GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California)

Transcription

1 NEW ISSUES BOOK-ENTRY ONLY Ratings: S&P: AA (Insured) A+ (Underlying) Moody s: A2 (Insured) Aa3 (Underlying) (See MISCELLANEOUS Ratings herein.) In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the District, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2015 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Series 2015 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2015 Bonds. See TAX MATTERS herein. $30,385,000 General Obligation Bonds, Election of 2008, Series 2015 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) $35,300,000 General Obligation Refunding Bonds, Series 2015 Dated: Date of Delivery Due: August 1, as shown herein This cover page is not a summary of this issue; it is only a reference to the information contained in this Official Statement. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 (the Series 2015 New Money Bonds ) are issued by the Gilroy Unified School District (the District ), located in the County of Santa Clara, California (the County ), to provide the funds necessary to pay the outstanding Gilroy Unified School District 2011 General Obligation Bond Anticipation Notes (Measure P) (Qualified School Construction Bonds Federally Taxable) and finance specific construction, repair and improvement projects approved by the voters of the District. The Series 2015 New Money Bonds are being issued under the laws of the State of California (the State ) and pursuant to resolutions of the Board of Education of the District and the Board of Supervisors of the County. The Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 (the Series 2015 Refunding Bonds ), are being authorizing to advance refund a portion of the outstanding Gilroy Unified School District (Santa Clara County, California) 2009 General Obligation Bonds (Election of 2008, Series A). The Series 2015 Refunding Bonds are being issued under the laws of the State and pursuant to a resolution of the Board of Education of the District. The Series 2015 New Money Bonds and the Series 2015 Refunding Bonds are referred to collectively herein, as the Series 2015 Bonds. The Series 2015 Bonds are payable from ad valorem taxes to be levied within the District pursuant to the California Constitution and other State law. 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), for the payment of principal of and interest on the Series 2015 Bonds, all as more fully described herein. See SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2015 BONDS herein. The scheduled payment of principal of and interest on the Series 2015 Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Series 2015 Bonds by ASSURED GUARANTY MUNICIPAL CORP. Each series of the Series 2015 Bonds will be issued as current interest bonds, as set forth on the inside front cover hereof. Interest on the Series 2015 Bonds is payable on each February 1 and August 1 to maturity, commencing August 1, Principal of the Series 2015 Bonds is payable on August 1 in each of the years and in the amounts set forth on the inside front cover hereof. The Series 2015 Bonds will be issued in denominations of $5,000 principal amount, or any integral multiple thereof, as shown on the inside front cover hereof. Each series of the Series 2015 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 The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Series 2015 Bonds. Individual purchases of the Series 2015 Bonds will be made in book-entry form only. Purchasers will not receive physical delivery of the Series 2015 Bonds purchased by them. See THE SERIES 2015 BONDS Form and Registration herein. Payments of the principal of and interest on the Series 2015 Bonds will be made by The Bank of New York Mellon Trust Company, N.A., as paying agent, registrar and transfer agent with respect to each series of the Series 2015 Bonds, to DTC for subsequent disbursement to DTC Participants, who will remit such payments to the beneficial owners of the Series 2015 Bonds. See THE SERIES 2015 BONDS Payment of Principal and Interest herein. The Series 2015 Bonds are subject to redemption prior to maturity as described herein. See THE SERIES 2015 BONDS Redemption herein. Each series of the Series 2015 Bonds will be offered when, as and if issued by the District and received by the Underwriter, subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Irvine, California, Bond Counsel to the District. Certain legal matters will be passed upon for the District by Orrick, Herrington & Sutcliffe LLP, Irvine, California, as Disclosure Counsel to the District. It is anticipated that each series of the Series 2015 Bonds, in definitive form, will be available for delivery through the facilities of DTC in New York, New York, on or about February 19, The date of this Official Statement is February 3, 2015.

2 Maturity (August 1) MATURITY SCHEDULE BASE CUSIP 1 : $30,385,000 SERIES 2015 NEW MONEY BONDS $6,310,000 Serial Bonds Principal Amount Interest Rate Yield CUSIP Number $1,360, % 3.210% DX ,545, DY ,625, EB ,780, EC2 $4,725, % Term Series 2015 New Money Bonds Due August 1, ED0 $6,350, % Term Series 2015 New Money Bonds Due August 1, 2040 Yield 3.000% C 1 DZ2 $13,000, % Term Series 2015 New Money Bonds Due August 1, 2044 Yield 3.540% C 1 EA6 Maturity (August 1) $35,300,000 SERIES 2015 REFUNDING BONDS Principal Amount Interest Rate Yield CUSIP Number $500, % 0.300% DL , DM , EE ,860, DN ,200, DP ,440, DQ ,775, DR ,130, DS ,430, C DT ,035, C DU ,625, C DV ,000, C DW9 1 CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright 2015 CUSIP Global Services. All rights reserved. CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such numbers. C Yield to call at par on August 1, 2024.

3 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) BOARD OF EDUCATION James E. Pace, President Fred Tovar, Vice President Heather Bass, Member Mark Good, Member Patricia Midtgaard, Member Linda Piceno, Member P. Jaime Rosso, Member DISTRICT ADMINISTRATORS Dr. Deborah A. Flores, Superintendent Alvaro Meza, Assistant Superintendent, Business Services Kimberly Mason, Director of Fiscal Services PROFESSIONAL SERVICES Financial Advisor Isom Advisors, Inc., a Division of Urban Futures, Inc. Walnut Creek, California Bond Counsel and Disclosure Counsel Orrick, Herrington & Sutcliffe LLP Irvine, California Paying Agent and Escrow Bank The Bank of New York Mellon Trust Company, N.A. Los Angeles, California Verification Agent Causey Demgen & Moore, P.C. Denver, Colorado

4 This Official Statement does not constitute an offering of any security other than the original offering of the Series 2015 Bonds by the District. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations other than as contained in this Official Statement, and if given or made, such other information or representation not so authorized should not be relied upon as having been given or authorized by the District. The Series 2015 Bonds are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)2 thereof. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy Series 2015 Bonds in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make suchofferorsolicitation. The information set forth herein other than that furnished by the District, although obtained from sources which are believed to be reliable, 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 Series 2015 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, 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. Certain statements included or incorporated by reference in this Official Statement constitute forwardlooking statements. Such statements are generally identifiable by the terminology used, such as plan, expect, estimate, budget or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The District does not plan to issue any updates or revisions to those forward-looking statements if or when their expectations, or events, conditions or circumstances on which such statements are based, occur. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the Series 2015 Bonds or the advisability of investing in the Series 2015 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND The District maintains a website. However, the information presented there is not part of this Official Statement and should not be relied upon in making an investment decision with respect to the Series 2015 Bonds. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market prices of the Series 2015 Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Series 2015 Bonds to certain securities dealers and dealer banks and banks acting as agent at prices lower than the public offering prices stated on the inside front cover page hereof and said public offering prices may be changed from time to time by the Underwriter.

5 TABLE OF CONTENTS Page INTRODUCTION...1 General...1 The District...2 THE SERIES 2015 BONDS...2 Authority for Issuance; Plan of Finance...2 Bond Insurance...4 Form and Registration...4 Payment of Principal and Interest...5 Redemption...5 Defeasance of Series 2015 Bonds...8 Unclaimed Moneys...8 Estimated Sources and Uses of Funds...9 Debt Service...11 Outstanding Bonds...12 Aggregate Debt Service...13 SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2015 BONDS...14 General...14 Property Taxation System...14 Assessed Valuation of Property Within the District...14 Tax Rates...20 Tax Charges and Delinquencies...21 Direct and Overlapping Debt...23 BOND INSURANCE...24 Bond Insurance Policy...24 Assured Guaranty Municipal Corp TAX MATTERS...27 OTHER LEGAL MATTERS...29 Legal Opinion...29 Legality for Investment in California...29 Continuing Disclosure...29 No Litigation...30 ESCROW VERIFICATION...30 MISCELLANEOUS...30 i

6 TABLE OF CONTENTS (continued) Page Ratings...30 Professionals Involved in the Offering...31 Underwriting...31 ADDITIONAL INFORMATION...32 APPENDIX A INFORMATION RELATING TO THE DISTRICT S OPERATIONS AND BUDGET...A-1 APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, B-1 APPENDIX C PROPOSED FORMS OF OPINIONS OF BOND COUNSEL...C-1 APPENDIX D FORMS OF CONTINUING DISCLOSURE CERTIFICATES...D-1 APPENDIX E SUMMARY OF SANTA CLARA COUNTY INVESTMENT POLICY AND PRACTICES AND DESCRIPTION OF INVESTMENT POOL...E-1 APPENDIX F BOOK-ENTRY ONLY SYSTEM... F-1 APPENDIX G SPECIMEN MUNICIPAL BOND INSURANCE POLICY...G-1 ii

7 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) $30,385,000 General Obligation Bonds, Election of 2008, Series 2015 $35,300,000 General Obligation Refunding Bonds, Series 2015 INTRODUCTION This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page 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 Series 2015 Bonds to potential investors is made only by means of the entire Official Statement. General This Official Statement, which includes the cover page and appendices hereto, is provided to furnish information in connection with the sale of (i) $30,385,000 aggregate principal amount of Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 (the Series 2015 New Money Bonds ), and (ii) $35,300,000 aggregate principal amount of Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 (the Series 2015 Refunding Bonds ), to be offered by the Gilroy Unified School District (the District ). The Series 2015 New Money Bonds and the Series 2015 Refunding Bonds are referred to collectively herein, as the Series 2015 Bonds. This Official Statement speaks only as of its date, and the information contained herein is subject to change. The District has no obligation to update the information in this Official Statement, except as required by the Continuing Disclosure Certificates to be executed by the District. See OTHER LEGAL MATTERS Continuing Disclosure. The purpose of this Official Statement is to supply information to prospective buyers of the Series 2015 Bonds. Quotations from and summaries and explanations of the Series 2015 Bonds, the resolutions of the Board of Education of the District and the Board of Supervisors of the County of Santa Clara, California (the County ), with respect to the Series 2015 New Money Bonds, and the resolution of the Board of Education of the District with respect to the Series 2015 Refunding Bonds, and the constitutional provisions, statutes and other documents described herein, do not purport to be complete, and reference is hereby made to said documents, constitutional provisions and statutes for the complete provisions thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or owners of any of the Series 2015 Bonds. Copies of documents referred to herein and information concerning the Series 2015 Bonds are available from the District by contacting: Gilroy Unified School District, 7810 Arroyo Circle, Gilroy, California 95020, Attention: Superintendent. The District may impose a charge for copying, handling and mailing such requested documents.

8 The District The District operates eight elementary schools, three middle schools, two comprehensive high schools, one early college academy and one continuation high school. The District s current enrollment for fiscal year is approximately 11,485 students, and the District s projected fiscal year general fund expenditures are approximately $99.9 million. Taxable property in the District has a fiscal year total assessed value of $8,325,283,754. As of June 30, 2014, the District employed 581 fulltime equivalent ( FTE ) certificated (teaching staff) employees, 380 FTE classified employees and 51 management and supervisory personnel. The District operates under the jurisdiction of the Santa Clara County Superintendent of Schools. The District is governed by a Board of Education consisting of seven publicly elected members and four nonvoting student members. The elected members are elected to four-year terms in staggered years. District day-to-day operations are managed by a board-appointed Superintendent of Schools. Dr. Deborah Flores has served as Superintendent since May Dr. Flores began her educational career in 1975 as a special education teacher, and has worked in various capacities in California school districts since 1988, including as superintendent of Lucia Mar Unified School District in San Luis Obispo County. RELATING TO THE DISTRICT S OPERATIONS AND BUDGET and APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, Authority for Issuance; Plan of Finance THE SERIES 2015 BONDS Series 2015 New Money Bonds. The Series 2015 New Money Bonds are issued under the provisions of California Government Code Section et seq., including Section thereof, and California Education Code Section and Article XIIIA of the California Constitution and pursuant to a resolution adopted by the Board of Education of the District on December 11, 2014 (the District New Money Resolution ). The Series 2015 New Money Bonds are issued by the District to provide the funds necessary to pay the District s outstanding Gilroy Unified School District 2011 General Obligation Bond Anticipation Notes (Measure P) (Qualified School Construction Bonds Federally Taxable) (the Series 2011 Notes ) and finance specific construction, repair and improvement projects approved by the voters of the District, including, but not limited to, roofs, technology, safety and security, concrete repair, heating and ventilation units and other site improvements. At an election held on November 4, 2008, the District received authorization to issue general obligation bonds of the District in an aggregate principal amount not to exceed $150,000,000 to finance specified projects (the 2008 District Bond Authorization ). On March 12, 2009, the Gilroy Unified School District 2009 General Obligation Bonds (Election of 2008, Series A) (the Series 2009 Bonds ), in an aggregate initial principal amount of $49,986,615, were issued as the first series of bonds to be issued under the 2008 District Bond Authorization. On April 15, 2010, the Gilroy Unified School District 2010 General Obligation Bond Anticipation Notes (Measure P) (the Series 2010 Notes ), in an aggregate initial principal amount of $44,996,556.20, were issued in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. On June 23, 2011, the Gilroy Unified School District 2011 General Obligation Bond Anticipation Notes (Measure P) (Qualified School Construction Bonds Federally Taxable) (the Series 2011 Notes ), in an aggregate principal amount of $15,385,000, were issued to defease a portion of the Series 2010 Notes and to fund additional projects in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. The Series

9 Notes mature on April 1, On February 27, 2013, the Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2013 (the Series 2013 Bonds ), in an aggregate initial principal amount of $40,670,000, were issued as the second series of bonds to be issued under the 2008 District Bond Authorization. The Series 2013 Bonds were issued to provide the funds necessary to pay the Series 2010 Notes that were not defeased by the Series 2011 Notes. The Series 2010 Notes matured on April 1, The Series 2015 New Money Bonds represent the third series of bonds to be issued under the 2008 District Bond Authorization. The District and The Bank of New York Mellon Trust Company, N.A., as escrow bank (the Escrow Bank ), will enter into the Escrow Agreement, dated as of February 1, 2015 (the Series 2011 Notes Escrow Agreement ), with respect to the Series 2011 Notes being paid, pursuant to which the District will deposit a portion of the proceeds from the sale of the Series 2015 New Money Bonds into a special fund to be held by the Escrow Bank. The amount deposited with the Escrow Bank with respect to the Series 2011 Notes will be used to purchase certain United States governmental obligations, the principal of and interest on which (together with any uninvested amount) will be sufficient to enable the Escrow Bank to pay the principal of and interest due on the Series 2011 Notes due and payable on the maturity date. See CONCLUDING INFORMATION Escrow Verification herein. Amounts on deposit with the Escrow Bank pursuant to the Series 2011 Notes Escrow Agreement are not available to pay debt serve on the Series 2015 New Money Bonds. Series 2015 Refunding Bonds. The Series 2015 Refunding Bonds are being issued by the District pursuant to the Constitution and laws of the State, including Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code, and other applicable provisions of law. The Series 2015 Refunding Bonds are being issued to provide the funds necessary to refund on an advance basis a portion of the Series 2009 Bonds, all as further described in the following table. Such Series 2009 Bonds to be refunded are referred to herein as the Prior Bonds. Maturity Date GILROY UNIFIED SCHOOL DISTRICT (Santa Clara County, California) Series 2009 Bonds To Be Refunded Principal Amount to be Redemption Refunded CUSIP (1) Date Redemption Price 2020 $2,700, CH3 08/01/ % ,100, CJ9 08/01/ ,375, CK6 08/01/ ,750, CL4 08/01/ ,150, CM2 08/01/ ,500, CN0 08/01/ ,100, CP5 08/01/ ,700, CQ3 08/01/ ,000, CR1 08/01/ (1) CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such CUSIP numbers. 3

10 The maturities of the District s outstanding Series 2009 Bonds listed in the following table will not be refunded with proceeds of the Series 2015 Refunding Bonds. GILROY UNIFIED SCHOOL DISTRICT (Santa Clara County, California) Unrefunded Series 2009 Bonds Maturity Date Outstanding Principal Amount CUSIP (1) 08/01/2015 $1,450, CC4 08/01/2016 1,700, CD2 08/01/2017 1,900, CW0 08/01/ , CE0 08/01/2018 2,200, CF7 08/01/2019 2,405, CG5 08/01/2029 (2) 502, DG4 08/01/2030 (2) 513, DH2 08/01/2031 (2) 228, DJ8 08/01/2032 (2) 223, DK5 (1) CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such CUSIP numbers. (2) Reflects unrefunded amounts not defeased to maturity in 2013; excludes accreted interest. The District and Escrow Bank will enter into the Escrow Agreement, dated as of February 1, 2015 (the Prior Bonds Escrow Agreement ), with respect to the Prior Bonds being refunded, pursuant to which the District will deposit a portion of the proceeds from the sale of the Series 2015 Refunding Bonds into a special fund to be held by the Escrow Bank. The amount deposited with the Escrow Bank with respect to the Prior Bonds will be used to purchase certain United States governmental obligations, the principal of and interest on which (together with any uninvested amount) will be sufficient to enable the Escrow Bank to (i) pay the interest due on the Prior Bonds being refunded to the optional redemption date (August 1, 2019), and (iv) redeem such Prior Bonds being refunded at a redemption price equal to 100% of the principal amount of such Prior Bonds being refunded on their applicable redemption dates in accordance with the schedule set forth in the Prior Bonds Escrow Agreement. See ESCROW VERIFICATION herein. Amounts on deposit with the Escrow Bank pursuant to the Prior Bonds Escrow Agreement are not available to pay debt serve on the Prior Bonds. Bond Insurance Concurrently with the issuance of the Series 2015 Bonds, Assured Guaranty Municipal Corp. ( AGM ) will issue its Municipal Bond Insurance Policy (the Policy ) for the Series 2015 Bonds. The Policy guarantees the scheduled payment of principal of and interest on the Series 2015 Bonds when due as set forth in the form of the Policy included as Appendix G to this Official Statement. See BOND INSURANCE. Form and Registration Each series of the Series 2015 Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 principal amount or integral multiples thereof. Each series of the Series 2015 Bonds will initially be registered in the name of Cede & Co., as nominee of The Depository 4

11 Trust Company ( DTC ), New York, New York. DTC will act as securities depository of the Series 2015 Bonds. Purchases of Series 2015 Bonds under the DTC book-entry system must be made by or through a DTC participant, and ownership interests in Series 2015 Bonds will be recorded as entries on the books of said participants. Except in the event that use of this book-entry system is discontinued for the Series 2015 Bonds, beneficial owners ( Beneficial Owners ) will not receive physical certificates representing Payment of Principal and Interest Interest. Each series of the Series 2015 Bonds will be dated as of their date of delivery, and bear interest at the rates set forth on the inside front cover page of this Official Statement, payable on February 1 and August 1 of each year (each, an Interest Payment Date ), commencing on August 1, 2015, computed on the basis of a 360-day year consisting of twelve 30-day months. Each Series 2015 Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof, unless it is authenticated after the close of business on the 15 th day of the calendar month immediately preceding an Interest Payment Date (the Record Date ) and on or prior to the succeeding Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, or unless it is authenticated on or before the Record Date preceding the first Interest Payment Date, in which event it shall bear interest from its dated date; provided, however, that if, at the time of authentication of any Series 2015 Bond, interest is in default on any outstanding Series 2015 Bonds, such Series 2015 Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on the outstanding Series 2015 Bonds. Payment of Series 2015 Bonds. The principal of the Series 2015 Bonds is payable in lawful money of the United States of America upon the surrender thereof at the principal corporate trust office of The Bank of New York Mellon Trust Company, N.A., as paying agent (the Paying Agent ) at the maturity thereof or upon redemption prior to maturity. Interest on the Series 2015 Bonds is payable in lawful money of the United States of America by check mailed on each Interest Payment Date (if a business day, or on the next business day if the Interest Payment Date does not fall on a business day) to the registered owner thereof (the Owner ) at such Owner s address as it appears on the bond registration books kept by the Paying Agent or at such address as the Owner may have filed with the Paying Agent for that purpose, except that the payment shall be made by wire transfer of immediately available funds to any Owner of at least $1,000,000 of outstanding Series 2015 Bonds who shall have requested in writing such method of payment of interest prior to the close of business on a Record Date. So long as the Series 2015 Bonds are held by Cede & Co., as nominee of DTC, payment shall be made by wire transfer. See Redemption Optional Redemption. The Series 2015 New Money Bonds maturing on or before August 1, 2024, are not subject to optional redemption prior to their respective stated maturity dates. The Series 2015 New Money Bonds maturing on or after August 1, 2025, are subject to redemption prior to their respective stated maturity dates, at the option of the District, from any source of available funds, as a whole or in part on any date on or after August 1, 2024, at a redemption price equal to the principal amount of the Series 2015 New Money Bonds called for redemption, together with interest accrued thereon to the date of redemption, without premium. The Series 2015 Refunding Bonds maturing on or before August 1, 2024, are not subject to optional redemption prior to their respective stated maturity dates. The Series 2015 Refunding Bonds maturing on or after August 1, 2025, are subject to redemption prior to their respective stated maturity dates, at the option of the District, from any source of available funds, as a whole or in part on any date on 5

12 or after August 1, 2024, at a redemption price equal to the principal amount of the Series 2015 Refunding Bonds called for redemption, together with interest accrued thereon to the date of redemption, without premium. Mandatory Sinking Fund Redemption. The $4,725,000 term Series 2015 New Money Bonds maturing on August 1, 2038, are subject to mandatory sinking fund redemption on August 1 in each of the years and in the respective principal amounts as set forth in the following schedule, at a redemption price equal to 100% of the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium: Mandatory Sinking Fund Redemption Date (August 1) Principal Amount to be Redeemed 2037 $1,935, ,790,000 Maturity. The principal amount to be redeemed in each year shown above will be reduced proportionately, or as otherwise directed by the District, in integral multiples of $5,000 principal amount, by any portion of the term Series 2015 New Money Bonds maturing on August 1, 2038 optionally redeemed prior to the mandatory sinking fund redemption date. The $6,350,000 term Series 2015 New Money Bonds maturing on August 1, 2040, are subject to mandatory sinking fund redemption on August 1 in each of the years and in the respective principal amounts as set forth in the following schedule, at a redemption price equal to 100% of the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium: Mandatory Sinking Fund Redemption Date (August 1) Principal Amount to be Redeemed 2039 $2,990, ,360,000 Maturity. The principal amount to be redeemed in each year shown above will be reduced proportionately, or as otherwise directed by the District, in integral multiples of $5,000 principal amount, by any portion of the term Series 2015 New Money Bonds maturing on August 1, 2040 optionally redeemed prior to the mandatory sinking fund redemption date. The $13,000,000 term Series 2015 New Money Bonds maturing on August 1, 2044, are subject to mandatory sinking fund redemption on August 1 in each of the years and in the respective principal amounts as set forth in the following schedule, at a redemption price equal to 100% of the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium: 6

13 Mandatory Sinking Fund Redemption Date (August 1) Principal Amount to be Redeemed 2041 $3,880, ,065, ,470, ,585,000 Maturity. The principal amount to be redeemed in each year shown above will be reduced proportionately, or as otherwise directed by the District, in integral multiples of $5,000 principal amount, by any portion of the term Series 2015 New Money Bonds maturing on August 1, 2044 optionally redeemed prior to the mandatory sinking fund redemption date. Selection of Series 2015 Bonds for Redemption. If less than all of the Series 2015 Bonds of a series are called for redemption, such Series 2015 Bonds shall be redeemed in inverse order of maturities or as otherwise directed by the District. Whenever less than all of the outstanding Series 2015 Bonds of any one maturity of a series are designated for redemption, the Paying Agent shall select the outstanding Series 2015 Bonds of such maturity and series to be redeemed by lot in any manner deemed fair by the Paying Agent. For purposes of such selection, each Series 2015 Bond shall be deemed to consist of individual Series 2015 Bonds of denominations of $5,000 principal amount, which may be separately redeemed. Notice of Redemption. Notice of redemption of any Series 2015 Bond will be given by the Paying Agent not less than 30 nor more than 60 days prior to the redemption date (i) by first class mail to the County and the respective Owners thereof at the addresses appearing on the bond registration books, and (ii) as may be further required in accordance with the applicable Continuing Disclosure Certificate DISCLOSURE CERTIFICATES. Each notice of redemption will contain the following information: (i) the date of such notice; (ii) the name of the Series 2015 Bonds and the date of issue of the Series 2015 Bonds; (iii) the redemption date; (iv) the redemption price; (v) the dates of maturity or maturities of Series 2015 Bonds to be redeemed; (vi) if less than all of the Series 2015 Bonds of any maturity are to be redeemed the distinctive numbers of the Series 2015 Bonds of each maturity to be redeemed; (vii) in the case of Series 2015 Bonds redeemed in part only, the respective portions of the principal amount of the Series 2015 Bonds of each maturity to be redeemed; (viii) the CUSIP number, if any, of each maturity of Series 2015 Bonds to be redeemed; (ix) a statement that such Series 2015 Bonds must be surrendered by the Owners at the principal corporate trust office of the Paying Agent or at such other place or places designated by the Paying Agent or at such other place or places designated by the Paying Agent; (x) notice that further interest on such Series 2015 Bonds will not accrue after the designated redemption date; and (xi) in the case of a conditional notice, that such notice is conditioned upon certain circumstances and the manner of rescinding such conditional notice. The actual receipt by the Owner of any Series 2015 Bond or by any securities depository or information service of notice of redemption shall not be a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, shall not affect the validity of the proceedings for the redemption of such Series 2015 Bonds or the cessation of interest on the date fixed for redemption. Effect of Notice of Redemption. When notice of redemption has been given substantially as described above and when the redemption price of the Series 2015 Bonds called for redemption is set 7

14 aside, the Series 2015 Bonds designated for redemption shall become due and payable on the specified redemption date and interest shall cease to accrue thereon as of the redemption date, and upon presentation and surrender of such Series 2015 Bonds at the place specified in the notice of redemption, such Series 2015 Bonds shall be redeemed and paid at the redemption price thereof out of the money provided therefor. The Owners of such Series 2015 Bonds so called for redemption after such redemption date shall look for the payment of such Series 2015 Bonds and the redemption premium thereon, if any, only to moneys on deposit for the purpose in the interest and sinking fund of the District within the County treasury (the Interest and Sinking Fund ) or the trust fund established for such purpose. All Series 2015 Bonds redeemed shall be cancelled forthwith by the Paying Agent and shall not be reissued. Right to Rescind Notice. The District may rescind any optional redemption and notice thereof for any reason on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the owners of the Series 2015 Bonds so called for redemption. Any optional redemption and notice thereof shall be rescinded if for any reason on the date fixed for redemption moneys are not available in the Interest and Sinking Fund of the District 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 Series 2015 Bonds called for redemption. Notice of rescission of redemption shall be given in the same manner in which notice of redemption was originally given. The actual receipt by the owner of any Series 2015 Bond of notice of such rescission shall not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice shall not affect the validity of the rescission. Defeasance of Series 2015 Bonds The District may pay and discharge any or all of any series of the Series 2015 Bonds by depositing in trust with the Paying Agent for such series or an escrow agent at or before maturity, money or non-callable direct obligations of the United States of America or other non-callable obligations the payment of the principal of and interest on which is guaranteed by a pledge of the full faith and credit of the United States of America, in an amount which will, together with the interest to accrue thereon and available moneys then on deposit in the Interest and Sinking Fund of the District, be fully sufficient to pay and discharge the indebtedness on such Series 2015 Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates. Unclaimed Moneys Any money held in any fund or by the Paying Agent in trust for the payment of the principal of, redemption premium, if any, or interest on any series of the Series 2015 Bonds and remaining unclaimed for two years after the principal of all of such series of Series 2015 Bonds has become due and payable (whether by maturity or upon prior redemption) shall be transferred to the Interest and Sinking Fund of the District for payment of any outstanding bonds of the District payable from said fund; or, if no such bonds of the District are at such time outstanding, said moneys shall be transferred to the general fund of the District as provided and permitted by law. 8

15 Estimated Sources and Uses of Funds The proceeds of the Series 2015 New Money Bonds are expected to be applied as follows: GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 Estimated Sources and Uses of Funds Sources of Funds: Principal Amount of Series 2015 New Money Bonds $30,385, Plus Net Original Issue Premium 1,088, Total Sources of Funds $31,473, Uses of Funds: Deposit to Building Fund $15,000, Deposit to Interest and Sinking Fund (1) 441, Payment of Series 2011 Notes (2) 15,689, Costs of Issuance (3) 197, Underwriter s Discount (4) 144, Total Uses of Funds $31,473, (1) Consists of premium received by the District. (2) Amounts will be used to provide the funds that are necessary to pay the Series 2011 Notes on their maturity date. See THE SERIES 2015 BONDS Authority for Issuance; Plan of Finance herein. (3) Includes legal fees, financial advisor fees, rating agency fees, printing fees, bond insurance premium, and other miscellaneous expenses the Underwriter has contracted to pay. (4) Exclusive of costs of issuance the Underwriter has contracted to pay. The proceeds from the sale of the Series 2015 New Money Bonds, to the extent of the principal amount thereof not used to pay the Series 2011 Notes, will be deposited in the County treasury to the credit of the building fund of the District (the Building Fund ) and shall be accounted for together with the proceeds of other bonds of the District separately from all other District and County funds. Such proceeds shall be applied solely for the purposes for which the Series 2015 Bonds were authorized. Any premium or accrued interest on the Series 2015 New Money Bonds received by the District and not used to pay the Series 2011 Notes will be deposited in the Interest and Sinking Fund of the District in the County treasury. Interest and earnings on each fund will accrue to that fund. All funds held by the County Treasurer (the County Treasurer ) in the Building Fund and the Interest and Sinking Fund are expected to be invested at the sole discretion of the County Treasurer on behalf of the District in such investments as are authorized by Section and following of the California Government Code and the investment SUMMARY OF SANTA CLARA COUNTY INVESTMENT POLICIES AND PRACTICES AND DESCRIPTION OF INVESTMENT POOL for a description of the permitted investments under the investment policy of the County. In addition, to the extent permitted by law, the District may request in writing that all or any portion of the funds held in the Building Fund may be invested (i) in the Local Agency Investment Fund in the treasury of the State, (ii) in investment agreements, including guaranteed investment contracts, float contracts or other investment products which will not adversely affect the rating on the Series 2015 Bonds, or (iii) in accordance with Sections and of the California 9

16 Education Code. The County Treasurer does not monitor such investments for arbitrage compliance and does not perform any arbitrage calculations with respect to such investments. The proceeds of the Series 2015 Refunding Bonds are expected to be applied as follows: Sources of Funds: GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 Estimated Sources and Uses of Funds Principal Amount of Series 2015 Refunding Bonds $35,300, Plus Net Original Issue Premium 6,067, Total Sources of Funds $41,367, Uses of Funds: Escrow Fund $41,033, Costs of Issuance (1) 166, Underwriter s Discount 167, Total Uses of Funds $41,367, (1) Includes bond counsel fees, disclosure counsel fees, financial advisor fees, rating agency fees, printing fees, bond insurance premium and other miscellaneous expenses. 10

17 Debt Service Debt service on each series of the Series 2015 Bonds, assuming no early redemptions, is as shown in the following table. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 and General Obligation Refunding Bonds, Series 2015 Series 2015 New Money Bonds Series 2015 Refunding Bonds Year Ending August 1, Principal Interest Principal Interest Total Debt Service $528, $653, $1,181, ,174, $500, ,451, ,126, ,174, ,436, ,611, ,174, , ,436, ,761, ,174, , ,432, ,761, ,174, ,860, ,427, ,461, ,174, ,200, ,341, ,716, ,174, ,440, ,213, ,828, ,174, ,775, ,076, ,025, ,174, ,130, , ,229, ,174, ,430, , ,364, ,174, ,035, , ,792, ,174, ,625, , ,180, ,174, ,000, , ,274, ,174, ,174, ,174, ,174, ,174, ,174, ,174, ,174, $1,360, ,174, ,534, ,545, ,133, ,678, ,625, ,087, ,712, ,780, ,038, ,818, ,935, , ,920, ,790, , ,714, ,990, , ,827, ,360, , ,048, ,880, , ,400, ,065, , ,429, ,470, , ,672, ,585, , ,688, Total $30,385, $29,553, $35,300, $14,217, $109,456,

