefits and 33 active plan members. Funding Policy. The contribution requirements of plan members and the District are established and may be amended by the District, the District s bargaining units and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined annually through agreements between the District, the District's bargaining units and unrepresented groups. The required contribution is based on projected payas-you-go financing requirements. The District s annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District's net OPEB obligation: OPEB OBLIGATIONS Fiscal Year Annual required contribution 146,285 Interest on net OPEB obligation 66 Adjustment to annual required contribution (82) Annual OPEB cost (expense) 146,269 Contributions made (309,393) Increase in net OPEB obligation (163,124) Net OPEB obligation, beginning of the year (129,226) Net OPEB obligation (asset), end of the year (292,350) Source: Middletown Unified School District Audited Financial Statements. Appendix B Page 24

71 Trend information for annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB asset/obligation is as follows: HISTORICAL OPEB OBLIGATIONS Fiscal Years to Fiscal Year Annual OPEB Cost Percentage Contributed Net OPEB Obligation (Asset) , % (292,350) , (129,226) , ,197 Source: Middletown Unified School District Audited Financial Statements. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. See also APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2015, Note 10. District Debt Structure General Obligation Bonds. The following table shows all of the District s outstanding general obligation bonds. ISSUED AND OUTSTANDING GENERAL OBLIGATION BONDED DEBT As of October 5, 2016 Amount of Original Issue Amount Outstanding (as of 10/5/16) (1) Dated Date Series Final Maturity 3/22/2007 Election of 2006, Series $ 4,999, $ 145, /2/2008 Election of 2006, Series ,496, ,930, /20/2009 Election of 2006, Series ,800, , /22/ Refunding Bonds ,470, ,345, /5/ Refunding Bonds ,950, ,950, Total $25,716, $16,867, (1) The amount of capital appreciation bonds outstanding is expressed in terms of original denominational amounts. Appendix B Page 25

72 The following table shows the District s annual requirements to amortize its outstanding general obligation bonds, assuming no optional redemption: AGGREGATE ANNUAL DEBT SERVICE REQUIREMENTS FOR ALL OUTSTANDING BONDS As of August 2, 2016 Election of 2006 Series 2007 Election of 2006 Series 2008 Election of 2006 Series Refunding 2016 Refunding Total Debt Service Date 8/1/2017 $150, $ 205, $ 265, $ 189, $ 252, $ 1,062, /1/ , , , , ,058, /1/ , , , , ,093, /1/ , , , , ,128, /1/ , , , , ,164, /1/ , , , , ,214, /1/ , , , , ,264, /1/ , , , ,142, /1/ , , , , /1/ , , , ,375, /1/ , , , ,349, /1/ , , , ,408, /1/ , , , ,194, /1/ , , ,418, /1/ , , ,467, /1/ , , ,495, /1/ , , ,555, Total $150, $5,806, ,175, $6,371, $7,870, $22,374, All debt service payments on the bonds, including refunding bonds, are payable from an ad valorem tax levied and collected by the County on assessed property in the District. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS The principal of and interest on the Bonds are payable from the proceeds of an ad valorem tax levied by the County for the payment thereof. (See THE BONDS Security. ) Articles XIIIA, XIIIB, XIIIC and XIIID of the California Constitution, Propositions 98, 111, 218 and 39, and certain other provisions of law discussed below, are included in this section to describe the potential effect of these Constitutional and statutory measures on the ability of the County to levy taxes and of the District to spend tax proceeds and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the County to levy taxes for payment of the Bonds. The tax levied by the County for payment of the Bonds was approved by the District s voters in compliance with Article XIIIA, Article XIIIC, and all applicable laws. Article XIIIA of the California Constitution Article XIIIA of the State Constitution, adopted and known as Proposition 13, was approved by the voters in June Section 1(a) of Article XIIIA limits the maximum ad valorem tax on real property to 1% of full cash value, and provides that such tax shall be collected by the counties and apportioned Appendix B Page 26

73 according to State law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to ad valorem taxes levied to pay interest and redemption charges on (i) indebtedness approved by the voters prior to July 1, 1978, or (ii) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast on the proposition, or (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Section 2 of Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the fiscal year tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. The Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently recapture such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending on the assessor s measure of the restored value of the damaged property. The State courts have upheld the constitutionality of this procedure. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except the 1% base tax levied by each county and taxes to pay debt service on indebtedness approved by the voters as described above. Since its adoption, Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of the District. Both the State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA. Legislation Implementing Article XIIIA Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The 1% property tax is automatically levied by the county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to That portion of annual property tax revenues generated by increases in assessed valuations within each tax rate area within a county, subject to redevelopment agency, if any, claims on tax increment and subject to changes in organizations, if any, of affected jurisdictions, is allocated to each jurisdiction within the tax rate area in the same proportion that the total property tax revenue from the tax rate area for the prior year was allocated to such jurisdictions. Appendix B Page 27

74 Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the annual adjustment not to exceed 2% are allocated among the various jurisdictions in the taxing area based upon their respective situs. Any such allocation made to a local agency continues as part of its allocation in future years. Beginning in fiscal year , assessors in California no longer record property values on tax rolls at the assessed value of 25% of market value which was expressed as $4 per $100 of assessed value. All taxable property is now shown at 100% of assessed value on the tax rolls. Consequently, the tax rate is expressed as $1 per $100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of taxable value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. Both the United States Supreme Court and the California State Supreme Court have upheld the general validity of Article XIIIA. Article XIIIB of the California Constitution Article XIIIB of the State Constitution, as subsequently amended by Propositions 98 and 111, respectively, limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and in population and for transfers in the financial responsibility for providing services and for certain declared emergencies. As amended, Article XIIIB defines (a) change in the cost of living with respect to school districts to mean the percentage change in California per capita income from the preceding year, and (b) change in population with respect to a school district to mean the percentage change in the average daily attendance of the school district from the preceding fiscal year. For fiscal years beginning on or after July 1, 1990, the appropriations limit of each entity of government will be the appropriations limit for the fiscal year adjusted for the changes made from that fiscal year pursuant to the provisions of Article XIIIB, as amended. The appropriations of an entity of local government subject to Article XIIIB limitations include the proceeds of taxes levied by or for that entity and the proceeds of certain state subventions to that entity. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to the entity from (a) regulatory licenses, user charges and user fees (but only to the extent that these proceeds exceed the reasonable costs in providing the regulation, product or service), and (b) the investment of tax revenues. Appropriations subject to limitation do not include (a) refunds of taxes, (b) appropriations for certain debt service, (c) appropriations required to comply with certain mandates of the courts or the federal government, (d) appropriations of certain special districts, (e) appropriations for all qualified capital outlay projects as defined by the legislature, (f) appropriations derived from certain fuel and vehicle taxes and (g) appropriations derived from certain taxes on tobacco products. Appendix B Page 28

75 Article XIIIB includes a requirement that all revenues received by an entity of government other than the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be returned by a revision of tax rates or fee schedules within the next two subsequent fiscal years. Article XIIIB also includes a requirement that 50% of all revenues received by the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it will be transferred and allocated to the State School Fund pursuant to Section 8.5 of Article XVI of the State Constitution. Unitary Property AB 454 (Chapter 921, Statutes of 1986) provides that revenues derived from most utility property assessed by the State Board of Equalization ( Unitary Property ), commencing with the fiscal year, will be allocated as follows: (1) each jurisdiction will receive up to 102% of its prior year Stateassessed revenue; and (2) if county-wide revenues generated from Unitary Property are less than the previous year s revenues or greater than 102% of the previous year s revenues, each jurisdiction will share the burden of the shortfall or excess revenues by a specified formula. This provision applies to all Unitary Property except railroads, whose valuation will continue to be allocated to individual tax rate areas. The provisions of AB 454 do not constitute an elimination of the assessment of any State-assessed properties nor a revision of the methods of assessing utilities by the State Board of Equalization. Generally, AB 454 allows valuation growth or decline of Unitary Property to be shared by all jurisdictions in a county. California Lottery In the November 1984 general election, the voters of the State approved a Constitutional Amendment establishing a California State Lottery, the net revenues (revenues less expenses and prizes) of which shall be used to supplement other moneys allocated to public education. The legislation further requires that the funds shall be used for the education of pupils and students and cannot be used for the acquisition of real property, the construction of facilities or the financing of research. Allocation of Lottery net revenues is based upon the average daily attendance of each school and community college district; however, the exact allocation formula may vary from year to year. The District estimates that it received $229,337 in Lottery aid in fiscal year , representing approximately 1% of the District s general fund revenues. At this time, the amount of additional revenues that may be generated by the Lottery in any given year cannot be predicted. Proposition 46 On June 3, 1986, California voters approved Proposition 46, which added an additional exemption to the 1% tax limitation imposed by Article XIIIA. Under this amendment to Article XIIIA, local governments and school and community college districts may increase the property tax rate above 1% for the period necessary to retire new, general obligation bonds, if two-thirds of those voting in a local election approve the issuance of such bonds and the money raised through the sale of the bonds is used exclusively to purchase or improve real property. Appendix B Page 29

76 Proposition 39 On November 7, 2000, California voters approved Proposition 39, called the Smaller Classes, Safer Schools and Financial Accountability Act (the Smaller Classes Act ) which amends Section 1 of Article XIIIA, Section 18 of Article XVI of the California Constitution and Section of the California Education Code and allows an alternative means of seeking voter approval for bonded indebtedness by 55% of the vote, rather than the two-thirds majority required under Section 18 of Article XVI of the Constitution. The 55% voter requirement applies only if the bond measure submitted to the voters includes, among other items: (1) a restriction that the proceeds of the bonds may be used for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities, (2) a list of projects to be funded and a certification that the school district board has evaluated safety, class size reduction, and information technology needs in developing that list and (3) that annual, independent performance and financial audits will be conducted regarding the expenditure and use of the bond proceeds. Section 1(b)(3) of Article XIIIA has been added to exempt the 1% ad valorem tax limitation that Section 1(a) of Article XIIIA of the Constitution levies, to pay bonds approved by 55% of the voters, subject to the restrictions explained above. The Legislature enacted AB 1908, Chapter 44, which became effective upon passage of Proposition 39 and amends various sections of the Education Code. Under amendments to Section and of the Education Code, the following limits on ad valorem taxes apply in any single election: (1) for an elementary and high school district, indebtedness shall not exceed $30 per $100,000 of taxable property, (2) for a unified school district, indebtedness shall not exceed $60 per $100,000 of taxable property, and (3) for a community college district, indebtedness shall not exceed $25 per $100,000 of taxable property. These requirements are not part of Proposition 39 and can be changed with a majority vote of both houses of the Legislature and approval by the Governor. Finally, AB 1908 requires that a citizens oversight committee must be appointed who will review the use of the bond funds and inform the public about their proper usage. Alternatively, charter schools are independent public schools formed by teachers, parents, and other individuals and/or groups. The schools function under contracts or charters with local school districts, county boards of education, or the State Board of Education. They are exempt from most State laws and regulations affecting public schools. As of June 2000, there were 309 charter schools in California, serving about 105,000 students (less than 2% of all K-12 students). The law permits an additional 100 charter schools each year until 2003, at which time the charter school program will be reviewed by the Legislature. Under current law, school districts must allow charter schools to use, at no charge, facilities not currently used by the district for instructional or administrative purposes. Proposition 39 requires that each local K-12 school district provide charter school facilities sufficient to accommodate the charter school s students. A K-12 school district, however, would not be required to spend its general discretionary revenues to provide these facilities for charter schools. Instead, the district could choose to use these or other revenues including State and local bonds. Such facilities must be reasonably equivalent to the district schools that such charter students would otherwise attend. The respective K-12 school district is permitted charge the charter school for its facilities if district discretionary revenues are used to fund the facilities and a district may decline to provide facilities for a Appendix B Page 30

77 charter school with a current or projected enrollment of fewer than 80 students who are residents in the District. Article XIIIC and XIIID of the California Constitution On November 5, 1996, an initiative to amend the California Constitution known as the Right to Vote on Taxes Act ( Proposition 218 ) was approved by a majority of California voters. Proposition 218 added Articles XIIIC and XIIID to the State Constitution and requires majority voter approval for the imposition, extension or increase of general taxes and 2/3 voter approval for the imposition, extension or increase of special taxes by a local government, which is defined in Proposition 218 to include counties. Proposition 218 also provides that any general tax imposed, extended or increased without voter approval by any local government on or after January 1, 1995, and prior to November 6, 1996 shall continue to be imposed only if approved by a majority vote in an election held within two years following November 6, All local taxes and benefit assessments which may be imposed by public agencies will be defined as general taxes (defined as those used for general governmental purposes) or special taxes (defined as taxes for a specific purpose even if the revenues flow through the local government s general fund) both of which would require a popular vote. New general taxes require a majority vote and new special taxes require a two-thirds vote. Proposition 218 also extends the initiative power to reducing or repealing local taxes, assessments, fees and charges, regardless of the date such taxes, assessments or fees or charges were imposed, and lowers the number of signatures necessary for the process. In addition, Proposition 218 limits the application of assessments, fees and charges and requires them to be submitted to property owners for approval or rejection, after notice and public hearing. The District has no power to impose taxes except property taxes associated with a general obligation bond election, following approval by 55% or 2/3 of the District s voters, depending upon the Article of the Constitution under which it is passed. Proposition 218 also expressly extends the initiative power to give voters the power to reduce or repeal local taxes, assessments, fees and charges, regardless of the date such taxes, assessments, fees or charges were imposed, and reduces the number of signatures required for the initiative process. This extension of the initiative power to some extent constitutionalizes the February 6, 1995 State Supreme Court decision in Rossi v. Brown, which upheld an initiative that repealed a local tax and held that the State constitution does not preclude the repeal, including the prospective repeal, of a tax ordinance by an initiative, as contrasted with the State constitutional prohibition on referendum powers regarding statutes and ordinances which impose a tax. Generally, the initiative process enables California voters to enact legislation upon obtaining requisite voter approval at a general election. Proposition 218 extends the authority stated in Rossi v. Brown by expanding the initiative power to include reducing or repealing assessments, fees and charges, which had previously been considered administrative rather than legislative matters and therefore beyond the initiative power. This extension of the initiative power is not limited by the terms of Proposition 218 to fees imposed after November 6,1996 and absent other legal authority could result in retroactive reduction in any existing taxes, assessments or fees and charges. Such legal authority could include the limitations imposed on the impairment of contracts under the contract clause of the United States Constitution. Proposition 218 has no effect upon the District s ability to pursue approval of a general obligation bond or a Mello-Roos Community Facilities District bond in the future, although certain procedures and burdens of proof may be altered slightly. The District is unable to predict the nature of any future Appendix B Page 31

78 challenges to Proposition 218 or the extent to which, if any, Proposition 218 may be held to be unconstitutional. Propositions 98 and 111 On November 8, 1988, voters approved Proposition 98, a combined initiative constitutional amendment and statute called the Classroom Instructional Improvement and Accountability Act (the Accountability Act ). Certain provisions of the Accountability Act have, however, been modified by Proposition 111, discussed below, the provisions of which became effective on July 1, The Accountability Act changes State funding of public education below the university level and the operation of the State s appropriations limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (hereinafter referred to collectively as K-14 school districts ) at a level equal to the greater of (a) the same percentage of general fund revenues as the percentage appropriated to such districts in , and (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The Accountability Act permits the Legislature to suspend this formula for a one-year period. Since the Accountability Act is unclear in some details, there can be no assurances that the Legislature or a court might not interpret the Accountability Act to require a different percentage of general fund revenues to be allocated to K-14 school districts, or to apply the relevant percentage to the State s budgets in a different way than is proposed in the Governor s Budget. In any event, the Governor and other fiscal observers expect the Accountability Act to place increasing pressure on the State s budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State s ability to fund such other programs by raising taxes. The Accountability Act also changes how tax revenues in excess of the State appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 school districts. Any such transfer to K-14 school districts would be excluded from the appropriations limit for K-14 school districts and the K-14 school district appropriations limit for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 school districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to K-14 school districts is 4% of the minimum State spending for education mandated by the Accountability Act. On June 5, 1990, the voters approved Proposition 111 (Senate Constitutional Amendment No. 1) called the Traffic Congestion Relief and Spending Limit Act of 1990 ( Proposition 111 ) which further modified Article XIIIB and Sections 8 and 8.5 of Article XVI of the State Constitution with respect to appropriations limitations and school funding priority and allocation. The most significant provisions of Proposition 111 are summarized as follows: a. Annual Adjustments to Spending Limit. The annual adjustments to the Article XIIIB spending limit were liberalized to be more closely linked to the rate of economic growth. Instead of being tied to the Consumer Price Index, the change in the cost of living is now measured by the change in California per capita personal income. The definition of change in Appendix B Page 32

79 population specifies that a portion of the State s spending limit is to be adjusted to reflect changes in school attendance. b. Treatment of Excess Tax Revenues. Excess tax revenues with respect to Article XIIIB are now determined based on a two-year cycle, so that the State can avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year are under its limit. In addition, the Proposition 98 provision regarding excess tax revenues was modified. After any two-year period, if there are excess State tax revenues, 50% of the excess are to be transferred to K-14 school districts with the balance returned to taxpayers; under prior law, 100% of excess State tax revenues went to K-14 school districts, but only up to a maximum of 4% of the schools minimum funding level. Also, reversing prior law, any excess State tax revenues transferred to K-14 school districts are not built into the school districts base expenditures for calculating their entitlement for State aid in the next year, and the State s appropriations limit is not to be increased by this amount. c. Exclusions from Spending Limit. Two exceptions were added to the calculation of appropriations which are subject to the Article XIIIB spending limit. First, there are excluded all appropriations for qualified capital outlay projects as defined by the Legislature. Second, there are excluded any increases in gasoline taxes above the 1990 level (then nine cents per gallon), sales and use taxes on such increment in gasoline taxes, and increases in receipts from vehicle weight fees above the levels in effect on January 1, These latter provisions were necessary to make effective the transportation funding package approved by the Legislature and the Governor, which expected to raise over $15 billion in additional taxes from 1990 through 2000 to fund transportation programs. d. Recalculation of Appropriations Limit. The Article XIIIB appropriations limit for each unit of government, including the State, is to be recalculated beginning in fiscal year It is based on the actual limit for fiscal year , adjusted forward to as if Proposition 111 had been in effect. e. School Funding Guarantee. There is a complex adjustment in the formula enacted in Proposition 98 which guarantees K-14 school districts a certain amount of State general fund revenues. Under prior law, K-14 school districts were guaranteed the greater of (1) 40.9% of State general fund revenues (the first test ) or (2) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the second test ). Under Proposition 111, schools will receive the greater of (1) the first test, (2) the second test, or (3) a third test, which will replace the second test in any year when growth in per capita State general fund revenues from the prior year is less than the annual growth in California per capital personal income. Under the third test, schools will receive the amount appropriated in the prior year adjusted for change in enrollment and per capita State general fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test will become a credit to schools which will be paid in future years when State general fund revenue growth exceeds personal income growth. Appendix B Page 33