18 Outstanding Bonds In addition to each series of the Series 2015 Bonds, the District has four additional series of general obligation bonds outstanding, each of which is secured by ad valorem taxes upon all property subject to taxation by the District on a parity with the Series 2015 Bonds. The District received authorization at an election held on November 5, 2002, to issue general obligation bonds of the District in an aggregate principal amount not to exceed $69,000,000 to finance specific construction and modernization projects (the 2002 District Bond Authorization ). On April 16, 2003, the Gilroy Unified School District General Obligation Bonds, Election of 2002, Series 2003 (the Series 2003 Bonds ), in an aggregate principal amount of $50,000,000, were issued as the first series of bonds to be issued under the 2002 District Bond Authorization. On August 25, 2005, the Gilroy Unified School District General Obligation Bonds, Election of 2002, Series 2005 (the Series 2005 Bonds ), in an aggregate principal amount of $19,000,000, were issued as the second and final series of bonds to be issued under the 2002 District Bond Authorization. In addition, as indicated above, at an election held on November 4, 2008, voters of the District approved the 2008 District Bond Authorization, authorizing the issuance of general obligation bonds of the District in an aggregate principal amount not to exceed $150,000,000 to finance specified projects. On March 12, 2009, the Series 2009 Bonds, in an aggregate initial principal amount of $49,986,615, were issued as the first series of bonds to be issued under the 2008 District Bond Authorization. On April 15, 2010, the Series 2010 Notes, in an aggregate initial principal amount of $44,996,556.20, were issued in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. On June 23, 2011, the Series 2011 Notes, in an aggregate principal amount of $15,385,000, were issued to defease a portion of the Series 2010 Notes and to fund additional projects in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. The Series 2011 Notes mature on April 1, On February 27, 2013, the Series 2013 Bonds, in an aggregate initial principal amount of $40,670,000, were issued as the second series of bonds to be issued under the 2008 District Bond Authorization. The Series 2013 Bonds were issued to provide the funds necessary to pay the Series 2010 Notes that were not defeased by the Series 2011 Notes. The Series 2010 Notes matured on April 1, The Series 2015 New Money Bonds represent the third series of bonds to be issued under the 2008 District Bond Authorization. On March 13, 2013, the Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2013 (the Series 2013 Refunding Bonds ), in an aggregate principal amount of $70,000,000, were issued by the District to refund on an advance basis a portion of the Series 2003 Bonds, a portion of the Series 2005 Bonds, and a portion of the Series 2009 Bonds to their maturity date. A summary of the District s general obligation bonded debt is set forth on the following page. 12

19 The following table summarizes the annual aggregate debt service requirements of all outstanding bonds of the District (including the Series 2015 Bonds), assuming no early redemptions. Aggregate Debt Service 13 Period Ending August 1, Series 2005 Bonds GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Series 2009 Series 2013 Bonds (1) Bonds Series 2013 Refunding Bonds Series 2015 New Money Bonds Series 2015 Refunding Bonds Aggregate Total Debt Service 2015 $338, $1,664, $621, $4,426, $528, $653, $8,232, ,080, , ,852, ,174, ,951, ,554, ,501, , ,059, ,174, ,436, ,172, ,415, , ,267, ,174, ,586, ,445, ,510, , ,493, ,174, ,587, ,766, , ,719, ,174, ,287, ,182, , ,960, ,174, ,541, ,678, , ,699, ,174, ,653, ,681, , ,397, ,174, ,851, ,626, , ,400, ,174, ,055, ,907, , ,797, ,174, ,189, ,590, , ,594, ,174, ,617, ,781, , ,888, ,174, ,006, ,480, ,669, , ,174, ,100, ,258, ,400, , ,114, ,174, ,377, ,200, , ,054, ,174, ,177, ,100, , ,000, ,174, ,077, ,400, , ,000, ,174, ,377, ,203, ,534, ,737, ,508, ,678, ,186, ,942, ,712, ,654, ,322, ,818, ,140, ,724, ,920, ,644, ,427, ,714, ,141, ,862, ,827, ,690, ,204, ,048, ,252, ,458, ,400, ,858, ,058, ,429, ,488, ,465, ,672, ,137, ,132, ,688, ,820, ,842, ,842, ,590, ,590, ,520, ,520, Total: $338, $29,272, $163,967, $84,040, $59,938, $49,517, $387,075, (1) Reflects the planned refunding of the Prior Bonds from proceeds of the Series 2015 Refunding Bonds.

20 SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2015 BONDS General In order to provide sufficient funds for repayment of principal and interest when due on each series of the Series 2015 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. When collected, the tax revenues will be deposited by the County in the Interest and Sinking Fund of the District, which is required to be maintained by the County and to be used solely for the payment of bonds of the District. The Series 2015 Bonds are payable from ad valorem taxes to be levied within the District pursuant to the California Constitution and other State law, and are not a debt or obligation of the County. No fund of the County is pledged or obligated to repayment of the Series 2015 Bonds. Property Taxation System Property tax revenues result from the application of the appropriate tax rate to the total assessed value of taxable property in the District. School districts receive property taxes for payment of voterapproved bonds as well as for general operating purposes. 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 tax rolls (including rates of tax for all taxing jurisdictions in the county) to the county board of supervisors for approval. The county treasurer-tax collector prepares and mails tax bills to taxpayers and collects the taxes. In addition, the county treasurer-tax collector, the superintendent of schools of which has jurisdiction over the school district holds school district funds, including taxes collected for payment of school bonds, and is charged with payment of principal and interest on the bonds when due, as ex officio treasurer of the school district. Assessed Valuation of Property Within the District Taxable property located in the District had a assessed value of $7,767,264,697 and has a assessed value of $8,325,283,754. All property (real, personal and intangible) is taxable unless an exemption is granted by the California Constitution or United States law. Under the State Constitution, exempt classes of property include household and personal effects, intangible personal property (such as bank accounts, stocks and bonds), business inventories, and property used for religious, hospital, scientific and charitable purposes. The State Legislature may create additional exemptions for personal property, but not for real property. Most taxable property is assessed by the assessor of the county in which the property is located. Some special classes of property are assessed by the State Board of Equalization, as described below. Taxes are levied for each fiscal year on taxable real and personal property assessed as of the preceding January 1, at which time the lien attaches. The assessed value is required to be adjusted during the course of the year when property changes ownership or new construction is completed. State law also affords an appeal procedure to taxpayers who disagree with the assessed value of any property. When necessitated by changes in assessed value during the course of a year, a supplemental assessment is 14

21 prepared so that taxes can be levied on the new assessed value before the next regular assessment roll is completed. See below. Under the State Constitution, the State Board of Equalization assesses property of State-regulated transportation and communications utilities, including railways, telephone and telegraph companies, and companies transmitting or selling gas or electricity. The 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. Locally taxed property is classified either as secured or unsecured, and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing State-assessed property and property (real or personal) for which there is a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. All other property is unsecured, and is assessed on the unsecured roll. Secured property assessed by the State Board of Equalization is commonly identified for taxation purposes as utility property. Shown in the following table is the assessed valuation of the various classes of property in the District for recent fiscal years. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Assessed Valuations Fiscal Years through Fiscal Year Local Secured Utility Unsecured Total $6,188,386,506 $107,173,790 $266,535,482 $6,562,095, ,884,295, ,680, ,802,970 7,234,779, ,574,634,011 95,186, ,802,768 7,940,622, ,985,684,560 94,891, ,868,472 8,391,444, ,359,223,089 82,191, ,724,886 7,742,139, ,952,983,187 80,991, ,559,893 7,296,534, ,894,019,920 78,786, ,689,869 7,288,496, ,913,331,868 72,186, ,270,340 7,290,788, ,405,387,641 64,286, ,590,804 7,767,264, ,968,842,255 52,575, ,865,605 8,325,283,754 Source: California Municipal Statistics, Inc. 15

22 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 pro-rated for each portion of the tax year. See also Values below. 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 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 or reconstruction 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. According to representatives of the County assessor s office, the County has in the past, pursuant to Article XIIIA of the State Constitution, ordered blanket reductions of assessed property values and corresponding property tax bills on single family residential properties when the value of the property has declined below the current assessed value as calculated by the County. 16

23 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. See APPENDIX A INFORMATION RELATING TO THE DISTRICT S OPERATIONS AND BUDGET CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Limitations on Revenues for a discussion of other limitations on the valuation of real property with respect to ad valorem taxes. Bonding Capacity. As a unified school district, the District may issue bonds in an amount up to 2.50% of the assessed valuation of taxable property within its boundaries. The District s fiscal year gross bonding capacity (also commonly referred to as the bonding limit or debt limit ) is approximately $208.1 million and its net bonding capacity is approximately $60.5 million (taking into account outstanding debt after debt service payments made or to be made through February 1, 2015, and before issuance of the Series 2015 Bonds and the refunding of the Prior Bonds). Refunding bonds may be issued without regard to this limitation; however, once issued, the outstanding principal of any refunding bonds is included when calculating the District s bonding capacity. Assessed Valuation by Jurisdiction. The following table gives a distribution of taxable real property located in the District by jurisdiction. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Assessed Valuation by Jurisdiction Jurisdiction Assessed Valuation in District %of District Assessed Valuation of Jurisdiction (1) %of Jurisdiction in District City of Gilroy $6,714,164, % $6,714,164, % Unincorporated Santa Clara County 1,611,118, $14,209,569, % Total District $8,325,283, % Santa Clara County $8,325,283, % $357,105,922, % (1) Before deduction of redevelopment incremental valuation. Source: California Municipal Statistics, Inc. 17

24 Assessed Valuation by Land Use. The following table gives a distribution of taxable property located in the District on the fiscal year tax roll by principal purpose for which the land is used, and the assessed valuation and number of parcels for each use. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Assessed Valuation and Parcels by Land Use Assessed Valuation (1) %of Total No. of Parcels %of Total Non-Residential: Agricultural $591,453, % 1, % Commercial/Office 996,274, Industrial 385,878, Recreational 20,795, Government/Social/Institutional 29,639, Miscellaneous 7,117, Subtotal Non-Residential $2,031,159, % 3, % Residential: Single Family Residence $5,216,417, % 11, % Condominium/Townhouse 121,934, Mobile Home 7,494, Residential Units 144,674, Residential Units/Apartments 196,812, Miscellaneous Residential 1,074, Subtotal Residential $5,688,408, % 13, % Vacant/Undeveloped $249,274, % 1, % Total $7,968,842, % 17, % (1) Local secured assessed valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. 18

25 Assessed Valuation of Single-Family Homes. The following table shows the assessed valuation of single-family homes in the District for fiscal year , including the median and mean assessed valuation per parcel. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Per Parcel Assessed Valuation of Single Family Homes Number of Parcels Assessed Valuation Average Assessed Valuation Median Assessed Valuation Single Family Residential 11,957 $5,216,417,303 $436,265 $413, Assessed Valuation No. of Parcels (1) %oftotal Cumulative %oftotal Total Valuation %oftotal Cumulative % of Total $0 - $99,999 1, % 8.388% $60,703, % 1.164% $100,000 - $199,999 1, ,006, $200,000 - $299,999 1, ,174, $300,000 - $399,999 2, ,520, $400,000 - $499,999 2, ,016,697, $500,000 - $599,999 1, ,909, $600,000 - $699, ,330, $700,000 - $799, ,738, $800,000 - $899, ,427, $900,000 - $999, ,515, $1,000,000 - $1,099, ,577, $1,100,000 - $1,199, ,688, $1,200,000 - $1,299, ,176, $1,300,000 - $1,399, ,436, $1,400,000 - $1,499, ,110, $1,500,000 - $1,599, ,652, $1,600,000 - $1,699, ,501, $1,700,000 - $1,799, ,377, $1,800,000 - $1,899, ,077, $1,900,000 - $1,999, ,642, $2,000,000 and greater ,153, Total 11, % $5,216,417, % (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc. 19

26 Largest Taxpayers in District. The twenty taxpayers with the greatest combined ownership of taxable property in the District on the fiscal year tax roll, and the assessed valuation of all property owned by those taxpayers in all taxing jurisdictions within the District, are shown below. Property Owner GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Largest Local Secured Taxpayers Primary Land Use Assessed Valuation Percent of Total (1) 1. Simon Property Group Outlet Stores $197,240, % 2. Olam West Coast Inc. Food Processing 71,559, Excel Gilroy LLC Commercial 70,594, Inland Western Retail Real / Inland Western Gilroy I LLC Commercial 47,667, Westwood Drive Fee Owner LLC Apartments 38,335, Isabella Way LLC Residential Care Facilities 36,702, Shapell Industries Inc. Residential Development 33,768, Christopher Ranch LLC Agricultural 32,187, Wal Mart Real Estate Business Trust Commercial 32,075, KB Home So. Bay Inc. Residential Development 21,095, Costco Wholesale Corp. Commercial 20,607, Chinatown LLC Commercial 18,817, Sterigenics US LLC Industrial 18,534, CP6SV LLC Commercial 18,170, Target Corporation Commercial 16,071, Lowes HIW Inc. Commercial 15,860, Mission Park Gilroy LLC Apartments 15,181, HD Development of Maryland, Inc. Commercial 15,077, Gilroy Village Shopping Center, LLC Commercial 14,150, D.R. Horton Bay Inc. Residential Development 13,856, $747,552, % (1) local secured assessed valuation: $7,968,842,255 Source: California Municipal Statistics, Inc. The more property (by assessed value) owned by a single taxpayer, the more tax collections are exposed to weakness in the taxpayer s financial situation and ability or willingness to pay property taxes. Furthermore, assessments may be appealed by taxpayers seeking a reduction as a result of economic and other factors beyond the District s control. See Assessed Values above. 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 Series 2015 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 Series 2015 Bonds is based on 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 20

27 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 pay the principal of and interest on the Series 2015 Bonds. Issuance of additional authorized bonds in the future might also cause the tax rate to increase. Typical Tax Rate Area. The following table shows ad valorem property tax rates for the last five fiscal years in a typical Tax Rate Area of the District (TRA 2-001). This Tax Rate Area comprises approximately 63.18% of the total fiscal year assessed value of the District. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Typical Total Tax Rates per $100 of Assessed Valuation (TRA 2-001) (1) Fiscal Years Through Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year General $ $ $ $ $ County Retirement Levy County Library County Hospital Bonds City of Gilroy Bonds Gavilan Joint Community College District Bond Gilroy Unified School District Bonds Gilroy Unified Lease Debt (2) Gilroy Unified Lease Debt Prior Year (2) Total All Property $ $ $ $ $ Santa Clara Valley Water District State Water Project $ $ $ $ $ Total Land and Improvement $ $ $ $ $ (1) The fiscal year assessed valuation of TRA is $5,259,582,827. (2) The Measure J leasing tax is an ad valorem tax approved by a majority of the voters of the District in 1974 for payment of lease obligations with respect to certain newly constructed school facilities. The Measure J leasing tax expired in Source: California Municipal Statistics, Inc. In accordance with the law which permitted the Series 2015 New Money Bonds to be approved by a 55% affirmative vote, bonds approved by the District s voters at the November 4, 2008 election may not be issued unless the District projects that repayment of all outstanding bonds approved at the election will require a tax rate no greater than $60.00 per $100,000 of assessed value. Based on the assessed value of taxable property in the District at the time of issuance of the Series 2015 New Money Bonds, the District projects that the maximum tax rate required to repay the Series 2015 New Money Bonds and all other outstanding bonds approved at the November 4, 2008 election will be within that legal limit. The tax rate test applies only when new bonds are issued, and is not a legal limitation upon the ability to levy taxes at such rate as may be necessary to pay debt service on the Series 2015 New Money Bonds in each year. Tax Charges and Delinquencies A school district s share of the 1% countywide tax is based on the actual allocation of property tax revenues to each taxing jurisdiction in the county in fiscal year , as adjusted according to a 21

28 complicated statutory scheme enacted since that time. Revenues derived from special ad valorem taxes for voter-approved indebtedness, including the Series 2015 Bonds, are reserved to the taxing jurisdiction that approved and issued the debt, and may only be used to repay that debt. The county treasurer-tax collector prepares the property tax bills. Property taxes on the regular secured assessment roll are due in two equal installments: the first installment is due on November 1, and becomes delinquent after December 10. The second installment is due on February 1 and becomes delinquent after April 10. If taxes are not paid by the delinquent date, a 10% penalty attaches and a $10 cost is added to unpaid second installments. If taxes remain unpaid by June 30, the tax is deemed to be in default, and a $15 state redemption fee applies. Interest then begins to accrue at the rate of 1.5% per month. The property owner has the right to redeem the property by paying the taxes, accrued penalties, and costs within five years of the date the property went into default. If the property is not redeemed within five years, it is subject to sale at a public auction by the county treasurer-tax collector. Property taxes on the unsecured roll are due in one payment on the lien date, January 1, and become delinquent after August 31. A 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue on November 1. To collect unpaid taxes, the county treasurer-tax collector may obtain a judgment lien upon and cause the sale of all property owned by the taxpayer in the county, and may seize and sell personal property, improvements and possessory interests of the taxpayer. The county treasurer-tax collector may also bring a civil suit against the taxpayer for payment. The date on which taxes on supplemental assessments are due depends on when the supplemental tax bill is mailed. The following table shows real property tax charges and corresponding delinquencies with respect to property located in the District for the fiscal years through GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Secured Tax Charges and Delinquencies Fiscal Years Through Secured Tax Charge (1) Amt. Del. June 30 %Del. June $7,666, $400, % ,273, , Secured Tax Charge (2) Amt. Del. June 30 %Del. June $3,423, $178, % ,741, , ,023, , Not available Not available ,433, , (1) Measure J leasing tax levy. The Measure J leasing tax is an ad valorem tax approved by a majority of the voters of the District in 1974 for payment of lease obligations with respect to certain newly constructed school facilities. The Measure J leasing tax expired in (2) General obligation bond debt service levy. Source: California Municipal Statistics, Inc. 22

29 Teeter Plan. The County has adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in Section 4701 and following of the California Revenue and Taxation Code. Under the Teeter Plan, each participating local agency levying property taxes in the County, including the District, receives the full amount of uncollected taxes credited to its fund (including delinquent taxes, if any), in the same manner as if the full amount due from taxpayers had been collected. In return, the County receives and retains delinquent payments, penalties and interest as collected, that would have been due the local agency. The County applies the Teeter Plan to taxes levied for repayment of school district bonds. The Teeter Plan is to remain in effect unless the County Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the Board of Supervisors receives a petition for its discontinuance from two-thirds of the participating revenue districts in the County. The Board of Supervisors 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. Direct and Overlapping Debt Set forth below is a schedule of direct and overlapping debt prepared by California Municipal Statistics Inc. effective December 1, 2014 for debt issued as of November 10, 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 the date of the schedule and whose territory overlaps the District in whole or in part. Column two shows the percentage of each overlapping agency s assessed value located within the boundaries of the District. This percentage, multiplied by the total outstanding debt of each overlapping agency (which is not shown in the table) produces the amount shown in column three, which is the apportionment of each overlapping agency s outstanding debt to taxable property in the District. The schedule generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. 23

30 Assessed Valuation: $8,325,382,754 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Statement Of Direct And Overlapping Bonded Debt DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 12/1/14 Santa Clara County 2.331% $18,556,960 Gavilan Joint Community College District ,991,505 Gilroy Unified School District ,157,495 (1) City of Gilroy ,820,000 City of Gilroy Community Facilities District No ,900,000 Santa Clara Valley Water District Benefit Assessment District ,671,345 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $269,097,305 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Santa Clara County General Fund Obligations 2.331% 17,403,114 Santa Clara County Pension Obligations ,658,352 Santa Clara County Board of Education Certificates of Participation ,806 Gilroy Unified School District Certificates of Participation ,850,000 City of Gilroy Certificates of Participation ,060,000 Santa Clara County Vector Control District Certificates of Participation ,340 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $101,274,612 Less: Santa Clara County supported obligations 12,181,877 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $89,092,735 GROSS COMBINED TOTAL DEBT 370,371,917 (2) NET COMBINED TOTAL DEBT $358,190,040 (1) Excludes Series 2015 Bonds to be sold but includes the Prior Bonds and the Series 2011 Notes. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to Assessed Valuation: Direct Debt ($172,157,495) % Combined Direct Debt ($203,007,495) % Total Direct and Overlapping Tax and Assessment Debt % Gross Combined Total Debt % Net Combined Total Debt % Source: California Municipal Statistics, Inc. BOND INSURANCE The following information and the specimen of the Policy attached as Appendix G hereto have been furnished by AGM for use in this Official Statement. No representation is made by the District as to the accuracy, completeness or adequacy of such information, nor as to the absence of material adverse changes in such information subsequent to the date of this Official Statement. The District has not made any independent investigation of AGM or the Policy, and reference is made to the information set forth below and in Appendix G hereto for a description thereof. Bond Insurance Policy Concurrently with the issuance of the Series 2015 Bonds, Assured Guaranty Municipal Corp. ( AGM ) will issue its Municipal Bond Insurance Policy for the Series 2015 Bonds (the Policy ). The Policy guarantees the scheduled payment of principal of and interest on the Series 2015 Bonds when due as set forth in the form of the Policy included as an exhibit to this Official Statement. 24

31 The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Assured Guaranty Municipal Corp. AGM is a New York domiciled financial guaranty insurance company and an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. Neither AGL nor any of its shareholders or affiliates, other than AGM, is obligated to pay any debts of AGM or any claims under any insurance policy issued by AGM. AGM s financial strength is rated AA (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ), AA+ (stable outlook) by Kroll Bond Rating Agency, Inc. ( KBRA )and A2 (stable outlook) by Moody s Investors Service, Inc. ( Moody s ). Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings On November 13, 2014, KBRA assigned an insurance financial strength rating of AA+ (stable outlook) to AGM. AGM can give no assurance as to any further ratings action that KBRA may take. On July 2, 2014, S&P issued a credit rating report in which it affirmed AGM s financial strength rating of AA (stable outlook). AGM can give no assurance as to any further ratings action that S&P may take. On July 2, 2014, Moody s issued a rating action report stating that it had affirmed AGM s insurance financial strength rating of A2 (stable outlook). AGM can give no assurance as to any further ratings action that Moody s may take. For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, Capitalization of AGM At September 30, 2014, AGM s policyholders surplus and contingency reserve were approximately $3,683 million and its net unearned premium reserve was approximately $1,810 million. Such amounts represent the combined surplus, contingency reserve and net unearned premium reserve of AGM, AGM s wholly owned subsidiary Assured Guaranty (Europe) Ltd. and 60.7% of AGM s indirect 25

32 subsidiary Municipal Assurance Corp.; each amount of surplus, contingency reserve and net unearned premium reserve for each company was determined in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference Portions of the following documents filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) (ii) (iii) the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (filed by AGL with the SEC on February 28, 2014); the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 (filed by AGL with the SEC on May 9, 2014); the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (filed by AGL with the SEC on August 8, 2014); and (iv) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 (filed by AGL with the SEC on November 7, 2014). All consolidated financial statements of AGM and all other information relating to AGM included in, or as exhibits to, documents filed by AGL with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, excluding Current Reports or portions thereof furnished under Item 2.02 or Item 7.01 of Form 8-K, after the filing of the last document referred to above and before the termination of the offering of the Series 2015 Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Except for the information referred to above, no information available on or through AGL s website shall be deemed to be part of or incorporated in this Official Statement. Any information regarding AGM included herein under the caption BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters AGM or one of its affiliates may purchase a portion of the Series 2015 Bonds or any uninsured bonds offered under this Official Statement and such purchases may constitute a significant proportion of the bonds offered. AGM or such affiliate may hold such Series 2015 Bonds or uninsured bonds for investment or may sell or otherwise dispose of such Series 2015 Bonds or uninsured bonds at any time or from time to time. AGM makes no representation regarding the Series 2015 Bonds or the advisability of investing in the Series 2015 Bonds. In addition, AGM has not independently verified, makes no representation 26

33 regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE and APPENDIX G SPECIMEN MUNICIPAL BOND INSURANCE POLICY. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel to the District ( Bond Counsel ), based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2015 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ) and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Series 2015 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Complete copies of the proposed forms of opinions of Bond Counsel are set forth in Appendix C hereto. To the extent the issue price of any maturity of the Series 2015 Bonds is less than the amount to be paid at maturity of such Series 2015 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Series 2015 Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Series 2015 Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Series 2015 Bonds is the first price at which a substantial amount of such maturity of the Series 2015 Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Series 2015 Bonds accrues daily over the term to maturity of such Series 2015 Bonds on the basis of a constant interest rate compounded semiannually (with straightline interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Series 2015 Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Series 2015 Bonds. Beneficial Owners of the Series 2015 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Series 2015 Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Series 2015 Bonds in the original offering to the public at the first price at which a substantial amount of such Series 2015 Bonds is sold to the public. Series 2015 Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of obligations, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series 2015 Bonds. The District has made certain representations and covenanted to comply with certain restrictions, 27

34 conditions and requirements designed to ensure that interest on the Series 2015 Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Series 2015 Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Series 2015 Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel s attention after the date of issuance of the Series 2015 Bonds may adversely affect the value of, or the tax status of interest on, the Series 2015 Bonds. Accordingly, the opinions of Bond Counsel are not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the Series 2015 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the Series 2015 Bonds may otherwise affect a Beneficial Owner s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series 2015 Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. For example, proposals made in 2014 included one by the then Chair of the House Ways and Means Committee that would subject interest on the Series 2015 Bonds to a federal income tax at an effective rate of 10% or more for individuals, trusts, and estates in the highest tax bracket, and another by the Obama Administration that would limit the exclusion from gross income of interest on the Series 2015 Bonds to some extent for high-income individuals. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Series 2015 Bonds. Prospective purchasers of the Series 2015 Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Series 2015 Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ( IRS ) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the District or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The District has covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Series 2015 Bonds ends with the issuance of the Series 2015 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the District or the Beneficial Owners regarding the tax-exempt status of the Series 2015 Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Series 2015 Bonds for audit, or the course or result of such audit, or an audit of 28

35 bonds presenting similar tax issues may affect the market price for, or the marketability of, the Series 2015 Bonds, and may cause the District or the Beneficial Owners to incur significant expense. Legal Opinion OTHER LEGAL MATTERS The validity of each series of the Series 2015 Bonds and certain other legal matters are subject to the approving opinions of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the District. Bond Counsel expects to deliver an opinion with respect to each series of the Series 2015 Bonds at the time of issuance of such series substantially in the forms set forth in Appendix C hereto. Bond Counsel, as such, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the District by Orrick, Herrington & Sutcliffe LLP, as Disclosure Counsel to the District. Legality for Investment in California Under the provisions of the California Financial Code, each series of the Series 2015 Bonds is a legal investment for commercial banks in California to the extent that the Series 2015 Bonds, in the informed opinion of the bank, is prudent for the investment of funds of depositors, and, under provisions of the California Government Code, each series of the Series 2015 Bonds is eligible securities for deposit of public moneys in the State. Continuing Disclosure The District has covenanted for the benefit of the holders and Beneficial Owners of each series of the Series 2015 Bonds to provide, or to cause to be provided, to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access system or such other electronic system designated by the Municipal Securities Rulemaking Board (the EMMA System ) certain annual financial information and operating data relating to the District (the Annual Report ) by not later than nine months following the end of the District s fiscal year (currently ending June 30), commencing with the report for the fiscal year (which is due no later than April 1, 2016) and notice of the occurrence of certain enumerated events ( Notice Events ) in a timely manner not in excess of ten business days after the occurrence of such a Notice Event. The specific nature of the information to be contained in the Annual DISCLOSURE CERTIFICATES. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the Rule ). A review of the District s compliance with its previous continuing disclosure undertakings was conducted and it was found, during the preceding five years, that the District did not timely file notices of certain rating changes. The District has decided to self-report to the U.S. Securities and Exchange Commission (the SEC ) under the SEC s Municipal Continuing Disclosure Cooperation Initiative ( MCDC Initiative ) with respect to certain of its statements in prior official statements regarding the District s compliance with its prior continuing disclosure undertakings pursuant to the Rule. The District does not believe that any of the minor discrepancies found in the course of its review constitute material misstatements in bond offering documents. However, because the SEC has not provided any guidance or definition of the term material for purposes of the MCDC Initiative, the District made the filing out of an abundance of caution. 29

36 No Litigation No litigation is pending or threatened concerning or contesting the validity of the Series 2015 Bonds or the District s ability to receive ad valorem taxes and to collect other revenues, or contesting the District s ability to issue and retire the Series 2015 Bonds. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the title to their offices of County or District officers who will execute the Series 2015 Bonds or County or District officials who will sign certifications relating to the Series 2015 Bonds, or the powers of those offices. A certificate (or certificates) to that effect will be furnished to the Underwriter at the time of the original delivery of the Series 2015 Bonds. The District is occasionally subject to lawsuits and claims. In the opinion of the District, the aggregate amount of the uninsured liabilities of the District under these lawsuits and claims will not materially affect the financial position or operations of the District. ESCROW VERIFICATION The arithmetical accuracy of certain computations included in the schedules provided by the Underwriter relating to the computation of projected receipts of principal and interest on the government obligations, and the projected payments of principal, redemption premium, if any, and interest to retire the Prior Bonds to be refunded will be verified by Causey Demgen & Moore, P.C., Denver, Colorado (the Verification Agent ). Such computations will be based solely on assumptions and information supplied by the District and the Underwriter. The Verification Agent will restrict its procedures to verifying the arithmetical accuracy of certain computations and will not make any study to evaluate the assumptions and information on which the computations are based, and will express no opinion on the data used, the reasonableness of the assumptions or the achievability of the projected outcome. Ratings MISCELLANEOUS Standard & Poor s Ratings Services ( S&P ) and Moody s Investors Service ( Moody s ) have assigned underlying ratings of A+ and Aa3, respectively, to the Series 2015 Bonds. Rating agencies generally base their ratings on their own investigations, studies and assumptions. The ratings reflect only the view of the rating agency furnishing the same, and any explanation of the significance of such rating should be obtained only from the rating agency providing the same. Such ratings are not a recommendation to buy, sell or hold the Series 2015 Bonds. There is no assurance that any rating will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the rating agency providing the same, if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of a rating may have an adverse effect on the market price of the Series 2015 Bonds. Neither the Underwriter nor the District has undertaken any responsibility after the offering of the Series 2015 Bonds to assure the maintenance of the ratings or to oppose any such revision or withdrawal. In addition, S&P and Moody s are expected to assign their respective ratings of AA (stable outlook) and A2 (stable outlook), respectively, to the Series 2015 Bonds with the understanding that, upon delivery of the Series 2015 Bonds, the Policy will be issued by AGM. See BOND INSURANCE. Such ratings are expected to be assigned solely as a result of the issuance of the Policy and would reflect only the rating agencies views of the claims-paying ability and financial strength of AGM. Neither the Underwriter nor the District has made any independent investigation of the claims-paying ability of AGM and no representation is made that any insured rating of the Series 2015 Bonds based upon the purchase 30