80 Proposition 30 On November 6, 2012, voters of the State approved the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment (also known as Proposition 30 ), which temporarily increases the State Sales and Use Tax and personal income tax rates on higher incomes. Proposition 30 temporarily imposes an additional tax on all retailers, at the rate of 0.25% of gross receipts from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, Proposition 30 also imposes an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013 and before January 1, 2017, for storage, use, or other consumption in the State. This excise tax will be levied at a rate of 0.25% of the sales price of the property so purchased. Beginning in the taxable year commencing January 1, 2012 and through the taxable year ending December 31, 2018, Proposition 30 increases the marginal personal income tax rate by: (i) 1% for taxable income over $250,000 but less than $300,000 for single filers (over $340,000 but less than $408,000 for head-of-household filers and over $500,000 but less than $600,000 for joint filers), (ii) 2% for taxable income over $300,000 but less than $500,000 for single filers (over $408,000 but less than $680,000 for head-of-household filers and over $600,000 but less than $1,000,000 for joint filers), and (iii) 3% for taxable income over $500,000 for single filers (over $680,000 for head-of-household filers and over $1,000,000 for joint filers). The revenues generated from the temporary tax increases will be included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Propositions 98 and 111 herein. From an accounting perspective, the revenues generated from the temporary tax increases are being deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the EPA ). Pursuant to Proposition 30, funds in the EPA are allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. 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 will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs. The California Children's Education and Health Care Protection Act of 2016, also known as Proposition 55, is a proposed constitutional amendment initiative that has qualified for the November 8, 2016 general election in California. Proposition 55 would extend the increases to personal income tax rates for high-income taxpayers that were approved as part of Proposition 30. Under Proposition 55, the Proposition 30 income tax rate increases on high-income Californians would not expire at the end of 2018, as scheduled under current law. The proposal would extend the income tax rate increases through Tax revenue received under Proposition 55 would be allocated 89% to K-12 schools and 11% to community colleges. Under the proposed constitutional amendment, the sales tax rate increase under Proposition 30 would not be extended. The District can make no representation as to whether Proposition 55 will be approved. Appendix B Page 34

81 Proposition 2 Proposition 2, also known as The Rainy Day Budget Stabilization Fund Act ( Proposition 2 ) was approved by California voters on November 4, Proposition 2 provides for changes to State budgeting practices, including revisions to certain conditions under which transfers are made into and from the State s Budget Stabilization Account (the Stabilization Account ) established by the California Balanced Budget Act of 2004 (also known as Proposition 58). Commencing in Fiscal Year and for each Fiscal Year thereafter, the State is required to make an annual transfer to the Stabilization Account in an amount equal to 1.5% of estimated State general fund revenues (the Annual Stabilization Account Transfer ). For a Fiscal Year in which the estimated State general fund revenues allocable to capital gains taxes exceed 8% of the total estimated general fund tax revenues, supplemental transfers to the Stabilization Account (a Supplemental Stabilization Account Transfer ) are also required. Such excess capital gains taxes, which are net of any portion thereof owed to K-14 school districts pursuant to Proposition 98, are required to be transferred to the Stabilization Account. In addition, for each Fiscal Year, Proposition 2 increases the maximum size of the Stabilization Account to 10% of estimated State general fund revenues. Such excess amounts are to be expended on State infrastructure, including deferred maintenance, in any Fiscal Year in which a required transfer to the Stabilization Account would result in an amount in excess of the 10% threshold. For the period from Fiscal Year through Fiscal Year , Proposition 2 requires that half of any such transfer to the Stabilization Account (annual or supplemental), shall be appropriated to reduce certain State liabilities, including repaying State interfund borrowing, reimbursing local governments for State mandated services, making certain payments owed to K-14 school districts, and reducing or prefunding accrued liabilities associated with State-level pension and retirement benefits. After Fiscal Year , the Governor and the Legislature are given discretion to apply up to half of any required transfer to the Stabilization Account to the reduction of such State liabilities and any amount not so applied shall be transferred to the Stabilization Account or applied to infrastructure, as set forth above. Accordingly, the conditions under which the Governor and the Legislature may draw upon or reduce transfers to the Stabilization Account are impacted by Proposition 2. Unilateral discretion to suspend transfers to the Stabilization Account are not retained by the Governor. Neither does the Legislature retain discretion to transfer funds from the Stabilization Account for any reason, as was previously provided by law. Instead, the Governor must declare a budget emergency (defined as an emergency within the meaning of Article XIIIB of the Constitution) or a determination that estimated resources are inadequate to fund State general fund expenditure, for the current or ensuing Fiscal Year, at a level equal to the highest level of State spending within the three immediately preceding Fiscal Years, and any such declaration must be followed by a legislative bill providing for a reduction or transfer. Draws on the Stabilization Account are limited to the amount necessary to address the budget emergency, and no draw in any Fiscal Year may exceed 50% of the funds on deposit in the Stabilization Account, unless a budget emergency was declared in the preceding Fiscal Year. Proposition 2 also provides for the creation of a Public School System Stabilization Account (the Public School System Stabilization Account ) into which transfers will be made in any Fiscal Year in which a Supplemental Stabilization Account Transfer is required, requiring that such transfer will be equal to the portion of capital gains taxes above the 8% threshold that would otherwise be paid to K-14 school districts as part of the minimum funding guarantee. Transfers to the Public School System Stabilization Account are only to be made if certain additional conditions are met, including that: (i) the minimum funding guarantee was not suspended in the immediately preceding Fiscal Year, (ii) the Appendix B Page 35

82 operative Proposition 98 formula for the Fiscal Year in which a Public School System Stabilization Account transfer might be made is Test 1, (iii) no maintenance factor obligation is being created in the budgetary legislation for the Fiscal Year in which a Public School System Stabilization Account transfer might be made, (iv) all prior maintenance factor obligations have been fully repaid, and (v) the minimum funding guarantee for the Fiscal Year in which a Public School System Stabilization Account transfer might be made is higher than the immediately preceding Fiscal Year, as adjusted for ADA growth and cost of living. Under Proposition 2, the size of the Public School System Stabilization Account is capped at 10% of the estimated minimum guarantee in any Fiscal Year, and any excess funds must be paid to K-14 school districts. Any reductions to a required transfer to, or draws upon, the Public School System Stabilization Account, are subject to the budget emergency requirements as described above. However, in any Fiscal Year in which the estimated minimum funding guarantee is less than the prior year s funding level, as adjusted for ADA growth and cost of living, Proposition 2 also mandates draws on the Public School System Stabilization Account. Proposition 26 On November 2, 2010, voters in the State approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of tax to include any levy, charge, or exaction of any kind imposed by a local government except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor s burdens on, or benefits received from, the governmental activity. California Senate Bill 222 Senate Bill 222 ( SB 222 ) was signed by the California Governor on July 13, 2015 and became effective on January 1, SB 222 amended Section of the California Education Code and added Section to the California Government Code to provide that voter approved general obligation bonds which are secured by ad valorem tax collections such as the Bonds are secured by a statutory lien on all revenues received pursuant to the levy and collection of the property tax imposed to service those bonds. Said lien shall attach automatically and is valid and binding from the time the bonds are executed and delivered. The lien is enforceable against the issuer, its successors, transferees, and creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without Appendix B Page 36

83 the need for any further act. The effect of SB 222 is the treatment of general obligation bonds as secured debt in bankruptcy due to the existence of a statutory lien. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID of the State Constitution and Propositions 2, 22, 26, 30, 39, 46 and 98 were each adopted as measure that qualified for the State ballot pursuant to the State s initiative process. From time to time other initiative measures could be adopted further affecting District revenues or the District s ability to expend revenues. The nature and impact of these measures cannot be anticipated by the District. Appendix B Page 37

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85 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2015 Appendix C

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87 MIDDLETOWN UNIFIED SCHOOL DISTRICT OF LAKE COUNTY MIDDLETOWN, CALIFORNIA JUNE 30, 2015 GOVERNING BOARD MEMBER OFFICE TERM EXPIRES William Wright President November 2016 Jay Albertson Clerk November 2018 Kim Tangermann Member November 2018 Sandy Tucker Member November 2016 Lynette Carrillo Member November 2018 ADMINISTRATION Korby Olson Sherrie Ebyam Superintendent Director of Business Services

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89 MIDDLETOWN UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2015 I - FINANCIAL SECTION Independent Auditors' Report 2 Management's Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements Governmental Funds Balance Sheet 18 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 20 Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance 21 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and 23 Changes in Fund Balances to the Statement of Activities Fiduciary Funds Statement of Net Position 25 Fiduciary Funds Statement of Revenues, Expenses, and Changes in Fund Net Position 26 Notes to Financial Statements 27 II - REQUIRED SUPPLEMENTARY INFORMATION General Fund Budgetary Comparison Schedule 59 Schedule of Other Postemployment Benefit (OPEB) Funding Progress 60 Schedule of the District s Proportionate Share of the Net Pension Liability 61 Schedule of District s Contributions for Pensions 62 Note to Required Supplementary Information 63 III - SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 65 Local Education Agency Organization Structure 66 Schedule of Average Daily Attendance 67 Schedule of Instructional Time 68 Reconciliation of Annual Financial and Budget Report with Audited Financial Statements 69 Schedule of Financial Trends and Analysis 70 Schedule of Charter Schools 71 Combining Statements Non-Major Governmental Funds Combining Balance Sheet 72 Combining Statement of Revenues, Expenditures, and Changes in Fund Balance 73 Note to Supplementary Information 74 IV - INDEPENDENT AUDITORS' REPORTS Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and other 77 Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditors Report on Compliance for Each Major Federal Program and Report on Internal 79 Control Over Compliance Required by the OMB Circular A-133 Independent Auditors' Report on State Compliance 81

90 MIDDLETOWN UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2015 V - SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditors' Results 85 Financial Statement Findings 86 Federal Award Findings and Questioned Costs 87 State Award Findings and Questioned Costs 88 Summary Schedule of Prior Audit Findings 89

91 I - Financial Section 1

92 Cichella & Tokunaga, LLP Certified Public Accountants 4671 Golden Foothill Parkway El Dorado Hills, CA Voice: (877) Fax: (916) INDEPENDENT AUDITORS' REPORT Governing Board Middletown Unified School District Middletown, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Middletown Unified School District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Standards and Procedures for Audits of California K-12 Local Education Agencies , issued by the California Education Audit Appeals Panel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 2

93 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the Middletown Unified School District, as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter Change in Accounting Principles As discussed in Note 1 to the financial statements, in 2015 the District adopted new accounting guidance, GASB Statement No. 68, Accounting and Financial Reporting for Pensions and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the required supplementary information, such as management's discussion and analysis, budgetary comparison information, the Schedule of Other Postemployment Benefits (OPEB) Funding Progress and Schedule of Proportionate Share of Net Pension Liability, and Schedule of District s Contributions for Pensions 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 Middletown Unified School District's basic financial statements. The accompanying supplementary information as listed in the table of contents including the schedule of expenditures of federal awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations is presented for purposes of additional analysis and is not a required part of the basic financial statements. 3

94 The accompanying supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 3, 2015, on our consideration of the Middletown Unified School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Middletown Unified School District's internal control over financial reporting and compliance. El Dorado Hills, California December 3,

95 This section of Middletown Unified School District's (the "District") financial performance provides an overview of the District's financial activities for the fiscal year ended June 30, It should be read in conjunction with the District's financial statements, which follows this section. OVERVIEW OF THE FINANCIAL STATEMENTS The Financial Statements The financial statements presented herein include all of the activities of the District and its component units using the integrated approach as prescribed by Governmental Accounting Standards Board (GASB) Statement No. 34. The Government-Wide Financial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting. They present governmental activities and business-type activities separately. These statements include all assets of the District (including capital assets), as well as all liabilities (including long-term obligations). Additionally, certain eliminations have occurred as prescribed by the statement in regards to interfund activity, payables, and receivables. The District does not have any business-type activities. The Governmental Activities are prepared using the current financial resources measurement focus and modified accrual basis of accounting. The Fund Financial Statements include statements for each of the two categories of activities: governmental and fiduciary. The Fiduciary Activities are agency funds, which only report a balance sheet and do not have a measurement focus. Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach. The Primary unit of government is the Middletown Unified School District. 5

96 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 REPORTING THE DISTRICT AS A WHOLE The Statement of Net Position and the Statement of Activities The Statement of Net Position and the Statement of Activities report information about the District as a whole and about its activities. These statements include all assets and liabilities of the District using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the District's net position and changes in them. Net position is the difference between assets and liabilities, which is one way to measure the District's financial health, or financial position. Over time, increases or decreases in the District's net position are one indicator of whether its financial health is improving or deteriorating. Other factors to consider are changes in the District's property tax base and the condition of the District's facilities. The relationship between revenues and expenses is the District's operating results. Since the governing board's responsibility is to provide services to our students and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District. The quality of the education and the safety of our schools will likely be an important component in this evaluation. In the Statement of Net Position and the Statement of Activities, we present the District activities as follows: Governmental Activities - The District reports all of its services in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development activities, and the ongoing effort to improve and maintain buildings and sites. Property taxes, State income taxes, user fees, interest income, Federal, State, and local grants, as well as general obligation bonds, finance these activities. 6

97 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 REPORTING THE DISTRICT'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds not the District as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. Department of Education. Governmental Funds - Most of the District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The difference of results in the governmental fund financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. THE DISTRICT AS A TRUSTEE Reporting the District's Fiduciary Responsibilities The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities. The District's fiduciary activities are reported in the Statement of Fiduciary Net Position. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. 7

98 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 FINANCIAL HIGHLIGHTS THE DISTRICT AS A WHOLE Net Position The District's net position was $(3,688,220) for the fiscal year ended June 30, Of this amount, $(10,828,059) was unrestricted. Restricted net position was reported separately to show legal constraints from debt covenants and enabling legislation that limit the governing board's ability to use that net position for day-today operations. In addition, the increase in long-term obligations and deferred inflows and outflows of resources is directly related to the implementation of GASB Statements No. 68 and No. 71 related to the recording of pension related obligations. Refer to Note 16 for further discussion. Our analysis below, in summary form, focuses on the net position (Table 1) and change in net position (Table 2) of the District's governmental activities. Table 1 Governmental Activities Difference Assets Cash $ 2,827,140 $ 7,482,166 $ (4,655,026) Other current assets 330,576 1,147,999 (817,423) Capital assets 23,155,609 18,407,225 4,748,384 Total Assets 26,313,325 27,037,390 (724,065) Deferred outflows of resources Deferred outflows - pensions 809, ,382 Liabilities Current liabilities 1,206, , ,921 Long-term obligations 26,953,463 18,192,044 8,761,419 Total Liabilities 28,160,062 18,665,722 9,494,340 Deferred inflows of resources 2,650,865-2,650,865 Deferred outflows - pensions Net Position Invested in capital assets, net of related debt 5,338, ,353 5,051,101 Restricted 1,801,485 6,894,982 (5,093,497) Unrestricted (10,828,159) 1,189,333 (12,017,492) Total Net Position $ (3,688,220) $ 8,371,668 $ (12,059,888) 8

99 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Changes in Net Position The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 17. Table 2 takes the information from the Statement, rounds off the numbers, and rearranges them slightly so you can see our total revenues and expenses for the year. Net position decreased by $424,798 due to operating activities and by an additional $11,635,090 for the cumulative effect of change in accounting principles for the implementation of the GASB Statement No. 68. Table 2 Governmental Activities Difference Revenues Program revenues: Charges for services $ 354,887 $ 332,844 $ 22,043 Operating grants and contributions 2,489,234 2,642,065 (152,831) Capital grants and contributions General revenues: Property taxes 5,565,669 5,488,727 76,942 Unrestricted Federal and State aid 6,334,167 5,706, ,588 Miscellaneous and other local 452, ,313 (194,401) Total Revenues 15,196,919 14,817, ,391 Expenses Instruction 9,725,880 8,816, ,906 Instruction-related services 1,375,116 1,163, ,005 Pupil services 2,096,644 2,072,734 23,910 General administration 1,135,220 1,197,222 (62,002) Plant services 701,618 1,259,631 (558,013) Ancillary services 174, ,895 24,760 Interest on long-term obligations 412,584 1,178,575 (765,991) Total Expenses 15,621,717 15,838,142 (216,425) Change in Net Position (424,798) (1,020,614) 595,816 Net Position - Beginning 8,371,668 9,952,545 (1,580,877) Cumulative effect of change in accounting principles (11,635,090) (560,263) (11,074,827) Net Position - Beginning - as restated (3,263,422) 9,392,282 (12,655,704) Net Position - Ending (3,688,220) 8,371,668 (12,059,888) 9

100 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Governmental Activities As reported in the Statement of Activities on page 17, the cost of all of our governmental activities this year was $15,621,617. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $5,565,669 because the cost was paid by those who benefited from the programs ($354,887) or by other governments and organizations who subsidized certain programs with grants and contributions ($2,489,284). We paid for the remaining "public benefit" portion of our governmental activities with $6,334,167 in Federal and State aid and $452,912 with other revenues, like interest and general entitlements. Schedule of Revenues for Governmental Functions FYE 2015 Percent of FYE 2014 Percent of Amount Total Amount Total Revenues Program revenues: Charges for services and sales $ 354, % $ 332, % Operating grants and contributions 2,489, % 2,642, % Capital grants and contributions % % General revenues: Federal and State aid not restricted 6,334, % 5,706, % Property taxes 5,565, % 5,488, % Other Revenues 452, % 647, % Total Revenues $ 15,196, % $ 14,817, % $7,000,000 Comparative Revenues $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $ Charges for Services Operating Grants & Contributions Capital Grants and Contributions Federal and State Aid Property Taxes 10

101 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Schedule of Expenses for Governmental Functions FYE 2015 Percent of FYE 2014 Percent of Amount Total Amount Total Expenses Instruction $ 9,725, % $ 8,816, % Instruction-related services 1,375, % 1,163, % Pupil services 2,096, % 2,072, % General administration 1,135, % 1,197, % Plant services 701, % 1,259, % Ancillary services 174, % 149, % Interest on long-term obligations 412, % 1,178, % Total Expenses $ 15,621, % $ 15,838, % $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Comparative Expenses Instruction Instruction-related services Pupil services General administration Interest on long-term obligations 11