37 of the Policy will remain the same. The existence of the Policy will not, of itself, negatively affect the underlying ratings. Without regard to any bond insurance, the Series 2015 Bonds are payable from the proceeds of an ad valorem tax approved by the voters of the District pursuant to all applicable laws and 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 of and interest on the Series 2015 Bonds. See SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2015 BONDS. However, any downward revision or withdrawal of any rating of AGM may have an adverse effect on the market price or marketability of the Series 2015 Bonds. Professionals Involved in the Offering Orrick, Herrington & Sutcliffe LLP is acting as Bond Counsel and Disclosure Counsel with respect to each series of the Series 2015 Bonds, and will receive compensation from the District contingent upon the sale and delivery of each series of the Series 2015 Bonds. Payment of the fees and expenses of Isom Advisors, Inc., a Division of Urban Futures, Inc., the District s financial advisor, is also contingent upon the sale and delivery of the Series 2015 Bonds. Underwriting The Series 2015 New Money Bonds are being purchased for reoffering to the public by George K. Baum & Company (the Underwriter ) pursuant to the terms of a bond purchase contract executed on February 3, 2015, by and between the District and the Underwriter (the New Money Purchase Contract ). The Underwriter has agreed to purchase the Series 2015 New Money Bonds at a price of $31,131, The New Money Purchase Contract provides that the Underwriter will purchase all of the Series 2015 New Money Bonds, subject to certain terms and conditions set forth in the New Money Purchase Contract, including the approval of certain legal matters by counsel. The Series 2015 Refunding Bonds are being purchased for reoffering to the public by the Underwriter pursuant to the terms of a bond purchase contract executed on February 3, 2015, by and between the District and the Underwriter (the Refunding Purchase Contract ). The Underwriter has agreed to purchase the Series 2015 Refunding Bonds at a price of $41,199, The Refunding Purchase Contract provides that the Underwriter will purchase all of the Series 2015 Refunding Bonds, subject to certain terms and conditions set forth in the Refunding Purchase Contract, including the approval of certain legal matters by counsel. The Underwriter may offer and sell the Series 2015 Bonds to certain dealers and others at prices lower than the public offering prices shown on the inside front cover page of this Official Statement. The offering prices may be changed from time to time by the Underwriter. 31

38 ADDITIONAL INFORMATION The purpose of this Official Statement is to supply information to purchasers of the Series 2015 Bonds. Quotations from and summaries and explanations of the Series 2015 Bonds and of the statutes and documents contained herein do not purport to be complete, and reference is made to such documents and statutes for full and complete statements of their provisions. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Series 2015 Bonds. The District has duly authorized the delivery of this Official Statement. GILROY UNIFIED SCHOOL DISTRICT By: /s/ Deborah A. Flores Superintendent 32

39 APPENDIX A INFORMATION RELATING TO THE DISTRICT S OPERATIONS AND BUDGET The information in this appendix concerning the operations of the Gilroy Unified School District (the District ), the District s finances, and State of California (the 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 or interest on the Series 2015 Bonds is payable from the general fund of the District or from State revenues. Each series of the Series 2015 Bonds is payable 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 of Santa Clara on property within the District in an amount sufficient for the timely payment of principal of and interest on each series of the Series 2015 Bonds. See SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2015 BONDS in the front portion of this Official Statement. Introduction THE DISTRICT The District is located in the County of Santa Clara (the County ) and provides public education in kindergarten through twelfth grade ( K-12 ) within an approximately 260-square-mile area that includes all of the City of Gilroy and adjoining unincorporated areas. The District has operated as a unified school district under the laws of the State of California (the State ) since The District operates eight elementary schools, three middle schools, two comprehensive high schools, one early college academy and one continuation high school. The District s current enrollment for fiscal year is approximately 11,485 students, and the District s projected fiscal year general fund expenditures are approximately $99.9 million. Taxable property in the District has a fiscal year total assessed value of $$8,325,283,754. As of June 30, 2014, the District employed 581 full-time equivalent ( FTE ) certificated (teaching staff) employees, 380 FTE classified employees and 51 management and supervisory personnel. The District operates under the jurisdiction of the Santa Clara County Superintendent of Schools. The District is governed by a Board of Education (the Board ) consisting of seven publicly elected members and four nonvoting student members. The elected members are elected to four-year terms in staggered years. District day-to-day operations are managed by a board-appointed Superintendent of Schools. Dr. Deborah Flores has served as Superintendent since May Dr. Flores began her educational career in 1975 as a special education teacher, and has worked in various capacities in California school districts since 1988, including as superintendent of Lucia Mar Unified School District in San Luis Obispo County. A-1

40 Board of Education Each December the Board elects a President and Vice-President to serve one-year terms. Current members of the Board, together with their office and the date their term expires, are listed below: GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Board of Education Name Office Term Expires James E. Pace President December 2016 Fred Tovar Vice President December 2016 Heather Bass Member December 2018 Mark Good Member December 2016 Patricia Midtgaard Member December 2018 Linda Piceno Member December 2018 P. Jaime Rosso Member December 2016 Superintendent and Business Services Personnel The Superintendent of the District is appointed by the Board and reports to the Board. The Superintendent is responsible for management of the District s day-to-day operations and supervises the work of other key District administrators. Information concerning the Superintendent and certain other key administrative personnel is set forth below. Dr. Deborah A. Flores, Superintendent. Dr. Deborah Flores has been the Superintendent of the District since July Dr. Flores has been a superintendent of schools for 10 years. Prior to joining the District, she was superintendent of two school districts: Lucia Mar Unified School District located in Arroyo Grande, California, and Santa Barbara School District in Santa Barbara, California. Dr. Flores also held the positions of Assistant and Deputy Superintendent in the Santa Barbara School District, wheresheworkedforalmost15years.priortocomingtocaliforniain1988,dr.floresworkedinthe field of special education, first as a special education teacher at an elementary level and then as a special education director (K-12). She also held the position of Pupil Services Director which included responsibility for a broad range of programs (special education, categoricals, guidance counseling and assessment). After moving to California, she initially worked for the Riverside County Office of Education in the child development division and administered preschool programs throughout Riverside County. Dr. Flores has a Ph.D from the University of California in Santa Barbara in Educational Administration, and a Masters in Education and Bachelors of Arts from the University of Massachusetts in Amherst, Massachusetts. Dr. Flores has received a number of awards including: Teacher of the Year (Amherst, Mass.), Woman of Achievement (Riverside County) and ACSA Central Office Administrator of the Year (Santa Barbara, California). Alvaro Meza, Assistant Superintendent, Business Services. Mr. Meza has over 13 years of public school finance experience. He started his career as a financial analyst in 2002 at the Salinas City Elementary School District. While at Salinas City Elementary School District, he was promoted to Coordinator of Fiscal Services, then Controller, and became the Director of Fiscal Services while obtaining the Chief Business Official Certificate from the California Association of School Business Officials. Mr. Meza became the Assistant Superintendent of Santa Cruz City Schools in 2009, where he helped such district regain its fiscal solvency and helped restored its positive certification. Mr. Meza joined the District in July 2013, and enjoys living and working in Gilroy. Mr. Meza has a Bachelors of A-2

41 Arts in Economics from the University of California, Santa Cruz, and a Masters of Science in Applied Economics and Finance, also from the University of California, Santa Cruz. DISTRICT FINANCIAL MATTERS State Funding of Education; State Budget Process General. As is true for all school districts in California, the District s operating income consists primarily of two components: a State portion funded from the State s general fund in accordance with the Local Control Funding Formula (see Funding Formula herein) and a local portion derived from the District s share of the 1% local ad valorem addition, school districts may be eligible for other special categorical funding from State and federal government programs. The District projects to receive approximately 46.0% of its general fund revenues from State funds (not including the local portion derived from the District s share of the local ad valorem tax), budgeted at approximately $45.3 million in fiscal year Such amount includes both the State School District; Local Control Funding Formula Attendance and LCFF Other State Revenues below). As a result, decreases or deferrals in State revenues, or in State legislative appropriations made to fund education, may significantly affect the District s revenues and operations. Under Proposition 98, a constitutional and statutory amendment adopted by the State s voters in 1988 and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution), a minimum level of funding is guaranteed to school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs. Recent years have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporate taxes, making it increasingly difficult for the State to meet its Proposition 98 funding mandate, which normally commands about 45% of all State general fund revenues, while providing for other fixed State costs and priority programs and services. Because education funding constitutes such a large part of the State s general fund expenditures, it is generally at the center of annual budget negotiations and adjustments. The State budget for fiscal year contained a new formula for funding the school finance system (the Local Control Funding Formula or LCFF ). The LCFF replaced the revenue limit funding system and most categorical programs. See Allocation of State Funding to School Districts; Local Control Funding Formula herein for more information. State Budget Process. According to the State Constitution, the Governor must propose a budget to the State Legislature no later than January 10 of each year, and a final budget must be adopted no later than June 15. Historically, the budget required a two-thirds vote of each house of the State Legislature for passage. However, on November 2, 2010, the State s voters approved Proposition 25, which amended the State Constitution to lower the vote requirement necessary for each house of the State Legislature to pass a budget bill and send it to the Governor. Specifically, the vote requirement was lowered from two thirds to a simple majority (50% plus one) of each house of the State Legislature. The lower vote requirement also would apply to trailer bills that appropriate funds and are identified by the State Legislature as related to the budget in the budget bill. The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. Under Proposition 25, a two thirds vote of the State Legislature is still required to override any veto by the Governor. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget A-3

42 act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget. The Governor signed the fiscal year State budget on June 20, When the State budget is not adopted on time, basic appropriations and the categorical funding portion of each school district s State funding are affected differently. Under the rule of White v. Davis (alsoreferredtoasjarvis v. Connell), a State Court of Appeal decision reached in 2002, there is no constitutional mandate for appropriations to school districts without an adopted budget or emergency appropriation, and funds for State programs cannot be disbursed by the State Controller until that time, unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the Constitution (such as appropriations for salaries of elected State officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. Should the State Legislature fail to pass a budget or emergency appropriation before the start of any fiscal year, the District might experience delays in receiving certain expected revenues. The District is authorized to borrow temporary funds to cover its annual cash flow deficits, and as a result of the White v. Davis decision, the District might find it necessary to increase the size or frequency of its cash flow borrowings, or to borrow earlier in the fiscal year. The District does not expect the White v. Davis decision to have any long-term effect on its operating budgets. Aggregate State Education Funding. The Proposition 98 guaranteed amount for education is based on prior-year funding, as adjusted through various formulas and tests that take into account State proceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and other factors. The State s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given fiscal year s budget, from the Governor s initial budget proposal to actual expenditures to post-year-end revisions, as better information regarding the various factors becomes available. Over the long run, the guaranteed amount will increase as enrollment and per capita personal income grow. If, at year-end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as settle-up. If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster than personal income (or sooner, as the Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as maintenance factor. In recent years, the State s response to fiscal difficulties has had a significant impact on Proposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-up amounts when funding has lagged the guaranteed amount. In response, teachers unions, the State Superintendent and others sued the State or Governor in 1995, 2005, 2009 and 2011 to force them to fund schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted in over $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down the obligations through additional education funding over time, including the Quality Education Investment Act of 2006, have also become part of annual budget negotiations, resulting in repeated adjustments and deferrals of the settle-up amounts. A-4

43 The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds from one fiscal year to the next; by permanently deferring apportionments of Proposition 98 funds from one fiscal year to the next; by suspending Proposition 98, as the State did in fiscal year , fiscal year , fiscal year and fiscal year ; and by proposing to amend the State Constitution s definition of the guaranteed amount and settle-up requirement under certain circumstances. The District cannot predict how State income or State education funding will vary over the term to maturity of the Series 2015 Bonds, and the District takes no responsibility for informing owners of the Series 2015 Bonds as to actions the State Legislature or Governor may take affecting the current year s budget after its adoption. Information about the State budget and State spending for education is regularly available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance, under the heading California Budget. An impartial analysis of the budget is posted by the Office of the Legislative Analyst at In addition, various State of California official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on school districts in the State, may be found at the website of the State Treasurer, The information referred to is prepared by the respective State agency maintaining each website and not by the District, and the District can take no responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references State Budget. The Governor signed the fiscal year State budget (the State Budget ) on June 20, The State Budget represents a multiyear plan that is balanced and that continues to focus on paying down budgetary debt from prior years, setting aside reserves and implementing a funding plan for the State Teachers Retirement System ( CalSTRS ). The State Budget provides for $109.4 billion in revenues and transfers for fiscal year (which amount includes a $3.9 billion prior year general fund balance from fiscal year ), $108.0 billion in expenditures and a balance of $450 million in the general fund traditional reserve and $1.6 billion in a rainy day fund (the Rainy Day Fund ). Revenues and expenditures for fiscal year , as revised under the State Budget, were $104.6 billion (which amount includes a $2.4 billion prior year general fund balance from fiscal year ) and $100.7 billion, respectively. The State Budget projects that budgetary debt, which was approximately $35 billion at the end of fiscal year and $26 billion at the end of fiscal year , will be eliminated by the end of fiscal year For fiscal year , specifically, the State Budget dedicates to paying down more than $10 billion of budgetary debt, including approximately $5 billion to pay down the deferral of payments to schools. As it relates to K-12 education, the State Budget provides total funding of $76.6 billion ($45.3 billion general fund and $31.3 billion other funds). The State Budget provides Proposition 98 funding for all K-14 education of $60.9 billion for fiscal year Such amount, when combined with an aggregate increase of $4.4 billion from fiscal years and provided for in the State Budget, results in an increase of $10 billion in funding for K-14 education. The State Budget notes that Proposition 98 funding for K-12 education has grown by more than $12 billion from fiscal year to fiscal year , representing an increase of more than $1,900 per student. A-5

44 Certain budget adjustments for K-12 programs include the following: funds to continue the State s 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 close the remaining funding implementation gap by more than 29%. Additionally, the State Budget addresses an administrative problem related to the collection of income eligibility forms that are used to determine student eligibility for free or reduced-price meals. K-12 Deferrals. The State Budget repays nearly $4.7 billion in Proposition 98 general funds for K-12 expenses that had been deferred from one year to the next during the economic downturn, leaving an outstanding balance of less than $900 million in K-12 deferrals. Further, the State Budget includes a trigger mechanism that will appropriate any additional funding resources attributable to the and fiscal years subsequent to the enactment of the State Budget for the purpose of retiring this remaining deferral balance. Independent Study. The State Budget streamlines the existing independent study program, reducing administrative burdens and freeing up time for teachers to spend on student instruction and support, while making it easier for schools to offer and expand instructional opportunities available to students through non-classroom based instruction. K-12 Mandates. An increase of $400.5 million in one-time Proposition 98 general funds to reimburse K-12 local educational agencies for the costs of State-mandated programs. These funds will make a significant down payment on outstanding mandate debt, while providing school districts, county offices of education and charter schools with discretionary resources to support critical investments such as Common Core implementation. K-12 High-Speed Internet Access. An increase of $26.7 million in one-time Proposition 98 general funds for the K-12 High Speed Network to provide technical assistance and grants to local educational agencies to address the technology requirements necessary for successful Common Core implementation. Based on an assessment by the K-12 High Speed Network, these funds will be targeted to those local educational agencies most in need of help with securing required internet connectivity and infrastructure to implement the new computer adaptive tests under Common Core. Career Technical Education Pathways Program. An increase of $250 million in one-time Proposition 98 general funds to support a second cohort of competitive grants for participating K-14 local educational agencies. Established in the State Budget Act for fiscal year , the Career Pathways Trust Program provides grant awards to improve career technical programs and linkages between employers, schools, and community colleges. Rainy Day Fund. The State Budget proposed certain constitutional amendments to the Rainy Day Fund on the November 2014 ballot, which proposition was approved by the voters. Such constitutional amendments (i) require deposits into the Rainy Day Fund whenever capital gains revenues rise to more than 8% of general fund tax revenues (and the State Budget notes that capital gains revenues are expected to account for approximately 9.8% of general fund revenues in fiscal year A-6

45 15); (ii) set the maximum size of the Rainy Day Fund at 10% of general fund revenues; (iii) for the next 15 years, require half of each year s deposit to be used for supplemental payments to pay down the budgetary debts or other long-term liabilities and, thereafter, require at least half of each year s deposit to be saved and the remainder used for supplemental debt payments or savings; (iv) allow the withdrawal of funds only for a disaster or if spending remains at or below the highest level of spending from the past three years; (v) require the State to provide a multiyear budget forecast; and (vi) create a Proposition 98 reserve (the Public School System Stabilization Account) to set aside funds in good years to minimize future cuts and smooth school spending. The State may deposit amounts into such account only after it has paid all amounts owing to school districts relating to the Proposition 98 maintenance factor for fiscal years prior to fiscal year The State, in addition, may not transfer funds to the Public School System Stabilization Account unless the State is in a Test 1 year under Proposition 98 or in any year in which a maintenance factor is created. SB 858. As part of the State Budget, the Governor signed Senate Bill 858 ( SB 858 ) which includes provisions which could limit the amount of reserves that may be maintained by a school district in certain circumstances. Such provisions became effective upon the State voters approval of the constitutional amendments relating to the Rainy Day Fund described above. Under SB 858, in any fiscal year immediately following a fiscal year in which the State has made a transfer into the Public School System Stabilization Account, any adopted or revised budget by a school district would need to contain a combined unassigned and assigned ending fund balance that (a) for school districts with an Average Daily Attendance ( A.D.A. ) of less than 400,000, is not more than two times the amount of the reserve for economic uncertainties mandated by the Education Code, or (b) for school districts with an A.D.A. that is more than 400,000, is not more than three times the amount of the reserve for economic uncertainties mandated by the Education Code. In certain cases, the county superintendent of schools may grant a school district a waiver from this limitation on reserves for up to two consecutive years within a threeyear period if there are certain extraordinary fiscal circumstances. The District, which has an A.D.A. of less than 400,000, is required to maintain a reserve for economic uncertainty in an amount equal to 3% of its general fund expenditures and other financing uses. The District s original adopted budget for fiscal year projected total expenditures and other financing uses of approximately $95.2 million, 3% of which is approximately $2.8 million. The estimated maximum amount permitted under SB 858 in fiscal year , if SB 858 were in effect for such fiscal year, would be approximately $5.7 million. The District s original adopted budget for fiscal year projected a combined assigned and unassigned ending fund balance of approximately $6.6 million, which is approximately $0.9 million more than the maximum what would be permitted under SB 858 if SB 858 were in effect. The District does not expect SB 858, if approved and operative, to adversely affect its ability to pay the principal of and interest on the Series 2015 Bonds as and when due. AB As part of the State Budget, the Governor signed Assembly Bill 1469 ( AB 1469 ) which implements a new funding strategy for CalSTRS, increasing the employer contribution rate in fiscal year from 8.25% to 8.88% of covered payroll. See Retirement Benefits CalSTRS herein for more information about CalSTRS and AB The complete State Budget is available from the California Department of Finance website at The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted therein, and such information is not incorporated herein by such reference. Prohibitions on Diverting Local Revenues for State Purposes. Beginning in , the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and community A-7

46 college districts through a local Educational Revenue Augmentation Fund (ERAF) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the State Legislature proposed an amendment to the State Constitution, which the State s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as Proposition 22. The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government, including school districts, or from temporarily shifting property taxes from cities, counties and special districts to schools, as in the ERAF program. This is intended to, among other things, stabilize local government revenue sources by restricting the State s control over local property taxes. One effect of this amendment will be to deprive the State of fuel tax revenues to pay debt service on most State bonds for transportation projects, reducing the amount of State general fund resources available for other purposes, including education. Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billion in local property tax revenues in from cities, counties, and special districts to the State to offset State general fund spending for education and other programs, and included another diversion in the adopted State budget of $1.7 billion in local property tax revenues from local redevelopment Redevelopment Agencies below). Redevelopment agencies had sued the State over this latter diversion. However, the lawsuit was decided against the California Redevelopment Association on May 1, Because Proposition 22 reduces the State s authority to use or shift certain revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget in some years such as reducing State spending or increasing State taxes, and school and community college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State s general fund. Dissolution of Redevelopment Agencies. The adopted State budget for fiscal , as signed by the Governor of the State on June 30, 2011, included as trailer bills Assembly Bill No. 26 (First Extraordinary Session) ( AB1X 26 ) and Assembly Bill No. 27 (First Extraordinary Session) ( AB1X 27 ), which the Governor signed on June 29, AB1X 26 suspended most redevelopment agency activities and prohibited redevelopment agencies from incurring indebtedness, making loans or grants, or entering into contracts after June 29, AB1X 26 dissolved all redevelopment agencies in existence and designated successor agencies and oversight boards to satisfy enforceable obligations of the former redevelopment agencies and administer dissolution and wind down of the former redevelopment agencies. Certain provisions of AB1X 26 are described further below. In July of 2011, various parties filed an action before the Supreme Court of the State of California (the Court ) challenging the validity of AB1X 26 and AB1X 27 on various grounds (California Redevelopment Association v. Matosantos). On December 29, 2011, the Court rendered its decision in Matosantos upholding virtually all of AB1X 26 and invalidating AB1X 27. In its decision, the Court also modified various deadlines for the implementation of AB1X 26. The deadlines for implementation of AB1X 26 below take into account the modifications made by the Court in Matosantos. On February 1, 2012, and pursuant to Matosantos, AB1X 26 dissolved all redevelopment agencies in existence and designated successor agencies and oversight boards to satisfy enforceable obligations of the former redevelopment agencies and administer dissolution and wind down of the former redevelopment agencies. With limited exceptions, all assets, properties, contracts, leases, records, A-8

47 buildings and equipment, including cash and cash equivalents of a former redevelopment agency will be transferred to the control of its successor agency and, unless otherwise required pursuant to the terms of an enforceable obligation, distributed to various related taxing agencies pursuant to AB1X 26. AB1X 26 requires redevelopment agencies to continue to make scheduled payments on and perform obligations required under its enforceable obligations. For this purpose, AB1X 26 defines enforceable obligations to include bonds, including the required debt service, reserve set-asides, and any other payments required under the indenture or similar documents governing the issuance of outstanding bonds of the former redevelopment agency and any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy. AB1X 26 specifies that only payments included on an enforceable obligation payment schedule adopted by a redevelopment agency shall be made by a redevelopment agency until its dissolution. However, until a successor agency adopts a recognized obligation payment schedule the only payments permitted to be made are payments on enforceable obligations included on an enforceable obligation payment schedule. A successor agency may amend the enforceable obligation payment schedule at any public meeting, subject to the approval of its oversight board. Under AB1X 26, commencing February 1, 2012, property taxes that would have been allocated to each redevelopment agency if the agencies had not been dissolved will instead be deposited in a redevelopment property tax trust fund created for each former redevelopment agency by the related county auditor-controller and held and administered by the related county auditor-controller as provided in AB1X 26. AB1X 26 generally requires each county auditor-controller, on May 16, 2012 and June 1, 2012 and each January 16 and June 1 (now each January 2 and June 1 pursuant to AB 1484, as described below) thereafter, to apply amounts in a related redevelopment property tax trust fund, after deduction of the county auditor-controller s administrative costs, in the following order of priority: To pay pass-through payments to affected taxing entities in the amounts that would have been owed had the former redevelopment agency not been dissolved; provided, however, that if a successor agency determines that insufficient funds will be available to make payments on the recognized obligation payment schedule and the county auditorcontroller and State Controller verify such determination, pass-through payments that had previously been subordinated to debt service may be reduced; To the former redevelopment agency s successor agency for payments listed on the successor agency s recognized obligation payment schedule for the ensuing six-month period; To the former redevelopment agency s successor agency for payment of administrative costs; and Any remaining balance to school entities and local taxing agencies. It is possible that there will be additional legislation proposed and/or enacted to clean up various inconsistencies contained in AB1X 26 and there may be additional legislation proposed and/or enacted in the future affecting the current scheme of dissolution and winding up of redevelopment agencies currently contemplated by AB1X 26. For example, AB 1484 was signed by the Governor on June 27, 2012, to clarify and amend certain aspects of AB1X 26. AB 1484, among other things, attempts to clarify the role and requirements of successor agencies, provides successor agencies with more control over agency bond proceeds and properties previously owned by redevelopment agencies and adds other new and modified requirements and deadlines. AB 1484 also provides for a tax claw back provision, wherein the State is authorized to withhold sales and use tax revenue allocations to local successor A-9

48 agencies to offset payment of property taxes owed and not paid by such local successor agencies to other local taxing agencies. This tax claw back provision has been challenged in court by certain cities and successor agencies. The District cannot predict the outcome of such litigation and what effect, if any, it will have on the District. Additionally, no assurances can be given as to the effect of any such future proposed and/or enacted legislation on the District. Proposed State Budget. The Governor released his proposed fiscal year State budget (the Proposed State Budget ) on January 9, The Proposed State Budget proposes a multiyear plan that is balanced, while paying off budgetary debt from past years and setting aside reserves. The Proposed State Budget projects general fund revenues (after transfers to the Rainy Day Fund in the amount of $1.6 billion and $1.2 billion in fiscal year and , respectively) in the amount of $108 billion in fiscal year and $113.4 billion in fiscal year , which is an additional $2.5 billion and $1 billion in revenues in fiscal years and , respectively, as compared to projections from the State Budget. According to the Proposed State Budget, the primary reason for such additional revenues is the higher forecast for the personal income tax and corporation tax, up almost $2.3 billion and $2 billion, respectively. Of the total State general fund revenues and transfers for fiscal year , personal income taxes are expected to contribute $75.2 billion (66.3%), sales and use taxes are expected to contribute $25.2 billion (22.2%) and corporation taxes are expected to contribute $10.2 billion (9%). Under the Proposed State Budget, general fund expenditures for fiscal year are $113.3 billion (an increase of $1.5 billion from fiscal year general fund expenditures), of which $47.1 billion (41.6%) is allocated to K-12 education. The Proposed State Budget proposes to reduce budgetary debt by repaying the remaining $1 billion in deferred payments to school districts and community college districts and making the final payments on the $15 billion in Economic Recovery Bonds borrowed to cover budget deficits since 2002 and the $533 million in mandate reimbursements owed to local governments. Additionally, the Proposed State Budget increases the State s Rainy Day Fund to a total balance of $2.8 billion by the end of fiscal year The Proposed State Budget notes that the passage of the Rainy Day Budget Stabilization Fund Act (Proposition 2) in November 2014 was a significant step toward a long term balanced budget. For more information about the Rainy Day Fund, see State Budget Rainy Day Fund above. Despite the recent budgetary improvements as compared to recent years, the Proposed State Budget acknowledges that the additional tax revenues from capital gains are temporary in nature and that the additional revenues from Proposition 30 will expire in 2016 (with respect to the sales tax increase) and 2018 (with respect to the income tax increase). Further, the Proposed State Budget observes several risks that the State should plan for, including: the inevitable occurrence of another recession, ongoing fiscal challenges of the federal government, the budget s heavy dependency on the performance of the stock market in fiscal year , the high levels of State debts and liabilities, including unfunded retirement liabilities, and deferred maintenance of the State s roads and other infrastructure. As it relates to K-12 education, the Proposed State Budget provides Proposition 98 funding of $65.7 billion for fiscal year , as well as an additional $2.3 billion and $400 million for fiscal years and , respectively. This translates to K-12 Proposition 98 per-pupil expenditures of $9,361 in fiscal year and $9,667 in fiscal year Such amounts are significant increases when compared to recent years, such as the $7,008 provided in fiscal year Total per-pupil expenditures from all sources are projected to be $13,223 in fiscal year and $13,462 in fiscal year , including funds provided for prior year settle-up obligations. The Proposed State Budget notes that attendance in public schools increased in fiscal years and A-10

49 , however, it is projected to decline slightly during For fiscal year , K-12 A.D.A. is estimated to be 6,000,733, an increase of 8,166 from fiscal year K-12 A.D.A. is estimated to drop by 585 in fiscal year to 6,000,148. The Proposed State Budget provides a third-year investment of $4 billion in the Local Control Funding Formula, which is expected to eliminate more than 32% of the remaining funding gap between actual funding and the target level of funding. With respect to K-12 school facilities, the Proposed State Budget acknowledges the ongoing discussion of the State s role, if any, in future school facilities funding and notes several problems with the current program that should be addressed in any future plan. While such discussion is ongoing, the Proposed State Budget dedicates $273.4 million in one-time Proposition 98 general fund resources to the Emergency Repair Program to fund all remaining Emergency Repair Program projects. The Proposed State Budget also includes reforms and investments relating to adult education, the implementation of Common Core standards, and energy efficiency (Proposition 39). Certain workload adjustments for K-12 programs included in the Proposed State Budget include the following: K-12 Deferrals. An increase of almost $900 million in one time Proposition 98 general funds in fiscal year to eliminate all remaining outstanding deferral debt for K 12. Inter year deferrals for K 12 had reached a high of $9.5 billion in fiscal year Emergency Repair Program. An increase of $273.4 million in one time Proposition 98 general fund resources for the Emergency Repair Program. This funding will retire the state s facilities funding obligation under the terms of an existing lawsuit settlement agreement. School District Local Control Funding Formula. Additional growth of approximately $4 billion in Proposition 98 general funds for school districts and charter schools in , an increase of 8.7% from fiscal year County Offices of Education Local Control Funding Formula. An increase of $109,000 Proposition 98 general funds to support a cost of living adjustment for those county offices of education at their target funding level under the Local Control Funding Formula. Charter Schools. An increase of $59.5 million Proposition 98 general funds to support projected charter school A.D.A. growth. Special Education. An increase of $15.3 million Proposition 98 general funds to reflect a projected increase in Special Education A.D.A. Cost-of-Living Adjustment Increases. An increase of $71.1 million to support a 1.58% cost of living adjustment for categorical programs that remain outside of the Local Control Funding Formula, including Special Education, Child Nutrition, Foster Youth, Preschool, American Indian Education Centers, and the American Indian Early Childhood Education Program. Cost of living adjustments for school districts and charters schools are provided within the increases for school district Local Control Funding Formula implementation noted above. A-11

50 Local Property Tax Adjustments. A decrease of $11.4 million Proposition 98 general funds for the school district and county office of education in as a result of higher offsetting property tax revenues. A decrease of $1.7 billion in Proposition 98 general funds for school districts and county offices of education in fiscal year as a result of increased offsetting local property tax revenues. A.D.A. An increase of $197.6 million in fiscal year for school districts and county offices of education as a result of an increase in projected A.D.A. from the State Budget, and a decrease of $6.9 million in fiscal year for school districts and county offices of education as a result of projected decline in A.D.A. for fiscal year Full Day State Preschool Slots. An increase of $14.8 million Proposition 98 general funds and $18.8 million non Proposition 98 general funds to support 4,000 State Preschool slots with full day wraparound care. These slots were established in the State Budget as of June 15, 2015 (for 15 days in fiscal year ) and these increases reflect the difference in full year cost for these slots in fiscal year The complete Proposed State Budget is available from the California Department of Finance website at The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted therein, and such information is not incorporated herein by such reference. LAO Overview of Proposed State Budget. The Legislative Analyst s Office ( LAO ), a nonpartisan State office which provides fiscal and policy information and advice to the State Legislature, released its report on the Proposed State Budget entitled The Budget: Overview of the Governor s Budget on January 13, 2015 (the Proposed Budget Overview ), in which the LAO commends the State for preserving budgetary balance. The LAO notes that such balance has been facilitated by the stock market, increased revenues from personal and corporate income taxes, and the Governor s reluctance to propose significant new non-proposition 98 spending commitments. Further, the LAO is generally supportive of the Governor s priorities and the Proposed State Budget s emphasis on debt repayment, which the LAO expects to place the State on even stronger fiscal footing. The LAO also notes that fiscal year revenues could be significantly higher than the projections in the Proposed State Budget. Nevertheless, what might happen to State revenues thereafter is uncertain and the LAO warns that budget vulnerability remains and that cautious budgetary decision making is necessary. For example, the LAO suggests that weak growth in an upcoming year could make it difficult to sustain the State s spending level, particularly, the higher level of school spending, and therefore, larger reserves would be desirable. With respect to the Proposition 98 budget plan in the Proposed State Budget, the LAO states that the Proposition 98 budget plan provides a reasonable mix of programmatic funding increases and pay downs of outstanding obligations. The LAO commends the proposal to eliminate K-14 budgetary deferrals, and recognizes that the use of new funding for one-time purposes helps the State minimize any future disruption in school funding as a result of revenue volatility or an economic slowdown. The LAO, however, observes that the Proposition 98 minimum guarantee in fiscal years and will be sensitive to changes in general fund revenues and could experience large swings over the coming months. Thus, the LAO cautions against committing all available Proposition 98 funds to ongoing purposes, as a sustained economic slowdown could force the State to cut programs and potentially backpedal in its implementation of the Local Control Funding Formula. A-12

51 The Budget Overview is available on the LAO website at The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted therein, and such information is not incorporated herein by such reference. Changes in State Budget. The final fiscal year State budget, which requires approval by a majority vote of each house of the State Legislature, may differ substantially from the Governor s budget proposal. Accordingly, the District cannot provide any assurances that there will not be any changes in the final fiscal year State budget from the Proposed State Budget. Additionally, the District cannot predict the impact that the final fiscal year State Budget, or subsequent budgets, will have on its finances and operations. The final fiscal year State budget may be affected by national and State economic conditions and other factors which the District cannot predict. Future Budgets and Budgetary Actions. The District cannot predict what future actions will be taken by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors beyond the District s ability to predict or control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State s ability to fund schools during future fiscal years. Certain factors, like an economic recession, could result in State budget shortfalls in any fiscal year and could have a material adverse financial impact on the District. Allocation of State Funding to School Districts; Local Control Funding Formula Prior to the implementation of the Local Control Funding Formula in fiscal year , under 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 district s student enrollment measured in units of average daily attendance. The base revenue limit was calculated from the 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 is 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; ultimately, a school district whose local property tax revenues exceeded its base revenue limit was entitled to receive no State equalization aid, and received 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 districts were known as basic aid districts, which are now referred to as community funded districts. School districts that received some equalization aid were commonly referred to as revenue limit districts, which are now referred to as LCFF districts. The District is an LCFF district. Beginning in fiscal year , the LCFF replaced the revenue limit funding system and most categorical programs, and distributes combined resources to school districts through a base revenue limit funding grant ( Base Grant ) per unit of A.D.A. with additional supplemental funding allocated to local educational agencies based on their proportion of English language learners, students from low-income families and foster youth. The LCFF has an eight year implementation program to incrementally close the gap between actual funding and the target level of funding, as described below. The LCFF includes the following components: A-13

52 A Base Grant for each local education agency, equivalent to $7,643 per unit of A.D.A. in fiscal year Such Base Grant per unit of A.D.A., adjusted by grade span variation and to be adjusted annually for cost-of-living, is as follows: $6,845 for grades K-3, $6,947 for grades 4-6, $7,154 for grades 7-8 and $8,289 for grades 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 grades A 20% supplemental grant for the unduplicated number of English language learners, students from low-income families and foster youth to reflect increased costs associated with educating those students. An additional concentration grant of up to 50% of a local education agency s Base Grant, based on the number of English language learners, students from low-income families and foster youth served by the local education agency that comprise more than 55% of enrollment. An Economic Recovery Target (the ERT ) that is intended to ensure that almost every local education agency receives at least their pre-recession funding level (i.e., the fiscal year revenue limit per unit of A.D.A.), adjusted for inflation, at full implementation of the LCFF. Upon full implementation, local education agencies would receive the greater of the Base Grant or the ERT. Of the projected $25 billion in new 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 new formula, for basic aid districts (now, community funded districts ), local property tax revenues would be used to offset up to the entire allocation under the new formula. However, community funded districts would continue to receive the same level of State aid as allocated in fiscal year Local Control Accountability Plans. A feature of the LCFF is a system of support and intervention for local educational agencies. School districts, county offices of education and charter schools are required to develop, implement and annually update a three-year local control and accountability plan ( LCAP ). Each LCAP must be developed with input from teachers, parents and the community, and should describe local goals as they pertain to eight areas identified as state priorities, including student achievement, parent engagement and school climate, as well as detail a course of action to attain those goals. Moreover, the LCAPs must be designed to align with the district s budget to ensure adequate funding is allocated for the planned actions. Each school district must submit its LCAP annually on or before July 1 for approval by its county superintendent. The county superintendent then has until August 15 to seek clarification regarding the contents of the LCAP, and the school district must respond in writing. The county superintendent can submit recommendations for amending the LCAP, and such recommendations must be considered, but are not mandatory. A school district s LCAP must be approved by its county superintendent by October 8 of each year if such superintendent finds (i) the LCAP adheres to the State template, and (ii) the district s budgeted expenditures are sufficient to implement the strategies outlined in the LCAP. A-14

53 Performance evaluations are to be conducted to assess progress toward goals and guide future actions. County superintendents are expected to review and provide support to the school districts under their jurisdiction, while the State Superintendent of Public Instruction performs a corresponding role for county offices of education. The California Collaborative for Education Excellence (the Collaborative ), a newly established body of educational specialists, was created to advise and assist local education agencies in achieving the goals identified in their LCAPs. For local education agencies that continue to struggle in meeting their goals, and when the Collaborative indicates that additional intervention is needed, the State Superintendent of Public Instruction would have authority to make changes to a local education agency s LCAP. Attendance and Base Revenue Limit. The following table sets forth the District s actual A.D.A., enrollment and base revenue limit per unit of A.D.A. for fiscal years through for grades kindergarten through grade 12. The A.D.A. and enrollment numbers reflected in the following table include special education but exclude adult education and preschool attendance. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Average Daily Attendance, Enrollment And Base Revenue Limit Fiscal Years Through Fiscal Year Average Daily Attendance (1) Enrollment (2) Base Revenue Limit Per Unit of Average Daily Attendance (3)(4) 10,599 11,077 $6, (5) 10,598 11,290 6, (6) 10,689 11,240 6,699 (1) A.D.A. for the second period of attendance, typically in mid-april of each school year. (2) Reflects enrollment as of October report submitted to the California Basic Educational Data System ( CBEDS ) in each school year. (3) The District had a % base revenue limit deficit factor and a negative 0.39% cost of living adjustment in fiscal year , which resulted in a funded base revenue limit of $5,221. (4) On November 18, 2010, the District approved a new independent charter school, Gilroy Prep School, which opened on July 1, Gilroy Prep School operates grades K-3 and current enrollment is 240 students. Students attending Gilroy Prop School are not included in the District s A.D.A. figures. (5) The District had a % base revenue limit deficit factor and a 0.39% cost of living adjustment in fiscal year , which resulted in a funded base revenue limit of $5,167. (6) The District had a % base revenue limit deficit factor and a 3.243% cost of living adjustment in fiscal year , which resulted in a funded base revenue limit of $5,224. Source: Gilroy Unified School District. A-15

54 Attendance and LCFF. The following table sets forth the District s actual and budgeted A.D.A., enrollment (including percentage of students who are English language learners, from low-income families and/or foster youth (collectively, EL/LI Students ), and targeted Base Grant per unit of A.D.A. for fiscal years and , respectively. The A.D.A. and enrollment numbers reflected in the following table include special education but exclude adult education and preschool attendance. GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Average Daily Attendance, Enrollment And Targeted Base Grant Fiscal Years Through Fiscal Year TK A.D.A./Base Grant Enrollment (5) Total A.D.A. Total Enrollment Unduplicated Percent of EL/LI Students A.D.A. (2) : 3,313 2,450 1,665 3,484 10,912 11,485 95% Targeted Base Grant (3) : $7,675 $7,056 $7,266 $8, (1) A.D.A. (2) : 3,300 2,460 1,670 3,490 10,920 11,495 95% Targeted Base Grant (3)(4) : $7,740 $7,116 $7,328 $8, (1) Figures are projections. (2) A.D.A. for the second period of attendance, typically in mid-april of each school year. (3) Such amounts represent the targeted amount of Base Grant per unit of A.D.A., and do not include any supplemental and concentration grants under the LCFF. Such amounts are not expected to be fully funded in fiscal years and (4) Targeted fiscal year Base Grant amounts reflect a 0.85% cost of living adjustment from targeted fiscal year Base Grant amounts. (5) Reflects enrollment as of October report submitted to the CBEDS in each school year. 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 fiscal year total enrollment. For fiscal year , the percentage of unduplicated EL/LI Students enrollment will be based on the two-year average of EL/LI Students 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 school district s EL/LI Students enrollment for the thencurrent fiscal year and the two immediately preceding fiscal years. Source: Gilroy Unified School District. The District received approximately $73.2 million in aggregate revenues reported under LCFF sources in fiscal year , and projects to receive approximately $83.0 million in aggregate revenues under the LCFF in fiscal year (or approximately 84.3% of its general fund revenues in fiscal year ). Such amount includes supplemental grants and concentration grants budgeted to be approximately $4.6 million, collectively, in fiscal year Effect of Changes in Enrollment. Changes in local property tax income and A.D.A. affect LCFF districts and community funded districts differently. In an LCFF district, increasing enrollment increases the total amount distributed under the LCFF and thus generally increases a district s entitlement to State equalization aid, while increases in property taxes do nothing to increase district revenues, but only offset the State funding requirement of equalization aid. Operating costs increase disproportionately slowly to enrollment growth; and only at the point where additional teachers and classroom facilities are needed. Declining enrollment has the reverse effect on LCFF districts, generally resulting in a loss of State equalization aid, while operating costs decrease slowly and only when, for example, the district decides to lay off teachers or close schools. A-16

55 In community funded districts, the opposite is generally true: increasing enrollment increases the amount to which the district would be entitled were it an LCFF district, but since all LCFF income (and more) is already generated by local property taxes, there is no increase in State income, other than the $120 per student in basic aid, as described above. Meanwhile, as new students impose increased operating costs, property tax income is stretched further. Declining enrollment does not reduce property tax income, and has a negligible impact on State aid, but eventually reduces operating costs, and thus can be financially beneficial to a community funded district. Local Sources of Education Funding The principal component of local revenues is a school district s property tax revenues, i.e., each district s share of the local 1% property tax, received pursuant to Sections 75 and following and Sections 95 and following of the California Revenue and Taxation Code. California Education Code Section 42238(h) itemizes the local revenues that are counted towards the amount allocated under the LCFF (and formerly, the base revenue limit) before calculating how much the State must provide in State aid. The more local property taxes a district receives, the less State aid it is entitled to receive. Prior to the implementation of the LCFF, a school district whose local property tax revenues exceeded its base revenue limit was entitled to receive no State aid, and received 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 districts were known as basic aid districts. School districts that received some State aid were commonly referred to as revenue limit districts. The District was a revenue limit district and is now referred to as an LCFF district. Under the LCFF, local property tax revenues are used to offset up to the entire State aid collection under the new formula; however, community funded districts would continue to receive the same level of State aid as allotted in fiscal year See Control Funding Formula herein for more information about the LCFF. Local property tax revenues account for approximately 50.6% of the District s aggregate revenues allocated under the LCFF, and are projected to be $42.0 million, or 42.7% of total general fund revenues in fiscal year For a discussion of legal limitations on the ability of the District to raise revenues through local property taxes, see CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS below. Other District Revenues Federal Revenues. The federal government provides funding for several District programs, including special education programs. Federal revenues, most of which are restricted, comprise approximately 7.6% (or approximately $7.51 million) of the District s general fund projected revenues for fiscal year Other State Revenues. In addition to State apportionments for Proposition 98 funding through the Local Control Funding Formula, the District receives other State revenues which comprise approximately 4.4% (or approximately $4.30 million) of the District s general fund budgeted revenues for fiscal year A significant portion of such other State revenues are amounts the District expects to receive from State lottery funds, which may not be used for non-instructional purposes, such as the acquisition of real property, the construction of facilities, or the financing of research. School districts receive lottery funds proportional to their total A.D.A. The District s State lottery revenue is projected at approximately $1.77 million for fiscal year A-17

56 Other Local Revenues. In addition to ad valorem property taxes, the District receives additional local revenues from items such as interest earnings and other local sources. Other local revenues comprise approximately 3.7% (or approximately $3.63 million) of the District s general fund budgeted revenues for fiscal year Significant Accounting Policies and Audited Financial Reports The State Department of Education imposes by law uniform financial reporting and budgeting requirements for K-12 school districts. Financial transactions are accounted for in accordance with the Department of Education s California School Accounting Manual. This manual, according to Section of the Education Code, is to be followed by all California school districts, including the District. Significant accounting policies followed by the District are explained in Note 1 to the District s audited financial statements for the fiscal year ended June 30, 2014, which are included as Appendix B. Independently audited financial reports are prepared annually in conformity with generally accepted accounting principles for educational institutions. The annual audit report is generally available about six months after the June 30 close of each fiscal year. The following table contains data abstracted from financial statements prepared by the District s former independent auditor, Vavrinek, Trine, Day & Co. LLP, Certified Public Accountants & Consultants, Palo Alto, California for fiscal years through , and by the District s current independent auditor, James Marta & Company LLP, Certified Public Accountants, Sacramento, California for fiscal years through The change in auditors after fiscal year resulted in the District presenting certain financial information differently in its audited financial statements. Thus, the information presented in the tables below for fiscal years through and fiscal years through are categorized differently. Although historical total revenue and expenditure figures are comparably consistent, the categorical breakdown of revenues and expenditures is different for the revised accounting formats and is not directly comparable. Vavrinek, Trine, Day & Co. LLP and James Marta & Company LLP have not been not been requested to consent to the use or to the inclusion of their respective reports in this Official Statement, and they have neither audited nor reviewed this Official Statement. The District is required by law to adopt its audited financial statements after a public meeting to be conducted no later than January 31 following the close of each fiscal year. The following table on page A-19 shows the statement of revenues, expenditures and changes in fund balances for the District s general fund for the fiscal years through The table on page A-20 shows the statement of revenues, expenditures and changes in fund balances for the District s general fund for the fiscal years and A-18

57 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Statement of General Fund Revenues, Expenditures and Changes in Fund Balance Fiscal Years through Fiscal Year Fiscal Year Fiscal Year REVENUES Revenue limit sources $53,988,794 $57,672,055 $58,075,882 Federal sources 8,235,056 8,821,729 6,326,322 Other State sources 15,830,378 15,307,083 15,568,750 Other local sources 5,877,332 5,742,354 4,961,432 Total Revenues 83,931,560 87,543,221 84,932,386 EXPENDITURES Current Instruction 53,766,143 54,374,045 52,587,213 Instruction related activities: Supervision of instruction 4,473,979 3,691,926 3,153,221 Instructional library, media, and technology 439, , ,275 School site administration 5,663,136 5,720,123 5,456,747 Pupil services: Home-to-school transportation 2,416,608 1,981,155 2,383,029 Food services All other pupil services 5,380,610 5,074,286 5,091,304 General administration: Data processing 774, , ,655 All other general administration 2,844,483 3,267,379 3,383,902 Plant services 7,820,556 7,743,663 8,193,491 Facility acquisition and construction 139,468 21, ,510 Ancillary services 771, , ,551 Community services 175, , ,360 Other outgo 2,724,768 1,710,078 1,638,971 Enterprise services 456, , ,024 Debt service Principal 302, , ,796 Interest and other 311, , ,625 Total Expenditures 88,461,480 86,609,422 84,817,348 Excess (Deficiency) of Revenues Over Expenditures (4,529,920) 933, ,038 OTHER FINANCING SOURCES (USES) Transfers In 338, , ,517 Other sources - 56,452 - Transfers out Net Financing Sources (Uses) 338, , ,517 NET CHANGE IN FUND BALANCES (4,191,021) 1,329, ,555 Fund Balance Beginning 10,719,974 6,528,953 7,858,904 Fund Balance Ending $6,528,953 $7,858,904 $8,312,459 Source: District Audited Financial Reports for fiscal years and A-19

58 GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Statement of General Fund Revenues, Expenditures and Changes in Fund Balance Fiscal Years and Fiscal Year Fiscal Year REVENUES LCFF/Revenue limit sources: State apportionment $17,928,945 $31,516,252 Local sources 41,901,881 41,691,222 Total revenue limit 59,830,826 73,207,474 Federal revenue 6,023,883 6,367,773 Other state revenues 13,709,534 7,454,890 Other local revenues 4,560,799 4,238,430 Total revenues 84,125,042 91,268,567 EXPENDITURES Certificated salaries 41,760,514 45,282,985 Classified salaries 12,562,133 13,680,082 Employee benefits 14,734,319 14,308,778 Books and supplies 2,210,867 3,279,003 Services and other operating expenditures 9,383,060 11,593,326 Capital outlay 31, ,471 Other outgo 1,677,693 2,515,304 Debt service expenditures - - Total Expenditures 82,360,375 91,429,949 Excess of revenues over expenditures 1,764,667 (161,382) OTHER FINANCING SOURCES (USES) Operating transfers in 239, ,410 Operating transfers out - (739,521) Other sources (166,936) - Other uses - - Other financing sources (uses) 72,462 (440,111) Net change in fund balances 1,837,129 (601,493) Fund balances, July 1, as originally reported 8,312,459 9,472,448 Prior period audit adjustments (677,140) (1) - Beginning Balance, July 1, as restated 7,635,319 - Fund balances, June 30 $9,472,448 $8,870,955 (1) Reflects a correction of revenues from fiscal year Source: District Audited Financial Reports for fiscal years and A-20

59 The following table shows the general fund balance sheet of the District for fiscal years through GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Summary of General Fund Balance Sheet Fiscal Years Through Fiscal Year Fiscal Year Fiscal Year ASSETS Deposits and investments $1,834,655 $177,500 $3,783,244 Receivables 7,031,065 12,629,679 12,728,390 Due from other funds 24,405 68, ,922 Prepaid expenses Stores inventories 80,943 57,731 86,385 Total Assets $8,971,068 $12,933,644 $16,881,941 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $1,568,537 $2,467,983 $5,876,014 Due to other funds 17,435 1,700,312 2,121,795 Deferred revenue 856, , ,673 Total Liabilities 2,442,115 5,074,740 8,569,482 Fund Balances (1) : Nonspendable - 82, ,385 Restricted - 389, ,221 Committed Assigned - 323, ,607 Unassigned - 7,063,236 7,329,246 Reserved for: Stores inventories Restricted Programs 559, Other reservations 105, Unreserved: - - Designated 2,995, Undesignated 2,867, Total Fund Balance 6,528,953 7,858,904 8,312,459 Total Liabilities and Fund Balances $8,971,068 $12,933,644 $16,881,941 (1) GASB 54, which became effective for fiscal year , caused the District to change its Fund Balance classifications from Reserved and Designated to Nonspendable, Restricted, Committed, Assigned and Unassigned. Source: Gilroy Unified School District Audited Financial Reports for fiscal years through A-21

60 The following table shows the general fund balance sheet of the District for fiscal years and GILROY UNIFIED SCHOOL DISTRICT (County of Santa Clara, California) Summary of General Fund Balance Sheet Fiscal Years and Fiscal Year Fiscal Year ASSETS Cash and cash equivalents $5,540,251 $3,229,161 Accounts receivable 7,110,688 10,425,172 Other assets 80,094 48,550 Due from other funds 466, ,756 Total assets $13,197,929 $14,215,639 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $3,058,667 $4,311,993 Due to other funds 67, ,137 Unearned revenue 598, ,554 Total liabilities 3,725,481 5,344,684 Fund balances Nonspendable 105, ,866 Restricted 1,586,932 2,915,450 Committed - - Assigned - 462,832 Unassigned 7,780,422 5,311,807 Total fund balances 9,472,448 8,870,955 Total liabilities and fund balances $13,197,929 $14,215,639 Source: Gilroy Unified School District Audited Financial Reports for fiscal years and A-22

61 District Budget Process and County Review State law requires school districts to adopt a balanced budget in each fiscal year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. Under current law, a school district governing board must adopt and file with the county superintendent of schools a tentative budget by July 1 in each fiscal year. The District is under the jurisdiction of the County of Santa Clara Superintendent of Schools. The county superintendent must review and approve, conditionally approve or disapprove the budget no later than August 15. The county superintendent is required to examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Trustees and identify technical corrections necessary to bring the budget into compliance with the established standards. If the budget is disapproved, it is returned to the District with recommendations for revision. The District is then required to revise the budget, hold a public hearing thereon, adopt the revised budget, and file it with the county superintendent no later than September 8. Pursuant to State law, the county superintendent has available various remedies by which to impose and enforce a budget that complies with State criteria, depending on the circumstances, if a budget is disapproved. After approval of an adopted budget, the school district s administration may submit budget revisions for governing board approval. Subsequent to approval, the county superintendent will monitor each district under its jurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis if the district can meet its current or subsequent year financial obligations. If the county superintendent determines that a district cannot meet its current or subsequent year s obligations, the county superintendent will notify the district s governing board of the determination and may then do either or both of the following: (a) assign a fiscal advisor to enable the district to meet those obligations, or (b) if a study and recommendations are made and a district fails to take appropriate action to meet its financial obligations, the county superintendent will so notify the State Superintendent of Public Instruction, and then may do any or all of the following for the remainder of the fiscal year: (i) request additional information regarding the district s budget and operations; (ii) develop and impose, after also consulting with the district s governing board, revisions to the budget that will enable the district to meet its financial obligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the county superintendent may not abrogate any provision of a collective bargaining agreement that was entered into prior to the date upon which the county superintendent assumed authority. A State law adopted in 1991 (known as A.B ) imposed additional financial reporting requirements on school districts, and established guidelines for emergency State aid apportionments. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the county superintendent (on December 15, for the period ended October 31, and by mid-march for the period ended January 31) as to its ability to meet its financial obligations for the remainder of the thencurrent fiscal year and, based on current forecasts, for the subsequent fiscal year. The county superintendent 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 is deemed unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years. A school district that receives a qualified or negative certification may not issue tax and revenue anticipation notes or certificates of participation without approval by the county superintendent in that fiscal year or in the next succeeding year. A-23

62 In the last five fiscal years, the District received a qualified certification in connection with its first interim report for fiscal year , and in connection with its first and second interim reports for fiscal years , and The District received a positive certification in connection with its most recent interim report, the first interim report for fiscal year The following table summarizes the District s adopted general fund budgets for fiscal years through , unaudited actuals for fiscal years and , and first interim report for fiscal year GILROY UNIFIED SCHOOL DISTRICT General Fund Budgets for Fiscal Years through , Unaudited Actuals for Fiscal Years and and First Interim Report for Fiscal Year Original Adopted Budget Unaudited Actuals (1) Original Adopted Budget Unaudited Actuals (1) Original Adopted Budget First Interim Report (2) REVENUES Revenue Limit Sources/LCFF Sources $59,054, $59,830, $60,611, $73,207, $82,224, $83,046, Federal Revenue 6,080, ,023, ,639, ,367, ,267, ,512, Other State Revenue 12,761, ,709, ,823, ,454, ,050, ,304, Other Local Revenue 4,299, ,560, ,090, ,238, ,357, ,633, TOTAL REVENUES 82,197, ,125, ,165, ,268, ,900, ,497, EXPENDITURES Certificated Salaries 39,123, ,760, ,537, ,282, ,929, ,990, Classified Salaries 12,099, ,562, ,222, ,680, ,736, ,704, Employee Benefits 14,701, ,734, ,717, ,308, ,469, ,499, Books and Supplies 3,120, ,210, ,681, ,172, ,317, ,801, Services, Other Operating Expenses 10,535, ,714, ,557, ,593, ,653, ,223, Capital Outlay - 31, , , , Other Outgo (excluding Direct Support/Indirect Costs) 1,743, ,677, ,716, ,515, ,491, ,503, Transfers of Direct Support/Indirect Costs (225,294.00) (239,398.47) (343,375.06) (299,409.50) (317,928.00) (299,841.00) TOTAL EXPENDITURES 81,097, ,452, ,089, ,023, ,198, ,891, EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 1,099, ,672, (924,078.14) 244, , (1,394,180.48) OTHER FINANCING SOURCES (USES) Inter-fund Transfers In 138, Inter-fund Transfers Out , OtherSources (Uses) Contributions TOTAL, OTHER FINANCING SOURCES (USES) 138, (739,520.63) - - NET INCREASE (DECREASE) IN FUND BALANCE 1,237, ,672, (924,078.14) (494,569.70) 701, (1,394,180.48) BEGINNING BALANCE, as of July 1 6,441, ,287, ,818, ,818, ,977, ,977, Audit Adjustments - 858, (345,978.17) - - AsofJuly1 Audited 6,441, ,145, ,818, ,472, ,977, ,977, Other Restatements Adjusted beginning Balance 6,441, ,145, ,818, ,472, ,977, ,977, ENDING BALANCE $7,679, $9,818, $8,894, $8,977, $9,679, $7,583, (1) Certain amounts may not match the District s audited financial statements due to audit adjustments related to the calculation of accruals. (2) Figures are projections. Source: Gilroy Unified School District Adopted general fund budgets for fiscal years , and ; unaudited actuals for fiscal years and ; and first interim report for fiscal year A-24

63 District Debt Structure Long-Term Debt Summary. A schedule of the District s long-term obligations for the year ended June 30, 2014, consisted of the following: Long-Term Debt Balance July 1, 2013 Additions Deductions Balance June 30, 2014 Due in One Year General obligation bonds (1) $161,199,998 $1,678,167 $2,290,000 $160,588,165 $1,250,00 Bond anticipation notes (2) 15,577, ,577,715 15,385,000 Certificates of participation 31,425, ,000 30,850, ,000 Accumulated vacation net 105,645-26,555 79,090 - Capital leases 110,006-84,934 25,072 25,072 Early retirement incentive 899,403 1,063, ,808 1,494, ,808 Subtotal 209,317,767 2,741,182 3,444, ,614,652 17,727,880 Unamortized general obligation bond premium 10,840, ,549 10,367,538 - Unamortized certificates of participation premium 613,288-25, ,734 - Unamortized defeasance costs Bond Anticipation Note (192,715) - (64,238) (128,477) - Unamortized Loss on Refunding (7,481,250) (427,500) - (7,908,750) - Total long term obligation $213,097,177 $2,313,682 $3,878,162 $211,532,697 $17,727,880 (1) Includes accreted interest. Amounts do not reflect the planned refunding of the Prior Bonds with the proceeds of the Series 2015 Refunding Bonds. See THE SERIES 2015 BONDS Authority for Issuance; Plan of Finance in the forepart of this Official Statement. (2) The Series 2011 Notes are expected to be paid with proceeds of the Series 2015 New Money Bonds. See THE SERIES 2015 BONDS Authority for Issuance; Plan of Finance in the forepart of this Official Statement. Source: Gilroy Unified School District Audit Financial Report for fiscal year General Obligation Bonds; Bond Anticipation Notes. In addition to each series of the Series 2015 Bonds, the District has outstanding four additional series of general obligation bonds, each of which is secured by ad valorem taxes upon all property subject to taxation by the District on a parity with the Series 2015 Bonds. The District received authorization at an election held on November 5, 2002, to issue general obligation bonds of the District in an aggregate principal amount not to exceed $69,000,000 to finance specific construction and modernization projects (the 2002 District Bond Authorization ). On April 16, 2003, the Gilroy Unified School District General Obligation Bonds, Election of 2002, Series 2003 (the Series 2003 Bonds ), in an aggregate principal amount of $50,000,000, were issued as the first series of bonds to be issued under the 2002 District Bond Authorization. On August 25, 2005, the Gilroy Unified School District General Obligation Bonds, Election of 2002, Series 2005 (the Series 2005 Bonds ), in an aggregate principal amount of $19,000,000, were issued as the second and final series of bonds to be issued under the 2002 District Bond Authorization. At an election held on November 4, 2008, the District received authorization to issue general obligation bonds of the District in an aggregate principal amount not to exceed $150,000,000 to finance specified projects (the 2008 District Bond Authorization ). On March 12, 2009, the Gilroy Unified School District 2009 General Obligation Bonds (Election of 2008, Series A) (the Series 2009 Bonds ), in an aggregate initial principal amount of $49,986,615, were issued as the first series of bonds to be issued under the 2008 District Bond Authorization. On April 15, 2010, the Series 2010 Notes, in an aggregate initial principal amount of $44,996,556.20, were issued in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. The Series 2010 Notes mature on April 1, On June 23, 2011, the Gilroy Unified School District 2011 General Obligation Bond A-25

64 Anticipation Notes (Measure P) (Qualified School Construction Bonds Federally Taxable) (the Series 2011 Notes ), in an aggregate principal amount of $15,385,000, were issued, in part, to defease and renew a portion of the Series 2010 Notes in anticipation of an additional series of bonds to be issued under the 2008 District Bond Authorization. The Series 2011 Notes mature on April 1, On March 13, 2013, the Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2013 (the Series 2013 New Money Bonds ), in an aggregate principal amount of $40,670,000, were issued by the District as the second series of bonds to be issued under the 2008 District Bond Authorization and to pay the remaining outstanding Series 2013 Notes on their maturity date. On March 13, 2013, the Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2013 (the Series 2013 Refunding Bonds ), in an aggregate principal amount of $70,000,000, were issued by the District to refund on an advance basis a portion of the Series 2003 Bonds, a portion of the Series 2005 Bonds, and a portion of the Series 2009 Bonds to their maturity date. The following table summarizes the District s bonds that were outstanding as of June 30, 2014, not including the Series 2005 Bonds (the final payment for which is due on August 1, 2015) and the Series 2015 Bonds: Bond Issue Date Maturity Date Original Issue Balance June 30, 2013 Issued or Accretion Redeemed Balance June 30, 2014 Series 2009 (1) 3/12/2009 8/1/2032 $49,986,615 $50,529,998 $488,167 $1,100,000 $49,918,165 Series 2013 (1) 3/13/2013 8/1/ ,670, ,670, ,670,000 $160,656,615 $161,199,998 $488,167 $1,100,000 $160,588,165 Premium GO Bond $10,367,538 $170,955,703 (1) Includes accreted interest. Amounts do not reflect the planned refunding of the Prior Bonds with the proceeds of the District s Series 2015 Refunding Bonds. See PLAN OF FINANCE in the front part of this Official Statement for more information. (2) Includes both the Series 2013 New Money Bonds and the Series 2013 Refunding Bonds. Source: Gilroy Unified School District. See also THE SERIES 2015 BONDS Outstanding Bonds and in the front portion of this Official Statement for the annual debt service requirements for these bonds and the Series 2005 Bonds. Certificates of Participation. At an election held in the District on June 4, 1974, voters of the District approved the levy of an ad valorem tax rate override of 25.5 per $100 of assessed valuation, authorized to be used to pay rent under a lease for certain school facilities. On November 3, 1992, voters reauthorized the use of the tax for additional projects and reduced the rate to 7.05 per $100 of assessed valuation (under a proposition known as Measure J ), which may be levied as needed through fiscal year The series of certificates of participation issued in 2001, 2004 and 2007 described below represent a general fund obligation of the District; however, the proceeds of the tax were lawfully available and used and sufficient to pay all such obligations. In June 2001, the District caused certificates of participation to be executed and delivered in the principal amount of $31,250,000 with interest rates ranging from 2.90% to 5.50% per year, in order to refund an outstanding issue of certificates of participation and provide new construction funds for Measure J capital projects. On September 1, 2011 the outstanding principal balance of $7,210,000 was paid off. In March 2004, the District caused certificates of participation to be executed and delivered in the principal amount of $8,550,000, maturing in 2013, with interest rates ranging from 2.50% to 3.0% per A-26