102 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 In Table 3, we have presented the cost and net cost of each of the District's largest functions: instruction, instruction-related services, pupil services, administration, plant services, ancillary services, and interest on longterm obligations. As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits they believe are provided by that function. Table 3 Total Cost of Services Net Cost of Services Instruction $ 9,725,880 $ 8,816,974 $ 8,176,207 $ 7,393,163 Instruction-related services 1,375,116 1,163,111 1,231,080 1,032,354 Pupil services 2,096,644 2,072,734 1,137,216 1,008,137 General administration 1,135,220 1,197, , ,616 Plant services 701,618 1,259, ,092 1,248,493 Ancillary services 174, , , ,895 Interest on long-term obligations 412,584 1,178, ,584 1,178,575 Total $ 15,621,717 $ 15,838,142 $ 12,777,546 $ 12,863,233 Program revenues financed 18 percent of the total cost of providing the service listed above, while the remaining 82 percent was financed by the general revenue of the District. 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 82% 81% 18% 19% Program Revenues General Revenues 12

103 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 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 the year, its governmental funds reported a combined fund balance of $2,630,208 which decreased from last year's ending fund balance by $5,598,071. Table 4 FUNDS Governmental: Balances and Activity July 1, 2014 Revenues Expenditures June 30, 2015 General $ 1,981,391 $ 13,558,657 $ 14,162,246 $ 1,377,802 Cafeteria Special Revenue 26, , ,404 27,576 Building 4,330,161 10,547 4,340,708 - Capital Facilities 567,848 59, , ,925 County School Facilities 335,620 1, ,665 1,966 Special Reserve Capital Outlay 61, ,177 47, ,296 Bond Interest and Redemption 925, , , ,643 Total Governmental 8,228,279 15,329,075 20,927,146 2,630,208 Fiduciary: Retiree Benefits 109,872 3, ,422 Total Fiduciary 109,872 3, ,422 Total Funds $ 8,338,151 $ 15,332,625 $ 20,927,146 $ 2,743,630 General Fund Budgetary Highlights Over the course of the year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on June 24, (A schedule showing the District's original and final budget amounts compared with amounts actually paid and received is provided in our annual report on page 59.) Budget revisions to the adopted budget required after approval of the State budget. Budget revisions to update revenues to actual enrollment information and to update expenditures for staffing adjustments related to actual enrollments. Other budget revisions routine in nature, including adjustments to categorical revenues and expenditures based on final awards, and adjustments between expenditure categories for school and department budgets. 13

104 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Other Governmental Funds The end balance of the Cafeteria Fund resulted in an increase of $940 due primarily to a combinations of loan and contribution from the General Fund to offset program costs of $34,750. Special Reserve Fund for Other than Capital Outlay Projects (Fund 17) has been rolled in the General Fund per GASB 54. If looked at separately however, Fund 17 resulted in a decrease of $65,092. This decrease came from the District s contribution for a new server and grades 6-12 math textbooks. These costs were partially offset by a contribution from the general fund for funding received from mandated cost block grant funding. Special Reserve for Postemployment Benefits was also rolled into the General Fund. If also looked at separately, Fund 20 resulted in an increase of $13,820. Capital Facilities resulted in a decrease of $146,924. Collections from developer fees and interest resulted in revenue of $59,696. Revenues were offset with costs for facility needs and the new elementary school. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2015, the District had invested $23,155,609, net of accumulated depreciation in a broad range of capital assets, including land, construction in progress, land improvements, buildings and improvements, and equipment. Table 5 Capital Assets Percent Change Land $ 1,385,603 $ 696, % Construction in progress 19,750 1,894, % Land improvements 436, , % Buildings and improvements 30,328,228 23,304, % Equipment in all areas 3,117,393 3,117, % Accumulated depreciation (12,131,919) (11,041,909) 9.9% Totals $ 23,155,609 $ 18,407, % 14

105 MIDDLETOWN UNIFIED SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2015 Long-Term Obligations At June 30, 2015, the District had $27,425,766 in debt, consisting mainly of General Obligation Bonds. Table 6 Long-Term Obligations 2015 Restated 2014 Percent Change General obligation bonds payable $ 14,457,527 $ 15,016, % Bond premium net of amoritzation 903, , % Compensated absences 77,863 72, % QZAB 2,145,000 2,150, % Net pension liability 1 9,841,875 12,376, % Totals $ 27,425,766 $ 30,568, % 1 The 2014 balance has been increased by $12,376,406 for the net pension liability as result of implementing GASB 68. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND ASSUMPTIONS The District used the following assumptions in constructing the 2015/16 fiscal year budget. The information provided below is current as of July 1, Local Control Fund Formula (LCFF) The Local Control Funding Formula (LCFF) which is the new finance system for K-12 education. The LCFF provides base, supplemental, and concentration grants in place of most previously existing Funding sources, including revenue limits and most state categorical programs. As part of the LCFF, the District will be required to develop, adopt, and annually update three-year Local Control and Accountability Plan (LCAP) using a template adopted by the California State Board of Education. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need any additional financial information, contact Stella Bratsis, Director of Business Services, Big Canyon Road, Middletown, CA 95461, (707)

106 MIDDLETOWN UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2015 Governmental Activities ASSETS Cash and cash equivalents $ 2,827,140 Accounts receivable 325,058 Stores inventories 5,518 Capital assets not depreciated 35,287,528 Capital assets, net of accumulated depreciation (12,131,919) Total Assets 26,313,325 DEFERRED OUTFLOWS - PENSIONS Deferred outflows - Related to pensions 809,382 LIABILITIES Accounts payable 444,637 Interest payable 206,788 Unearned revenue 82,871 Current portion of long-term obligations 472,303 Noncurrent portion of long-term obligations 17,111,588 Net pension liability 9,841,875 Total Liabilities 28,160,062 DEFERRED INFLOWS - PENSIONS Deferred inflows - Related to pensions 2,650,865 NET POSITION Invested in capital assets, net of related debt 5,338,454 Restricted for: Debt service 892,643 Educational programs 173,195 Capital projects 332,187 Other activities 403,460 Unrestricted (10,828,159) Total Net Position $ (3,688,220) The accompanying notes are an integral part of these financial statements. 16

107 MIDDLETOWN UNIFIED SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Net (Expenses) Revenues and Changes in Net Program Revenues Position Charges for Operating Capital Services and Grants and Grants and Governmental Functions/Programs Expenses Sales Contributions Contributions Activities Governmental Activities: Instruction $ 9,725,880 $ 174,375 $ 1,375,248 $ 50 $ (8,176,207) Instruction-related activities:. Supervision of instruction 11, (11,022) Instructional library, media, and technology 153,001 1,068 4,397 - (147,536) School site administration 1,210, ,439 - (1,072,522) Pupil services: Home-to-school transportation 536,528-27,340 - (509,188) Food services 648, , ,672 - (13,250) All other pupil services 911, ,632 - (614,778) Administration: Data processing 226,865 27,737 27,683 - (171,445) All other general administration 908,355 7,936 99,782 (800,637) Plant services 701,618 2,792 8,734 - (690,092) Ancillary services 174,655 5,195 11,175 - (158,285) Interest on long-term obligations 412, (412,584) Other outgo Total Governmental Activities $ 15,621,717 $ 354,887 $ 2,489,234 $ 50 $ (12,777,546) General revenues and subventions: Taxes, levied for general purposes 4,708,825 Taxes, levied for debt service 856,844 Federal and State aid not restricted to specific purposes 6,334,167 Interest and investment earnings 22,707 Miscellaneous 430,205 Subtotal, General Revenues 12,352,748 Change in Net Position (424,798) Net Position - Beginning 8,371,668 Cumulative effect of change in accounting principles (11,635,090) Net Position - Beginning - as restated (3,263,422) Net Position - Ending $ (3,688,220) The accompanying notes are an integral part of these financial statements. 17

108 MIDDLETOWN UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2015 Bond Interest Non-Major General Building and Redemption Governmental Fund Fund Fund Funds ASSETS Cash and cash equivalents $ 1,526,735 $ 9,060 $ 893,563 $ 397,782 Accounts receivable 258, ,157 Due from other funds 25,478 1, Stores inventories ,518 Total Assets 1,811,114 10, , ,348 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable 350,441 10, ,681 Due to other funds ,904 Unearned revenue 82, Total Liabilities 433,312 10, ,585 Fund Balances: Nonspendable 5, ,518 Restricted 168, ,108 Committed Assigned 375, , ,137 Unassigned 828, Total Fund Balance 1,377, , ,763 Total Liabilities and Fund Balances $ 1,811,114 $ 10,595 $ 893,563 $ 470,348 The accompanying notes are an integral part of these financial statements. 18

109 Total Governmental Funds $ 2,827, ,058 27,904 5,518 3,185, ,637 27,904 82, ,412 10, ,303-1,600, ,723 2,630,208 $ 3,185,620 19

110 MIDDLETOWN UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2015 Total Fund Balance - Governmental Funds $ 2,630,208 Amounts Reported for Governmental Activities in the Statement of Net Position is Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is $ 35,287,528 Accumulated depreciation is (12,131,919) Net Capital Assets 23,155,609 Interest on long-term obligations is not reported in the governmental funds 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 liabilities for the unmatured interest owing at the end of the period are included on the statement of net position. (206,788) In governmental funds, deferred outflows and inflows of resources related to pensions are applicable to future periods and, therefore, are not reported in the funds. In the statement of net position, deferred outflows and inflows of resources relating to pensions are reported. Deferred outflows of resources related to pensions. 809,382 Deferred inflows of resources related to pensions (2,650,865) Long-term liabilities are not due and payable in the current period, and, therefore, are not reported as liabilities in the governmental funds. Long-term liabilities at year-end consist of: General obligation bonds payable 14,457,527 Compensated absences (vacation) 77,863 QZAB 2,145,000 Bond Premium Net of amortization 903,501 Net Pension Liability 9,841,875 Total Long-Term Obligations (27,425,766) Total Net Position - Governmental Activities $ (3,688,220) The accompanying notes are an integral part of these financial statements. 20

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112 MIDDLETOWN UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED JUNE 30, 2015 REVENUES Bond Interest Non-Major General Building and Redemption Governmental Fund Fund Fund Funds LCFF sources $ 10,680,942 $ - $ - $ - Federal sources 737, ,402 Other State sources 792,596-7,260 36,928 Other local sources 1,347,375 10, , ,744 EXPENDITURES Current Total Revenues 13,558,657 10, , ,074 Instruction 8,740, Instruction-related activities: Supervision of instruction 11, Instructional library, media and technology 152, School site administration 1,206, Pupil services: Home-to-school transportation 417, Food services 3, ,612 All other pupil services 908, Administration: Data processing 226, All other general administration 888, ,490 Plant services 1,273, ,092 Facility acquisition and construction 28,322 4,340, ,578 Ancillary services 174, Debt service: Debt service principal ,000 - Debt service interest ,420 - Other outgo Total Expenditures 14,030,090 4,340, ,420 1,532,772 Excess (Deficiency) of Revenues Over Expenditures (471,433) (4,330,161) (32,779) (763,698) Other Financing Sources (Uses) Transfers in ,156 Transfers out (132,156) Net Financing Sources (Uses) (132,156) ,156 NET CHANGE IN FUND BALANCES (603,589) (4,330,161) (32,779) (631,542) Fund Balance - Beginning 1,981,391 4,330, , ,305 Fund Balance - Ending $ 1,377,802 $ - $ 892,643 $ 359,763 The accompanying notes are an integral part of these financial statements. 21

113 Total Governmental Funds $ 10,680,942 1,215, ,784 2,464,047 15,196,919 8,740,401 11, ,337 1,206, , , , , ,595 1,352,310 5,162, , , ,420-20,794,990 (5,598,071) $ 132,156 (132,156) - (5,598,071) 8,228,279 2,630,208 The accompanying notes are an integral part of these financial statements. 22

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115 MIDDLETOWN UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Net Change in Fund Balances - Governmental Funds $ (5,598,071) Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures; however, for governmental activities, those costs are shown in the statement of net position and allocated over their estimated useful lives as annual depreciation expenses in the statement of activities. This is the amount by which capital outlays exceeds depreciation in the period. Depreciation expense $ (1,090,000) Capital outlays 5,838,394 Net Expense Adjustment 4,748,394 Accreted interest on capital appreciation bonds is accrued as long-term debt in the government-wide financials, increasing expense. (42,783) Repayment of the principal of long-term obligations is reported as an expenditure in the governmental funds. However, the repayment reduces long-term obligations in the statement of net position. 606,492 In the statement of activities, certain operating expenses, such as compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). (5,691) Bond premiums are revenue in the governmental funds in the year bonds are issued, but are recorded as a long-term liability and amortized over the term of the bonds in the statement of net position. 50,125 The accompanying notes are an integral part of these financial statements. 23

116 MIDDLETOWN UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 Unmatured interest on long-term obligations is recognized in governmental funds in the period when it is due. However, in the statement of activities, unmatured interest on long-term obligations is accrued at year end. (134,996) Governmental funds report district pension contributions as expenditures. However in the Statement of Activities, the cost of pension benefits earned net of employee contributions is reported as pension expense. District pension contributions 809,382 Cost of benefits earned net of employee contributions (857,650) (48,268) Change in Net Position of Governmental Activities $ (424,798) The accompanying notes are an integral part of these financial statements. 24

117 MIDDLETOWN UNIFIED SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF NET POSITION JUNE 30, 2015 Retiree Benefits Agency Fund Fund (ASB) Total ASSETS Cash and cash equivalents $ 113,421 $ 245,205 $ 358,626 Total Current Assets 113, , ,626 LIABILITIES Current Liabilities Due to student groups - 245, ,205 Total Current Liabilities - 245, ,205 NET POSITION Assets held in trust for health benefits 113, ,421 Total Net Position $ 113,421 $ - $ 113,421 The accompanying notes are an integral part of these financial statements. 25

118 MIDDLETOWN UNIFIED SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION FOR THE YEAR ENDED JUNE 30, 2015 Retiree Benefits Fund ADDITIONS Fair market value adjustment to investments $ 3,550 Total Additions 3,550 DEDUCTIONS Fair market value adjustment to investment - Total Deductions - Change in Net Position 3,550 Total Net Position - Beginning 109,871 Total Net Position - Ending $ 113,421 The accompanying notes are an integral part of these financial statements. 26

119 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Middletown Unified School District (the "District") is a public educational agency operating under the applicable laws and regulations of the State of California. It is governed by a five member Board of Trustees (the "Board") elected by registered voters of the District, which comprises an area in southern Lake County. The District was established in 1963 and serves students in grades K-12. The District maintains three elementary schools, one middle school, one high school, one community day school and one continuation school. 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, boards, and agencies that are not legally separate from the District. For Middletown Unified School District, this includes general operations, food service, and student related activities of the District. Component Units Component units are legally separate organizations for which the District is financially responsible. 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. The District has no component units. Other Related Entities Public Entity Risk Pools and Joint Powers Authorities The District is associated with three joint power agencies. These organizations do not meet the criteria for inclusion as component units of the District. Additional information is presented in Note 15 to the financial statements. These organizations are: School Insurance Group Northern Alliance (SIGNAL and SIGNAL II) Self-Insured Schools of California (SISC) Basis of Presentation The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The following are the District's major and non-major governmental funds: 27

120 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Major Governmental Funds General Fund The General Fund accounts for all financial resources except those required to be accounted for in another fund. The General Fund balance is available to the District for any purpose provided it is expended or transferred according to the general laws of California. One fund currently defined as a special revenue fund in the California State Accounting Manual (CSAM) does not meet the GASB Statement No. 54 special revenue fund definition. Specifically, Fund 17, Special Reserve Fund for Other Than Capital Outlay Projects, and Fund 20, Special Reserve for Postemployment Benefits is not substantially composed of restricted or committed revenue sources. While this fund is authorized by statute and will remain open for internal reporting purposes, this fund functions effectively as an extension of General Fund, and accordingly has been combined with the General Fund for presentation in these audited financial statements. Capital Project Funds The Capital Project Funds are used to account for the acquisition and/or construction of all major governmental fixed assets. The District maintains the following capital project funds: Building Fund The Building Fund exists primarily to account separately for proceeds from sale of bonds and acquisition of major governmental capital facilities and buildings. Debt Service Funds The Debt Service Funds are used to account for the accumulation of resources for, and the debt service payments related to, the District's debt issuances. The District maintains the following non-major debt service funds: Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is maintained by the County Treasurer and is used to account for both the accumulation of resources from ad valorem tax levies and the interest payments and redemption of principal of the District's general obligation bond issuance. Non-Major Governmental Funds Special Revenue Funds The Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. The District maintains the following special revenue funds: Cafeteria Fund The Cafeteria Fund is used to account for the financial transactions related to the food service operations of the District. Capital Project Funds The Capital Project Funds are used to account for the acquisition and/or construction of all major governmental fixed assets. The District maintains the following capital project funds: Capital Facilities Fund The Capital Facilities Fund is used to account for resources received from developer impact fees assessed under provisions of the California Environmental Quality Act (CEQA). Special Reserve Capital Outlay Fund The Special Reserve Fund 25 was used to account for funds set up for Board designated construction projects. 28

121 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section to receive apportionments from the 1998 State School Facilities Fund (Proposition 1A), the 2002 State School Facilities Fund (Proposition 47), or the 2004 State School Facilities Fund (Proposition 55) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grant, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section et seq). Fiduciary Funds Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into four classifications: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds. The District maintains an agency fund, which is custodial in nature (assets equal liabilities) and does not involve measurement of results of operations. The District also maintains a Retiree Benefits Fund used to account for funds deposited in an irrevocable trust held for retiree benefits. The District's agency fund accounts for associated student body activities (ASB). Basis of Accounting Measurement Focus Government-Wide Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the nonfiduciary activities of the District and its component units. The government-wide statements are prepared using the economic resources measurement focus. This is the same approach used in the preparation of the fiduciary fund financial statements but differs from the manner in which governmental fund financial statements are prepared. Governmental fund financial statements, therefore, include a reconciliation with brief explanations to better identify the relationship between the government-wide statements and the statements for the governmental funds. The government-wide statement of activities presents a comparison between direct expenses and program revenues for each function or program of the District's governmental activities. Direct expenses are those that are specifically associated with a service, program or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the statement of activities. Program revenues include charges paid by the recipients of goods or services offered by a program, as well as grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues which are not classified as program revenues are presented as general revenues of the District, with certain exceptions. The comparison of direct expenses with program revenues identified the extent to which each governmental function is self-financing or draws from the general revenues of the District. Net position should be reported as restricted when constraints placed on net assets use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net position restricted for other activities result from special revenue funds and the restrictions on their net asset use. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental and proprietary fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. The internal service fund is presented in a single column on the face of the proprietary fund statements. 29

122 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Governmental Funds All governmental funds are accounted for using the flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balance reports on the sources (revenues and other finances sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements, therefore, include reconciliations with brief explanations to better identify the relationship between the government-wide financial statements, prepared using the economic resources measurement focus and the accrual basis of accounting, and the governmental fund financial statements, prepared using the flow of current financial resources measurement focus and the modified accrual basis of accounting. Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources management focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of the District. Revenues Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. Generally, "available" is defined as collectible within 90 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 measureable and available at fiscal year-end: State apportionments, interest, certain gains, and other local sources. Non-exchange transactions are when 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 restrictions. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Unearned Revenue Unearned revenue arises when potential revenue does not meet both the "measureable" 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 legal claim to the resources, the liability for unearned revenue is removed from the balance sheet and revenue is recognized. Certain grants received before the eligibility requirements are met 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. 30

123 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable and typically paid within 90 days. Principal and interest on longterm obligations, which has not matured, are recognized when paid in the governmental-wide statements. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows. Investments Investments held at June 30, 2015, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county investment pool are determined by the program sponsor. Stores Inventory Inventories are recorded using the consumption method, in that inventory acquisitions are initially recorded in inventory (asset) accounts, and are charged as expenditures when used. Reported inventories are equally offset by nonspendable fund balance which indicates that these amounts are not "available for appropriation and expenditure" even though they are a component of net current assets. The District's cafeteria inventory valuation is First-in-First-out (FIFO). Prepaid Expenditures Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditures when paid. The District did not have any prepaid expenditures to report as of June 30, Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. Capital assets are long-lived assets of the District. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. Improvements are capitalized; the cost of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide statement of net position. The valuation basis for capital assets is historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. 31

124 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: land, 20 years; buildings and improvements, 7-50 years; equipment, 5-20 years; and vehicles, 8 years. Deferred Outflows/Inflows of Resources In addition to assets, the balance sheet reports separate sections for deferred outflows of resources and deferred inflows of resources. Deferred outflows of resources represent a consumption of resources that apply to a future period(s) and will not be recognized as an outflow or resources (expense) until then. Conversely, deferred inflows of resources represent an acquisition of resources that applies to a future period(s) and will not be recognized as an inflow of resources (revenue) until that time. When applicable, the District s deferred amount on refunding, resulting from the difference in the carrying value and reacquisition price of the refunded debt, is reported as a deferred outflow of resources and is amortized over the shorter of the life of the refunded debt or refunding bond. On governmental fund financial statements, receivables associated with non-exchange transactions that will not be collected within the availability period have been offset with unavailable revenue. The District s unavailable revenue in the balance sheet is for the long-term facilities lease and future development fees. Contributions made to the District s pension plan(s) after the measurement date but before the fiscal year-end are recorded as a deferred outflow of resources and will reduce the net pension liability in the next fiscal year. Additional factors involved in the calculation of the District s pension expense and net pension liability includes the difference between expected and actual experience, changes in assumptions, difference between projected and actual investment earnings, change in proportion, and differences between the District s contributions and proportionate shares of contributions. These factors are recorded as deferred outflows and inflows of resources and amortized over various periods. Net Pension Liability 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 State Teachers Retirement Plan (CalSTRS Plan), and classified employees are members of the Schools Pool (CalPERS Plan), collectively referred to as the Plans. For purposes of measuring the net pension liability, pension expense, and deferred outflows/inflows of resources related to pensions, information about fiduciary net position of the District s portions of the Plans and additions to and deductions from the Plans fiduciary net positions have been determined on the same basis as they are reported by the Plans. 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. Interfund Balances "In the financial statements, receivables and payables resulting from short-term interfund loans are classified as interfund receivables/payables". These amounts are eliminated in the governmental column of the statement of net assets. 32

125 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Compensated Absences Accumulated unpaid vacation benefits are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide statement of net assets. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year-end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January 1, At retirement, each member will receive.004 year of service credit for each day of unused sick leave. Accrued Liabilities and Long-Term Obligations All payables, accrued liabilities, and long-term obligations are reported in the government-wide and proprietary fund financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the governmental funds. However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from government funds are reported as a liability in the governmental fund financial statements only to the extent that they are due for repayment during the current year. Bonds, capital leases, and other long-term obligations are recognized as liabilities in the governmental fund financial statements when due. Premiums and Discounts In the government-wide financial statements, long-term obligations are reported as liabilities in the applicable governmental activities or proprietary fund statement of net position. Bond premiums and discounts are amortized over the life of the bonds using the straight-line method. Fund Balance Reporting The District reports fund balance within one of the following categories: Nonspendable such as fund balance associated with inventories, prepaids, long-term loans and notes receivable, and property held for resale (unless the proceeds are restricted, committed, or assigned), Restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resources providers, or through enabling legislation, 33

126 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the School District Board of Directors (the district's highest level of decisionmaking authority), Assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, and Unassigned fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications. Committed Fund Balance Policy For funds that are determined to fall within the "Committed Fund Balance" classification, the Governing Board, as the District's highest level of decision-making authority, may commit fund balance for specific purposes pursuant to constraints imposed by formal actions taken, such as a majority vote or resolution. These committed amounts cannot be used for any other purpose unless the Governing Board removes or changes the specific use through the same type of formal action taken to establish the commitment. Governing Board action to commit fund balance needs to occur within the fiscal reporting period, no later than June 30 th ; however, the amount can be determined with the release of the financial statements. Assigned Fund Balance Policy Amounts that are constrained by the District's intent to be used for specific purposes, but are neither restricted nor committed, should be reported as assigned fund balance. The District delegates the authority to assign amounts to be used for specific purposes to the Chief Business Official for the purpose of reporting these amounts in the financial statements. Minimum Fund Balance Policy The purpose of the District's fund balance policy is to maintain a prudent level of financial resources to protect against reducing service levels because of temporary revenue shortfalls or unpredicted one-time expenditures. The District has adopted a policy to achieve and maintain unrestricted fund balance in the General Fund of 3 percent of total General Fund expenditures, other uses and transfers out at the close of each fiscal year, consistent with the recommended level promulgated by the State of California. Order of Fund Balance Spending Policy For which amounts in any of the unrestricted fund balance classifications could be used, the District's policy is to apply expenditures in the following order: committed, assigned, and then unassigned. Net Position Net position represents the difference between assets and liabilities. Net position invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. Net position is reported as restricted when there are limitations imposed on their use either through the enabling of legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws and regulations of other governments. The District first applies restricted resources when an expense is incurred for purposes in which both restricted and unrestricted net position is available. 34

127 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Operating Revenues and Expenses Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. For the District, these revenues are in district premiums. Operating expenses are necessary costs incurred to provide the good or service that is the primary activity of the fund. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Interfund Activity Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented in the financial statements. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 st 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 amendments have been accounted for. For purposes of the budget, on behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles. Property Tax Secured property taxes attach as an enforceable lien on property as of January 1 st. Taxes are payable in two installments on November 1 st and February 1 st and become delinquent on December 10 th and April 10 th, respectively. Unsecured property taxes are payable in one installment on or before August 31 st. The County of Lake bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. 35

128 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Current GASB Implementation GASB Statement No. 68 In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. The Primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and interperiod equity, and creating additional transparency. The Statement is effective for periods beginning after June 15, The District has implemented GASB Statement No. 68 for the year ended June 30, GASB Statement No. 71 In November 2013, GASB issued Statement 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68. This standard seeks to clarify certain implementation issues related to amounts that are deferred and amortized at the time GASB 68 is first adopted. It applies to situations in which the measurement date of an actuarial valuation differs from the government s fiscal year. The Statement is effective for periods beginning after June 15, The District has implemented GASB Statement No. 71 for the year ended June 30, New Accounting Pronouncements GASB Statement No. 72 In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This standard addresses accounting and financial reporting issues related to fair value measurements. The Statement is effective for periods beginning after June 15, This District has not yet determined the impact on the financial statements. GASB Statement No. 73 In June 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. This standard establishes requirements for defined benefit pensions that are not within the scope of GASB Statement 68 and amends certain provisions of GASB Statements 67 and 68. The Statement is effective for periods beginning after June 15, The District has not yet determined the impact on the financial statements. GASB Statement No. 75 In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. This standard s primary objective is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions. The Statement is effective for periods beginning after June 15, The District has not yet determined the impact on the financial statements. 36

129 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 2 DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2015, are classified in the accompanying financial statements as follows: Governmental activities $ 2,832,540 Fiduciary funds 245,205 Total Deposits and Investments $ 3,077,745 Deposits and investments as of June 30, 2015, consist of the following: Cash on hand and in banks $ 245,605 Cash in revolving accounts 5,000 Investments 2,827,140 Total Deposits and Investments $ 3,077,745 Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investment in County Treasury The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. 37

130 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: Maximum Maximum Maximum Authorized Remaining Percentage Investment Investment Type Maturity of Portfolio in One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker's Acceptance 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 year 30% None Repurchase Agreements 1 year None None Reverse Repurchase Agreements 92 days 20% of base None Medium-Term Corporate Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass-Through Securities 5 years 20% None County Pooled Investment Fund N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Powers Authority Pools N/A None None Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. As of June 30, 2015, the weighted average maturity of the investments contained in the Treasury investment pool was not available. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The District's investment in the county pool is not required to be rated, nor has it been rated as of June 30,

131 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Custodial Credit Risk Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by State or local government units by pledging securities in an undivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2015, the District's bank balance was $245,605 with a carrying amount of $250,605. The District's bank balance was insured to $250,000. Custodial Credit Risks Investments This is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments of collateral securities that are in possession of an outside party. The California Government Code and the Agency's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments. NOTE 3 RECEIVABLES Receivables at June 30, 2015, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full. Non-Major General Governmental Fund Funds Total Federal Government Categorical aid $ 58,930 $ 60,954 $ 119,884 State Government Apportionment State categorical aid - - Other State 98,772 5, ,975 Local Government Interest Other Local Sources 101, ,199 Total $ 258,901 $ 66,157 $ 325,058 39

132 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 4 CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2015, was as follows: Balance Additions & Deductions & Balance July 1, 2014 Adjustments Adjustments June 30, 2015 Governmental Activities Capital Assets Not Being Depreciated: Land $ 696,568 $ 689,035 $ - $ 1,385,603 Construction in Progress 1,894,579-1,874,829 19,750 Total Capital Assets Not Being Depreciated 2,591, ,035 1,874,829 1,405,353 Capital Assets Being Depreciated: Land Improvements 436, ,554 Buildings and Improvements 23,304,040 7,024,188-30,328,228 Furniture and Equipment 3,117, ,117,393 Total Capital Assets Being Depreciated 26,857,987 7,024,188-33,882,175 Total Capital Assets 29,449,134 7,713,223 1,874,829 35,287,528 Less Accumulated Depreciation: Land Improvements 375,136 6, ,111 Buildings and Improvements 8,616, ,504-9,539,514 Furniture and Equipment 2,050, ,531-2,210,294 Total Accumulated Depreciation 11,041,909 1,090,010-12,131,919 Governmental Activities Capital Assets, Net $ 18,407,225 $ 6,623,213 $ 1,874,829 $ 23,155,609 Depreciation expense was charged as a direct expense to governmental functions as follows: Governmental Activities Instruction $ 948,963 Home-to-school transportation 117,285 Food services 545 All other general administration 1,417 Plant services 21,800 Total Depreciation Expenses Governmental Activities $ 1,090,010 40

133 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 5 INTERFUND TRANSACTIONS Operating Transfers Interfund transfers for the year ended June 30, 2015 consisted of the following: The General Fund transferred to Cafeteria Fund for temporary loan to cover expenses $11,000 The General Fund transferred to the Special Reserve Capital Outlay Fund to pay for QZAB Liability $121,156 Interfund transfers are used to (1) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. NOTE 6 ACCOUNTS PAYABLE Accounts payable at June 30, 2015, consisted of the following: Bond Interest Non-Major General Building and Redemption Governmental Fund Fund Fund Funds Total Vendor payables $ 296,983 $ - $ 920 $ 50,067 $ 347,970 Construction - 10,595-28,575 39,170 Salaries and benefits 53, ,039 57,497 Total $ 350,441 $ 10,595 $ 920 $ 82,681 $ 444,637 NOTE 7 UNEARNED REVENUE Unearned revenue at June 30, 2015, consists of the following: General Fund State categorical aid $ 82,871 41

134 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 8 LONG-TERM OBLIGATIONS Summary The changes in the District's long-term obligations during the year consisted of the following: Balance Additions and Balance Due in June 30, 2014 Adjustments Deductions June 30, 2015 One Year General obligation bonds $ 15,016,246 $ 42,783 $ 601,502 $ 14,457,527 $ 289,178 Compensated absences 72,172 5,691-77,863 - QZAB 2,150,000-5,000 2,145, ,000 Net pension liability 12,376, ,316 3,275,847 9,841,875 - $ 29,614,824 $ 789,790 $ 3,882,349 $ 26,522,265 $ 422,178 Bond premium net of amortization 953,626-50, ,501 50,125 $ 30,568,450 $ 789,790 $ 3,932,474 $ 27,425,766 $ 472,303 Bonded Debt On November 2, 2006, the District's registered voters authorized the District to issue general obligation bonds not to exceed $4,999,987 in principal amounts; known as the Election of March 2007, the District issued Series 2007 of the Election of 2006 in the amounts of $3,560,000 in current interest bonds and $1,439,987 in capital appreciation bonds. Interest on the current interest bonds is payable on August 1 and February 1 of each year, commencing August 1, The capital appreciation bonds accrete interest compounded semi-annually on August 1 and February 1 of each year, commending August 1, The proceeds from the sale of the bonds will be used for the acquisition, construction, furnishing and equipping of the District facilities. In December 2008, Middletown Unified School District issued Series 2008 of the Election of 2006 in the amounts of $3,895,000 in current interest bonds and $2,601,431 in capital appreciation bonds. Interest on the current interest bonds is payable on August 1 and February 1 of each year, commencing February 1, The capital appreciation bonds accrete interest compounded semi-annually on August 1 and February 1, commencing February 1, The proceeds from the sale of the bonds will be used for the acquisition, construction and furnishing of equipment for district facilities. In February 2009, Middletown Unified School District issued Series 2009 of the Election of 2006 in the amounts of $2,975,000 in current interest bonds and $825,154 in capital appreciation bonds. Interest on the current interest bonds is payable on August 1 and February 1 of each year, February 1, The capital appreciation bonds accrete interest compounded semi-annually on August 1 and February 1, commencing August 1, The proceeds from the sale of the bonds will be used for the acquisition, construction and furnishing of equipment for district facilities. 42

135 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The outstanding general obligation bonded debt of the District at June 30, 2015 is as follows: Bonds Current Year Redeemed Bonds Issue Maturity Interest Original Outstanding Additions/ Current Outstanding Date Date Rate Issue July 1, 2014 Accretions Year June 30, /8/ % $ 3,560,000 $ 3,225,000 $ - $ 125,000 $ 3,100,000 12/2/ % $ 3,895,000 3,895, ,895,000 12/2/ % $ 2,601,431 3,653, , ,417 3,483,467 2/4/ % $ 2,975,000 2,975, ,975,000 2/4/ % $ 825,154 1,267,323 (94,178) 169,085 1,004,060 $ 15,016,246 $ 42,783 $ 601,502 $ 14,457,527 Debt Service Requirements to Maturity The bonds mature through 2033 as follows: Interest to Fiscal Year Principal Maturity Total , , , , , , , , , , , , , , , ,985,259 2,197,095 4,182, ,368,800 1,922,316 5,291, ,850, ,536 6,640,536 Total 12,712,811 $ 7,260,212 $ 19,973,023 Accretion to date 2,044,843 Total $ 14,757,654 43

136 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Qualified Zone Academy Bond (QZAB) Debt On December 2, 2012, Lease Revenue Bonds in the amount of $2,155,000 were issued at an interest rate of 1 percent. The bonds are designated as Qualified Zone Academy Bon ("QZAB") which were issued by the Public Property Financing Corporation of California to finance improvements to school facilities within the District. The District is responsible for repayment of principal and interest amounts as shown below. Pursuant to a Trustee Agreement governing the repayment terms, the Trustee is scheduled to receive refundable tax credits (shown below as "Expected Subsidy"), subject to reduction or offset by the IRS. Debt Redeemed Bonds Issue Maturity Interest Original Outstanding Current year Current Outstanding Date Date Rate Issue July 1, 2014 Additions Year June 30, /1/ /1/ % $ 2,155,000 $ 2,150,000 $ - $ 5,000 $ 2,145,000 The bonds mature through 2030 as follows: Interest to Fiscal Year Principal Maturity Subtotal Subsidy Total , , ,239 (91,454) 153, , , ,003 (85,558) 154, ,000 97, ,686 (79,596) 154, ,000 90, ,315 (73,590) 153, ,000 82, ,863 (67,518) 154, , ,970 1,013,970 (244,420) 769, , , ,195 (83,270) 769,925 Total $ 2,145,000 $ 890,271 $ 3,035,271 $ (725,406) $ 2,309,865 Accumulated Unpaid Employee Vacation The long-term portion of accumulated unpaid employee vacation for the District at June 30, 2015, amounted to $77,863. Other Postemployment Benefits (OPEB) Obligation The District implemented GASBS No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions during the year ended June 30, The District's annual required contribution for the year ended June 30, 2015 was $146,285 and the District has made contributions of $309,393 during the year, which resulted in an OPEB asset of $292,350. See Note 10 for additional information regarding the OPEB obligation and the postemployment benefit plan. 44

137 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 9 FUND BALANCES Fund balances with reservations and designations are composed of the following elements: Bond Interest And Non-Major General Redemption Governmental Fund Fund Funds Total Fund Balances Nonspendable: Revolving cash $ 5,000 $ - $ - $ 5,000 Stores - - 5,518 5,518 Restricted for: Purpose of fund 168,195-22, ,303 Assigned to: Supplemental & Concentration 102, ,286 Future retiree post employment benefits 102, ,274 Special Reserves 171, ,324 Repayment of QZAB , ,296 Repayment of Bond - 892, ,643 District Facilities , ,925 Other Assigned - - 1,916 1,916 Unassigned: - Reserve for Economic Uncertainty 410, ,327 Other unassigned 418, ,396 Total Fund Balance $ 1,377,802 $ 892,643 $ 359,763 $ 2,630,208 NOTE 10 POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The Postemployment Benefit Plan (the "Plan") is a single-employer defined benefit healthcare plan administered by the Middletown Unified School District. The Plan provides medical, dental and vision insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 16 retirees and beneficiaries currently receiving benefits and 33 active plan members. The unfunded portion of annual required contributions (net OPEB obligation) is presented in the statement of net position as a portion of long-term obligations. 45