65 year, in order to provide construction funds for Measure J capital projects. On September 1, 2011 the outstanding principal balance of $1,925,000 was paid off. In July 2007, the District caused certificates of participation to be executed and delivered in the principal amount of $5,725,000 with interest rates ranging from 4.50% to 5.00% per year, maturing on September 1, 2012, in order to provide construction funds for Measure J capital projects. The final payment with respect to such certificates of participation was made on September 1, 2012, and the principal balance has been paid off. In May 2008, the District caused certificates of participation to be executed and delivered in the principal amount of $33,000,000 with interest rates ranging from 3.75% to 5.25% per year, payable through April 1, 2039, in order to provide construction funds for Christopher High School. These certificates of participation represent a general fund obligation of the District that is not payable with Measure J tax proceeds. The aggregate annual repayment obligation for such certificates of participation, as of June 30, 2014, is as follows: Year Ending June 30 Principal Interest Total 2015 $600,000 $1,563,000 2,163, ,000 1,533,000 2,158, ,000 1,501,750 2,151, ,000 1,469,250 2,144, ,000 1,435,500 2,160, ,100,000 6,641,250 10,741, ,255,000 5,482,500 10,737, ,720,000 4,005,750 10,725, ,500,000 2,099,688 13,599,688 Total $30,850,000 $25,731,688 $56,581,688 Source: Gilroy Unified School District Audit Financial Report for fiscal year Capitalized Lease Obligations. The District leases certain vehicles and equipment under leases with option to purchase. Rental payments under such leases are a general fund obligation of the District. The District s liabilities on such capital leases are summarized as follows: Buses Copier Total Balance, July 1, 2013 $114,645 $1,943 $116,588 Payments 88,306 1,943 90,249 Balance, June 30, 2014 $26,339 $ - $26,339 Source: Gilroy Unified School District Audit Financial Report for fiscal year Such capital leases have minimum lease payments as follows: Year Ending June 30, Lease Payment 2015 $26,339 Less: Amount Representing Interest 1,267 Present Value of Minimum Lease Payments $25,072 Source: Gilroy Unified School District Audit Financial Report for fiscal year A-27

66 Early Retirement Incentives. In the fiscal year , the District offered an early retirement incentive to eligible certificated employees. Fourteen employees took the incentives. Retirement benefits totaling $814,585 will be paid out in installments of $162,917 each year for the next five years starting on August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District and the end of fiscal year In fiscal year , the District offered an early retirement incentive to eligible certificated employees. Seventeen employees took the incentives. Retirement benefits totaling $890,935 will be paid out in installments of $178,187 each year for the next five years starting on August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of fiscal year In fiscal year , the District offered an early retirement incentive to eligible certificated employees. Twelve employees took the incentives. Retirements benefits totaling $633,520 will be paid out in installments of $126,704 each year for the next five years starting on August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of fiscal year In fiscal year , the District offered an early retirement incentive to eligible certificated employees. Twenty-two employees took the incentives. Retirement benefits totaling $1,063,075 will be paid out in installments to $212,603 each year for the next five years starting on July 1, August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of fiscal year No Other Post-Employment Benefits (OPEBs). Other than the retirement plan benefits with CalSTRS and CalPERS (see Retirement Benefits below), the District does not provide any other postretirement healthcare benefits to District employees. Tax and Revenue Anticipation Notes. Because District revenues from local property taxes and State apportionments are received at irregular intervals throughout the year, while expenditures tend to be incurred on a regular monthly basis, the District has usually found it necessary to borrow for short-term cash needs by issuance of tax and revenue anticipation notes each year, as shown in the table below. The District s notes are a general obligation of the District, payable from the District s general fund and any other lawfully available moneys, but for which the District has no taxing authority. Issuance Date Principal Amount Interest Rate Yield Due Date July 3, 2004 $5,945, % 1.60% July 6, 2005 July 1, ,000, July 6, 2006 July 6, ,965, July 6, 2007 July 6, ,725, July 6, 2008 July 1, ,780, July 6, 2009 July 6, ,885, July 1, 2010 July 1, ,410, July 1, 2011 July 28, ,224, April 30, 2012 July 2, ,000, May 1, 2013 July 15, ,020, June 2, 2014 In fiscal year , the District issued $8,020,000 aggregate principal amount of tax and revenue anticipation notes (the Series 2014 Notes ), dated July 15, 2013, through the California School Cash Reserve Program Authority. The Series 2014 Notes matured on June 2, 2014 and yield 0.21%. The District currently does not expect to issue any tax and revenue anticipation notes in fiscal year A-28

67 The District may issuance tax and revenue anticipation notes in future fiscal years to supplement cash flow as necessary. Employment As of June 30, 2014, the District employed 581 FTE certificated (teaching staff) employees, 380 FTE classified employees and 51 management and supervisory personnel. For fiscal year , the total certificated and classified payrolls are projected to be approximately $46.0 million and $14.7 million, respectively. District employees are represented by employee bargaining units as follows: Name of Bargaining Unit Number of Employees Represented Current Contract Expiration Date Gilroy Teachers Association 581 June 30, 2013 (1) Gilroy Federation of Paraeducators 127 June 30, 2012 (1) California School Employees Association Ch June 30, 2015 (1) The District is currently negotiating certain annual items under the operative contract, and a tentative agreement has been reached subject to approval by the District Board. Source: Gilroy Unified School District. Retirement Benefits The District participates in retirement plans with CalSTRS which covers all full-time certificated District employees, and the State Public Employees Retirement System ( CalPERS ), which covers certain classified employees. Classified school personnel who are employed four or more hours per day may participate in CalPERS. CalSTRS. Contributions to CalSTRS are fixed in statute. For fiscal year , teachers contributed 8% of salary to CalSTRS, while school districts contributed 8.25%. In addition to the teacher and school contributions, the State contributed 4.517% of teacher payroll to CalSTRS (calculated on payroll data from two fiscal years ago). Unlike typical defined benefit programs, however, neither the CalSTRS employer nor the State contribution rate varies annually to make up funding shortfalls or assess credits for actuarial surpluses. The State does pay a surcharge when the teacher and school district contributions are not sufficient to fully fund the basic defined benefit pension (generally consisting of 2% of salary for each year of service at age 60 referred to herein as pre-enhancement benefits ) within a 30- year period. However, this surcharge does not apply to systemwide unfunded liability resulting from recent benefit enhancements. As of June 30, 2013, an actuarial valuation (the 2013 CalSTRS Actuarial Valuation ) for the entire CalSTRS defined benefit program showed an estimated unfunded actuarial liability of $74.4 billion, an increase of $3.4 billion from the June 30, 2012 valuation. The funded ratios of the actuarial value of valuation assets over the actuarial accrued liabilities as of June 30, 2013, June 30, 2012 and June 30, 2011, based on the actuarial assumptions, were approximately 67%, 67% and 69%, respectively. Future estimates of the actuarial unfunded liability may change due to market performance, legislative actions and other experience that may differ from the actuarial assumptions. The following are certain of the actuarial assumptions set forth in the 2013 CalSTRS Actuarial Valuation: measurement of accruing costs by the Entry Age Normal Actuarial Cost Method, 7.50% investment rate of return, 4.50% interest on member accounts, 3.75% projected wage growth, and 3.00% projected inflation. The 2013 CalSTRS Actuarial Valuation also assumes that all members hired on or after January 1, 2013 are subject to the A-29

68 the pension reform measure signed by the Governor in August 2012 expected to help reduce future pension obligations of public employers with respect to employees hired on or after January 1, Future estimates of the actuarial unfunded liability may change due to market performance, legislative actions, changes in actuarial assumptions and other experiences that may differ from the actuarial assumptions. As indicated above, there was no required contribution from teachers, schools districts or the State to fund the unfunded actuarial liability for the CalSTRS defined benefit program and only the State legislature can change contribution rates. The 2013 CalSTRS Actuarial Valuation noted that, as of June 30, 2013, the contribution rate, inclusive of contributions from the teachers, the school districts and the State, was equivalent to % over the next 30 years. The 2013 CalSTRS Actuarial Valuation provides that the contribution rate would need to have been raised by % to a total of % to amortize the unfunded liability over a 30-year period as of June 30, As part of the State Budget, the Governor signed Assembly Bill 1469 which implements a new funding strategy for CalSTRS, increasing the employer contribution rate in fiscal year from 8.25% to 8.88% of covered payroll. Such rate would increase by 1.85% beginning in fiscal year until the employer contribution rate is 19.10% of covered payroll as further described below. Teacher contributions will also increase from 8.00% to a total of 10.25% of pay, phased in over the next three years. The State s total contribution will also increase from approximately 3% in fiscal year to 6.30% of payroll in fiscal year , plus the continued payment of 2.5% of payroll annual for a supplemental inflation protection program for a total of 8.80%. In addition, AB 1469 provides the State Teachers Retirement Board with authority to modify the percentages paid by employers and employees for fiscal year and each fiscal year thereafter to eliminate the CalSTRS unfunded liability by June 30, The State Teachers Retirement Board would also have authority to reduce employer and State contributions if they are no longer necessary. Pursuant to Assembly Bill 1469, school district s contribution rates will increase in accordance with the following schedule: Effective Date (July 1) School District Contribution Rate % Source: Assembly Bill The District s total employer contributions to CalSTRS for fiscal years , , and were $3,472,181, $3,318,096, $3,441,0604 and $3,733,108, respectively, and were equal to 100% of the required contributions for each year. The District projects employer contributions to CalSTRS of approximately $4.1 million for fiscal year With the implementation of AB 1469, the District anticipates that its contributions to CalSTRS will increase in future fiscal years as compared to prior fiscal years. The District, nonetheless, is unable to predict all factors or any changes in law that could affect its required contributions to CalSTRS in future fiscal years. A-30

69 CalSTRS produces a comprehensive annual financial report and actuarial valuations which include financial statements and required supplementary information. Copies of the CalSTRS comprehensive annual financial report and actuarial valuations may be obtained from CalSTRS. The information presented in these reports is not incorporated by reference in this Official Statement. CalPERS. All qualifying classified employees of K-12 school districts in the State are members in CalPERS, and all of such districts participate in the same plan. As such, all such districts share the same contribution rate in each year. However, unlike school districts participating in CalSTRS, the school districts contributions to CalPERS fluctuate each year and include a normal cost component and a component equal to an amortized amount of the unfunded liability. Accordingly, the District cannot provide any assurances that the District s required contributions to CalPERS will not significantly increase in the future above current levels. According to the CalPERS State and Schools Actuarial Valuation as of June 30, 2012, the CalPERS Schools plan had a funded ratio of 75.5% on a market value of assets basis. The funded ratio as of June 30, 2011, June 30, 2010, June 30, 2009 and June 30, 2008 was 78.7%, 69.5%, 65.0% and 93.8%, respectively. According to the actuarial valuation as of June 30, 2012, the latest decline in the funded ratio was because the investment return experienced by CalPERS in fiscal year was less than the assumed 7.5%. In June 2009, the CalPERS Board of Administration adopted a new employer rate smoothing methodology for local governments and school employer rates. It was designed to ease the impact of the investment losses which were then expected in fiscal year on affiliated public employers while strengthening the long-term financial health of the pension fund. Under such methodology, certain investment losses are amortized and paid off over a fixed and declining 30-year period instead of a rolling 30-year amortization period. In March of 2012, the CalPERS Board of Administration adopted new economic actuarial assumptions to be used with the June 30, 2011 actuarial valuation; in particular, lowering the price inflation assumption from 3.00% to 2.75%. Lowering the price inflation assumption resulted in a reduced discount rate, which is the fund s assumed rate of return calculated based on expected price inflation and the expected real rate of return, from 7.75% to 7.5%. According to CalPERS, this reduction in the discount rate is anticipated to increase State and school district employer contributions for each fiscal year beginning in fiscal year by 1.2% to 1.6% for miscellaneous plans (which includes general office and others) and by 2.2% to 2.4% for safety plans beginning in fiscal year In April of 2013, the CalPERS Board of Administration approved changes to the CalPERS amortization and smoothing policy intended to reduce volatility in employer contribution rates. Beginning with the June 30, 2013 actuarial valuation, CalPERS will employ a new 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 (as compared to the current policy of spreading investment returns over a 15-year period with experience gains and losses paid for over a rolling 30-year period). Such changes, the implementation of which are delayed until fiscal year for the State, schools and all public agencies, are expected to increase contribution rates in the near term but lower contribution rates in the long term. In February of 2014, the CalPERS Board of Administration adopted new actuarial demographic assumptions that take into account public employees living longer. Such assumptions are expected to increase costs for the State and public agency employers (including school districts), which costs will be amortized over 20 years and phased in over three years beginning in fiscal year for the State and amortized over 20 years and phased in over five years beginning in fiscal year for the employers. CalPERS estimates that the new demographic assumptions could cost public agency employers up to 9% of payroll for safety employees and up to 5% of payroll for miscellaneous employees at the end of the five year phase in period. To the extent, however, that future experiences differ from CalPERS current assumptions, the required employer contributions may vary. A-31

70 The District s total employer contributions to CalPERS for fiscal years , , and were $1,385,319, $1,370,466, $1,489,832 and $1,621,038, respectively, and were equal to 100% of the required contributions for each year. The District projects employer contributions to CalPERS of approximately $1.7 million for fiscal year With the change in actuarial assumptions described above, the District anticipates that its contributions to CalPERS will increase in future fiscal Reform below), however, is expected to help reduce certain future pension obligations of public employers with respect to employees hired on or after January 1, The District cannot predict the impact these changes will have on its contributions to CalPERS in future years. CalPERS produces a comprehensive annual financial report and actuarial valuations that include financial statements and required supplementary information. Copies of the CalPERS comprehensive annual financial report and actuarial valuations may be obtained from CalPERS Financial Services Division. The information presented in these reports is not incorporated by reference in this Official Statement. Governor s Pension Reform. On August 28, 2012, Governor Brown and the State Legislature reached agreement on a new law that reforms pensions for State and local government employees. AB 340, which was signed into law on September 12, 2012, established the California Public Employees Pension Reform Act of 2012 ( PEPRA ) which governs pensions for public employers and public pension plans on and after January 1, For new employees, PEPRA, among other things, caps pensionable salaries at the Social Security contribution and wage base, which is $110,100 for 2012, or 120% of that amount for employees not covered by Social Security, increases the retirement age by two years or more for all new public employees while adjusting the retirement formulas, requires state employees to pay at least half of their pension costs, and also requires the calculation of benefits on regular, recurring pay to stop income spiking. For all employees, changes required by PEPRA include the prohibition of retroactive pension increases, pension holidays and purchases of service credit. PEPRA applies to all State and local public retirement systems, including county and district retirement systems. PEPRA only exempts the University of California system and charter cities and counties whose pension plans are not governed by State law. Although the District anticipates that PEPRA would not increase the District s future pension obligations, the District is unable to determine the extent of any impact PEPRA would have on the District s pension obligations at this time. Additionally, the District cannot predict if PEPRA will be challenged in court and, if so, whether any challenge would be successful. The District is unable to predict what the amount of State pension liabilities will be in the future, or the amount of the contributions which the District may be required to make. CalSTRS and CalPERS are more fully described in Note 7 to the District s financial statements attached hereto as APPENDIX B GASB 67 and 68. In June 2012, the Governmental Accounting Standards Board approved a pair of related statements, Statement Number 67, Financial Reporting for Pension Plans ( Statement Number 67 ), which addresses financial reporting for pension plans, and Statement Number 68, Accounting and Financial Reporting for Pensions ( Statement Number 68 ), which establishes new accounting and financial reporting requirements for governments that provide their employees with pensions. The guidance contained in these statements will change how governments calculate and report the costs and obligations associated with pensions. Statement Number 67 replaces the current requirements of Statement Number 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, for most public employee pension plans, and Statement Number 27 replaces the current requirements of Statement Number 27, Accounting for Pensions by State and Local Governmental Employers, for most government employers. The new statements also replace the A-32

71 requirements of Statement Number 50, Pension Disclosures, for those governments and pension plans. Certain of the major changes include: (i) the inclusion of unfunded pension liabilities on the government s balance sheet (such unfunded liabilities are currently typically included as notes to the government s financial statements); (ii) full pension costs would be shown as expenses regardless of actual contribution levels; (iii) lower actuarial discount rates would be required to be used for most plans for certain purposes of the financial statements, resulting in increased liabilities and pension expenses; and (iv) shorter amortization periods for unfunded liabilities would be required to be used for certain purposes of the financial statements, which generally would increase pension expenses. Statement Number 67 will take effect in fiscal years beginning after June 15, 2013, and Statement Number 68 will take effect in fiscal years beginning after June 15, Insurance, Risk Pooling and Joint Powers Agreements and Joint Ventures The District is a member of the Santa Clara County Schools Insurance Group (SCCSIG) public entity risk pool. The District pays an annual premium to the entity for its workers compensation and property and liability. Payments for services provided are paid to SCCSIG. The relationship between the District and SCCSIG is such that it is not a component unit of the District for financial reporting purposes. The SCCSIG has budgeting and financial reporting requirements independent of member units and its financial statements are not presented in the District s financial statements; however, fund transactions between SCCSIG and the District are included in these statements. Audited financial statements are generally available from SCCSIG. The District has appointed one member to the governing board of SCCSIG. See Note 9 in Appendix B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 for more information. During the year ended June 30, 201, the District made payments of $603,360 to SCCSIG for services rendered. Limitations on Revenues CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS On June 6, 1978, California voters approved Proposition 13 ( Proposition 13 ), which added Article XIIIA to the State Constitution ( Article XIIIA ). Article XIIIA limits the amount of any ad valorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii) bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-thirds of the voters on such indebtedness, and (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. Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership have occurred after the 1975 assessment. This full cash value may be increased at a rate not to exceed 2% per year to account for inflation. Article XIIIA has subsequently been amended to permit reduction of the full cash value base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the full cash value base in the event of reconstruction of property damaged or destroyed in a disaster and in other minor or technical ways. A-33

72 County of Orange v. Orange County Assessment Appeals Board No. 3. Section 51 of 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 restoration of value of the damaged property. The constitutionality of this procedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court, and in similar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new base year value for purposes of Proposition 13 and that subsequent increases in the assessed value of a property by more than 2% in a single year violate Article XIIIA. On appeal, the California Court of Appeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling, leaving the recapture law in place. 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 Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the 2% annual adjustment 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 the fiscal year, assessors in the State no longer record property values on tax rolls at the assessed value of 25% of market value which was expressed as $4 per $100 assessed value. All taxable property is now shown at full market 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 market value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. Article XIIIB of the California Constitution An initiative to amend the State Constitution entitled Limitation of Government Appropriations was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution ( Article XIIIB ). Under Article XIIIB state and local governmental entities have an annual appropriations limit and are not permitted to spend certain moneys which are called appropriations subject to limitation (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriation of moneys which are excluded from the definition of appropriations subject to limitation, including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the appropriations limit is to be based on certain expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. The District s budgeted appropriations from proceeds of taxes (sometimes referred to as the Gann limit ) for the fiscal year are equal to the allowable limit of $65,991,200, and estimates an appropriations limit for the fiscal year of $65,839,420. Any proceeds of taxes received by the District in excess of the allowable limit are absorbed into the State s allowable limit. A-34

73 Article XIIIC and Article XIIID of the California Constitution On November 5, 1996, the voters of the State of California approved Proposition 218, popularly known as the Right to Vote on Taxes Act. Proposition 218 added to the California Constitution Articles XIIIC and XIIID ( Article XIIIC and Article XIIID, respectively), which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges. According to the Title and Summary of Proposition 218 prepared by the California Attorney General, Proposition 218 limits the authority of local governments to impose taxes and property-related assessments, fees and charges. Among other things, Article XIIIC establishes that every tax is either a general tax (imposed for general governmental purposes) or a special tax (imposed for specific purposes), prohibits special purpose government agencies such as school districts from levying general taxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote; and also provides that the initiative power will not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIIC furtherprovidesthatnotaxmaybeassessedonpropertyotherthanad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIID deals with assessments and property-related fees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development. The District does not impose any taxes, assessments, or property-related fees or charges which are subject to the provisions of Proposition 218. It does, however, receive a portion of the basic 1% ad valorem property tax levied and collected by the County pursuant to Article XIIIA of the California Constitution. The provisions of Proposition 218 may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District thereby causing such local governments to reduce service levels and possibly adversely affecting the value of property within the District. Statutory Limitations On November 4, 1986, State voters approved Proposition 62, an initiative statute limiting the imposition of new or higher taxes by local agencies. The statute (a) requires new or higher general taxes to be approved by two-thirds of the local agency s governing body and a majority of its voters; (b) requires the inclusion of specific information in all local ordinances or resolutions proposing new or higher general or special taxes; (c) penalizes local agencies that fail to comply with the foregoing; and (d) required local agencies to stop collecting any new or higher general tax adopted after July 31, 1985, unless a majority of the voters approved the tax by November 1, Appellate court decisions following the approval of Proposition 62 determined that certain provisions of Proposition 62 were unconstitutional. However, the California Supreme Court upheld Proposition 62 in its decision on September 28, 1995 in Santa Clara County Transportation Authority v. Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regarding Proposition 62 were not addressed in the Supreme Court s decision, such as whether the decision applies retroactively, what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62, and whether the decision applies to charter cities. A-35

74 Proposition 98 and Proposition 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 ). The Accountability Act changed 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 (collectively, K-14 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 , which percentage is equal to 40.9%, or (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for growth in enrollment and inflation. Since the Accountability Act is unclear in some details, there can be no assurance 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 districts than the 40.9%, 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 districts. Such transfer would be excluded from the Appropriations Limit for K-14 districts and the K-14 school Appropriations Limits 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 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 schools is 4% of the minimum State spending for education mandated by the Accountability Act, as described above. On June 5, 1990, California voters approved Proposition 111 (Senate Constitutional Amendment 1), which further modified the Constitution to alter the spending limit and education funding provisions of Proposition 98. Most significantly, Proposition 111 (1) liberalized the annual adjustments to the spending limit by measuring the change in the cost of living by the change in State per capita personal income rather than the Consumer Price Index, and specified that a portion of the State s spending limit would be adjusted to reflect changes in school attendance; (2) provided that 50% of the excess tax revenues, determined based on a two-year cycle, would be transferred to K-14 school districts with the balance returned to taxpayers (rather than the previous 100% but only up to a cap of 4% of the districts minimum funding level), and that any such transfer to K-14 school districts would not be built into the school districts base expenditures for calculating their entitlement for State aid in the following year and would not increase the State s appropriations limit; (3) excluded from the calculation of appropriations that are subject to the limit appropriations for certain qualified capital outlay projects and certain increases in gasoline taxes, sales and use taxes, and receipts from vehicle weight fees; (4) provided that the Appropriations Limit for each unit of government, including the State, would be recalculated beginning in the fiscal year, based on the actual limit for fiscal year , adjusted forward to as if Senate Constitutional Amendment 1 had been in effect; and (5) adjusted the Proposition 98 formula that guarantees K-14 school districts a certain amount of general fund revenues, as described below. Under prior law, K-14 school districts were guaranteed the greater of (a) 40.9% of general fund revenues (the first test ) or (b) the amount appropriated in the prior year adjusted for changes in the cost A-36

75 of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the second test ). Under Proposition 111, school districts would receive the greater of (a) the first test, (b) the second test or (c) a third test, which would replace the second test in any year when growth in per capita general fund revenues from the prior year was less than the annual growth in State per capita personal income. Under the third test, school districts would receive the amount appropriated in the prior year adjusted for change in enrollment and per capita general fund revenues, plus an additional small adjustment factor. If the third test were used in any year, the difference between the third test and the second test would become a credit to be paid in future years when general fund revenue growth exceeds personal income growth. Proposition 30 On November 6, 2012, voters approved Proposition 30, also referred to as the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment. Proposition 30 temporarily (a) increased the personal income tax on certain of the State s income taxpayers by one to three percent for a period of seven years beginning with the 2012 tax year and ending with the 2019 tax year, and (b) increased the sales and use tax by one-quarter percent for a period of four years beginning on January 1, 2013 and ending with the 2016 tax year. The revenues generated from such tax increases are included in the calculation of the Proposition 98 minimum funding guarantee (see Proposition 98 and Proposition 111 above). The revenues generated from such temporary tax increases are deposited into a State account created pursuant to Proposition 30 (the Education Protection Account), and 89% of the amounts therein are allocated to school districts and 11% of the amounts therein are allocated to community college districts. The Proposition 30 tax increases are temporary and expire at the end of the 2016 and 2019 tax years. The District cannot predict the effect the loss of the revenues generated from such temporary tax increases will have on total State revenues and the effect on the Proposition 98 formula for funding schools. Applications of Constitutional and Statutory Provisions The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. For a discussion of how the provisions of Proposition 98 have been applied to school funding see DISTRICT FINANCIAL MATTERS State Funding of Education; State Budget Process. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, as well as Propositions 62, 98, 111 and 218, were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time other initiative measures could be adopted, further affecting District revenues or the District s ability to expend revenues. A-37

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77 APPENDIX B FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 B-1

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79 GILROY UNIFIED SCHOOL DISTRICT COUNTY OF SANTA CLARA GILROY, CALIFORNIA FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR'S REPORT FOR THE YEAR ENDED JUNE 30, 2014 GILROY UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS 4 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements Statement of Net Position 12 Statement of Activities 13 Fund Financial Statements Balance Sheet Governmental Funds 14 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 15 Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds 16 Reconciliation of the Governmental Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 17 Proprietary Fund Statement of Net Position 18 Proprietary Fund Statement of Revenues, Expenses and Changes in Net Position 19 Proprietary Fund Statement of Cash Flows 20 Fiduciary Fund Statement of Net Position 21 Fiduciary Fund Changes in Net Position 22 Notes to the Basic Financial Statements 23 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Revenues, Expenditures, and Changes in Fund Balance Budget (Non-GAAP) and Actual - General Fund 45 Notes to required supplementary information Excess of Expenditures Over Appropriations 46

80 GILROY UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS SUPPLEMENTARY INFORMATION Combining Balance Sheet All Non-major Funds 47 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances All Non-major Funds 48 Combining Statement of Changes in Assets and Liabilities All Agency Funds 49 Organization 50 Schedule of Average Daily Attendance 51 Schedule of Instructional Time 52 Schedule of Charter Schools 53 Reconciliation of Unaudited Actual Financial Report with Audited Financial Statements 54 Schedule of Expenditures of Federal Awards 55 Schedule of Financial Trends and Analysis 56 Notes to Supplementary Information 57 OTHER INDEPENDENT AUDITOR S REPORTS Independent Auditor's Report on Compliance with State Laws and Regulations 58 Report on Internal Control Over Financial Reporting and on Compliance and on Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 61 Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by OMB Circular A FINDINGS AND RECOMMENDATIONS SECTION Schedule of Findings and Questioned Costs 66 Status of Prior Year Recommendations 73 James Marta & Company LLP Certified Public Accountants Accounting, Auditing, Consulting and Tax INDEPENDENT AUDITOR'S REPORT To the Governing Board Gilroy Unified School District Gilroy, 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 Gilroy Unified School District (the District ), as of and for the year ended June 30, 2014, 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 bythe Comptroller General of the United States. Because of the matter described in Basis for Qualified Opinion on Aggregate Remaining Fund Information, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 701 Howe Avenue Suite E3, Sacramento, California Phone: (916) Fax: (916) jmarta@jpmcpa.com 1

81 Opinions Summary of Opinions Opinion Unit Type of Opinion Governmental Activities Unmodified Major Funds Unmodified Aggregate Remaining Fund Information Qualified Basis for Qualified Opinion on Aggregate Remaining Fund Information Gilroy Unified School District s fiduciary investment in the Gilroy Foundation has a balance of $660,962 as of June 30, As noted in the Schedule of Findings and Questioned Costs: , we were unable to obtain sufficient appropriate audit evidence to verify the balance in the Foundation s Scholarship Trust funds because independent third party documentation was unavailable. Consequently, we were unable to determine whether this balance was presented fairly. Qualified Opinion on Aggregate Remaining Fund Information In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion on Aggregate Remaining Fund Information, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund of Gilroy Unified School District (the District ), as of June 30, 2014, 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. Unmodified Opinions on the Governmental Activities and Major Funds. In our opinion, the financial statements of the governmental activities, business-type activities, and each major fund present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of the Gilroy Unified School District (the District ), as of June 30, 2014, 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. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, budgetary comparison information on pages 4-11 and 45 respectively 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 as a whole. The accompanying supplemental information as listed in the table of contents, including the schedule of expenditures of Federal Awards, which is required by U.S. Office of Management and Budget Circular A-133 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 supplemental information as listed in the table of contents, including the schedule of expenditures of Federal Awards, which is required by U.S. Office of Management and Budget Circular A-133 is fairly stated in all material respects in relation to the 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 November 21, 2014 on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering District s internal control over financial reporting and compliance. James Marta & Company LLP Certified Public Accountants Sacramento, California November 21,

82 MANAGEMENT S DISCUSSION AND ANALYSIS GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 This section of Gilroy Unified School District's (the District ) annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, Please read it in conjunction with the District's financial statements, which immediately follow this section. DISTRICT PROFILE Gilroy Unified School District is located in Gilroy, California, nestled in the southern portion of Santa Clara County, midway between San Francisco and Monterey Bay. Gilroy is best known as the Garlic Capital of the World, and home of the annual Garlic Festival in July. According to the 2013 U.S. Census Bureau, Gilroy s population is estimated to be 51,701. Despite the recent economic downturn, Gilroy s population grew by 5.9% from 2010 to 2013, while the rest of California overall grew by 2.9%. The City of Gilroy has approved several single family subdivisions, and multi-family developments that are projected to add 400 to 600 residents over the next several years. The District is comprised of eight elementary schools, three middle schools, two comprehensive high schools, one early college academy, one continuation school, and one charter school that serve approximately 11,500 students. The District currently employs approximately 1,000 staff members. MISSION Gilroy Unified School District will provide opportunities for all students to reach their highest academic and intellectual competencies and personal attributes to be life-long learners, responsible citizens, and productive members of society. This will be accomplished by having a clear focus on student needs; staff, parents and community members demonstrating high expectations for themselves and for every child served; and by continually improving the quality of teaching and learning. OVERVIEW OF THE FINANCIAL STATEMENTS The Statement of Net Position and the Statement of Activities and Change in Net Position 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, one way to measure the District s financial health or financial position. Over time, increases or decreases in the District s net position is one indicator of whether its financial health is improving or deteriorating. Other factors to consider are changes in the District s enrollment, property tax base, and the condition of the District s facilities. 4

83 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 The relationship between revenues and expenses is the District s operating results. Since the 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 two important factors. Fund Financial Statements The fund financial statements are designed to report information about the District s most significant funds. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs. Some funds are required by State law and by bond covenants. The District establishes other funds to control and manage money for particular purposes or to show that it is properly using certain revenues. Fund financial statements focus on individual parts of the District, reporting the District s operations in more detail than the district-wide statements. Governmental funds statements tell how basic services such as instruction and pupil services were financed in the short term as well as what remains for future spending. Most of the District s basic services are included in governmental funds. Because this information does not encompass the additional long-term focus of the district-wide statements, we provide additional information in the reconciliation statements that explains the relationship (or differences) between them. Proprietary funds statements offer financial information about the activities the district operates on a cost reimbursement basis, such as the self-insurance fund. Proprietary funds are reported in the same way as the district-wide statements. The District currently has one internal service fund the self-insurance fund for dental and vision benefits. Fiduciary funds statements provide information about the financial relationships in which the District acts solely as a trustee or agent for the benefit of others to whom the resources belong such as associated student body accounts. The District is responsible for ensuring that the assets reported in these funds are used only for their intended purposes. All of the District s fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. We exclude these activities from the district-wide financial statements because the District cannot use these assets to finance its operations. Notes to the Basic Financial Statements Notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in district-wide and fund financial statements. The notes to the financial statements are followed by a section of required supplementary information that further explains and supports the financial statements with a comparison of the District s general fund budget, both the adopted and final version, with yearend actuals. 5 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 FINANCIAL HIGHLIGHTS Despite the recent economic downturn, Gilroy s population has continued to outpace the State s growth rate, and GUSD s enrollment has increased from 11,571 in to 11,786 for , representing a 1.8% growth to the District. The Average Daily Attendance (ADA) for the District is 95% or above the total enrollment. The actual unrestricted ending general fund balance was $6 million, which was $1.5 million higher than the estimated actual. The actual Reserve for Economic Uncertainties was 5.8%. The Unrestricted General Fund had a planned operating deficit of $1.8 million as a result of a 4.5% salary increase to employee compensation. The salary increase was the 1 st since the great recession. Total long-term liabilities decreased by $703 thousand. On the Statement of Activities, total current year expenditures exceeded total current year revenues by $10 million, primarily due spending down Measure P construction funds. Capital assets, net of depreciation, increased $5.6 million due to acquisitions and improvements increasing more than accumulated depreciation. Total salary and benefits for the General Fund represented 80.1% of total expenditures. The new Local Control Funding Formula will yield additional revenues to the District, over an eight (8) year period, anticipated to yield $3.7 to $5 million each fiscal year until The assessed valuation from last year to this year increased 6.8%, the third-highest roll growth in County history. 6