138 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Certificated Classified Management Benefit Types Provided Medical, Dental and Vision Medical, Dental and Vision Medical, Dental and Vision Duration of Benefits To Age 65 To Age 65 To Age 65 Required Service 10 Years 10 Years 10 Years Minimum Age Dependent Coverage No No No District Contribution % 100% 100% 100% District Cap $10,820 per year $10,820 per year $12,044 per year Contribution Information The contribution requirements of plan members and the District are established and may be amended by the District, the District's bargaining units and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined annually through agreements between the District, the District's bargaining units and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements. Annual OPEB Cost and Net OPEB Obligation The District's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and the amortization of any unfunded actuarial accrued liabilities (UAAL) (or funding excess) for a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the Plan and changes in the District's net OPEB obligation to the Plan. Annual required contribution $ 146,285 Interest on net OPEB obligation 66 Adjustment to annual required contribution (82) Annual OPEB cost (expense) 146,269 Contributions made (309,393) Increase in net OPEB obligation (163,124) Net OPEB obligation, beginning of year (129,226) Net OPEB obligation (asset), end of year $ (292,350) 46

139 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan and the net OPEB obligation for 2015 was as follows: Year Ended June 30, Annual Required Contribution Percentage Contributed Net OPEB Obligation (Asset) 2013 $ 184, % $ 1, $ 184, % $ (129,226) 2015 $ 146, % $ (292,350) Funded Status and Funding Progress Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of the occurrence of events far into the future. Examples include assumptions about future employment, mortality and the trend of healthcare costs. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continuous revisions as actual results are compared with past expectation and as new estimates are made concerning future events. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information regarding whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Since this is the first year of implementation, only current year information is presented in these financial statements. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the "substantive plan" (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation along with the historical pattern of the sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the actuarial valuation report dated July 1, 2013, the "entry age normal" method was utilized. The actuarial assumptions include a 5.5 percent investment rate of return (net of administrative expenses). Additionally, actuarial assumptions include an 8 percent per year trend increase in healthcare costs. The UAAL is being amortized at a level percentage of payroll, assuming a 3 percent annual increase in payroll. The remaining amortization period at July 1, 2013 was 30 years. 47

140 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 11 CHARTER SCHOOLS The District granted and approved one Charter School pursuant to Education Code Section as follows: The Lake County International Charter School was approved March 23, NOTE 12 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; injuries to employees and natural disasters. During fiscal year ending June 30, 2015, the District contracted for property and liability insurance coverage. Settled claims have not exceeded this commercial coverage in any of the past three years. Workers' Compensation For fiscal year 2015, the District participated in the School Insurance Group Northern Alliance (SIGNAL) JPA for workers' compensation insurance. The intent of SIGNAL is to achieve the benefit of a reduced premium for the District by virtue of its grouping and representation with other participants. The workers' compensation experience of the participating districts is calculated as one experience and a common premium rate is applied to all districts in SIGNAL. Each participant pays its workers' compensation premium based on its individual rate. Total savings are then calculated and each participant's individual performance is compared to the overall savings percentage. A participant will either receive money from or be required to contribute to the "equity-pooling fund". This "equity-pooling" arrangement insures that each participant shares equally in the overall performance of the group. Coverage provided for property and liability and workers' compensation is as follows: Insurance Program/Company Name Type of Coverage Limits Property and Liability Program School Insurance Group Northern Alliance - SIGNAL II Liability $ 25,000,000 Defense Costs $ 100,000 Builders Risk Varies Depending on Type of Loss Covered Party $ 25,000 Crime $ 5,000,000 Property $ 250,000,000 Workers' Compensation School Insurance Group Northern Alliance - SIGNAL Workers' Compensation State Statutory Limit 48

141 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 13 EMPLOYEE RETIREMENT SYSTEMS California State Teachers Retirement System (CalSTRS) Plan Description The District participates in the State Teacher s Retirement Plan (CalSTRS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalSTRS. CalSTRS acts as a common investment and administrative agent for participating public entities within the State of California. CalSTRS issues a publicly available financial report that includes financial statements and required supplementary information for this plan. This report is available online at Benefits Provided The benefits for the CalSTRS Plan are established by contract, in accordance with the provisions of the State Teachers Retirement Law. Benefits are based on members years of service, age, final compensation and a benefit formula. Benefits are provided for disability, death and survivors of eligible members or beneficiaries. The California Public Employees Pension Reform Act of 2013 (PEPRA) made significant changes to the benefit structure that primarily affect members first hired to perform CalSTRS creditable activities on or after January 1, As a result of PEPRA, the CalSTRS plan has two benefit structures: 1) CalSTRS 2% at 60 Members first hired on or after January 1, 2013 to perform CalSTRS creditable activities. The 2 percent, also known as the age factor, refers to the percentage of final compensation received as a retirement benefit for each year of service credit. To be eligible for service retirement, members hired prior to January 1, 2013, must be at least age 60 with a minimum of five years of CalSTRS-credited service, while members hired after January 1, 2013, must be at least age 62 with five years of service. Contributions Assembly Bill 1469 (AB 1469), signed into law as part of the State of California s (the State) budget, increased contributions to the CalSTRS Plan from members, employers, and the State over the next seven years, effective July 1, School employer contributions will increase from 8.25% to a total of 19.1% of covered payroll over the seven-year period. The District s required contribution rate for the year ended June 30, 2014, was 8.88% of annual pay. District contributions to the CalSTRS Plan were $541,702 for the year ended June 30, The State contributes a percentage of the annual earnings of all members of the CalSTRS Plan. AB 1469 increases the State s contribution attributable to the benefits in effect in 1990, but does not change the base rate of 2.017%. Thus the State contributions rate, which in the period ended June 30, 2015 was 3.454% of covered payroll, will increase over the next two years to a total of 6.328%. Actuarial Assumptions The total pension liability for the CalSTRS Plan was determined by applying updated procedures to a financial reporting actuarial valuation as of June 30, 2013, and rolling forward the total pension liability to the measurement date of June 30, The financial reporting actuarial valuation as June 30, 2013, used the following actuarial method and assumptions, applied to all prior periods included in the measurement: 49

142 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Actuarial Cost Method Entry-Age Normal Actuarial Assumptions: Discount Rate 7.60% Consumer Price Inflation 3.00% Wage Growth 3.75% Investment Rate of Return 7.60% 1 Mortality 2 CalSTRS Members Data Post-Retirement Benefit Increase 2% simple 1 Net of investment expenses, but gross of administrative expenses. 2 CalSTRS uses custom mortality tables to best fit the patterns of mortality among its members. These custom tables are based on RP 2000 series tables adjusted to fit CalSTRS experience. RP 2000 series table 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. Discount Rate The discount rate used to measure the CalSTRS Plan s total pension liability was 7.6%. The projection of each flow used to determine the discount rate assumed that contributes from plan members and employers will be made at statutory contributions rates in accordance with the rate increases per AB Projected inflows from investment earnings were calculated using the long-term assumed investment rate of return (7.60%) and assuming that the contributions, benefits payments and administrative expenses occur midyear. Based on those assumptions, the CalSTRS Plan 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 payment to determine the total pension liability. The long-term expected rate of return on pension plan investment was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pensions plan investment expense and inflation) are developed for each major asset class. The best-estimate ranges were developed using capital market assumptions from CalSTRS general investment consultant as an input to process. Based on the model from CalSTRS consulting actuary s investment practice, a best estimate range was determined by assuming the portfolio is rebalanced 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 CalSTRS general investment consultant is based on CalSTRS board policy for target asset allocation in effect on February 2, 2013, the date the current experience study was approved by the CalSTRS board. 50

143 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Best estimates of 10-year geometric real rates of return and the assumed asset allocation for each major asset class used as input to develop the actuarial investment rate of return are summarized in the following table: Long-Term* Asset Class Assumed Asset Allocation Expected Real Rate of Return Global Equity 47% 4.50% Private Equity Real Estate Inflation Sensitive Fixed Income Cash / Liquidity % * 10-year geometric average California Public Employee s Retirement System (CalPERS) Plan Description The District participates in the California Public Employee s Retirement System (CalPERS Plan). A cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. CalPERS act as a common investment and administrative agent for participating public entities within the State of California. CalPERS issues a publicly available financial report that includes financial statements and required supplementary information for this plan. This report is available online at Benefits Provided The benefits for the CalPERS Plan are established by contract, in accordance with the provisions of the California Public Employees Retirement Law (PERL). The benefits are based on member s year of service, age, final compensation, and benefit formula. Benefits are provided for disability, death, and survivors of eligible members or beneficiaries. PEPRA made significant changes to the benefit structure that primarily affect members first hired to perform CalPERS creditable activities on or after January 1, As a result of PEPRA, the CalPERS Plan has two benefit structures: 1) CalPERS 2% at 55 - Members first hired on or before December 31, 2012, to perform CalPERS creditable activities, and 2) CalPERS 2% at 62 - Members first hired on or after January 1, 2013, to perform CalPERS creditable activities. To be eligible for service retirement, members hired prior to January 1, 2013 must be at least age 50 with a minimum of five years of CalPERS-credited service, while members hired after January , must be at least age 52 with a minimum of five years of service. Contributions Section 20814(c) of the PERL requires that the employer contribution rates for all public employers to be determined on an annual basis by the actuary and shall be effective on the July 1 following, notice of a change in the rate. Contribution rates for the CalPERS Plan are determined annually on an actuarial basis as of June 30 by CalPERS. The CalPERS Plan s actuarially determined rate is the estimated amount necessary to finance the cost 51

144 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District s required contribution rate for the year ended June 30, 2015 was % of annual pay. District contributions to the CalPERS Plan were $267,680 for the year ended June 30, Actuarial Assumptions For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30, 2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Cost Method Entry-Age Normal Actuarial Assumptions: Discount Rate 7.50% Inflation 2.75% Salary Increases Varies 1 Investment Rate of Return Mortality 3 CalPERS Members Data Post-Retirement Benefit Increase Up to 2.75% 4 1 Depending on age, service and type of employment 2 Net of pension plan investment and administrative expenses; includes inflation 3 The mortality table used was developed based on CalPERS-specific data. The table includes 20 years of mortality improvement using Society of Actuaries Scale Bb. For more details on this table, refer to the 2014 experience study report. 4 contract COLA up to 2.00% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. Further details of the experience study can be found at CalPERS website. Discount Rate The discount rate used to measure the total pension liability was 7.5% for the CalPERS Plan. 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 7.5% discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The stress test results are present in detailed report, GASB Statements 67 and 68 Crossover Testing Report for Measurement Date June 30, 2014 based on June 30, 2013 Valuation, that can be obtained from 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. For the Schools Pool, this difference was deemed immaterial. 52

145 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 CalPERS is scheduled to review all actuarial assumptions as part of its regular asset liability management 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. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, staff took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds asset classes, expected compound (geometric) 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 long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects 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 geometric rates of return are net of administrative expenses. Asset Class New Strategic Allocation Real Return Year 1-10 a Real Return Year 11+ b Global Equity 47% 5.25% 5.71% Global Fixed Income Inflation Sensitive Private Equity Real Estate Infrastructure and Forestland Liquidity Total 100% a An expected inflation of 2.5% was used for this period b An expected inflation of 3.0% was used for this period 53

146 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 Pension Liabilities, Pension Expense, and Deferred Outflows/Inflows of Resources Related to Pensions As of June 30, 2015 the District reported a liability for its proportional share of the net pension liability that reflect a reduction for the State s pension support provided to the District. The amount recognized by the District as its proportionate share of the net pension liability, the related state support and the total portion of the net pension liability that was associated with the District were as follows: District's proportionate share of the net pension liability: CalSTRS Plan $ 7,571,388 CalPERS Plan 2,270,487 State's proportionate share of CalSTRS net pension liability associated with the District 4,573,118 Total $ 14,414,993 The District s net pension liability is measured as the proportionate share of each Plan s net pension liability. The net pension liabilities of the Plans are measured as of June 30, 2014 and calculated by reducing the total pension liability of each Plan by the respective Plan s fiduciary net position. The District s proportion of each Plan s net pension liability was based on the ratio of the District s actual received by the respective Plan in the measurement period. The District s proportionate share of the net pension liability as of June 30, 2014, was 0.013% and 0.020% for the CalSTRS and CalPERS Plans, respectively. For the year ended June 30, 2015, the District recognized pension expense of $1,210,159 and revenue of $352,509 for support provided by the State. At June 30, 2015, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources District contributions subsequent to measurement date $ 809,382 $ - Net difference between projected and actual earnings on plan investment - 2,650,865 Total $ 809,382 $ 2,650,865 54

147 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 The $809,382 reported as deferred outflows of resource related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ending June 30, Other amounts reported as deferred outflows/inflows of resources related to pensions will be recognized as pension expense as follows: Year Ended June 30 Amount 2016 $ (662,716) 2017 (662,716) 2018 (662,716) 2019 (662,717) Total $ (2,650,865) Sensitivity of the District s Proportional 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 of the Plans as of the measurement date, calculated using the discount rate, as well as what the District s proportionate share of the net pension liability would be if it were calculated using discount rate that is 1 percentage point lower or 1 percentage point higher than the current rate. Discount Rate - 1% (6.60%) Current Discount Rate (7.60%) Discount Rate +1% (8.60%) District's proportionate share of the CalSTRS Plan's net pension liability $ 11,841,440 $ 7,571,388 $ 4,057,560 Discount Rate - 1% (6.50%) Current Discount Rate (7.50%) Discount Rate +1% (8.50%) District's proportionate share of the CalPERS Plan's net pension liability $ 3,982,952 $ 2,270,487 $ 839,549 55

148 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 14 COMMITMENTS AND CONTINGENCIES Grants The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the General Fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, Litigation The District is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the District. NOTE 15 PARTICIPATION IN PUBLIC ENTITY RISK POOLS, JOINT POWERS AUTHORITIES AND OTHER RELATED PARTY TRANSACTIONS The Middletown Unified School District participates in three joint ventures under joint powers agreements (JPA's): the School Insurance Group Northern Alliance (SIGNAL and SIGNAL II) and the Self-Insured Schools of California (SISC). The relationship between the Middletown Unified School District and the JPA's are such that the JPA's are not component units of the Middletown Unified School District for financial reporting purposes. SIGNAL arranged for and provides workers' compensation insurance; SIGNAL II arranges for and provides property and liability insurance. These entities have budgeting and financial reporting requirements independent of member units and their financial statements are not presented in these financial statements; however, fund transactions between the entities and the District are included in these statements. Audited financial statements are generally available from the respective entities. During the year ended June 30, 2015, the District made payments to the risk pools and joint powers agencies as follows: Joint Power Authority Payments Made School Insurance Group Northern Alliance - SIGNAL $ 397,683 School Insurance Group Northern Alliance - SIGNAL II $ 117,147 56

149 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 16 RESTATEMENT OF NET POSITION The beginning net position of Governmental Activities has been restated in order to record the District s proportionate share of net pension liability and deferred outflows of resources related to pensions in accordance with GASB Statement No. 68, Accounting and Financial Reporting for Pensions and No. 71, Pension Transition for Contributions made Subsequent to the Measurement Date. The effect on beginning net position is presented as follows: Governmental Activities Net Position - Beginning, as Previously Reported $ 8,371,668 Restatement (11,635,090) Net Position - Beginning as Restated $ (3,263,422) 57

150 II - Required Supplementary Information 58

151 MIDDLETOWN UNIFIED SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2015 REVENUES Actual Variances - Positive (Negative) Final to Original Final (GAAP Basis) Actual LCFF sources $ 10,711,038 $ 10,770,303 $ 10,680,942 $ (89,361) Federal sources 715, , ,744 - Other State sources 411, , , ,638 Other local sources 1,063,056 1,347,196 1,347, EXPENDITURES Current Total Revenues 12,901,453 13,378,201 13,558, ,456 Certificated salaries 5,892,646 6,235,424 6,235, Classified salaries 2,175,479 2,407,374 2,407, Employee benefits 2,960,694 3,255,733 3,608,154 (352,421) Books and supplies 454, , , Services and operational expenditures 1,128,970 1,026,975 1,026, Other outgo (14,750) (14,967) (14,750) (217) Capital outlay - 80,614 80,612 2 Debt services - Principal Debt services - Interest Total Expenditures 12,597,482 13,677,554 14,030,090 (352,536) Excess (Deficiency) of Revenues Over Expenditures 303,971 (299,353) (471,433) (172,080) Other Financing Sources (Uses) Budgeted Amounts (GAAP Basis) Transfers in Transfers out (121,156) (132,156) (132,156) - Net Financing Sources (Uses) (121,156) (132,156) (132,156) - NET CHANGE IN FUND BALANCES 182,815 (431,509) (603,589) (172,080) Fund Balance - Beginning 1,981,391 1,981,391 1,981,391 Fund Balance - Ending $ 2,164,206 $ 1,549,882 $ 1,377,802 $ (172,080) See accompanying note to required supplementary information 59

152 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS AND EMPLOYER CONTRIBUTION JUNE 30, 2015 Actuarial Valuation Date Actuarial Value of Assets (a) Schedule of Funding Progress Actuarial Accrued Liability (AAL) - Level Percent of Payroll (b) Unfunded AAL (UAAL) (b-a) Funded Ratio (a / b) Estimated Covered Payroll (c) UAAL as a Percentage of Covered Payroll ([b - a] / c) July 1, 2008 $ 70,620 $ 2,638,777 $ 2,568,157 3% $ 5,500,000 47% July 1, 2011 $ 85,363 $ 1,850,547 $ 1,765,184 5% $ 5,700,000 31% July 1, 2013 $ 93,780 $ 1,682,455 $ 1,588,675 6% $ 8,600,000 18% See accompanying note to required supplementary information 60

153 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY AS OF JUNE 30, 2015 LAST 10 YEARS* CalSTRS Plan Proportion of the net pension liability % District's proportionate share of the net pension liability $ 7,571,388 State's proportionate share of the net pension liability associated with the District 4,573,113 Total $ 12,144,501 District's covered employee payroll $ 6,014,242 District's proportionate share of the net pension liability as a percentage of its covered employee payroll 126% Plan fiduciary net position as a percentage of the total pension liability 77% Proportion of the net pension liability % District's proportionate share of the net pension liability $ 2,270,487 District's covered employee payroll $ 2,142,466 District's proportionate share of the net pension liability as a percentage of its covered employee payroll 106% Plan fiduciary net position as a percentage of the total pension liability 83% Notes to Schedule: CalPERS Plan Change of benefit terms In 2015, there were no changes to the benefit terms. Changes in assumptions In 2015, there were no changes in assumptions. * Fiscal year 2015 was the first year of implementation, therefore only one year is shown See accompanying note to required supplementary information 61