84 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 Gilroy Unified School District Enrollment The table above shows a history of strong growth for GUSD, despite the recession triggered by the collapse of the housing sector. The City of Gilroy has approved housing developments, which is expected to add between 300 to 400 new homes per year for the next several years. Typically, GUSD generates 1 student for every two new homes built within its boundary. The Gilroy Unified District is very proud of this achievement as a culmination of years of hard-work, dedication, and focus on student-achievement from its students, staff, and community, and its Governing Board. 7 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 NET POSITION Table 1 below shows the District s net position decreased from $162,904,330 at June 30, 2013 to $152,831,075 at June 30, 2014, as net assets decreased by $5.9 million and current liabilities increased by $5 million due to Measure P. Table 1 Governmental Activities Net Change Assets Current and other assets $ 39,467,444 $ 50,983,731 $ (11,516,287) Capital assets 341,245, ,646,664 5,598,683 Total Assets 380,712, ,630,395 (5,917,604) Deferred Outflows of Resources Deferred loss on refunding of bonds 7,908,750 7,481, ,500 Unamortized bond discount 128, ,715 (64,238) 8,037,227 7,673, ,262 Liabilities Current Liabilities 34,076,899 12,388,822 21,688,077 Long-term obligations 190,886, ,557,833 (16,671,061) Total Liabilities 224,963, ,946,655 5,017,016 Deferred Inflows of Resources Deferred bond premium revenue 10,367,538 10,840,087 (472,549) Deferred COP premium revenue 587, ,288 (25,554) 10,955,272 11,453,375 (498,103) Net Position Invested in capital assets, net of related debt 144,441, ,141,634 (5,699,745) Restricted 18,821,973 8,431,331 10,390,642 Unrestricted (10,432,787) 4,331,365 (14,764,152) Total Net Position $ 152,831,075 $ 162,904,330 $ (10,073,255) 8

85 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 GOVERNMENTAL ACTIVITIES The Chart 1 below provides a breakdown of the $91.2 million of General Fund revenues by category: 5% $ 8% 7% 24% 91,268,567 State Aid (LCFF) Prop 30 Taxes Federal 13% 43% Other State Revenue Other Local Revenue Chart 2 provides a breakdown of the expenditures by function: 9% 0% 1% 1% 5% 10% $ 3% 91,429,949 Instruction Instruction Related Pupil Services 10% Ancillary Services Community Services Enterprise General Administration 61% Plant Services Other Outgo Instruction and Instruction-related services account for 71% of total expenditures by function. Overall, salary and benefits made up 80.5% of the total expenditures in the General Fund for GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 LONG TERM LIABILITIES Total long-term liabilities decrease by $703,115 in Table 2 Governmental Activities Net Change Bonds $ 160,588,165 $ 161,199,998 $ (611,833) Bond Anticipation Note (BAN) 15,577,715 15,577,715 $ - COP's 30,850,000 31,425,000 $ (575,000) Accumulated Vacation-net 79, ,645 $ (26,555) Capital Leases 25, ,006 $ (84,934) Early Retirement Incentive 1,494, ,403 $ 595,207 Total $ 208,614,652 $ 209,317,767 $ (703,115) The notes to the financial statements are an integral part of the financial presentation and contain more detailed information as to interest, principal, retirement amounts, and future debt retirement dates. ECONOMIC FACTORS AND THE FY BUDGET The implementation of the Local Control Funding Formula (LCFF) revamped the school finance system for the first time in forty years. With a goal of increasing local control, the new system encourages stakeholders to provide input in the development of the Local Control Accountability Plan (LCAP). The District s LCAP and the budget are aligned to the eight state priorities: Basic Services, Implementation of State Standards, Course Access, Pupil Achievement, OtherPupil Outcomes, Parent Involvement, Pupil Engagement, and Student Climate. The financial reform is taking place at an opportune time. The State economy continues to grow at a modest pace. If the economy continues to expand, the State revenues will be sufficient to provide for the projected gap funding levels estimated by the Department of Finance (DOF). However, during a downturn, obligations can exceed State revenues. Under LCFF, there is no statute to provide the Cost of Living Adjustment (COLA) to districts. In the past, Legislative action was required to suspend Prop 98. Under LCFF, the gap funding is determined by any and all available revenues. Furthermore, the passage of Proposition 30 created approximately $7 billion of temporary taxes to the State. The quarter-cent sales tax portion is scheduled to expire in 2016, and the income tax component ends at the end of The State budget is also inherently dependent on capital tax gains, which do fluctuate greatly from year to year, and the DOF has already lowered its initial funding estimates for & Recognizing the volatility this model creates for education, and in order to maintain fiscal stability and accountability, the Gilroy Unified School District Governing Board has adopted a minimum reserve policy, which is higher than the State s minimum threshold. Based on the reserve policy, the reserve Designated for Economic Uncertainties (DEU) will be as follows: : Five percent (5%) reserve : Six percent (6%) reserve & Thereafter: Seven percent (7%) reserve 10

86 GILROY UNIFIED SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS FOR FISCAL YEAR ENDED JUNE 30, 2014 The passage of Proposition 2, which sets forth a maximum reserve threshold, may impact the District s policy in the future. However, in order for the State to enforce it, the State needs to repay the funding owed to education under the old revenue limit model, and the Capital Gains Tax needs to exceed 8% of the total general fund revenues. Therefore, it is very unlikely that Proposition 2 will have any immediate impact on the District s ability to be fiscally prudent and meeting its reserve polity threshold of 7% by CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, parents, 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 regarding this report or need additional financial information, contact the District Office, Gilroy Unified School District, 7810 Arroyo Circle, Gilroy, California FINANCIAL SECTION

87 GILROY UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2014 Governmental Activities ASSETS Cash $ 25,824,708 Investments - Receivables 12,451,443 Other assets 140,270 Other current assets 1,051,023 Capital Assets - net of accumulated depreciation 341,245,347 Total Assets 380,712,791 DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding of bonds 7,908,750 Unamortized bond discount 128,477 Total deferred Outflows 8,037,227 LIABILITIES Accounts payable and other current liabilities 15,774,465 Unearned revenue 574,554 Long-term liabilities - Due within one year 17,727,880 Due after one year 190,886,772 Total Liabilities 224,963,671 DEFERRED INFLOWS OF RESOURCES Deferred bond premium revenue 10,367,538 Deferred COP premium revenue 587,734 Total deferred Inflows 10,955,272 NET POSITION Invested in capital assets, net of related debt 144,441,889 Restricted 18,821,973 Unrestricted (10,432,787) Total Net Position $ 152,831,075 The accompanying notes are an integral part of these financial statements. 12 GILROY UNIFIED SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Program Revenues Net (Expense) Revenues and Changes in Net Position Operating Capital Charges for Grants and Grants and Governmental Functions Expenses Services Contributions Contributions Activities Governmental Activities Instruction $ 51,506,646 $ 73,728 $ 9,440,749 $ 1,193,391 $ (40,798,778) Instruction - related services: Supervision of instruction 3,558,788 17,720 1,609,127 - (1,931,941) Instructional library and technology 240,370-5,897 - (234,473) School site administration 5,721,059 4, ,487 - (5,045,035) Pupil Services: Home-to-school transportation 2,312,955 12, ,931 - (2,011,265) Food services 4,656, ,891 4,249, ,664 All other pupil services 5,611,422 8, ,991 - (4,671,797) General administration: Data processing 1,035, (1,035,958) All other general administration 4,198,618 39,880 1,157,275 - (3,001,463) Plant services 9,656,949 28, ,230 - (9,421,885) Ancillary services 854,760-11,460 - (843,300) Community services 261,302 4,297 10,301 - (246,704) Enterprise activities 248,908-7,165 - (241,743) Interest on long-term debt 8,138, (8,138,574) Other outgo 7,586, ,835 1,360,612 - (5,798,850) Depreciation (unallocated) 7,663, (7,663,027) Total governmental activities $ 113,252,354 $ 1,276,115 $ 19,949,719 $ 1,193,391 (90,833,129) General Revenues Taxes and subventions: Taxes levied for general purposes 42,708,799 Taxes levied for debt service 8,869,832 Taxes levied for other specific purposes - Federal and state aid not restricted to specific purposes 33,082,278 Interest and investment earnings 169,807 Interagency revenues 42,750 Miscellaneous 2,543,664 Special and extraordinary items (6,657,256) Total general revenues 80,759,874 Change in net position (10,073,255) Net position - beginning, July 1, ,904,330 Net position - ending, June 30, 2014 $ 152,831,075 The accompanying notes are an integral part of these financial statements. 13

88 GILROY UNIFIED SCHOOL DISTRICT BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2014 Capital All General Building Facilities Non-Major Fund Fund Fund Funds Total ASSETS Cash and cash equivalents $ 3,229,161 $ 10,237,494 $ 2,724,549 $ 9,633,504 $ 25,824,708 Accounts receivable 10,425,172 8,178 9,365 2,008,728 12,451,443 Stores 48, , ,270 Due from other funds 512,756 1,367, ,137 2,338,174 Total assets $ 14,215,639 $ 11,612,953 $ 2,733,914 $ 12,192,089 $ 40,754,595 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 4,311,993 $ 1,486,648 $ 1,610 $ 405,597 $ 6,205,848 Due to other funds 458,137-1,367, ,756 2,338,174 Unearned revenue 574, ,554 Total liabilities 5,344,684 1,486,648 1,368, ,353 9,118,576 Fund balances Nonspendable 180, , ,586 Restricted 2,915,450 8,830,135-7,076,388 18,821,973 Committed - - 1,365,023 4,105,628 5,470,651 Assigned 462,832 1,296, ,759,002 Unassigned 5,311, ,311,807 Total fund balances 8,870,955 10,126,305 1,365,023 11,273,736 31,636,019 Total liabilities and fund balances $ 14,215,639 $ 11,612,953 $ 2,733,914 $ 12,192,089 $ 40,754,595 The accompanying notes are an integral part of these financial statements. 14 GILROY UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION GOVERNMENTAL FUNDS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Totalfund balances - governmentalfunds $ 31,636,019 Amounts reported for assets and liabilities for governmental activities in the statement of net position are different from amounts reported in governmental funds because: Capital assets: In governmental funds, only current assets are reported. In the statement of net position, allassets are reported, including capitalassets and accumulated depreciation. Capital assets at historical cost: $ 417,957,270 Accumulated depreciation: (76,711,923) 341,245,347 Unamortized costs: In governmental funds, debt issuance premiums, gain or loss on refunding, and defeasance costs are recognized as expenditures in the period they are incurred. In the government-wide statements, these amounts are amortized over the life of the debt. Unamortized premiums, losses, and defeasance costs at year end consist of: Unamortized portion of COP premiums (587,734) Unamortized portion of bond premiums (10,367,538) Unamortized portion of loss on refunding 7,908,750 Unamortized bond defeasance costs 128,477 Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is not recognized untilthe period in which it matures and is paid. In the government-wide statement of activities, it is recognized in the period that it is incurred. The additional liability for unmatured interest owing at the end of the period was: (9,568,617) Long-term liabilities: In governmental funds, only current liabilities are reported. In the statement of net position, all liabilities, including long-term liabilities, are reported. Longterm liabilities relating to governmental activities consist of: Generalobligation bonds payable $ 160,588,165 Bond Anticipation Note 15,577,715 Capital leases payable 25,072 Certificates of participation payable 30,850,000 Other general long-term debt 1,494,610 Compensated absences payable 79,090 Internal service funds: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full cost-recovery bases. Because internal service funds are presumed to operate for the benefit of governmental activities, assets and liabilities of internal service funds are reported with governmental activities in the statement of net position. Net position for internal service funds are: (208,614,652) 1,051,023 Total net position, governmental activities $ 152,831,075 The accompanying notes are an integral part of these financial statements. 15

89 GILROY UNIFIED SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Capital All General Building Facilities Non-Major Fund Fund Fund Funds Total REVENUES LCFF sources: State apportionment $ 31,516,252 $ - $ - $ - $ 31,516,252 Local sources 41,691, ,691,222 TotalLCFF revenue 73,207, ,207,474 Federal revenue 6,367, ,318,351 10,686,124 Other state revenues 7,454, ,350,877 9,805,767 Other local revenues 4,238,430 56,383 2,153,730 9,688,449 16,136,992 Total revenues 91,268,567 56,383 2,153,730 16,357, ,836,357 EXPENDITURES Certificated salaries 45,282, ,272 45,704,257 Classified salaries 13,680, ,815-1,811,144 15,839,041 Employee benefits 14,308,778 83, ,783 15,082,750 Books and supplies 3,279,003 2,783 41,473 33,419 3,356,678 Services and other operating expenditures 11,593,326 44, ,646 3,481,206 15,252,404 Capital outlay 770,471 12,432,963-21,888 13,225,322 Other outgo 2,515,304 21,932-1,726 2,538,962 Debt service expenditures - - 2,186,061 9,220,623 11,406,684 Total expenditures 91,429,949 12,932,908 2,361,180 15,682, ,406,098 Excess of revenues over expenditures (161,382) (12,876,525) (207,450) 675,616 (12,569,741) OTHER FINANCING SOURCES (USES) Operating transfers in 299, ,521 1,038,931 Operating transfers out (739,521) - - (299,410) (1,038,931) Total other financing sources (uses) (440,111) ,111 - Net change in fund balances (601,493) (12,876,525) (207,450) 1,115,727 (12,569,741) Beginning Balance, July 1, ,472,448 23,002,830 1,572,473 10,158,009 44,205,760 Fund balances, June 30, 2014 $ 8,870,955 $ 10,126,305 $ 1,365,023 $ 11,273,736 $ 31,636,019 The accompanying notes are an integral part of these financial statements. 16 GILROY UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Total net change in fund balances - governmental funds $ (12,569,741) Amounts reported for revenues and expenses for governmentalactivities in the statement of activities are different from amounts reported in governmentalfunds because: Capital outlay: In governmental funds, the costs of capital assets are reported as expenditures in the period when the assets are acquired. In the statement of activities, costs of capital assets are allocated over their estimated useful lives as depreciation expense. The difference between capital outlay expenditures and depreciation expense for the period is: Expenditures for capital outlay: $ 13,269,513 Depreciation expense: (7,663,027) 5,606,486 Debt service: In governmentalfunds, repayments of long-term debt are reported as expenditures. In the governmentwide statements, repayments of long-term debt are reported as reductions of liabilities. Expenditures for repayment of the principalportion of long-term debt were: 676,560 Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is recognized in the period that it becomes due. In the government-wide statement of activities, it is recognized in the period that it is incurred. Unmatured interest owing at the end of the period, less matured interest paid during the period but owing from the prior period was: (3,922,944) Gain or loss from disposal of capital assets: In governmentalfunds, the entire proceeds from disposalof capitalassets are reported as revenue. In the statement of activities, only the resulting gain or loss is reported. The difference between the proceeds from disposalof capitalassets and the resulting gain is: (7,804) Internal Service Funds: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full cost-recovery basis. Because internal service funds are presumed to benefit governmental activities, internal service activities are reported as govermental in the statement of activities. The net increase or decrease in internalservice funds was: 117,633 Compensated absences: In governmentalfunds, compensated absences are measured by the amounts paid during the period. In the statement of activities, compensated absences are measure by the amounts earned. The difference between compensated absences paid and compensated absences earned was: 26,555 Totalchange in net position - governmentalactivities $ (10,073,255) The accompanying notes are an integral part of these financial statements. 17

90 GILROY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND - STATEMENT OF NET POSITION FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Governmental Activities - Internal Service Fund ASSETS Current Assets Deposits and investments $ 1,133,494 Recievables 3,186 Total Current Assets 1,136,680 LIABILITIES Current Liabilities Claim liability 85,657 Total Current Liabilities 85,657 NET POSITION Restricted 1,051,023 Net Position $ 1,051,023 The accompanying notes are an integral part of these financial statements. 18 GILROY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Governmental Activities - Internal Service Fund OPERATING REVENUES Interdistrict premiums $ 1,488,047 OPERATING EXPENDITURES Claims Paid 1,372,899 Operating Income 115,148 NONOPERATING REVENUES Interest Income 2,485 Change in Net Position 117,633 Net Position - Beginning 933,390 Net Position - Ending $ 1,051,023 The accompanying notes are an integral part of these financial statements. 19

91 GILROY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF CASH FLOWS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Governmental Activities - Internal Service Fund CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from premiums 1,503,877 Cash payments for insurance claims (1,369,538) Net Cash Provided by Operating Activites 134,339 CASH FLOWS FROM INVESTING ACTIVITIES Interest 2,485 Net Increase in Cash and Cash Equivalents 136,824 Cash and Cash Equivalents - Beginning 996,670 Cash and Cash Equivalents - Ending 1,133,494 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 115,148 Adjustments to reconcile net income to net cash Provided by operations: (Increase)/Decrease in: Receivables 15,830 Increase/(Decrease) in: Accrued liabilities 3,361 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 134,339 The accompanying notes are an integral part of these financial statements. 20 GILROY UNIFIED SCHOOL DISTRICT FIDUCIARY FUND STATEMENT OF NET POSITION FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Private-Purpose Trust Agency Funds Student Total Scholarship Body Fiduciary Funds Funds Funds ASSETS Cash and cash equivalents $ 660,962 $ 756,008 $ 1,416,970 Total assets 660, ,008 1,416,970 LIABILITIES Due to student groups - 756, ,008 Total liabilities - 756, ,008 NET POSITION Reserved for scholarships 660, ,962 Total net position $ 660,962 $ - $ 660,962 The accompanying notes are an integral part of these financial statements. 21.

92 GILROY UNIFIED SCHOOL DISTRICT FIDUCIARY FUND CHANGES IN NET POSITION FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Private-Purpose Trust Scholarship Funds Additions Donations $ 63,650 Deductions Scholarships 13,475 Changes in Net Position 50,175 Net Assets Net Position - July 1, ,787 Net Position - June 30, 2014 $ 660,962 The accompanying notes are an integral part of these financial statements. 22 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. HISTORY OF DISTRICT Gilroy Unified School District is located in the southernmost region of Santa Clara County. It is one of a few districts in the county that continues to grow. Over the last 19 years, the student population has grown from 8,448 in to more than 11,000 K - 12 students today. The surrounding Gilroy community has experienced growth in housing and industry. Known for its garlic fields, the agricultural areas that surround Gilroy provide a diverse array of agribusiness opportunities for its occupants. The town has also become home to commuters in Silicon Valley and San Jose. Even with the current economic downturn, many of the agribusinesses and other operations are thriving. The housing industry crisis has not impacted the increase in students, which exceeded projected numbers this year by 360 students. The Gilroy Unified School District was established in July 1, 1966, under the laws of the State of California. The District operates under a locally elected seven-memberboard formof government and provides educational services to grades K - 12 as mandated by the State and Federal agencies. The District operates eight elementary schools, three middle schools, three high schools, one community day school, one independent study school, one continuation school, and an adult school. B. REPORTING ENTITY The 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 Gilroy Unified School District, this includes general operations, food service, and student related activities of the District. Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. For financial reporting purposes, the component unit has a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus is included in the financial statements of the District. The component unit, although a legally separate entity, is reported in the financial statements using the blended presentation method as if it were part of the District's operations because the governing board of the component unit is essentially the same as the governing board of the District and because its purpose is to finance the construction of facilities to be used for the direct benefit of the District. The Building Corporation's financial activity is presented in the financial statements as a subfund of the Building fund, Capital Facilities fund and Tax Override fund. Certificates of participation issued by the Corporation are included as long-term liabilities in the government-wide financial statements. Individually-prepared financial statements are not prepared for the Building Corporation. 23

93 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 C. ACCOUNTING POLICIES The Gilroy Unified School District (the District) accounts for its financial transactions in accordance with the policies and procedures of the Department of Education's California School Accounting Manual. The accounting policies of the District conform to generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants. For state entitlement programs, the District has elected to match the revenues in the period that program expenditures are made to be consistent with the accounting for grants and other revenues. D. BASIS OF PRESENTATION Government-wide Financial Statements The statement of net position and the statement of activities display information about the District. These statements include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. The government-wide statement of net position presents information on all of the District s assets and liabilities, with the difference between the two presented as net position. Net position is reported as one of three categories: invested in capital assets, net of related debt; restricted; or unrestricted. Restricted net position are further classified as either net position restricted by enabling legislation or net assets that are otherwise restricted. 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 identifies the extent to which each governmental function is self-financing or draws from the general revenues of the District. The District reports all direct expenses by function in the Statement of Activities. Direct expenses are those that are clearly identifiable with a function. Depreciation expense is specifically identified by function and is included in the direct expense function. Interest on long-term liabilities is considered an indirect expense and is reported separately in the Statement of Activities. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major governmental fund is presented in a separate column, and all non-major funds are aggregated into one column. Fiduciary funds are reported by fund type. 24 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 E. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING Government-Wide Financial Statements The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements are met. Expenses are recorded when liabilities are incurred. Governmental Fund Financial Statements Governmental fund financial statements (i.e., balance sheet and statement of revenues, expenditures, and changes in fund balances) are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded under the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, available means collectible within the current period or within 60 days after year-end. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, grants, and entitlements. Under the accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants and entitlements is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are to be used, or the fiscal year when use is first permitted; matching requirements, in which the District must provide local resources to be used for a specified purpose; and expenditure requirements, in which the resources are provided to the District on a reimbursement basis. Under the modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. 25

94 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 F. FUND ACCOUNTING The accounts of the District are organized on the basis of funds or account groups, each of which is considered to be a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate. District resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent and the means by which spending activities are controlled. The District funds are as follows: Major Governmental Funds: The General Fund is the general operating fund of the District. It is used to account for the ordinary operations of the District. All transactions except those accounted for in another fund are accounted for in this fund. The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued. The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code sections ). Expenditures are restricted to the purposes specified in Government Code sections or to the items specified in agreements with the developer (Government Code Section 66006). Non-Major Governmental Funds: The Special Revenue funds are established to account for the proceeds from specific revenue sources (other than trusts, major capital projects, or debt service) that are restricted or committed to the financing of particular activities and that compose a substantial portion of the inflows of the fund. Additional resources that are restricted, committed, or assigned to the purpose of the fund may also be reported in the fund. The Adult Education Fund is used to account separately for Federal, State, and local revenues for adult education programs and is to be expended for adult education purposes only. The Child Development Fund is used to account separately for Federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs. The Cafeteria Fund is used to account separately for Federal, State, and local resources to operate the food service program (Education Code Sections ) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections and 38100). The Deferred Maintenance Fund is used to account separately for State apportionments and the District's contributions for deferred maintenance purposes (Education Code Sections ) and for items of maintenance approved by the State Allocation Board. 26 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Governmental Funds (Continued): The Debt Service Funds are used to account for the accumulation of restricted, committed, or assigned resources for the payment of principal and interest on general long-term obligations. The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a district (Education Code Sections ). The Tax Override Fund is used for the repayment of voted indebtedness (other than Bond Interest and Redemption Fund repayments) to be financed from ad valorem tax levies. The Capital Project Funds are used to account for and report financial resources that are restricted, committed, or assigned to the acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary funds and trust funds). The County School Facilities Fund is established pursuant to Education Code Section to receive apportionments from the 1998 State School Facilities Fund (Proposition la), 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 grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section et seq.). Proprietary fund reporting focuses on the determination of operating income, changes in net position, financial position, and cash flows. Proprietary funds are classified as enterprise or internal service. The District has only one following proprietary fund: Internal Service Funds may be used to account for any activity for which services are provided to other funds of the District on a cost-reimbursement basis. The District operates a Self- Insurance fund that is accounted for in an internal service fund. Fiduciary Funds are used to account for assets held in trustee or agent capacity for others that cannot be used to support the district s own programs. The fiduciary fund category includes Trust and agency funds. The Private Purpose Trust Fund is used to account for assets held by the District as a trustee. The District maintains a private-purpose trust fund, the Scholarship fund, to provide scholarships to students of the District. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The District's agency funds include Associate Student Body that accounts for student body activities (ASB) and Foundation Fund. The District uses agencyfunds for student body funds to account for the raising and expending of money to promote the general welfare, morale and educational experience of the student body. These funds activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. These funds are custodial in nature and do not involve measurement of results of operations. Accordingly, the District presents only a statement of fiduciary net assets and does not present a statement of changes in fiduciary net assets. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the District s own programs. Fiduciary funds are presented on an economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements. 27

95 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 G. BUDGETS AND BUDGETARY ACCOUNTING Annual budgets are adopted on a basis consistent with generally accepted accounting principles for all governmental funds. By state law, the District's governing board must adopt a final budget no later than July 1. A public hearing must be conducted to receive comments prior to adoption. The District's governing board satisfied these requirements. During the year, budget revisions by the District's governing board and district superintendent give consideration to unanticipated revenue and expenditures. The final revised budgets are presented in the financial statements. Formal budgetary integration was employed as a management control device during the year for all budgeted funds. The District employs budget control by major object and by individual appropriation accounts. Expenditures cannot legally exceed appropriations by major object account. The budgets are revised during the year by the District s Board of Education and District Superintendent to provide for unanticipated revenues and expenditures. H. ENCUMBRANCES Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated when the commitments are paid. All encumbrances are liquidated at June 30. I. 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. For the District, available means expected to be received within 90 days of fiscal year-end. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose restrictions. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Under the modified accrual basis, the following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. 28 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 J. UNEARNED REVENUE Unearned Revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred 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 deferred revenue. K. 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 long-term obligations, which have not matured, are recognized when paid in the governmental funds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds but are recognized in the entity-wide statements. L. CASH AND CASH EQUIVALENTS The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and shortterm 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. M. INVESTMENTS Investments held at June 30, 2014, 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. N. 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. O. STORES INVENTORIES Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost, on the weighted average basis. The costs of inventory items are recorded as expenditures in the governmental type funds and expenses in the proprietary type funds when used. P. CAPTIAL 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 costs 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. 29

96 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide statement of net assets. 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. Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: Asset Class Estimated Useful Life in Years Buildings and improvements 7-50 (case by case) Furniture and equipment 3-10 (case by case) Q. INTERFUND BALANCES On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables". These amounts are eliminated in the governmental and business-type activities columns of the statement of net position. R. COMPENSATED ABSENCES Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide financial statements. 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 except paraprofessional employees who are members of the California School Employees Association (CSEA) and Gilroy Federation of Teachers and Paraprofessionals (GFT). The CSEA and GFT paraprofessional employees are paid for 25 percent of accumulated unused sick leave balance at termination of employment. Therefore, the value of accumulated sick leave is 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. S. 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 governmental funds are reported as a liability in the governmental fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and other long-term obligations are recognized as liabilities in the governmental fund financial statements when due. 30 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 T. DEFERRED ISSUANCE COSTS, PREMIUMS AND DISCOUNTS In the government-wide financial statements and in the proprietary fund type financial statements, longterm debt and other long-term obligations are reported as liabilities in the applicable governmental activities, or proprietary fund statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight line method. U. LOCAL CONTROL FUNDING FORMULA/PROPERTY TAX The District's local control funding formula is received from a combination of local property taxes, state apportionments, and other local sources. Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Santa Clara bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. The County Auditor reports the amount of the District's allocated property tax revenue to the California Department of Education. Property taxes are recorded as local control funding formula (LCFF) sources by the District. The California Department of Education reduces the District's entitlement by the District's local property tax revenue. The balance is paid from the State General Fund, and is known as the state apportionment. V. FUND BALANCE The governmental fund financial statements present fund balances based on classifications that comprise a hierarchy that is based primarily on the extent to which the District is bound to honor constraints on the specific purposes for which amounts in the respective governmental funds can be spent. The classifications used in the governmental fund financial statements are as follows: Nonspendable: This classification includes amounts that are not expected to be converted to cash, such as resources that are not in a spendable form (e.g. inventories and prepaids) or that are legally or contractually required to be maintained intact. The District has classified it revolving cash account as being Nonspendable as it is required to be maintained intact. Restricted: This classification includes amounts constrained to specific purposes by their providers or by law. The District has classified federal and state categorical programs as being restricted because their use is restricted by Statute. Debt service resources are to be used for future servicing of the general obligation bonds and are restricted through debt covenants. Committed: This classification includes amounts constrained to specific sources by the Board. For this purpose, all commitments of funds shall be approved by a majority vote of the Board. The constraintsshallbeimposednolaterthan theend ofthereportingperiod ofjune30, although the actual amounts may be determined subsequent to that date but prior to the issuance of the financial statements. The District did not have any committed resources as of June 30,

97 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Assigned: This classification includes amounts which the Board or its designee intends to use for a specific purpose but are neither restricted nor committed. The Board delegates authority to assign funds to the assigned fund balance to the Superintendent or designee and authorizes the assignment of such funds to be made any time prior to the issuance of the financial statements. This classification also includes the remaining positive fund balance for all governmental funds except for the General Fund. The Agency has assigned funds for Other Capital Projects that are to be used for the repair and replacement of equipment. Unassigned: This classification includes the residual fund balance for the General Fund and includes the amount designated for economic uncertainties. To protect the District against unforeseen circumstances such as revenue shortfalls and unanticipated expenditures, the Board maintains a minimum unassigned fund balance which includes a reserve for economic uncertainties equal to at least one month of average general fund expenditures or 8% of general fund expenditures and other financing uses. If the unassigned fund balance falls below this level due to an emergency situation, unexpected expenditures, or revenue shortfalls, the Board shall develop a plan to recover the fund balance which may include dedicating new unrestricted revenues, reducing expenditures, and/or increasing revenues or pursuing other funding sources. When multiple types of funds are available for an expenditure, the District shall first utilize funds from the restricted fund balance as appropriate, then from committed fund balance, then from the Assigned fund balance, and lastly from the Unassigned fund balance. W. 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 legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position is available. X. 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 primarily interfund insurance premiums. Operating expenses are necessary costs incurred to provide the goods or services that are the primary activity of the fund. Y. INTERFUND ACTIVITY Transfers between governmental activities in the government-wide financial statements are reported in the same manner as general revenues. 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 32 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented in the financial statements. Z. 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. 2. CASH AND INVESTMENTS Cash at June 30, 2014 consisted of the following: Governmental Proprietary Fiduciary Activities Activities Activities Cash on hand and in banks $ 79,486 $ 14 $ 1,416,970 Cash in revolving fund 25, Cash with fiscal agent 3,121, ,061 - Cash in county treasury 22,598, ,419 - Total Cash and Cash Equivalents $ 25,824,708 $ 1,133,494 $ 1,416,970 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. A. Cash in Bank and Revolving Funds Cash balances held in banks and revolving funds are insured up to $250,000 by the Federal Depository Insurance Corporation. All cash held by the financial institution is fully insured or collateralized. B. Cash with Fiscal Agent Cash with Fiscal Agent represents funds held by third parties restricted for the repayment of General Obligation Bonds and Certificates of Participation, The carrying value is % of the market value or ($21) less. A market value adjustment was not made. 33

98 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 C. Cash 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. The market value is of the book value or $26,282 more. A market value adjustment has not been made. 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. The District manages its exposure to interest rate risk by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. 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 measure by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by the California Government Code, the Districts' investment policy, or debt agreements, and the actual rating as of the year-end for each investment type. 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 governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agency. 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. The District believes it has no significant custodial credit risk. 34 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Custodial Credit Risk - 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 or collateral securities that are in possession of an outside party. Of the total investment held at the Bank of New York, the District has a custodial credit risk exposure of $3,721,249 because the related securities are uninsured, unregistered and held by the brokerage firm which is also the counterparty for these securities. The District does not have a policy limiting the amount of securities that can be held by counterparties. 3. INTERFUND TRANSACTIONS Transactions between funds of the District are recorded as interfund transfers. The unpaid balances at yearend, as a result of such transactions, are shown as due to and due from other funds. Interfund Receivables/Payables As of June 30, 2014, the interfund receivable and payable balances were as follows: Interfund Interfund Receivables Payables Major Funds General Fund $ 512,756 $ 458,137 Building Fund 1,367,281 - Capital Facilities Fund - 1,367,281 Nonmajor Funds Adult Education Fund 124,553 6,345 Child Development - 60,000 Deferred Maintenance 332,901 - Cafeteria Special Revenue Fund ,411 Total $ 2,338,174 $ 2,338,174 Interfund Transfers Transfer from General Fund to the Deferred Maintenance 662,901 for program support Transfer from General Fund to the Cafeteria Special Revenue Fund for 257,560 Indirect Costs Transfer from General Fund to Adult Education Fund for 76,620 program support Transfer from Child Development Fund to the General Fund for 41,850 Indirect Costs Total Transfers $ 1,038,931 35

99 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, CAPITAL ASSETS Capital asset activity for the year ended June 30, 2014 is shown below: Balance Balance July 1, 2013 Additions Deletions June 30, 2014 Non-depreciable assets: Land $ 58,067,162 $ - $ - $ 58,067,162 Construction in progress 6,934,876 12,432,964 3,577,617 15,790,223 65,002,038 12,432,964 3,577,617 73,857,385 Depreciable assets: Buildings and Improvements 333,511,758 3,585,544 7, ,089,375 Furniture and equipment 6,181, ,621-7,010, ,693,646 4,414,165 7, ,099,884 Totals, at cost 404,695,684 16,847,130 3,585, ,957,270 Accumulated depreciation: Building and Improvements 63,491,646 7,417, ,909,465 Furniture and Equipment 5,557, ,084-5,802,458 69,049,020 7,663, ,711,923 Depreciable assets, net 270,644,626 (3,248,861) 7, ,387,961 Capital assets, net $ 335,646,664 $ 9,184, $ 3,585,420 $ 341,245,347 The entire amount of depreciation expense was unallocated in the Statement of Activities. 36 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, LONG-TERM LIABILITIES Summary The changes in the District s long-term obligations during the year consisted of the following: Amounts Balance Balance Due Within June 30, 2013 Additions Deductions June 30, 2014 One Year General Obligation Bond $ 161,199,998 $ 1,678,167 $ 2,290,000 $ 160,588,165 $ 1,250,000 Bond Anticipation Note 15,577, ,577,715 15,385,000 Certificates of Participation 31,425, ,000 30,850, ,000 Accumulated vacation - net 105,645-26,555 79,090 - Capital Leases 110,006-84,934 25,072 25,072 Early Retirement Incentive 899,403 1,063, ,808 1,494, ,808 Sub total 209,317,767 2,741,182 3,444, ,614,652 17,727,880 Unamortized general obligation bond premium 10,840, ,549 10,367,538 - Unamortized certificates of participation premium 613,288-25, ,734 - Unamortized defeasance costs - Bond Anticipation (192,715) - (64,238) (128,477) - Unamortized Loss on Refunding (7,481,250) (427,500) - (7,908,750) - Total long term obligation $ 213,097,177 $ 2,313,682 $ 3,878,162 $ 211,532,697 $ 17,727,880 Payment of the general obligation bonds will be made by the Bond Interest and Redemption Fund. The Bond Interest and Redemption Fund receives property tax revenues which are used solely to repay the principal and interest due on these obligations. Principal payments of the Bond Anticipation Note will be made using proceeds from the expected issuance of a Measure P General Obligation Bond. Payments on 2001, 2004 and 2007 Certificates of participation are paid by the Tax Override Fund. Payments on the 2008 certificates of participation are paid by the Capital Facilities Fund. The accrued vacation and early retirement incentive will be paid by the fund for which the employee worked. General Obligation Bonds The outstanding general obligation bonded debt is as follows: Balance Balance Issue Date Maturity Date Interest Rate Original Issue June 30, 2013 Issued/ Accretion Redeemed June 30, /12/ /01/32 3.0%-6.81% 49,986,615 50,529, ,167 1,100,000 $ 49,918,165 2/27/ /01/ %-5% 110,670, ,670, $ 110,670,000 $ 229,656,615 $ 161,199,998 $ 488,167 $ 1,100,000 $ 160,588,165 Premium GO Bond $ 10,367,538 $ 170,955,703 37

100 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 LONG-TERM LIABILITIES (Continued) Debt Service Requirements to Maturity The bonds mature through 2048 as follows: Year Ending June 30 Principal Interest to Maturity Total ,250,000 7,426,438 8,676, ,450,000 7,376,969 8,826, ,000,000 7,616,750 9,616, ,205,000 7,252,400 9,457, ,435,000 7,349,100 9,784, ,115,000 36,964,199 56,079, ,450,000 29,113,722 52,563, ,751,615 56,956,250 61,707, ,205,000 40,466,025 59,671, ,470,000 49,331,150 82,801, ,250,000 53,918, ,168,750 Total $ 158,581,615 $ 303,771,752 $ 462,353,367 Total Accretion 2,006,550 Total GO Bonds $ 160,588,165 Bond Anticipation Note On June 1, 2011, the District issued a Bond Anticipation Note in the amount of $15,385,000. Interest payments are due April 1 and October 1 of each year starting October 1, 2011 with interest rate of 3.96 percent. The note is payable as follows: Principal Interest Total ,385, ,246 15,994,246 Certificates of Participation In June 2001, the District Building Corporation issued certificates of participation in the amount of $31,250,000 through the George K. Baum & Company with interest rates ranging from 2.90 to 5.50 percent. On September 1, 2011 the outstanding principal balance of $7,210,000 was paid off. In July 2007, the District Building Corporation issued certificates of participation in the amount of $5,725,000 through the George K. Baum & Company with interest rates ranging 4.5 to 5.0 percent. As of June 30, 2012, the principal balance outstanding was $550,000. The certificates mature on September 1, GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 LONG-TERM LIABILITIES (Continued) In May 2008, the District issued certificates of participation in the amount of $33,000,000 through the George K. Baum & Company with interest rates ranging from 3.75 to 5.25 percent. As of June 30, 2012, the principal balance outstanding was $31,975,000. The certificates mature through The aggregate principal outstanding for all issues is as follows: Year Ending June 30 Principal Interest Total ,000 1,563,000 2,163, ,000 1,533,000 2,158, ,000 1,501,750 2,151, ,000 1,469,250 2,144, ,000 1,435,500 2,160, ,100,000 6,641,250 10,741, ,255,000 5,482,500 10,737, ,720,000 4,005,750 10,725, ,500,000 2,099,688 13,599,688 Total 30,850,000 25,731,688 56,581,688 Capitalized Lease Obligations The District s liabilities on lease agreements with options to purchase are summarized below: Buses Copier Total Balance, July 1, 2013 $114,645 $1,943 $116,588 Payments 88,306 1,943 90,249 Balance, June 30, 2014 $26,339 - $26,339 The capital leases have minimum lease payments as follows: Year Ending Lease June 30, Payment ,339 Less: Amount Representing Interest 1,267 Present Value of Minimum Lease Payments $25,072 39

101 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 LONG-TERM LIABILITIES (Continued) Early Retirement Incentive Programs In the fiscal year, the District offered an early retirement incentive to eligible certificated employees. Fourteen employees took the incentives. Retirement benefits totaling $814,585 will be paid out in installments of $162,917 each year for the next five years starting on August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of the fiscal year. In the fiscal year, the District offered an early retirement incentive to eligible certificated employees. Seventeen employees took the incentives. Retirement benefits totaling $890,935 will be paid out in installments of $178,187 each year for the next five years starting on August 1,2010. The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of the fiscal year. In the fiscal year the District offered an early retirement incentive to eligible certificated employees. Twelve employees took the incentives. Retirement benefits totaling $633,520 will be paid out in installments of $126,704 each year for the next five years starting on August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of the fiscal year. In the fiscal year the District offered an early retirement incentive to eligible certificated employees. Twenty-two employees took the incentives. Retirement benefits totaling $1,063,075 will be paid out in installments of $212,603 each year for the next five years starting on July 1, and August 1, The offers were extended to those who were at least 58 years of age with 10 or more years of permanent services to the District at the end of the fiscal year. 40 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, FUND BALANCE As of these financial statements, the District has adopted GASB Statement No. 54, which redefined how fund balances of the governmental funds are presented in the financial statements. The following schedule is a summary of the components of the ending fund balance by fund type at June 30, 2014: General Fund Building Fund Capital Facilities Fund All Non-Major Funds Total Nonspendable: Revolving cash $ 25,000 $ - $ - $ - $ 25,000 All others Stores 155, , ,196 Total Nonspendable 180, , ,585 Restricted for: English learners Medi-Cal Billing Option 549, ,645 California Clean Energy Jobs Act 485, ,853 Common Core State Stanards Implementation 1,648, ,648,363 Lottery: Instrucitonal Materials 111, ,811 Ongoing & Major Maintenance Account 119, ,778 Child Development: Center-Based Reserve Account ,125 35,125 State School Facilities Projects ,193,391 1,193,391 Child Nutrition: SchoolPrograms , ,190 Other Restricted Local - 8,830,135-5,165,682 13,995,817 Total Restricted 2,915,450 8,830,135-7,076,388 18,821,973 Committed: Other Commitments - 1,296,170 1,365,023 4,105,628 6,766,821 Total Committed - 1,296,170 1,365,023 4,105,628 6,766,821 Assigned to: EIA/SCE Fund Balance Resource , ,695 EIA/LEP Fund Balance Resource , ,049 Transportation Fund Balance Resource 29, ,087 Total Assigned 462, ,831 Unassigned: Economic uncertainties 2,752, ,752,894 Unassigned/Unappropriated 2,558, ,558,915 Total Unassigned 5,311, ,311,809 TotalFund Balances $ 8,870,955 $ 10,126,305 $ 1,365,023 $ 11,273,736 $ 31,636,019 41

102 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, EMPLOYEE RETIREMENT SYSTEMS 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 System and classified employees are members of the Public Employees' Retirement System. A. California Public Employees Retirement System (CalPERS) Plan Description. The District contributes to the School Employer Pool under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by state statutes, as legislatively amended, within the Public Employees' Retirement Law. CalPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California Funding Policy. Active plan members are required to contribute 7% of their salary while the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalPERS Board of Administration. The required employer contribution rate for fiscal year was % of annual payroll. The contribution requirements of the plan members are established by the state statute. The District's contributions to CalPERS for the fiscal year ending June 30, 2014, 2013 and 2012 were $1,621,038, $1,489,832, and $1,370,466, respectively, and equal 100% of the required contributions for each year. B. State Teachers Retirement System (STRS) Plan Description. The District contributes to the State Teachers' Retirement System (STRS), a costsharing, multiple-employer, public employee retirement system defined benefit pension plan administered by STRS. The plan provides retirement and disability benefits and survivor benefits to beneficiaries. Benefit provisions are established by state statutes, as legislatively amended, within -the State Teachers' Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the STRS annual financial report may be obtained from the STRS, 7667 Folsom Boulevard, Sacramento, California Funding Policy. Active plan members are required to contribute approximately 8.1% of their salary while the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers' Retirement Board. The required employer contribution rate for fiscal year was 8.25% of annual payroll. The contribution requirements of the plan members are established by the state statute. The District's contributions to STRS for the fiscal year ending June 30, 2014, 2013 and 2012 were $3,733,108, $3,441,064, and $3,318,096, respectively, and equal 100% of the required contributions for each year. 42 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, COMMITMENTS AND CONTINGENCIES The District has received state and federal funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is management s opinion that any required reimbursement subsequently determined will not have a material effect on the District s financial position. 9. JOINT VENTURES The District is a member of the Santa Clara County Schools Insurance Group (SCCSIG) public entity risk pool (the pool). The District pays an annual premium for its property liability coverage. The relationship between the District and the pool is such that the pool is not a component unit of the District for financial reporting purposes. SCCSIG has 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 by contracting with SCCSIG. The District has appointed one board member to the Governing Board of the Santa Clara County Schools Insurance Group. During the year ended June 30, 2014, the District made payment of$603,360 to the Santa Clara County Schools Insurance Group. The most recent condensed financial information available for the year ended June 30 is as follows: 2013* 2013* ReLiEF SCCSIG (Audited) (Audited) Total Assets $ 68,154,000 $ 15,154,589 Total Liabilities 43,117,190 5,327,029 Net Position 25,036,810 9,827,560 Total Liabilities and Net Position $ 68,154,000 $ 15,154,589 Total Revenues 16,785,404 28,596,859 Total Expenditures 21,795,973 28,140,496 Increase (Decrease) in Net Position $ (5,010,569) $ 456,363 * Most recent report availible 43

103 GILROY UNIFIED SCHOOL DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, TAX AND REVENUE ANTICIPATION NOTES The District issued $8,020,000 of tax and revenue anticipation notes (TRANs) dated July 15, The issuance cost was $20,500, Underwriter s discount of $8,020 and the premium was $126, The final cost for the TRANs was $8,138, The note matures in 2 installments at 2% interest. The first payment of $4,010,000 was made on January 31, 2014 and second payment of $4,151, was made on April 30, The District issued $6,880,000 of tax and revenue anticipation notes (TRANs) dated July 15, The issuance cost was $23,500, Underwriter s discount of $6,880 and the premium was $128, The final cost for the TRANs was $7,016, The note matures in 2 installments at 2% interest. The first payment of $3,440,000 is scheduled to be made on January 31, 2015 and second payment of $3,576, is scheduled to be made on April 30, The notes were sold to supplement cash flow. 11. SUBSEQUENT EVENTS The District s management evaluated its June 30, 2014 financial statements for subsequent events through November 21, 2014, the date the financial statements were available tobeissued. Management is not aware of any subsequent events that would require recognition or disclosure in the financial statements. 44 REQUIRED SUPPLEMENTARY INFORMATION

104 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET (NON-GAAP) AND ACTUAL GENERAL FUND FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Variance with Final Budget Budget Favorable Original Final Actual (Unfavorable) REVENUES LCFF revenue 60,611,765 63,604,547 73,207,474 9,602,927 Federal revenue 5,639,714 7,232,004 6,367,773 (864,231) Other state revenues 12,823,626 15,926,386 7,454,890 (8,471,496) Other local revenues 4,090,453 5,023,228 4,238,430 (784,798) Total revenues 83,165,558 91,786,165 91,268,567 (10,120,525) EXPENDITURES Certificated salaries 42,537,145 44,499,003 45,282,985 (783,982) Classified salaries 12,222,534 13,770,899 13,680,082 90,817 Employee benefits 14,717,268 14,607,892 14,308, ,114 Books and supplies 3,681,444 6,226,936 3,279,003 2,947,933 Services and other operating - expenditures 9,557,693 14,540,666 11,593,326 2,947,340 Capital outlay - 709, ,471 (60,871) Other outgo 1,373,552 1,971,197 2,515,304 (544,107) Total expenditures 84,089,636 96,326,193 91,429,949 4,896,244 Excess (deficiency) of revenues over expenditures (924,078) (4,540,028) (161,382) 4,378,646 OTHER FINANCING SOURCES (USES) Operating transfers in ,410 (299,410) Operating transfers out - (330,000) (739,521) 409,521 Total other financing sources (uses) - (330,000) (440,111) (110,111) Net change in fund balances (924,078) (4,870,028) (601,493) 4,268,535 Fund balances, July 1, ,472,448 9,472,448 9,472,448 - Fund balances, June 30, 2014 $ 8,548,370 $ 4,602,420 $ 8,870,955 $ 4,268, GILROY UNIFIED SCHOOL DISTRICT NOTES TO REQUIRED SUPPLEMENTARY INFORMATION FOR THE FISCAL YEAR ENDED JUNE 30, PURPOSE OF SCHEDULES A. Budgetary Comparison Schedule The District employs budget control by object codes and by individual appropriation accounts. Budgets are prepared on the modified accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board. The budgets are revised during the year by the Board of Trustees to provide for revised priorities. Expenditures cannot legally exceed appropriations by major object code. The originally adopted and final revised budgets for the General Fund are presented as Required Supplementary Information. The basis of budgeting is the same as GAAP. Excess of expenditures over appropriations for the year ended June 30, 2014 were as follows: General Fund: Excess Expenditures Certificated salaries $ 783,982 Capital outlay 60,871 The excess is not in accordance with Education Code

105 GILROY UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET 47 SUPPLEMENTARY INFORMATION ALL NON-MAJOR FUNDS JUNE 30, 2014 Cafeteria Adult Special Child Deferred County School Bond Interest Tax Education Revenue Development Maintenance Facilities and Redemption Override Fund Fund Fund Fund Fund Fund Fund Total ASSETS Cash and cash equivalents $ 11,212 $ 543,212 $ 5,928 $ 228,328 $ 45,930 $ 5,164,293 $ 3,634,601 $ 9,633,504 Accounts receivable 4, ,071 99, ,193,410 1,389-2,008,728 Stores - 91, ,720 Due from other funds 124, , ,137 Total assets $ 139,900 $ 1,345,686 $ 105,401 $ 561,479 $ 1,239,340 $ 5,165,682 $ 3,634,601 $ 12,192,089 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 133,555 $ 125,365 $ 10,276 $ 136,401 $ - $ - $ - $ 405,597 Due to other funds 6, ,411 60, ,756 Total liabilities 139, ,776 70, , ,353 Fund balances Nonspendable - 91, ,720 Restricted - 682,190 35,125-1,193,391 5,165,682-7,076,388 Commitments ,078 45,949-3,634,601 4,105,628 Totalfund balances - 773,910 35, ,078 1,239,340 5,165,682 3,634,601 11,273,736 Total liabilities and fund balances $ 139,900 $ 1,345,686 $ 105,401 $ 561,479 $ 1,239,340 $ 5,165,682 $ 3,634,601 $ 12,192,089

106 GILROY UNIFIED SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE ALL NON-MAJOR FUNDS JUNE 30, 2014 Cafeteria Adult Special Child Deferred County School Bond Interest Tax Education Revenue Development Maintenance Facilities and Redemption Override Fund Fund Fund Fund Fund Fund Fund Total REVENUES Federal revenue - $ 4,275,955 $ 42,396 $ - $ - $ - $ - $ $ 4,318,351 2,350,877 Other state revenues - 307, ,412-1,193,391 64, Other local revenues ,262 78, ,867,014 (56,875) 9,688,449 Total revenues 155 5,381, , ,193,872 8,931,451 (56,848) 16,357,677 EXPENDITURES Certificated salaries 35, , ,272 Classified salaries 10,092 1,560, , ,811,144 Employee benefits 4, , , ,783 Books and supplies ,492 6, ,419 Services and other operating expenditures 132,270 2,752,427 25, , ,481,206 Capital outlay - 21, ,888 Other outgo 1, ,726 Debt service expenditures ,220,623-9,220,623 COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES ALL AGENCY FUNDS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Balance Balance June 30, 2013 Additions Deductions June 30, 2014 Assets: Cash on hand and in banks Brownwell Middle School $ 14,967 $ 3,697 $ - $ 18,664 Christopher High School 574, , , ,498 South Valley Middle School 4, , ,110 20,606 MT. Madonna High School 16,275 1,209 2,508 14,976 Eliot Elementary School 3, ,019 2,834 ASMS 42,010 95,664 97,708 39,966 Gilroy High School - 978, , ,305 Rucker Elementary School - 1,421-1,421 El Roble Elementary School - 25,280 13,080 12,200 Antonio Del Buono ES - 6, ,936 Gilroy Early College Academy - 73,363 46,761 26,602 Total Assets $ 655,181 $ 1,432,363 $ 1,331,536 $ 756,008 Liabilities: Due to Student Groups $ 655,181 $ 1,432,363 $ 1,331,536 $ 756, Total expenditures 184,492 4,872, , ,808-9,220,623-15,682,061 Excess of revenues over expenditures (184,337) 509,500 73,446 (570,845) 1,193,872 (289,172) (56,848) 675,616 OTHER FINANCING SOURCES (USES) Operating transfers in 76, , ,521 Operating transfers out - (257,560) (41,850) (299,410) Total other financing sources (uses) 76,620 (257,560) (41,850) 662, ,111 Net change in fund balances (107,717) 251,940 31,596 92,056 1,193,872 (289,172) (56,848) 1,115,727 Beginning Balance,July 1, , ,970 3, ,022 45,468 5,454,854 3,691,449 10,158,009 Fund balances, June 30, 2014 $ - $ 773,910 $ 35,125 $ 425,078 $ 1,239,340 $ 5,165,682 $ 3,634,601 $ 11,273,736 48

107 GILROY UNIFIED SCHOOL DISTRICT ORGANIZATION JUNE 30, 2014 The Gilroy Unified School District was established in July 1, 1966, under the laws of the State of California. The District operates under a locally elected seven-member Board form of government and provides educational services to grades K - 12 as mandated by the State and Federal agencies. The District operates eight elementary schools, three middle schools, two high schools, one early college high school, one independent study school, and one continuation school. GOVERNING BOARD Term Expires Name Office December Mark Good President 2016 James E. Pace Vice President 2014 Tom Bundros Member 2014 Patricia Midtgaard Member 2014 Dom Payne Member 2014 Jaime Rosso Member 2014 Fred Tovar Member 2016 ADMINISTRATION Dr. Deborah Flores Superintendent Alvaro Meza Assistant Superintendent, Business Services Marilyn Ayala Assistant Superintendent, Educational Services Kimberly Mason Director of Fiscal Services Kim Filice Director of Human Resources Barbara Brown Director of Student Services 50 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Second Period Annual Report Report Elementary TK through Third 3,297 3,296 Fourth through Sixth 2,435 2,438 Seventh to Eighth 1,655 1,648 Special Education 6 7 Extended Year ,403 7,399 Secondary Regular Classes 3,458 3,417 Special Education 4 3 Extended Year 5 6 3,467 3,426 10,870 10,825 See the accompanying notes to supplementary information. 51

108 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF INTRUCTIONAL TIME FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Standard Reduced Minutes Minutes Actual Instructional Grade Level Requirement Requirement Minutes Days Status Kindergarten 36,000 35,000 44, In compliance Grade 1 50,400 49,000 50, In compliance Grade 2 50,400 49,000 50, In compliance Grade 3 50,400 49,000 50, In compliance Grade 4 54,000 52,500 54, In compliance Grade 5 54,000 52,500 54, In compliance Grade 6 54,000 52,500 60, In compliance Grade 7 54,000 52,500 60, In compliance Grade 8 54,000 52,500 60, In compliance Grade 9 64,800 63,000 64, In compliance Grade 10 64,800 63,000 64, In compliance Grade 11 64,800 63,000 64, In compliance Grade 12 64,800 63,000 64, In compliance See the accompanying notes to supplementary information. 52 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS FOR FISCAL YEAR ENDED JUNE 30, 2014 Included in District Financial Statements, Charter Schools Chartered by District or Separate Report Gilroy Prep Academy Separately Reported See the accompanying notes to supplementary information. 53

109 GILROY UNIFIED SCHOOL DISTRICT RECONCILIATION OF UNAUDITED ACTUAL FINANCIAL REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements for the fiscal year ended June 30, Capital Self General Building Facilities Non-Major Insurance FUND BALANCE Balance, June 30, 2014, Unaudited Actuals $ 8,977,880 $ 10,066,606 $ 4,231,346 $ 8,467,112 $ 1,091,018 Increase in: Cash with fiscalagent/trustee - 59,699-2,806,624 Decrease in: Cash in County Treasury - - (2,806,624) - - Cash with fiscalagent/trustee - - (59,699) - (255,361) Stores (106,926) - Accounts Payable ,366 Professional/Consulting Services & Operating Expenditures Balance, June 30, 2014, Audited Financial Statement $ 8,870,955 $ 10,126,305 $ 1,365,023 $ 11,273,736 $ 1,051,023 See the accompanying notes to supplementary information. 54 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Pass- Through Federal Pass-Through CFDA Entity Identifying Federal Number Grantor and Program Title Number Expenditures U.S. Department of Education Passed through California Department of Education Special Education Cluster: Special Education: IDEA Basic Local Assistance Entitlement, Part B, Section 611 (Formerly PL ) $1,624, Special Education: IDEA Local Assistance, Part B, Sec 611, Private School ISPs , A SpecialEducation: MentalHealth Allocation Plan, Part B, Section , A Special Ed: IDEA Preschool Local Entitlement, Part B, Section 611 (AGE 3-4-5) , SpecialEd: IDEA PreschoolGrants, Part B, Section 619 (Age 3-4-5) , Special Ed: IDEA Preschool Staff Development, Part B, Sec Subtotal Special Education Cluster 1,988, NCLB: Title I, Part A, Basic Grants Low-Income and Neglected ,158, B NCLB Title I, Part G: Advanced Placement (AP) Test Fee Reimbursement Program , NCLB: Title I, Part C, Migrant Ed (Regular and Summer Program) , NCLB: Title I, Migrant Ed Summer Program , NCLB: Title I, Part A, Program Improvement LEA Corrective Action, Minor Performance Problems , NCLB: Title II, Part A, Improving Teacher Quality LocalGrants , NCLB (ESEA) : Title III, Limited English Proficient (LEP) Student Program , NCLB: Title IV, Part B, 21st Century Community Learning Centers Program , Department of Rehabilitation: Workability II, Transitions Partnership Program ,016 Total U.S. Department ofeducation 5,559,466 U.S. Department of Agriculture Passed through California Department of Education Child Nutrition: SchoolPrograms ,275,955 Total U.S. Department ofagriculture 4,275,955 U.S. Department of Health and Human Services Passed through California Department of Education Dept of Health Care Services (DHCS): Medi-CalBilling Option , Child Development: Federal Family Child Care Homes ,396 Passed through Santa Cruz County Office of Education Medi-Cal Administrative Activities (MAA) ,254 Total U.S. Department ofhealth and Human Services 850,703 Total Federal Programs $ 10,686,124 See the accompanying notes to supplementary information. 55

110 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 General Fund Adopted Budget Actuals Actuals Actuals 2014/ / / /2012 Revenues and Other Financial Sources $ 98,502,080 $ 91,268,567 $ 84,364,440 $ 82,859,461 Expenditures 98,565,120 91,429,949 83,037,515 82,744,423 Other Uses and Transfers Out 2,173, , ,936 (338,517) Total Outgo 100,738,696 91,870,060 83,204,451 82,405,906 Change in Fund Balance (2,236,616) (601,493) 1,159, ,555 Ending Fund Balance $ 6,634,339 $ 8,870,955 $ 9,472,448 $ 8,312,459 Available Reserves * $ 6,636,264 $ 5,311,809 $ 7,780,422 $ 7,329,246 Designated for Economic Uncertainties $ 5,036,935 $ 2,752,894 $ 2,369,771 $ - Undesignated Fund Balance $ 1,599,329 $ 2,558,915 $ 5,410,651 $ - Available Reserves as a Percentage of Total Outgo 6.6% 5.8% 9.4% 8.9% All Funds Total Long-Term Debt $ 190,886,772 $ 208,614,652 $ 209,317,767 $ 216,567,621 Actual Daily Attendance at P-2 10,870 10,870 10,775 10,560 (Exclusive of Adult ADA) *Available reserves consist of all undesignated fund balances and all funds designated for economic uncertainty contained within the General Fund The general fund balance has increased by $558,496 over the past two years. For a District this size, the State of California recommends available reserves of at least 3 percent of total general fund expenditures, transfers out, and other uses (total outgo). The district has met this requirement. Total long-term liabilities have decreased by $7,952,969 over the past two years. Average Daily Attendance (ADA) has increased by 310 over the past two years. The District anticipates no change in ADA in 2014/15. See the accompanying notes to supplementary information. 56 GILROY UNIFIED SCHOOL DISTRICT NOTES TO SUPPLEMENTARY INFORMATION FOR THE FISCAL YEAR ENDED JUNE 30, Schedule of Average Daily Attendance Average daily attendance is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. 2. 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 in accordance with the State s standard requirement as required by Education Code Section 46201(b). The District participated in the Longer Day incentives and met or exceeded its target funding. 3. Schedule of Charter Schools This schedule provides information for the California Department of Education to monitor financial reporting by Charter Schools. 4. Reconciliation of Unaudited Actual Financial Report with Audited Financial Statements This schedule provides information necessary to reconcile the Unaudited Actual Fund Financial Reports to the audited financial statements. 5. Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of federal awards includes federal grant activity of Gilroy Unified School District and is presented under the modified accrual basis of accounting. OMB Circular A-133 requires a disclosure of the financial activities of all federally funded programs. This schedule was prepared to comply with Circular A-133 and state requirements. Therefore, some amounts presented in this schedule may differ from amounts presented in or used in the preparation of the general purpose financial statements. Noncash assistance in the form of donated commodities was received from the California Department of Education as a pass-through grant from the U.S. Department of Agriculture. The total fair market value of commodities received during the fiscal year was $328,162 and is not included in the schedule. 6. 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. 57.