154 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF THE DISTRICT S CONTRIBUTIONS FOR PENSIONS AS OF JUNE 30, 2015 LAST 10 YEARS* CalSTRS Plan Contractually required contribution (actuarially determined) $ 541,702 Contributions in relation to the actuarially determined contribution 541,702 Contribution deficiency (excess) $ Covered-employee payroll $6,100,695 contribution as a percentage of covered-employee payroll 8.88% CalPERS Plan Contractually required contribution (actuarially determined) $ 267,580 Contributions in relation to the actuarially determined contribution 267,580 Contribution deficiency (excess) $ Covered-employee payroll $2,291,722 Contribution as a percentage of covered-employee payroll 11.68% *Fiscal year 2015 was the first year of implementation, therefore only one year is shown. See accompanying note to required supplementary information 62

155 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTE TO REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED JUNE 30, 2015 NOTE 1 PURPOSE OF SCHEDULES Budgetary Comparison Schedule This schedule is 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 schedule presents 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 the District s Proportionate Share of the Net Pension Liability This 10-year schedule is required by GASB Statement No. 68 for each cost-sharing pension plan. Until a full 10- year trend is compiled, the schedule will only show those years under which GASB Statement No. 68 was applicable. The schedule presents the District s proportion (percentage) of the collective net pension liability, the District s proportionate share (amount) of the collective net pension liability, the District s covered-employee payroll, and the pension plan s fiduciary net position as a percentage of the total pension liability. Schedule of District s Contributions for Pensions This 10-year schedule is required by GASB Statement No. 68 for each cost-sharing pension plan. Until a full 10- year trend is compiled, the schedule will only show those years under which GASB Statement No. 68 was applicable. The schedule presents the District s statutorily or contractually required employer contribution, the amount of contributions recognized by the pension plan in relation to the statutorily or contractually required employer contribution, the difference between the statutorily or contractually required employer contribution and the amount of contributions recognized by the pension plan in relation to the statutorily or contractually required employer contribution, the District s covered-employee payroll, and the amount of contributions recognized by the pension plan in relation to the statutorily or contractually required employer contribution as a percentage of the District s covered-employee payroll. 63

156 III - Supplementary Information 64

157 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2015 Pass-Through Federal Entity Federal Grantor/Pass-Through CFDA Identifying Federal Grantor/Program or Cluster Title Number Number Expenditures U.S. DEPARTMENT OF EDUCATION Passed through California Department of Education: No Child Left Behind Act (NCLB) Title I, Part A - Basic Grants Low-Income and Neglected $ 333,318 Subtotal Title I Grants to Local Educational Agencies Cluster 333,318 Title II, Part A - Improving Teacher Quality Local Grants ,480 Title III - Limited English Proficiency (LEP) Student Program ,352 Title VI, Part B, Rural and Low Income ,690 Individuals with Disabilities Education Act (IDEA) Cluster IDEA: Basic Local Assistance Entitlement, Part B, Sec ,769 IDEA: Preschool Grants, Part B, Sec ,875 IDEA: Preschool Local Entitlement, Part B, Sec A ,533 Subtotal Individuals with Disabilities Education Act (IDEA) Cluster 313,177 Total U.S. Department of Education 733,017 U.S. DEPARTMENT OF AGRICULTURE Passed through California Department of Education: Child Nutrition Cluster National School Lunch ,113 School Breakfast Program ,588 Meal Supplement N/A* 6,135 Equipment Assistance Grants ,575 Fair Market Value of Commodities ,990 Subtotal of Child Nutrition Cluster 477,401 Total U.S. Department of Agriculture 477,401 Total Expenditures of Federal Awards $ 1,210,418 *Passthrough Entity Identifying Number not available or not applicable See accompanying note to supplementary information. 65

158 MIDDLETOWN UNIFIED SCHOOL DISTRICT LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE FOR THE YEAR ENDED JUNE 30, 2015 ORGANIZATION The Middletown Unified School District was established on July 1, 1963 and encompasses an area within Lake County. The District operates three elementary schools, one middle school, one high school, one community day school and one continuation school. The District is the authorizing agency for Lake County International Charter School. GOVERNING BOARD MEMBER OFFICE TERM EXPIRES William Wright President November 2016 Jay Albertson Clerk November 2018 Kim Tangermann Member November 2018 Sandy Tucker Member November 2016 Lynette Carrillo Member November 2018 ADMINISTRATION Korby Olson Sherrie Ebyam Superintendent Director of Business Services See accompanying note to supplementary information. 66

159 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2015 Second Period Annual Report Report ELEMENTARY Kindergarten First through third Fourth through sixth Seventh and eighth Home Hospital 1 1 Special education Community Day School 2 2 Total Elementary 1,008 1,014 HIGH SCHOOL Ninth through twelfth Home Hospital - 1 Special education 1 1 Community Day School 5 4 Total High School Grand Total 1,437 1,439 See accompanying note to supplementary information. 67

160 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME FOR THE YEAR ENDED JUNE 30, Number of Days Minutes Adjusted & Actual Traditional Multitrack Grade Level Requirement Reduced Minutes Calendar Calendar Status Kindergarten 36,000 35,000 39, N/A Complied Grade 1 50,400 49,000 55, N/A Complied Grade 2 50,400 49,000 55, N/A Complied Grade 3 50,400 49,000 55, N/A Complied Grade 4 54,000 52,500 55, N/A Complied Grade 5 54,000 52,500 55, N/A Complied Grade 6 54,000 52,500 55, N/A Complied Grade 7 54,000 52,500 56, N/A Complied Grade 8 54,000 52,500 56, N/A Complied Grade 9 64,800 63,000 65, N/A Complied Grade 10 64,800 63,000 65, N/A Complied Grade 11 64,800 63,000 65, N/A Complied Grade 12 64,800 63,000 65, N/A Complied See accompanying note to supplementary information. 68

161 MIDDLETOWN UNIFIED SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2015 Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements. CAPITAL ASSETS Capital Assets Total Capital Assets, June 30, 2015, Unaudited Actuals $ 9,714,488 Assets Land and construction in progress (1,211,482) Land improvements 322,846 Buildings and improvements 13,375,386 Equipment 2,044,205 Accumulated Depreciation (1,089,834) Total Capital Assets, June 30, 2015, Audited Financial Statements $ 23,155,609 Long-Term LONG-TERM DEBT Debt Total Long-Term Debt, June 30, 2015, Unaudited Actuals $ 15,220,089 Increase in: General Obligation Bonds 2,343,761 Net pension liability 9,841,875 Bond premium net of amortization 903,501 Decrease in: Net OPEB obligation (878,570) Other long term debt (4,990) Total Long-Term Debt, June 30, 2015, Audited Financial Statements $ 27,425,666 See accompanying note to supplementary information. 69

162 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 (Budget) GENERAL FUND Revenues and other financial sources $ 14,667,768 $ 13,558,657 $ 13,146,568 $ 12,440,434 Other transfers in 87,966 Total Revenues 14,755,734 13,558,657 13,146,568 12,440,434 Expenditures 13,692,408 14,030,090 13,305,784 12,609,199 Other uses and transfers out 214, ,156 88,989 7,561 Total Expenditures and Other Uses 13,907,103 14,162,246 13,394,773 12,616,760 INCREASE (DECREASE) IN FUND BALANCE $ 848,632 $ (603,589) $ (248,205) $ (176,326) ENDING FUND BALANCE $ 2,226,434 $ 1,377,802 $ 1,981,391 $ 2,229,596 AVAILABLE RESERVES 2 $ 802,364 $ 828,723 $ 1,328,297 $ 1,702,155 AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO 5.77% 5.85% 9.92% 13.49% LONG-TERM OBLIGATIONS 3 $ 26,953,363 $ 27,425,666 $ 30,568,450 $ 17,929,600 K-12 AVERAGE DAILY ATTENDANCE AT P-2 1,435 1,437 1,444 1,479 The General Fund balance has decreased by $851,794 over the past two years. The fiscal year budget projects a budget increase of $848,632. For a district this size, the State recommends available reserves of at least three percent of total General Fund expenditures, transfers out, and other uses (total outgo). The District has incurred an operating deficit in two of the past three years and anticipates incurring an operating surplus during the fiscal year. The total long-term obligations have increased by $9,496,066 over the past two years. Average daily attendance has decreased by 42 over the past two years. A decline of 2 ADA is anticipated during fiscal year Budget 2016 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all undesignated fund balances and all funds designated for economic uncertainty contained within the General Fund. 3 Beginning for the fiscal year , the net pension liability is included in long-term debt due to the implementation of GASB 68. Fiscal year long-term debt was restated to include the net pension liability. See accompanying note to supplementary information. 70

163 MIDDLETOWN UNIFIED SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS JUNE 30, 2015 Charter School Status Included in Audit Report Lake County International Charter School Active No See accompanying note to supplementary information. 71

164 MIDDLETOWN UNIFIED SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET JUNE 30, 2015 Special Capital County Reserve For Total Non-Major Cafeteria Facilities School Facilities Capital Outlay Governmental Fund Fund Fund Fund Funds ASSETS Cash and cash equivalents $ 11,681 $ 196,870 $ 2,507 $ 186,724 $ 397,782 Accounts receivable 66, ,157 Due from other funds Stores inventories 5, ,518 Total Assets 84, ,870 2, , ,348 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable 32,921 45, ,428 82,681 Due to other funds 23,750 4, ,904 Total Liabilities 56,671 49, , ,585 Fund Balances: Nonspendable 5, ,518 Restricted 22, ,108 Assigned - 146,925 1, , ,137 Total Fund Balance 27, ,925 1, , ,763 Total Liabilities and Fund Balances $ 84,247 $ 196,870 $ 2,507 $ 186,724 $ 470,348 See accompanying note to supplementary information. 72

165 MIDDLETOWN UNIFIED SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED JUNE 30, 2015 Special Capital County Reserve For Total Non-Major Cafeteria Facilities School Facilities Capital Outlay Governmental Fund Fund Fund Fund Funds REVENUES Federal sources $ 477,402 $ - $ - $ - $ 477,402 Other State sources 36, ,928 Other local sources 146,015 59,697 1,011 48, ,744 Total Revenues 660,345 59,697 1,011 48, ,074 EXPENDITURES Current Instruction - Pupil services: Food services 643, ,612 Administration: All other general administration 14,750 1, ,490 Plant services 12,042 19,967-47,083 79,092 Facility acquisition and construction - 458, , ,578 Debt service: Debt service principal Debt service interest Total Expenditures 670, , ,665 47,083 1,532,772 Excess (Deficiency) of Revenues Over Expenditures (10,059) (420,923) (333,654) 938 (763,698) Other Financing Sources (Uses) Transfers in 11, , ,156 Net Financing Sources (Uses) 11, , ,156 NET CHANGE IN FUND BALANCES 941 (420,923) (333,654) 122,094 (631,542) Fund Balance - Beginning 26, , ,620 61, ,305 Fund Balance - Ending $ 27,576 $ 146,925 $ 1,966 $ 183,296 $ 359,763 See accompanying note to supplementary information. 73

166 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2015 NOTE 1 PURPOSES OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of Federal awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. Local Education Agency Organization Structure This schedule provides information about the District's boundaries and schools operated, members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. 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 required by Education Code Section Reconciliation of Annual Financial and Budget Report with Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Unaudited Actual Financial Report to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Charter School This schedule represents a complete listing of all charter schools authorized by the District and indicates whether their financial activities and balances have been included in the District's annual audited financial statements for fiscal year ended June 30,

167 MIDDLETOWN UNIFIED SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2015 Non-Major Governmental Funds Balance Sheet and Statement of Revenues, Expenditures and Change in Fund Balance The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balance is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance. 75

168 IV - Independent Auditors' Reports 76

169 Cichella & Tokunaga, LLP Certified Public Accountants 4671 Golden Foothill Parkway El Dorado Hills, CA Voice: (877) Fax: (916) 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 Governing Board Middletown Unified School District Middletown, 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 the Middletown Unified School District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise Middletown Unified School District's basic financial statements, and have issued our report thereon dated December 3, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Middletown 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 Middletown Unified School District's internal control. Accordingly, we do not express an opinion on the effectiveness of Middletown 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. 77

170 Compliance and Other Matters As part of obtaining reasonable assurance about whether Middletown Unified School District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 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. El Dorado Hills, California December 3,

171 Cichella & Tokunaga, LLP Certified Public Accountants 4671 Golden Foothill Parkway El Dorado Hills, CA Voice: (877) Fax: (916) INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A-133 Governing Board Middletown Unified School District Middletown, California Report on Compliance for Each Major Federal Program We have audited Middletown 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 Middletown Unified School District's (the District) major Federal programs for the year ended June 30, Middletown Unified School District's major Federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its Federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each Middletown 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 reason able 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 Middletown 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 Middletown Unified School District's compliance. 79

172 Opinion on Each Major Federal Program In our opinion, Middletown Unified School District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major Federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of Middletown 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 Middletown 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 Middletown Unified School District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. El Dorado Hills, California December 3,

173 Cichella & Tokunaga, LLP Certified Public Accountants 4671 Golden Foothill Parkway El Dorado Hills, CA Voice: (877) Fax: (916) INDEPENDENT AUDITORS' REPORT ON STATE COMPLIANCE Governing Board Middletown Unified School District Middletown, California Report on State Compliance We have audited Middletown Unified School District's compliance with the types of compliance requirements as described in the Standards and Procedures for Audit of California K-12 Local Educational Agencies applicable to the Middletown Unified School District's programs as identified in the below schedule for the year ended June 30, Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its State programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance of each of the Middletown Unified School District's State programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Standards and Procedures for Audits of California K-12 Local Educational Agencies , published by the Education Audit Appeals Panel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a direct and material effect on the applicable government programs noted below. An audit includes examining, on a test basis, evidence about Middletown 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 State compliance. Our audit does not provide a legal determination of Middletown Unified School District's compliance with those requirements. 81

174 Other Matters In connection with the audit referred to above, we selected and tested transactions and records to determine the Middletown Unified School District's compliance with the State laws and regulations applicable to the following items: Procedures Compliance Requirements Performed LOCAL EDUCATION AGENCIES OTHER THAN CHARTER SCHOOLS Attendance Yes Teacher Certification and Misassignments Yes Kindergarten Continuance Yes Independent Study No, See Below Continuation Education Not Applicable Instructional Time Yes Instructional Materials Yes Ratios 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 Occupational Centers or Programs Maintenance of Effort Yes Adult Education Maintenance of Effort Not Applicable SCHOOL DISTRICTS, COUNTY OFFICE EDUCATION AND CHARTER SCHOOLS California Clean Energy Jobs Act After School Education and Safety Program Proper Expenditure of Education Protection Account Funds Common Core Implementation Funds Unduplicated Local Control Funding Formula Pupil Counts Local Control and Accountability Plan Yes Not Applicable Yes Yes Yes Yes CHARTER SCHOOLS Attendance Mode of Instruction Non-classroom-Based Instructions/Independent Study Determination of Funding for Non-classroom-Based Instruction Annual Instructional Minutes Classroom Based Charter School Facilities Grant Program Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable 82

175 The District's reported ADA for Independent Study was below the materiality level that requires testing; therefore, we did not perform any testing of Independent Study ADA. Opinion on State Compliance In our opinion, Middletown 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 the programs identified in the above schedule for the year ended June 30, El Dorado Hills, California December 3,

176 V - Schedule of Findings and Questioned Costs 84

177 MIDDLETOWN UNIFIED SCHOOL DISTRICT SUMMARY OF AUDITORS RESULTS FOR THE YEAR ENDED JUNE 30, 2015 FINANCIAL STATEMENTS Type of auditors' report issued: Internal control over financial reporting: Material weaknesses identified? Significant deficiencies identified not considered to be material weaknesses? Noncompliance material to financial statements noted? FEDERAL AWARDS Internal control over major federal programs: Material weaknesses identified? Significant deficiencies identified not considered to be material weaknesses? Type of auditors' report issued on compliance for major federal programs: Any audit findings disclosed that are required to be reported in accordance with OMB Circular A-133, Section.510(a) Identification of major federal programs Unmodified No None Reported No No None Reported Unmodified No , A, Special Education IDEA Cluster Dollar threshold used to distinguish between Type A and Type B programs: $300,000 Auditee qualified as low-risk auditee? Yes STATE AWARDS Internal control over state programs: Material weaknesses identified? Significant deficiency identified? Types of auditors report issued on compliance for state programs: No None Reported Unmodified 85

178 MIDDLETOWN UNIFIED SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2015 None reported. 86

179 MIDDLETOWN UNIFIED SCHOOL DISTRICT FEDERAL AWARD FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2015 There were no audit findings and questioned costs related to the federal awards for the year ended June 30,

180 MIDDLETOWN UNIFIED SCHOOL DISTRICT STATE AWARD FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2015 There were no audit findings and questioned costs related to the state awards for the year ended June 30,

181 MIDDLETOWN UNIFIED SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, Student Body Operations (30000) Criteria or Specific Requirements General best accounting practices emphasize the importance of good internal controls. Strong internal controls over associated student body (ASB) funds are especially important due to the decentralized nature of ASB cash collections and disbursements. Condition During our testing of the student body internal control procedures we noted the following: Coyote Valley Elementary School Pre-numbered receipts are not being issued for cash collections. Middletown Middle School Funds are not being deposited in a timely manner. Questioned Cost None Effect Lack of proper documentation for the ASB activities and site cash receipts exposes ASB and site receipts to a greater risk of misstatement and causes difficulty in verifying that all cash collected was deposited to the banks intact. Cause The school site ASB clerk is not aware of the requirements to issue pre-numbered receipts and that deposits should be made in a timely manner. Prior to going on break, cash and checks were not deposited. Recommendation We recommend that the District provide training on the importance of strengthening the internal controls over ASB funds, specifically issuing pre-numbered receipts on all cash collections, depositing receipts on a weekly basis, obtaining signature approvals on all disbursements. Status Implemented 89

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183 APPENDIX D COUNTY INVESTMENT POLICY Appendix D