111 OTHER INDEPENDENT AUDITOR S REPORTS James Marta & Company LLP Certified Public Accountants Accounting, Auditing, Consulting and Tax INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH STATE LAWS AND REGULATIONS Board of Education Gilroy Unified School District Gilroy, California Report on Compliance for Each State Program We have audited the compliance of Gilroy Unified School District (the District ) with the types of compliance requirements described in the State of California s Standards and Procedures for Audits of California K-12 Local Education Agencies (the Audit Guide ) to the state laws and regulations listed below for the year ended June 30, Management s Responsibility Compliance with the requirements of state laws and regulations is the responsibility of District s management. Auditor s Responsibility Our responsibility is to express an opinion on the District s compliance based on our audit. 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 State of California s Standards and Procedures for Audits of California K-12 Local Education Agencies. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the state laws and regulations listed below occurred. An audit includes examining, on a test basis, evidence about the 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. Our audit does not provide a legal determination of the District s compliance with those requirements. Description Audit Guide Procedures Procedures Performed Attendance Reporting 6 Yes Teacher Certification and Misassignments 3 Yes Kindergarten Continuance 3 Yes Independent Study 23 No, see below Continuation Education 10 Yes Instructional Time for School Districts 10 Yes Instructional Materials General Requirements 8 Yes Ratio of Administrative Employees to Teachers 1 Yes Classroom Teacher Salaries 1 Yes Early Retirement Incentive Program 4 No, see below Gann Limit Calculation 1 Yes 701 Howe Avenue, Suite E3, Sacramento, CA fax jmarta@jpmcpa.com 58

112 Description Audit Guide Procedures Procedures Performed School Accountability Report Card 3 Yes Juvenile Court Schools 8 No, see below Local Control Funding Formula Certification 1 Yes California Clean Energy Jobs Act 3 Yes After Schools Education and Safety Program General requirements 4 Yes After School 5 Yes Before School 6 Yes Education Protection Account Funds 1 Yes Common Core Implementation Funds 3 Yes Unduplicated Local Control Funding Formula Pupil Counts 3 Yes Contemporaneous Records of Attendance, for Charter Schools 8 No, see below Mode of Instruction, for Charter Schools 1 No, see below Nonclassroom-Based Instruction/Independent Study, for Charter Schools 15 No, see below Determination of Funding for Nonclassroom-Based Instruction, for Charter Schools 3 No, see below Annual Instructional Minutes - Classroom Based, for Charter Schools 4 No, see below Charter School Facility Grant Program 1 No, see below We did not perform any procedures for Independent Study since ADA for this program is below materiality. We did not perform any procedures related to Early Retirement Incentive Program because the District did not offer this program. We did not perform any procedures related to Juvenile Court Schools because the District is not a CountyOffice of Education. We did not perform any procedures related to Contemporaneous Records of Attendance for Charter Schools, Mode of Instruction for Charter Schools, Nonclassroom-Based Instruction/Independent Study for Charter Schools, Determination of Funding for Nonclassroom-Based Instruction for Charter Schools, and Annual Instructional Minutes-Classroom-Based for Charter Schools, Charter School Facility Grant Program because the District did not have any charter schools. Opinion Modified Opinion on Compliance with State Laws and Regulations In our opinion, except for the noncompliance described in the Basis for Modified Opinion paragraph, Gilroy Unified School District complied, in all material respects, with the state laws and regulations referred to above for the year ended June 30, Basis for Modified Opinion on Compliance with State Laws and Regulations As described in Finding in the accompanying Schedule of Audit Findings and Questioned Costs, Gilroy Unified School District did not comply with requirements regarding Kindergarten Continuance. Compliance with such requirements is necessary, in our opinion, for Gilroy Unified School District to comply with state laws and regulations applicable to Attendance Accounting and Reporting. 59 Unmodified Opinion on Each of the Other State Programs In our opinion, except for the effects of the matter described in the Basis for Modified Opinion on Compliance with State Laws and Regulations, Gilroy Unified School District complied, in all material respects, with the other applicable state compliance requirements referred to above for the year ended June 30, Other Matters Gilroy Unified School District s response to the finding identified in our audit is included in the accompanying Schedule of Audit Findings and Questioned Costs. We did not audit the District s response and, accordingly, express no opinion on it. James Marta & Company LLP Certified Public Accountants Sacramento, California November 21,

113 James Marta & Company LLP Certified Public Accountants Accounting, Auditing, Consulting and Tax REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR S REPORT Board of Education Gilroy Unified School District Gilroy, California We have audited, 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, the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Gilroy Unified School District (the District ), as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, and have issued our report thereon dated November 21, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered 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 District s internal control. Accordingly, we do not express an opinion on the effectiveness of the District s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when thedesign 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. We consider the deficiencies described in the accompanying schedule of findings and questioned costs to be material weaknesses: , 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. We consider the deficiencies described in the accompanying schedule of findings and questioned costs to be significant deficiencies: Compliance and Other Matters As part of obtaining reasonable assurance about whether District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and questioned costs as items Gilroy Unified School District s Response to Findings The District s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The District s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity 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 entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. James Marta & Company LLP Certified Public Accountants Sacramento, California November 21,

114 James Marta & Company LLP Certified Public Accountants Accounting, Auditing, Consulting and Tax REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY OMB CIRCULAR A-133 INDEPENDENT AUDITOR S REPORT Board of Education Gilroy Unified School District Gilroy, California Report on Compliance for Each Major Federal Program We have audited the Gilroy Unified School District s (the District ) 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 District s major federal programs for the year ended June 30, The 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 of the District s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the 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 the District s compliance. 701 Howe Avenue, Suite E3, Sacramento, CA (916) fax (916) jmarta@jpmcpa.com 63 Opinion on Each Major Federal Program In our opinion, the 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, Internal Control Over Compliance Management of the 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 the District s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or 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. 64

115 Report on Schedule of Expenditures of Federal Awards Required by OMB Circular A-133 We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the District as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the District s basic financial statements. We issued our report thereon dated November 21, 2014, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by OMB Circular A-133 and is not a required part of the basic financial statements. Such 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. The information has been subjected to the auditing procedures applied in the audit of the 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 schedule of expenditure of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. James Marta & Company LLP Certified Public Accountants Sacramento, California November 21, FINDINGS AND RECOMMENDATIONS

116 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section I Summary of Auditor s Results Financial Statements Type of auditor s report issued: Summary of Opinions Opinion Unit Type of Opinion Governmental Activities Unmodified Major Funds Unmodified Aggregate Remaining Fund Information Qualified Basis for Qualified Opinion on Aggregate Remaining Fund Information We were unable to gather sufficient evidence to verify the balances in the Scholarship Trust funds. Internal control over financial reporting: Material weakness(es) identified? X Yes No Significant deficiency(ies) identified not considered to be material weakness(es)? X Yes None reported Noncompliance material to financial statements noted? Yes X No Federal Awards Type of auditor s report issued on compliance for major programs: Unmodified Internal control over major programs: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified not considered to be material weaknesses? Yes X None reported Any audit findings disclosed that are required to be reported in accordance with OMB Circular A-133, Section.510(a)? Yes X No Identification of major programs: CFDA Numbers Name of Federal Program or Cluster Child Nutrition: School Breakfast / NSL Title I Grants to Local Educational Agencies , A, , A Special Education Cluster Dollar threshold used to distinguish between Type A and Type B programs: $320,584 Auditee qualified as low-risk auditee? Yes X No State Awards 66 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Type of auditor s report issued on compliance for state programs: Modified Internal control over state programs: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified not considered to be material weaknesses? Yes X None reported 67

117 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section II Financial Statement Findings Internal Control Associate Student Body Criteria: The internal controls over the financial reporting of the Associated Student Body (ASB) accounts should include proper documentation, monitoring and overseeing the money used in the organization. Bank statements should be reconciled to the general ledger balance on a monthly basis. Condition: While performing the walk-through procedures of the ASB at Brownell Middle School we noted account reconciliations are not being performed and documented on a monthly basis. Also, during our year-end fieldwork, reconciliations for the following schools: Brownell Middle School were not available. Effect: The amount of cash reported at year end may be misstated as bank balances will not include any possible deposits in transit or checks outstanding. Cause: The policies and procedures for account and cash handling procedures, as outlined by the District, were not properly implemented by school site personnel. Recommendation: All ASB cash accounts should be reconciled between the cash balance per bank and per books. This can be easily tracked by using the template for reconciliations provided by the District. One of these templates should be completed monthly and reviewed for accuracy and approval by a second person, such as the Principal, and kept intact with the monthly bank statements. A copy of these should be forwarded to the District business office monthly. Management Response: The district has hired a Fiscal Controller and assigned that employee the responsibility of monitoring the various sites to ensure ASB reconciliations are being performed. The Fiscal Controller also is in charge of reviewing the reconciliations for accuracy. 68 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section II Financial Statement Findings Fixed Assets (30000) Material Weakness Criteria: Fixed assets financial data is to be maintained in a schedule which tracks all fixed assets in possession of the District, cost, date of purchase, date of disposal, current year depreciation and accumulated depreciation by class of fixed asset. Condition: The prior year fixed asset and depreciation schedule was not updated for current year activity. The Auditor however subsequently updated and reconciled fixed assets upon the district s request. Questioned Cost: None Context: None Cause: The District has experienced significant turn-over and vacancies in the past two years in the finance department. Fixed Assets were not being properly tracked. Effect: Fixed asset and depreciation balances may be misstated. Recommendation: Management should appoint an employee to be responsible to tracking purchases of fixed assets, disposals of fixed assets, depreciation calculations and work in process activity. A Depreciation Schedule and Roll Forward schedule should be maintained by this person, which will be used in conversion entries. Management Response: The District has hired a part-time Bond Accountant, who will work closely with management in Business Services to assist in maintaining the fixed asset schedule. The district is also implementing a process in which the Director of Fiscal Services will review the fixed asset schedule to ensure proper records. 69

118 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section II Financial Statement Findings Fiduciary Assets Foundation Fund (30000) Material Weakness Criteria: Fiduciary funds held in trust should be properly safeguarded and recorded. Condition: We were unable to confirm the balance of assets in the foundation fund as of June 30, In addition, the nonprofit foundation that holds the funds could not provide an independent audit report that displays a schedule of funds held in trust. Questioned Cost: $660,962 was reported on deposit with an outside nonprofit for the benefit of the Gilroy Foundation. Context: None Cause: The outside nonprofit does not hold the funds in an independent custodian account that separately accounts for and reports balances to Gilroy Unified School District. Effect: We were unable to independently verify amounts held in trust. Recommendation: To properly safeguard assets and provide accountability we suggest that cash and investments be held in the County Treasury, a bank or an independent custodian. We suggest the Superintendent of Business review and consider these options. Management Response: The district will request the Annual Audit report from the Silicon Valley Community Foundation, which will outline Gilroy Unified School District's Fiduciary Assets in relation to the Gilroy Foundation and ensure the safeguarding Gilroy Unified School District's cash investments. 70 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section III Federal Award Findings and Questioned Costs No matters were noted. 71

119 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Section III State Award Findings and Questioned Costs Kindergarten Continuance State Compliance Criteria: Per Section of the Education Code, a child who, consistent with Section 48000, has been admitted to the kindergarten maintained by a private or a public school in California or any other state, and who has completed one school year therein, shall be admitted to the first grade of an elementary school unless the parent or guardian of the child and the school district agree that the child may continue in kindergarten for not more than an additional school year. In order to include such students in the District s computation average daily attendance in accordance with Education Code Section 46300, the school district must have on file an agreement approved in form and content by the Department of Education and signed by the pupil s parent or guardian, that the pupil may continue in kindergarten for not more than one additional year. Condition: Of the students tested, the district was unable to provide a signed parental agreement to continue form for one student. Effect: The District inappropriately reported.2992 units of ADA for apportionment Cause: Due to the pupil transferring between schools during the school year, it is possible that the form was misplaced. Recommendation: The District should maintain signed parental agreement to continue forms for all students enrolled in kindergarten, not including transitional kindergarten, for two years. Management Response: The district has an Educational Services department that is responsible for ensuring that kindergarten continuance forms are obtained and filed appropriately. 72 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Associate Student Body (30000) Material Weakness Finding: We tested internal controls for the ASB at Gilroy High School during our interim fieldwork and noted the following control deficiencies: a. Revenue potential forms were prepared for some events but not for the theater events which collected approximately $10,000. b. Pre-numbered receipts were not used for various cash collection transactions. Recommendation: The revenue potential form is a vital internal control tool and it should be used to document revenues, expenditures, potential revenue and actual revenue. This allows an analysis of the fundraiser to be conducted, indicating to the staff the success or failure of the completed project, in addition, would provide assurance that all moneys earned are properly receipted and deposited. Sales summaries should be prepared to indicate how many tickets were sold and for the price of each ticket. Reconciliations between how much should be collected from the sale of those tickets versus how much was actually collected should be performed for all fundraisers. Status: Partially implemented. Please see Schedule of Findings and Questioned Costs:

120 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Copier Lease Obligation (30000) - Significant Deficiency Finding: One disbursement was found to be coded incorrectly to leases, rentals, repairs and maintenance. This item should have been coded to payment on principle of debt as the equipment in question is still under lease. Recommendation: Management should implement a system to track items which qualify as capital leases and flag these payments to prevent miscoding. Status: Implemented. 74 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Fixed Assets (30000) Material Weakness Finding: A current fixed asset schedule was not maintained. Recommendation: Management should appoint an employee to be responsible to tracking purchases of fixed assets, disposals of fixed assets, depreciation calculations and work in process activity. A Depreciation Schedule and Roll Forward schedule should be maintained by this person, which will be used in conversion entries. Status: Partially implemented. Please see Schedule of Findings and Questioned Costs:

121 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Long-term Debt Obligations (30000) Material Weakness Finding: Long-term Debt was not reconciled or recorded correctly. The refunding and debt service transactions that were executed through fiscal agent were not recorded during the year. Recommendation: Management should appoint an employee to be responsible to reconciling Long-term liabilities and ensure that transactions executed through the Fiscal Agent are properly recorded. Status: Implemented. 76 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Fiduciary Assets Foundation Fund (30000) Material Weakness Finding: We were unable to confirm the balance of assets in the foundation fund as of June 30, In addition, the nonprofit foundation that holds the funds could not provide an independent audit report that displays a schedule of funds held in trust. Recommendation: To properly safeguard assets and provide accountability we suggest that cash and investments be held in the County Treasury, a bank or an independent custodian. We suggest the Superintendent of Business review and consider these options. Status: Not implemented. Please see Schedule of Findings and Questioned Costs:

122 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Maintenance of Financial Personnel Material Weakness Finding: Although the district has recently staffed certain senior positions in finance, the district has had significant turnover of key accounting and support staff during the past year. During the year there were vacancies in many key positions, key budgetary, compliance and operational monitoring was not maintained during the year. Recommendation: The board and management team should review its hiring criteria and compensation to ensure it is offering competitive compensation with other districts in the area to attract and maintain a quality team. Status: Implemented. 78 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Medi-Cal Billing Option Program Missing Time Certification (50000) CFDA# For year ended June 30, 2013 Pass-through # U.S. Department of Health and Human Services Passed Through California Department of Education Finding: In our review of time certifications we noted that the district had a procedure in place to obtain time certifications for regular full time positions; however, the district was unable to provide us with a time certification for one of the employees we sampled out of 6 tested for the Medi-Cal Billing program. Recommendation: The employee or the supervisor of the employee should sign the time certification in a timely manner. Status: Implemented. 79

123 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, National School Lunch Program - Revenue Recognition (50000) Reimbursement discrepancy CFDA# For year ended June 30, 2013 Pass-through # U.S. Department of Agriculture Passed through California Department of Education Finding: Child Nutrition Revenue did not equal the amount of earned reimbursements from state and federal sources. The amount to be reimbursed by the Child Nutrition Program was not recorded in the accounts receivable balance at June 30, The amount was erroneously recorded as revenue in Recommendation: Management should ensure revenue is properly recorded as to period earned. Status: Implemented. 80 GILROY UNIFIED SCHOOL DISTRICT SCHEDULE OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS FOR THE FISCAL YEAR ENDED JUNE 30, Attendance Accounting Code (10000) Finding: Attendance summary information did not agree to the original entry and there were no explanatory notes available to identify the difference. Recommendation: The District business office should review with site personnel the procedure for documenting changes of attendance. For example, if a student is marked absent and later it was determined they were just tardy then a process should be established for documenting any changes to the original entered information. Status: Implemented. 81

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125 APPENDIX D FORMS OF CONTINUING DISCLOSURE CERTIFICATES CONTINUING DISCLOSURE CERTIFICATE THIS CONTINUING DISCLOSURE CERTIFICATE (this Disclosure Certificate ) is executed and delivered by the Gilroy Unified School District (the District ) in connection with the issuance of $30,385,000 aggregate principal amount of Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 (the Bonds ). The Bonds are being issued pursuant to a resolution adopted by the Board of Trustees of the District on December 11, 2014 (the Resolution ). The District covenants and agrees as follows: Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Holders 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 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 hereof. Beneficial Owner shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). Dissemination Agent shall mean Isom Advisors, a Division of Urban Futures, Inc., or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. Holder shall mean the person in whose name any Bond shall be registered. Listed Events shall mean any of the events listed in Section 5(a) or (b) hereof. MSRB shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at Official Statement shall mean the Official Statement, dated February 3, 2015 (including all exhibits or appendices thereto), relating to the offer and sale of Bonds. Participating Underwriter shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. D-1

126 Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. Section 3. Provision of Annual Reports. (a) 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 due date shall be April 1 of each year, so long as the fiscal year ends on June 30), commencing with the report for the Fiscal Year (which is due not later than April 1, 2016), provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 hereof. The Annual Report must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB, and may cross-reference other information as provided in Section 4 hereof; provided, however, 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. 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(e) hereof. The Annual Report shall be submitted on a standard form in use by industry participants or other appropriate form and shall identify the Bonds by name and CUSIP number. (b) Not later than 15 business days prior to the date specified in subsection (a), the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If the District is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the District shall send a notice to the MSRB, in substantially the form attached as Exhibit A. (c) The Dissemination Agent shall: (i) (if the Dissemination Agent is other than the District), provide any Annual Report received by it to the MSRB as provided herein; and (ii) (if the Dissemination Agent is other than the District), file a report with the District certifying that the Annual Report has been provided to the MSRB pursuant to this Disclosure Certificate, stating the date it was provided to the MSRB. Section 4. Content of Annual Reports. The District s Annual Report shall contain or include by reference the following: (a) Audited financial statements of the District for the preceding fiscal year, prepared in accordance with the laws of the State of California and including all statements and information prescribed for inclusion therein by the Controller of the State of California. If the District s audited financial statements are not available by the time the Annual Report is required to be provided to the MSRB pursuant to Section 3(a) hereof, 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 provided to the MSRB in the same manner as the Annual Report when they become available. (b) To the extent not included in the audited financial statements of the District, the Annual Report shall also include the following: (i) The adopted budget of the District for the then-current fiscal year. (ii) Assessed value of taxable property in the District for the then-current fiscal year as shown on the most recent equalized assessment role. D-2

127 (iii) If the County of Santa Clara (the County ) no longer includes the tax levy for payment of the Bonds in its Teeter Plan, the property tax levies, collections, and delinquencies for the District for the most recently completed fiscal year. (iv) Top ten property owners in the District for the then-current fiscal year, as measured by secured assessed valuation, the amount of their respective taxable value, and their percentage of total secured assessed value. (c) In addition to any of the information expressly required to be provided under subsections (a) and (b) hereof, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in light of the circumstances under which they are made, not misleading. Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been made available to the public on the MSRB s website. The District shall clearly identify each such other document so included by reference. Section 5. Reporting of Significant Events. (a) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds not later than ten business days after the occurrence of the event: (i) principal and interest payment delinquencies; (ii) unscheduled draws on debt service reserves reflecting financial difficulties; (iii) difficulties; (iv) perform; unscheduled draws on credit enhancements reflecting financial substitution of the credit or liquidity providers or their failure to (v) adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); (vi) (vii) (viii) (ix) obligated person. tender offers; defeasances; rating changes; or bankruptcy, insolvency, receivership or similar event of the For the purposes of the event identified in subparagraph (ix), 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 D-3

128 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) 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, not later than ten business days after the occurrence of the event: (i) unless described in paragraph 5(a)(v) hereof, other material notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; (ii) modifications to rights of Bond Holders; (iii) (iv) the Bonds; optional, unscheduled or contingent Bond calls; release, substitution, or sale of property securing repayment of (v) non-payment related defaults; (vi) 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; or (vii) appointment of a successor or additional paying agent or the change of name of a paying agent. (c) The District shall give, or cause to be given, in a timely manner, notice of a failure to provide the annual financial information on or before the date specified in Section 4 hereof, as provided in Section 4(b) hereof. (d) Whenever the District obtains knowledge of the occurrence of a Listed Event described in Section 5(b) hereof, the District shall determine if such event would be material under applicable federal securities laws. (e) If the District learns of the occurrence of a Listed Event described in Section 5(a) hereof, or determines that knowledge of a Listed Event described in Section 5(b) hereof would be material under applicable federal securities laws, the District shall within ten business days of occurrence file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections (a)(vii) or (b)(iii) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Resolution. Section 6. Termination of Reporting Obligation. The District s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all D-4

129 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(e) hereof. Section 7. 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 Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall be Isom Advisors, a Division of Urban Futures, Inc. Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Section 3(a) hereof, Section 4 hereof, or Section 5(a) or (b) hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) the undertaking, as amended or taking into account such waiver, would, in the opinion of 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; and (c) the proposed amendment or waiver either (i) is approved by the Holders in the same manner as provided in the Resolution for amendments to the Resolution with the consent of Holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the District shall describe such amendment in the next 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(e) hereof, 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 9. 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 Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. D-5

130 Section 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate; provided, that any such action may be instituted only in Superior Court of the State of California in and for the County of Santa Clara or in U.S. District Court in or nearest to the County of Santa Clara. A default under this Disclosure Certificate shall not be deemed an event of default under the Resolution, and 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 11. 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 (if the Dissemination Agent is other than the District), 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) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. Dated: February 19, 2015 GILROY UNIFIED SCHOOL DISTRICT By: ACCEPTED AND AGREED TO: ISOM ADVISORS, A DIVISION OF URBAN FUTURES, INC., as Dissemination Agent By: D-6

131 EXHIBIT A NOTICE TO THE MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Name of Issue: GILROY UNIFIED SCHOOL DISTRICT Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 Date of Issuance: February 19, 2015 NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Bonds as required by Section 4 of the Continuing Disclosure Certificate of the District, dated February 19, [The District anticipates that the Annual Report will be filed by.] Dated: GILROY UNIFIED SCHOOL DISTRICT D-7

132 CONTINUING DISCLOSURE CERTIFICATE THIS CONTINUING DISCLOSURE CERTIFICATE (this Disclosure Certificate ) is executed and delivered by the Gilroy Unified School District (the District ) in connection with the issuance of $35,300,000 aggregate principal amount of Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 (the Bonds ). The Bonds are being issued pursuant to a resolution adopted by the Board of Trustees of the District on December 11, 2014 (the Resolution ). The District covenants and agrees as follows: Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Holders 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 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 hereof. Beneficial Owner shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). Dissemination Agent shall mean Isom Advisors, a Division of Urban Futures, Inc., or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. Holder shall mean the person in whose name any Bond shall be registered. Listed Events shall mean any of the events listed in Section 5(a) or (b) hereof. MSRB shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at Official Statement shall mean the Official Statement, dated February 3, 2015 (including all exhibits or appendices thereto), relating to the offer and sale of Bonds. Participating Underwriter shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. Section 3. Provision of Annual Reports. (a) 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 due date shall be April 1 of each year, so long as the fiscal year ends on June 30), commencing with the report D-8

133 for the Fiscal Year (which is due not later than April 1, 2016), provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 hereof. The Annual Report must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB, and may cross-reference other information as provided in Section 4 hereof; provided, however, 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. 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(e) hereof. The Annual Report shall be submitted on a standard form in use by industry participants or other appropriate form and shall identify the Bonds by name and CUSIP number. (b) Not later than 15 business days prior to the date specified in subsection (a), the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If the District is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the District shall send a notice to the MSRB, in substantially the form attached as Exhibit A. (c) The Dissemination Agent shall: (i) (if the Dissemination Agent is other than the District), provide any Annual Report received by it to the MSRB as provided herein; and (ii) (if the Dissemination Agent is other than the District), file a report with the District certifying that the Annual Report has been provided to the MSRB pursuant to this Disclosure Certificate, stating the date it was provided to the MSRB. Section 4. Content of Annual Reports. The District s Annual Report shall contain or include by reference the following: (a) Audited financial statements of the District for the preceding fiscal year, prepared in accordance with the laws of the State of California and including all statements and information prescribed for inclusion therein by the Controller of the State of California. If the District s audited financial statements are not available by the time the Annual Report is required to be provided to the MSRB pursuant to Section 3(a) hereof, 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 provided to the MSRB in the same manner as the Annual Report when they become available. (b) To the extent not included in the audited financial statements of the District, the Annual Report shall also include the following: (i) The adopted budget of the District for the then-current fiscal year. (ii) Assessed value of taxable property in the District for the then-current fiscal year as shown on the most recent equalized assessment role. (iii) If the County of Santa Clara (the County ) no longer includes the tax levy for payment of the Bonds in its Teeter Plan, the property tax levies, collections, and delinquencies for the District for the most recently completed fiscal year. D-9

134 (iv) Top ten property owners in the District for the then-current fiscal year, as measured by secured assessed valuation, the amount of their respective taxable value, and their percentage of total secured assessed value. (c) In addition to any of the information expressly required to be provided under subsections (a) and (b) hereof, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in light of the circumstances under which they are made, not misleading. Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been made available to the public on the MSRB s website. The District shall clearly identify each such other document so included by reference. Section 5. Reporting of Significant Events. (a) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds not later than ten business days after the occurrence of the event: (i) principal and interest payment delinquencies; (ii) unscheduled draws on debt service reserves reflecting financial difficulties; (iii) difficulties; (iv) perform; unscheduled draws on credit enhancements reflecting financial substitution of the credit or liquidity providers or their failure to (v) adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); (vi) (vii) (viii) (ix) obligated person. tender offers; defeasances; rating changes; or bankruptcy, insolvency, receivership or similar event of the For the purposes of the event identified in subparagraph (ix), 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. D-10

135 (b) 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, not later than ten business days after the occurrence of the event: (i) unless described in paragraph 5(a)(v) hereof, other material notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; (ii) modifications to rights of Bond Holders; (iii) (iv) the Bonds; optional, unscheduled or contingent Bond calls; release, substitution, or sale of property securing repayment of (v) non-payment related defaults; (vi) 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; or (vii) appointment of a successor or additional paying agent or the change of name of a paying agent. (c) The District shall give, or cause to be given, in a timely manner, notice of a failure to provide the annual financial information on or before the date specified in Section 4 hereof, as provided in Section 4(b) hereof. (d) Whenever the District obtains knowledge of the occurrence of a Listed Event described in Section 5(b) hereof, the District shall determine if such event would be material under applicable federal securities laws. (e) If the District learns of the occurrence of a Listed Event described in Section 5(a) hereof, or determines that knowledge of a Listed Event described in Section 5(b) hereof would be material under applicable federal securities laws, the District shall within ten business days of occurrence file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections (a)(vii) or (b)(iii) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Resolution. Section 6. Termination of Reporting Obligation. The District s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. 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(e) hereof. Section 7. 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 Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report D-11

136 prepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall be Isom Advisors, a Division of Urban Futures, Inc. Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Section 3(a) hereof, Section 4 hereof, or Section 5(a) or (b) hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) the undertaking, as amended or taking into account such waiver, would, in the opinion of 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; and (c) the proposed amendment or waiver either (i) is approved by the Holders in the same manner as provided in the Resolution for amendments to the Resolution with the consent of Holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the District shall describe such amendment in the next 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(e) hereof, 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 9. 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 Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate; provided, that any such action may be instituted only in Superior Court of the State of California in and for the County of Santa Clara or in U.S. District Court in or nearest to the County of Santa Clara. A default under this Disclosure Certificate shall not be deemed an event of default under the Resolution, and the sole remedy under this D-12

137 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 11. 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 (if the Dissemination Agent is other than the District), 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) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. Dated: February 19, 2015 GILROY UNIFIED SCHOOL DISTRICT By: ACCEPTED AND AGREED TO: ISOM ADVISORS, A DIVISION OF URBAN FUTURES, INC., as Dissemination Agent By: D-13

138 EXHIBIT A NOTICE TO THE MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Name of Issue: GILROY UNIFIED SCHOOL DISTRICT Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 Date of Issuance: February 19, 2015 NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Bonds as required by Section 4 of the Continuing Disclosure Certificate of the District, dated February 19, [The District anticipates that the Annual Report will be filed by.] Dated: GILROY UNIFIED SCHOOL DISTRICT D-14

139 APPENDIX C PROPOSED FORMS OF OPINIONS OF BOND COUNSEL Upon the delivery of the Series 2015 Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the District, proposes to render its final approving opinions with respect to each series of the Series 2015 Bonds in substantially the following forms: [Date of Delivery] Gilroy Unified School District Gilroy, California Ladies and Gentlemen: Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 (Final Opinion) We have acted as bond counsel to the Gilroy Unified School District (the District ) in connection with the issuance by the District, which is located in the County of Santa Clara (the County ), of $30,385,000 aggregate principal amount of bonds designated as Gilroy Unified School District (County of Santa Clara, California) General Obligation Bonds, Election of 2008, Series 2015 (the Series 2015 Bonds ), authorized at an election held in the District on November 4, The Series 2015 Bonds are issued under and pursuant to a resolution of the Board of Education of the District adopted on December 11, 2014 (the Resolution ). In such connection, we have reviewed the Resolution, the Tax Certificate of the District, dated the date hereof (the Tax Certificate ), certificates of the District, the County and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Series 2015 Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or C-1

140 certified in the documents referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Resolution and the Tax Certificate, including, without limitation, covenants and agreements compliance with which is necessary to ensure that future actions, omissions or events will not cause interest on the Series 2015 Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Series 2015 Bonds, the Resolution and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against school districts or counties in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement, dated February 3, 2015, or other offering material relating to the Series 2015 Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Series 2015 Bonds constitute valid and binding obligations of the District. 2. The Resolution has been duly and legally adopted and constitutes a valid and binding obligation of the District. 3. The Board of Supervisors of the County has power and is obligated to levy ad valorem taxes without limitation as to rate or amount upon all property within the District s boundaries subject to taxation by the District (except certain personal property which is taxable at limited rates) for the payment of the Series 2015 Bonds and the interest thereon. 4. Interest on the Series 2015 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Series 2015 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2015 Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP C-2

141 [Date of Delivery] Gilroy Unified School District Gilroy, California Ladies and Gentlemen: Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 (Final Opinion) We have acted as bond counsel to the Gilroy Unified School District (the District ), which is located in the County of Santa Clara (the County ), in connection with the issuance by the District of $35,300,000 aggregate principal amount of Gilroy Unified School District (County of Santa Clara, California) General Obligation Refunding Bonds, Series 2015 (the Series 2015 Refunding Bonds ), pursuant to a resolution of the Board of Education of the District adopted on December 11, 2014 (the Resolution ). Capitalized undefined terms used herein have the meanings ascribed thereto in the Resolution. In such connection, we have reviewed the Resolution, the Tax Certificate of the District, dated the date hereof (the Tax Certificate ), certificates of the District, the County and others, and such other documents and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Series 2015 Refunding Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Resolution and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to ensure that future actions, omissions or events will not cause interest on the Series 2015 Refunding Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Series 2015 Refunding Bonds, the Resolution and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, C-3

142 moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against school districts or counties in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement, dated February 3, 2015, or other offering material relating to the Series 2015 Refunding Bonds and express no opinion with respect thereto. Based on and subject to the foregoing and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Series 2015 Refunding Bonds constitute valid and binding obligations of the District. 2. The Resolution has been duly and legally adopted and constitutes a valid and binding obligation of the District. 3. The Board of Supervisors of the County has power and is obligated to levy ad valorem taxes without limitation as to rate or amount upon all property within the District s boundaries subject to taxation by the District (except certain personal property which is taxable at limited rates) for the payment of the Series 2015 Refunding Bonds and the interest thereon. 4. Interest on the Series 2015 Refunding Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Series 2015 Refunding Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding any other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2015 Refunding Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP C-4

143 APPENDIX E SUMMARY OF SANTA CLARA COUNTY INVESTMENT POLICY AND PRACTICES AND DESCRIPTION OF INVESTMENT POOL E-1

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163 Accepted: 11/04/2014 Quarterly Investment Report September 30, 2014

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165 *Yield to maturity (YTM) is the rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date and if the coupon interest paid over the life of the bond is reinvested at the same rate as the coupon rate. The calculation for YTM is based on the coupon rate, length of time to maturity, and market price at time of purchase. Yield is a snapshot measure of the yield of the portfolio on the day it was measured based on the current portfolio holdings on that day. This is not a measure of total return, and is not intended to be, since it does not factor in unrealized capital gains and losses and reinvestment rates are dependent upon interest rate changes 1 Santa Clara County Commingled Pool and Segregated Investments September 30, 2014 Fund Commingled Investment Pool Retiree Health Fixed Income Worker's Compensation Mountain View-Los Altos Palo Alto Unified Park Charter Fund San Jose-Evergreen West Valley Mission CCD - Building Fund Medical Malpractice Insurance Fund (1) Total Cost Value** % Market Value Variance Variance $4,096,575,855 $4,099,281,543 $2,705, % $13,325 $13,325 $0 0.00% $26,915,593 $26,986,443 $70, % $2,017,971 $597,808 $11,353,443 $19,657,241 $11,860,705 $14,204,209 $2,018,966 $599,971 $11,334,669 $19,735,840 $11,880,374 $14,207,464 $996 $2,162 -$18,773 $78,600 $19,669 $3, % 0.36% -0.17% 0.40% 0.17