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185 COUNTY OF LAKE STATEMENT INVESTMENT OF POLICY [Updated for the year 2013] As designated by Board of Supervisors under the laws of the State of California, it is the responsibility of the County Treasurer, to secure and protect the public funds of the County, and to establish proper safeguards, controls, and procedures to maintain these funds in a lawful, rational and auspicious manner. Said maintenance shall include the prudent and secure investment of those funds that are not immediately required for daily operations, in a manner anticipated to provide additional benefit to the people of the County of Lake. In addition, the County Treasurer acts as the Treasurer, cash manager, and investor for a sizable number of public agencies within the County, rather than each entity having to locate and hire a knowledgeable person to handle the entity s banking, investments and other financial duties separately. This pooling of public funds not only eliminates duplication of expenses, but also smoothes out cash flow differences, permits cost savings through higher volume, and attracts more professional service providers. This document contains the policies, procedures, and legalities guiding the County Treasurer when investing the Pool s temporarily unemployed funds. This Statement of Investment Policy is reviewed no less than annually and may be adjusted as needed to reflect any changes in the Government Code or investment practices. Upon request, this Policy will be provided to participants in the County Investment Pool; to securities dealers, banks and brokers currently approved for conducting investment transactions with the County Treasurer's office in the ongoing effort to manage the excess cash portfolio; to other involved persons or entities; and to any member of the electorate wishing to review this document. The Treasurer reserves the right to provide these documents on a cost basis. SCOPE This Statement of Investment Policy pertains to those temporarily surplus funds under the control of the Treasurer, designated for the daily ongoing operations of the County Pool participants; and concerns the deposit, maintenance, and safekeeping of all such funds, and the investments made with these funds. This Policy does not apply to pension moneys, delayed compensation funds, trustee, and certain other non-operating funds not participating in the County Investment Pool. Percentage limitations noted within this Policy shall apply to all money considered to be within the County Investment Pool. Any investments existing outside the Pool shall be subject to the local agency s individual percentages. PURPOSE OF POLICY STATEMENT The purpose of this Statement of Investment Policy is to provide those entities participating in the County Investment Pool, those involved in servicing the investment requirements of the County, and any other interested party, a clear understanding of the regulations and internal guidelines that will be observed in maintaining and investing those pooled funds deemed to not be required to meet immediate cash flow requirements. TREASURY OBJECTIVES The prime and overriding objective of the Treasurer is to protect the safety of the principal of the Investment Pool through the judicious purchase of those legal investments permitted to local agencies, as defined in the State of California Government Codes, consistent with current conditions and the other dominant objectives pursuant to managing a local agency portfolio, namely: Safety: It is the primary responsibility of the Treasurer to maintain the safe return of all principal placed in investments by avoiding decisions that might result in losses through either fraud, default, or adverse market conditions. Import is also accorded the protection of accrued interest earned on any investment instrument. Liquidity: It is imperative that a vast majority of all investments be in items that are immediately negotiable, as the portfolio is a cash management fund. It shall always be assumed that all investments could require immediate liquidation in order to meet unexpected cash calls. 1 of 10

186 Availability: Due to the nature of a public funds portfolio, it is mandatory that moneys be available to meet the monetary requirements inherent to operating a public entity. Thus funds need to be invested in such a manner that money will always be available, without risk of trading loss, to pay normal cash requirements. A vast majority of the moneys invested by the Treasurer should never require the realization of immoderate losses should an unforeseen cash demand require the sale of investments prior to maturity. A sufficient portion of all funds shall be invested in securities providing a high degree of availability, that is, in securities easily sold or converted to cash in a timely manner, with little or no loss of interest earnings. Yield: While it is considered desirable to obtain a yield commensurate to current conditions, yield shall not be the driving force in determining which investments are to be selected for purchase. Yield is definitely considered to be of much lesser importance than either safety, liquidity or availability. The Treasurer places investments with the objective of obtaining a respectable rate of return, not attempting to maximize yield at the expense of either safety, liquidity, or availability, yet not totally ignoring those factors within the marketplace that may be indicative of either favorable or hazardous conditions. The portfolio will be managed very conservatively, but actively enough to avert avoidable losses due to adverse market conditions. PRUDENCE The Treasurer is subject to the "Prudent Person Rule" whenever making a decision regarding the investment of the Pool's funds. This rule states, in principle: In investing property for the benefit of others, a trustee shall exercise the judgment and care, under circumstances then prevailing, that persons of prudence, discretion and intelligence, would exercise in the management of their own affairs - not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable safety of, as well as the probable income from, their capital." The Treasurer, and those acting for the Treasurer, are considered to have a fiduciary, trustee, relationship with the public for the public funds, and all investment decisions will be made in a manner sustaining this responsibility. DELEGATION OF AUTHORITY While the Treasurer has final responsibility for all investment decisions, other Treasury personnel may aid in the day to day operations. Those staff members, in addition to the Treasurer, currently authorized to act on behalf of the Pool, as of the date entered on this Policy, are listed below. This list is subject to change, and those parties newly involved in transactions with the Treasurer's department should always obtain a current Trading Authorization and Agreement form, and be verbally introduced by a known Treasury employee, prior to accepting unconfirmed verbal instructions from any previously unknown Treasury staff member. Authorized Personnel SANDRA M. SHAUL BARBARA C. RINGEN CAROLYN CALL Title TREASURER-TAX COLLECTOR CHIEF DEPUTY TREASURER-TAX COLLECTOR DEPUTY TREASURER 2 of 10

187 Other persons, both inside and outside County employment, may act in the role of assistant or advisor to aid in the timely and proper settlement of investment transactions. While these persons may provide information or aid in the expedient delivery of securities, they may not authorize, approve, or initiate any trading activities. Only the persons listed on a current Trading Authorization & Agreement, and the Treasurer, may initiate trading activity. SECURITIES CUSTODY The Treasurer has established a third party custody and safekeeping account to which all negotiable instruments shall be delivered upon purchase on a payment versus delivery basis. No negotiable, deliverable, securities or investments will be left in the custody of any brokerage firm or issuing party, including any collateral from Repurchase Agreements. AUTHORIZED INVESTMENTS AND LIMITATIONS The Government Codes of the State of California, primarily within sections et. seq., establish the legality of certain types of investment vehicles for a California local agency's portfolio. Thereby, under no circumstances is the Treasurer permitted to purchase an investment that is not specifically authorized for a local agency under these, or other code sections that may apply, or might later be enacted, pertaining to local agency investments. Securities brokers dealing with the County Pool should possess a complete understanding of these Code sections. An attached Addendum briefly describes the types of securities legal within the Government Code sections noted above and outlines the various limitations included in these sections. Except for the restrictions noted below in this section, all legality permitted investment options described in the Government Code are authorized at this time. Funds placed in the State s Local Agency Investment Fund (LAIF) shall follow the limitations placed on these deposits by the State and may change in accordance with these restrictions. Though these Government Code sections define the investment types and terms permissible to the Treasurer under this Policy, various temporary and more restrictive constraints may at times be deemed beneficial due to transient conditions within the marketplace. These flexible constraints are not part of this Policy but may be obtained by requesting a current Temporary Constraints and Restrictions on Investments document, which will change on an as needed basis. These constraints or restrictions may only be more restrictive than those of the Policy, but may not be less restrictive. Securities Brokers and Dealers should be aware of these temporary conditions in order to save time and best serve the County Pool. Though the Government Code sections define the investment types and terms permissible to the Treasurer, the Treasurer currently will not: Invest in any security or investment with a stated or potential final maturity longer than five years, unless the conditions of the security include terms that permit the purchaser to unconditionally put, or sell back, to the original issuer, the security prior to five years from the purchase date; or the Board of Supervisors has pre-approved, as required by the Government Codes. Invest in any security or investment wherein, by the terms of the investment, interest might not be earned during any period the security or investment exists. Purchase any security wherein under terms inherent to the security, or the investment agreement under which the security is purchased, circumstances could result wherein the investment runs a risk of earning a rate of return substantially below other investments obtainable on a fixed rate basis at the time of purchase, or drastically different than the prevailing rate during any time prior to the maturity of the issue. Enter into a reverse repurchase agreement. Purchase any Collateralized Mortgage Obligation. Invest in futures or options. AUTHORIZED DEALER LIST It is prohibited for a transaction to be entered into with any securities broker, dealer or bank investment department or subsidiary prior to that enmity being designated an Authorized Dealer, and placed on the Authorized Dealer List. For a firm to become authorized it must first demonstrate that it will add value to the Treasurer's efforts 3 of 10

188 to best manage the cash portfolio, as well as fulfill certain other minimum requirements. To qualify for Authorized Dealer status, a brokerage firm or bank must: 1) Be a dealer operation properly licensed to deal with local agencies in California, and; 2) Have a minimum of $XXmm in capital, or, be a Primary Dealer of the Federal Reserve Bank of New York; and; 3) Be headquartered in the State of California, or, the City of New York, or be the direct issuer of a security type normally purchased by the Treasurer; Or; Or; Be a department or subsidiary of an insured bank with minimum assets of $XXmm that the County has comprehensive banking relationships with; Be an established broker operation in New York or its environs, with a history of profitability, that is properly licensed to deal with local agencies in California, that has capital of not less than $XXmm, and does not position securities for their own portfolio, but brokers securities for their established clients consisting primarily of traders for Primary Dealers and/or other major institutional fixed income brokerage operations, issuers and investors. If meeting the above requirements, a salesperson may apply to become an Authorized Dealer by sending to the Treasurer their most recent annual and interim audited financial statements and a letter furnishing: 1) Their reasons for believing they would add value to the present coverage; and, 2) A general roster of those markets they participate in, and specifics on those types of securities they as a firm, regularly issue or regularly hold dealer trading positions in; [or, a list of those dealers they are able to represent, and the securities they regularly position;] and, 3) A list of five references, at least three being California local agency treasurers, including telephone numbers that the Treasurer or his representative may contact. The Treasurer will instigate an investigation of the applying salesperson and the firm through various sources, including the California Department of Corporations and FINRA, to determine market participation, knowledge, reputation, and financial stability. All salespeople and their supervisors will be expected to have a working knowledge of the appropriate sections of the State of California Government Code, sufficient experience in covering public entities, a willingness to well serve their customers, a complete and total understanding of this Investment Policy, and demonstrate an ongoing ability to work with the Treasurer and staff. The Treasurer will review all new requests at the end of each quarter, and if the decision is made that additional dealers would be beneficial to best service the portfolio's needs, those dealers selected will be informed of their addition to the Authorized Dealer List. All dealers are subject to removal from the Authorized Dealer List at any time, solely at the discretion of the Treasurer. The Treasurer, or Treasury staff, are prohibited from dealing with a salesman, broker, or account executive from any broker, dealer or bank investment department or bank subsidiary until the Acknowledgment form found on the last page of the Trading Authorization and Agreement is signed by all parties and received by the Treasurer. The Trading Authorization and Agreement is sent out to all approved dealers, and is an integral addition to this Policy Statement for Brokers/ Dealers, etc. doing investment business with the County Treasurer or Treasury staff. Similar restrictions and forms may be required of those firms doing business with the County Pool through retained financial advisors or managers. Certain selected firms may be chosen or appointed by the Treasurer to render specific services the Treasurer determines they are uniquely qualified to provide, wherein some of the requirements of this section may be waived. Neither the Treasurer, nor any member of the Treasurer s staff, may accept any gift, honoraria, gratuity or service of value in violation of the regulations set forth by the Fair Political Practices Commission, the Government Code, additional limitations set forth by County ordinance, or internal requirements of the Treasurer. The Treasurer and all members of the Treasury staff are prohibited from conducting any business with any broker, dealer, or securities firm that has made a political contribution within any consecutive 48 month period beginning January 1, 4 of 10

189 1996, in an amount exceeding the limitation contained in Rule G 37 of the Municipal Securities Rulemaking Board, to the County Treasurer or any member of the Board of Supervisors, or any candidate for these offices. TREASURY OVERSIGHT Oversight of treasury operations and pooled investments shall be achieved through the following measures: 1. A Report of Investment will be prepared by the Treasurer and distributed to the Board of Supervisors, the Chief Administrative Officer, and the County Auditor-Controller quarterly. The report will be available to pool participants and the public on request. 2. Pooled investments will be audited annually as to their compliance with government standards and investment regulations. 3. The Treasurer will present a report of investments to the public, pool participants and the Board of Supervisors annually. TERMS FOR FUNDS INVESTED WITH THE COUNTY INVESTMENT POOL The Government Code requires the County Treasurer to define the limits and conditions under which local agencies having their money in the Investment Pool may deposit and withdraw their funds. The Government Codes confer upon the Treasurer the final authority as to how funds for which the Treasurer is responsible for overseeing, are to be invested. The Treasurer must take into consideration the current financial condition of the sum total of the Pool s agencies, the conditions of the market place, as well as the cash flow projections and the potential for changes in the Pool s cash needs. The Treasurer must protect the earnings of each individual local agency in the Pool, and also see that no decision will reward a particular agency or group of agencies within the Pool at the expense of another or others within the Pool. If the Treasurer determines that a request for a withdrawal of funds for a specific or outside investment is not, in the Treasurer s opinion, in the best interest of a particular agency, or is overly detrimental to the pool as a whole, the Treasurer must legally deny the request, or find a means of neutralizing the harm to all others affected. Any funds deposited in accounts that are consolidated into the County Investment Pool that are not immediately required to meet cash flows of the Pool will be invested by the Treasurer or the Treasurer s staff. All Pool entities agree that by placing funds in such accounts that they agree to proportionately participate in all investments within the Investment Pool. FUNDS OF AGENCIES REQUIRED TO INVEST WITHIN THE POOL Funds will be accepted at all times, in the manner prescribed, from those local agencies where the County Treasurer is also the Treasurer for the local agency, or from any agencies that by statute must place their money in the County Pool. Funds will earn interest based on the average daily balance, paid on a quarterly basis. Should a legislative body of a local agency determine that certain funds will not be required by the local agency for a period of at least two years, the local agency may petition the County Treasurer to invest that portion of the local agency s excess funds in a specific investment under the control of the County Treasurer. Such a petition should state the nature of the funds the legislative body wishes to invest specifically, and the reasons why the legislative body believes a specific investment is a preferable and viable alternative to general Pool participation. Should the Treasurer determine that the request for a specific investment is valid and not counter-productive to the Pool as a whole, the Treasurer will consult with the local agency s legislative body, or its appointed representative, to suggest and determine exactly what investment(s) should be purchased to fulfill the needs of the local agency. The Treasurer will then purchase the specific investment(s) upon receipt of a written resolution, issued by the legislative body of the local agency, requesting the specific investment. The resolution must acknowledge that the local agency s legislative body takes full responsibility for the decision to purchase the specific investment(s), and that should conditions change requiring a sale prior to maturity of the specific investment(s), any loss that might be suffered as a result, will be solely that of the local agency, and that this loss shall not be shared by the Pool as a whole, nor by the County. Under language added to the Government Code in 1995, it is not permissible for local agency legislative bodies, required to have their funds within the Pool, to withdraw funds from the Pool in order to invest outside the County Pool in any manner, at any time, without the specific permission of the Treasurer. Any such investments shall either be terminated and all funds returned to the Pool, or the securities so purchased shall be transferred to the custody of the County Treasurer immediately. Upon receipt of any such securities by the Treasurer, the Treasurer shall at the Treasurer s option, place the investment in the Pool, terminate the investment at the current market value 5 of 10

190 and credit the local agency with the proceeds, or place the security in the name of the local agency as a specific investment. MONEY VOLUNTARILY INVESTED WITH THE COUNTY INVESTMENT POOL By Government Code, the County Treasurer shall set conditions under which money from local agencies, not required to have their funds in the Investment Pool, may deposit and withdraw voluntarily invested funds. Local agencies from outside the County will not be permitted to deposit funds in the County Pool. Funds from local agencies within the County, voluntarily wishing to participant in the Pool, shall be accepted under the terms existing in this Policy, along with any additional terms the Treasurer deems prudent, given the entity s particular situation. Voluntary money maybe withdrawn under conditions set forth in Sections and of the Government Codes and as previously specified in any agreements made with the Treasurer. Specific investments are not normally permitted with voluntary funds, though on a cost recovery basis and under circumstances that dictate such activity, exceptions may be permitted. OVERDRAFTS AND BORROWING The Government Codes set certain requirements for overdrafts. Participants may overdraw their accounts on a temporary basis, but only when such overdrafts are due to cash flow differences, and not the result of indeterminate budget shortfalls. All overdrafts existing longer than one month must be repaid no later than the end of the fiscal year. APPORTIONING OF COSTS AND INTEREST All costs related to investing, maintaining and accounting for the investments purchased for the Investment Pool, as authorized by Section 27013, shall be apportioned equally on the average daily balance method quarterly to all participants with funds in the Investment Pool, including those held in specific investments. Interest earning shall be apportioned on the same basis and also distributed quarterly. REPORTING The Treasurer generally makes adjustments to the County Pool Investment Policy near the beginning of the calendar year and makes the revised document available to those requesting it. Other reports on the holdings, status and earnings of the portfolio may also available during the year. 6 of 10

191 Addendum Legal Pool Investments* Investment Type Max. % of Portfolio Max. Maturity Quality Requirements a) Bonds issued by a local agency None None None b) Treasury obligations None None None c) State of California Obligations None None None d) Obligation of Calif. local agency None None None e) Obligations issued by Federal Agencies None None None and U.S. Government Sponsored Enterprises f) Bankers Acceptances 40% 180 days max. None g) Commercial Paper 40% 270 days max. U.S. entity with credit enhancements resulting in paper rating A1/P1 or better; with $500MM in assets; A or higher long term rating if any; max. 10% of portfolio per issuer. h) Negotiable C.D.s 30% 5 years None i) Repurchase Agreements None 1 year Collateral must be a legal investment Reverse Repurchase Agreements 20% of base 92 days max., or to maturity None j) Medium Term Note 30% 5 years U.S. Corporations, or Banks licensed within any State of the U.S., A" or better rating by major rating service. k) Mutual Funds 20%, 10% per fund NA A defined money market fund; or invest only in a-j, m, n, of this list, as restricted; Highest letter and number ranking of 2 of 3 rating services; or a SEC Registered Advisor with 5 Yrs. experience, managing assets of $500MM or more; No load. l) Investments as permitted by As per bond NA Not contrary to & 35 and other pertinent provision in agreements of indebtedness documentation law. m) Asset secured indebtedness None None As required by o) Collaterallized Mortgage obligations 20% 5 years Issuer must be rated A minimum, security must be AA by national rating service. p) Contracted Non-Neg. Time Deposits None None None 635.8) Deposited Pooled small C.D.s 30% None Insured as to principle and interest These tables are not meant to be a replacement for the Government Code. Involved parties should obtain a valid, updated copy of the pertinent Code sections to fully understand all the details included within these Codes. *See Temporary Constraints & Restrictions document for conditions on these permitted investments in effect at the annual review of this Policy 7 of 10

192 Temporary Constraints and Restrictions on Investments* a. Bonds issued by the County or County Agencies. The Treasurer may purchase debt issued by the County or its agencies, but any such debt purchased will normally be obtained only directly from the issuing agency and not in the secondary market. The purchase of appropriate issues of local agencies existing within the County, maturing beyond five years, may also be purchased after consultation and the proper approval of the Board of Supervisors. Such issues, along with issues from c and d below, shall not exceed 10% of the total portfolio. LAIF investments shall not be included when calculating this percentage. b. U.S. Treasury obligations. The Treasurer may purchase U.S. Treasury obligations for the liquidity and availability they provide when investing in issues beyond two years. However, the spread available on issues with less availability or quality may suggest that other issues be substituted. Treasury issues will not be limited in quantity, though the cash flow requirements of the Pool shall be considered when purchasing all longer term maturities. c. State of California Obligations. The Treasurer does not currently invest in State obligations, though participation in the Local Agency Investment Fund is part of the overall investment strategy. The holding of interest bearing State issued warrants as an investment alternative is permissible under some occasions, though the purchase of such warrants will not be considered under normal circumstances. State issued obligations, along with issues from a and d, shall not exceed 10% of the overall portfolio. LAIF investments shall not be included when calculating this percentage. d. Obligations of another California local agency. The Treasurer does not currently purchase many of these securities when issued by individual agencies due to tax considerations, but may occasionally purchase taxable issues should the issues meet liquidity and safety requirements. The total of all such individual local agency issues, along with issues from a and c above, shall not exceed 10% of the overall portfolio. LAIF investments shall not be included when calculating this percentage, nor shall investments in joint power authorities that resemble money market mutual funds such as CAMP. Maximum investments in LAIF shall be governed by the maximum permitted by the State. Investments in joint powers authority investment funds shall not exceed 25% of the Pool s portfolio under normal conditions. Neither of these limits shall include specific investments or individual local agency s investments of bond proceeds not made through the Pool. e. Obligations of the various Federal agencies and enterprises. The Treasurer currently does not invest in any long term pooled securities issued by GNMA, FHLMC, SBA, or any Federal Agency or Enterprise with a maturity based on average life calculations. Due to the frequent concerns for the safety and liquidity levels many agency and enterprise obligations, the Treasurer monitors their debt and may restrict the purchase of any such securities at any time. Agency obligations are expected to yield a reasonable spread over Treasury issues of the same maturity. No single agency shall account for more that 15% of the portfolio at this time, nor will the total of all Federal agencies exceed 25% of the portfolio under normal circumstances.. f. Bankers Acceptances. The Treasurer is currently willing to purchases B.A.s from those banks with a proven record of dependability and market participation when offered at competitive rates relative to other types of securities. Foreign banks shall be headquartered in certain Western European countries, Canada, or Japan. For additional potential restrictions see section p below. g. Commercial Paper. Given the current state of the credit markets in general, purchases of Commercial Paper will remain very limited and be restricted to the financially strongest and most liquid issuers. Under normal market conditions, the Treasurer currently does not impose any additional restrictions on commercial paper, though as a rule will maintain an inverted ratio that results in the percentage of commercial paper in the portfolio decreasing as the weighted average maturity of the commercial paper within the portfolio increases. The percentage in commercial paper will not approach the maximum unless all maturities are under thirty days, nor will the percentage of commercial paper generally exceed 30% of the total portfolio unless the 8 of 10

193 average weighted maturity of commercial paper investments is under 60 days. See section p below for additional potential restrictions on particular Commercial Paper issues. h. Negotiable Certificates of Deposit. The Treasurer currently purchases those types of Negotiable C.D.s permitted by the Government Codes from issuers with a proven record of dependability and market participation. The Treasurer monitors, and therefore may possibly eliminate those banks whose marketability and liquidity may be considered suspect due to their liquidity and pricing within the secondary markets. Negotiable S&L, credit union, and savings bank C.D.s are not currently purchased. Foreign banks shall be headquartered in certain Western European countries, Canada, or Japan and shall be further limited to the largest and most stable banks of any one country. The Treasurer does not purchasing any type of C.D. with a maturity beyond five years. Any C.D.s purchased with a maturity longer than thirteen months normally must pay interest no less frequently than semiannually, or yield accordingly. Please see section p below for additional potential restrictions on C.D. purchases. i. [a] Repurchase Agreements. Repurchase agreements (Repos) will only be entered into with Primary Dealers, and shall require additional collateral if the market value falls to a level of 100% of the cash value invested, when Treasury Notes and Bonds are the collateral, and at higher levels for other types of collateral. Treasury Notes and Bonds will be collateralized at a minimum of 102% of market at the start of the repo, for short term repos, and possibly at higher levels for longer term repos, (percentage determined by market conditions, etc.). Repo agreements with Treasury Bills or other discounted securities as collateral will be priced to market and collateralized at a minimum of 102% of market, (actual percentage to be determined by collateral type, conditions, etc.) Collateral with maturities beyond five years are not acceptable, (except in certain limited cases where unrestricted 'puts' are included with the issue), and all collateral must meet the same requirements as purchased securities. Repurchase Agreements will not be entered into for periods longer than 90 days. Repurchase Agreement contracts will be on file for any dealer with which the County does repos. See section p below for other potential restrictions on Repo collateral. [b] Reverse Repurchase Agreements. [The Treasurer currently does not invest in Reverse Repurchase Agreements.] or [Reverses Repurchase agreements will be done only in one specific instance: When the Treasurer determines that due to an emergency or unanticipated cash need, it is more advantageous to reverse a security, rather than sell it, to raise needed cash. This type of Reverse Repo shall not exceed thirty days, and shall match a known cash inflow sufficient to cover principal and interest payments due on the Reverse. These types of Reverse Repos may not be extended, rolled or reinvested. Reverse Repurchase Agreements are expected to be entered into only in very rare circumstances.. The Treasurer will monitor the value of the collateral on all Reverse Repos as to current market value versus cash received, and request or make adjustments if appropriate. The percentage of the total portfolio engaged in Reverse Repo Agreements shall not exceed 5% of the base portion of the Investment Pool. Repurchase Agreement contracts will be on file for any dealer which the County does Reverse Repos. All Reverse Repos must be done directly with Primary Dealers, and will never be done as a means of financing the security involved, or as a means of financing the purchase of another security with a maturity longer than the term of the Reverse Repurchase Agreement.] [c] Securities Lending Agreements. The Treasurer currently does not participate in securities lending. j. Medium Term Notes. The Treasurer normally only purchases Medium Term Notes with a minimum rating of "A" or better for a maturity up to two years. Maturities beyond two years generally require a rating of "AA" or better by at least one of the rating agencies. However, given current market conditions, many other factors other than the rating will be included in any investment decision on an MTN. See section p below for additional potential restrictions on Medium Term Notes. k. Mutual Funds. The Treasurer currently imposes no additional restrictions on Mutual Fund purchases beyond those in the Codes. 9 of 10

194 l. Investment of Bond indebtedness. The Treasurer will consider GICs and other similar investments as bond documentation permits. m. Asset backed securities. The Treasurer normally purchases only asset backed securities where the presence of asset backing is not a deciding factor for investing in the security. n. CMO investments. Under the terms of the Investment Policy, the Treasurer does not currently purchase any CMO investments. o. 1) Contracted Non-negotiable Time Deposits. The Treasurer will enter into contracts for Time Deposits of amounts greater than $240,000, only with those banks that meet the requirements for investment in Negotiable C.D.s, or with those banks headquartered or with a branch within the County, that are rated "A-" or better by a recognized rating agency. Time Deposits for amounts of $240,000 or less shall be with California institutions rated "A" or better by a recognized rating agency, having assets of at least $25,000,000 and shall require at least quarterly interest payments. Issuers of all Time Deposits shall agree to early withdrawal, under a bona fide emergency circumstance, with penalties not exceeding an interest adjustment to the level of the yield available to the investor on the original settlement date, for the shorter time period actually held. The maximum maturity on any Time Deposit shall usually not exceed 1 year, nor shall the total of all Time Deposits exceed 5% of the total portfolio. Mandated deposits or investments specifically invested by pool participant s request are not included in this percentage restriction. See section p below for additional potential restrictions. 2) Pooled CDs in Depository Custody as per The Treasurer does not invest in these instruments. p. Exposure Limits. Presently the total exposure to any one issuer, when totaling all types of securities, shall not exceed {10/15%} of the total portfolio on date of purchase. Possible exceptions to this rule shall include U.S. Treasury issues, Federal Agency issues, local agency issues, and funds in LAIF. Repurchase Agreement collateral shall not be excluded from this calculation unless the Repurchase Agreement is for 5 business days or less. Exposure to the overall credit of individual foreign countries shall be monitored and maintained at prudent levels. q. Futures and Options. Under the terms of the Investment Policy the Treasurer does not currently invest in futures or options. r. Maturities over one year. Any investment made with a maturity exceeding one year, not made by the Treasurer, shall require approval of the Treasurer. s. Permitted Percentages. State law states that all required percentages included within investment related sections of the Government Codes are only binding on the day the investment is made, and that future changes in the size of the portfolio do not require the Treasurer to readjustment the total percentage of each security type within the portfolio to reflect the change in size. Neither is it necessary to sell an investment when changes occur such that the security no longer meets the minimum requirements of the Codes, or the Codes are changed such as to no longer include certain current holdings. The Treasurer shall weigh any Code changes to determine whether or not a security should be sold or retained within the Portfolio after a change in conditions or the Codes result in a particular security no longer meeting existing or new regulations. *These are the constraints in place at the onset of the year changes are possible on a regular and constant basis. 10 of 10

195 APPENDIX E FORM OF OPINION OF BOND COUNSEL [Letterhead of Quint & Thimmig LLP] [Closing Date] Board of Education of the Middletown Unified School District Big Canyon Road Middletown, California OPINION: $5,950,000 Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds Members of the Board of Education: We have acted as bond counsel to the Middletown Unified School District (the District ) in connection with the issuance by the District of $5,950,000 principal amount of Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds (the Bonds ), pursuant to the provisions of Articles 9 and 11 of Chapter 3 (commencing with section 53550) of Division 2 of Title 5 of the California Government Code (the Act ), and a resolution adopted by the Board of Education of the District on September 7, 2016 (the Resolution ). We have examined the law and such certified proceedings and other papers as we deemed 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 Resolution and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify such facts by independent investigation. Based upon our examination, we are of the opinion, as of the date hereof, that: 1. The District is duly created and validly existing as a school district with the power to cause the Board to issue the Bonds in its name and to perform its obligations under the Resolution and the Bonds. 2. The Resolution has been duly adopted by the District and creates a valid first lien on the funds pledged under the Resolution for the security of the Bonds. 3. The Bonds have been duly authorized, executed and delivered by the Board and are valid and binding general obligations of the District. The Board of Supervisors of Lake County is required under the Act to levy a tax upon all taxable property in the District for the interest and redemption of all outstanding bonds of the District, including the Bonds. The Bonds are payable from an ad valorem tax levied without limitation as to rate or amount. 4. Subject to the District s compliance with certain covenants, interest on the Bonds 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 (the Code ), 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 District covenants could cause interest on the Bonds to be includible in gross income for federal income tax purposes retroactively to Appendix E Page 1

196 the date of issuance of the Bonds. It is also our opinion that the Bonds are qualified tax-exempt obligations under section 265(b)(3) of the Code. 5. The interest on the Bonds is exempt from personal income taxation imposed by the State of California. Ownership of the Bonds may result in other tax consequences to certain taxpayers, and we express no opinion regarding any such collateral consequences arising with respect to the Bonds. The rights of the owners of the Bonds and the enforceability of the Bonds and the Resolution 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 E Page 2

197 APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the Disclosure Certificate ) is executed and delivered by the MIDDLETOWN UNIFIED SCHOOL DISTRICT (the District ) in connection with the issuance by the District of its $5,950,000 Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds (the Bonds ). The Bonds are being issued pursuant to a resolution adopted by the Board of Education of the District on September 7, 2016 (the Resolution ). The District covenants and agrees as follows: Section 1. Definitions. In addition to the definitions set forth in the Bond Resolution, 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 Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. Dissemination Agent shall mean the District 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 Stifel, Nicolaus & Company, Incorprated, the original underwriter of the Bonds, required to comply with the Rule in connection with offering of the Bonds. 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 Bonds and in order to assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). Section 3. Provision of Annual Reports. (a) Delivery of Annual Report. The District shall, or shall cause the Dissemination Agent to, not later than nine 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 March 31, 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 Appendix F Page 1

198 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(c), 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, in a timely manner, 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 a timely manner, 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 in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) 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 or then current fiscal year, as applicable, substantially similar to that provided in the corresponding tables and charts in the official statement for the Bonds, as follows: (i) (ii) The District s approved budget for the then current fiscal year; Assessed value of taxable property in the District as shown on the most recent equalized assessment role; (iii) Property tax levies, collections and delinquencies for the District, for the most recent completed fiscal year, if the County is no longer participating in the Teeter Plan; and (iv) The top ten property taxpayers in the District. (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. Appendix F Page 2

199 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 (if not the District) to, give notice of the occurrence of any of the following events with respect to the Bonds: (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 Bonds, 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 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. Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall, or shall cause the Dissemination Agent (if not the District) to, file a notice of such occurrence with Appendix F Page 3

200 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 the 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 Bonds under the Bond Resolution. 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 Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(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 Bondholder, 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 compensation by the District for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the District from time to time and all expenses, legal fees and 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. (c) Responsibilities of Dissemination Agent. In addition of the filing obligations of the Dissemination Agent set forth in Sections 3(e) and 5, the Dissemination Agent shall be obligated, and hereby agrees, to provide a request to the District to compile the information required for its Annual Report at least 30 days prior to the date such information is to be provided to the Dissemination Agent pursuant to subsection (c) of Section 3. The failure to provide or receive any such request shall not affect the obligations of the District under Section 3. 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 requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or the type of business conducted. Appendix F Page 4

201 (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 Bonds, 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 Bondholders in the same manner as provided in the Bond Resolution for amendments to the Bond Resolution with the consent of Bondholders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Bondholders 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 Bondholder 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 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 Paying Agent under the Bond Resolution. The obligations of the District under this Section 12 shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Appendix F Page 5

202 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 Bonds, and shall create no rights in any other person or entity. Date: [Closing Date] MIDDLETOWN UNIFIED SCHOOL DISTRICT By Catherine Stone Superintendent Appendix F Page 6

203 EXHIBIT A NOTICE TO EMMA OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Name of Issue: Date of Issuance: Middletown Unified School District Middletown Unified School District (Lake County, California) 2016 General Obligation Refunding Bonds [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 Issuer in connection with the Issue. The Issuer anticipates that the Annual Report will be filed by. Dated: MIDDLETOWN UNIFIED SCHOOL DISTRICT, as Dissemination Agent By Title cc: Paying Agent Appendix F Page 7

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205 APPENDIX G BOOK-ENTRY SYSTEM The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal of and interest on the Bonds to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the Bonds, confirmation and transfer of beneficial ownership interests in the Bonds and other Bond related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the Bonds is based solely on information furnished by DTC to the District which the District believes to be reliable, but the District and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fullyregistered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized bookentry 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 and Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in Appendix G Page 1

206 the name of DTC s partnership nominee, Cede &Co. or such other name as requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct or Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as tenders, defaults, and proposed amendments to the Bonds documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent and request that copies of notices be provided directly to them. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal of and interest on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or the Paying Agent, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its service as depository with respect to the Bonds at any time by giving reasonable notice to the District or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry Only transfers through DTC (or a successor securities depository). In that event, the Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. In the event that (a) DTC determines not to continue to act as securities depository for the Bonds, or (b) the District determines that DTC shall no longer act and delivers a written certificate to the Paying Agent to that effect, then the District will discontinue the Book-Entry System with DTC for the Bonds. If the District determines to replace DTC with another qualified securities depository, the District will prepare or direct the preparation of a new single separate, fully registered Bond for each maturity of the Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Resolution. If the District fails to identify another qualified securities depository to replace the incumbent securities depository for the Bonds, then the Bonds shall no longer be restricted to being registered in the Bond registration books in the name of the incumbent Appendix G Page 2

207 securities depository or its nominee, but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the Bonds shall designate. In the event that the Book-Entry System is discontinued, the following provisions would also apply: (i) the Bonds will be made available in physical form, (ii) payment of principal of and interest on the Bonds will be payable upon surrender thereof at the trust office of the Paying Agent identified in the Resolution, and (iii) the Bonds will be transferable and exchangeable as provided in the Resolution. The District and the Paying Agent do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the Bonds, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal of and interest on the Bonds; (iii) the delivery of any notice which is permitted or required to be given to registered owners under the Resolution; (iv) any consent given or other action taken by DTC as registered owner; or (v) any other matter arising with respect to the Bonds or the Resolution. The District and the Paying Agent cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal of and interest on the Bonds paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The District and the Paying Agent are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the Bonds or any error or delay relating thereto. Appendix G Page 3

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209 APPENDIX H SPECIMEN MUNICIPAL BOND INSURANCEW POLICY Appendix G Page 1

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211 MUNICIPAL BOND INSURANCE POLICY ISSUER: [NAME OF ISSUER] Policy No: MEMBER: [NAME OF MEMBER] BONDS: $ in aggregate principal amount of [NAME OF TRANSACTION] [and maturing on] Effective Date: Risk Premium: $ Member Surplus Contribution: $ Total Insurance Payment: $ BUILD AMERICA MUTUAL ASSURANCE COMPANY ( BAM ), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the Trustee ) or paying agent (the Paying Agent ) for the Bonds named above (as set forth in the documentation providing for the issuance and securing of the Bonds), for the benefit of the Owners or, at the election of BAM, 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 first Business Day following the Business Day on which BAM shall have received Notice of Nonpayment, BAM will disburse (but without duplication in the case of duplicate claims for the same Nonpayment) to or for the benefit of each Owner of the Bonds, the face amount of principal of and interest on the Bonds that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by BAM, in a form reasonably satisfactory to it, of (a) evidence of the Owner s right to receive payment of such 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 BAM. 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 BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of the preceding sentence, and BAM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, any of whom may submit an amended Notice of Nonpayment. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner s right to receive payments under such Bond. Payment by BAM either to the Trustee or Paying Agent for the benefit of the Owners, or directly to the Owners, on account of any Nonpayment shall discharge the obligation of BAM under this Policy with respect to said Nonpayment. 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 (as defined herein) 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 BAM 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 made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. Notice means delivery to BAM of a notice of claim and certificate, by certified mail, or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by an Owner, the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or 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, the Member or any other person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds.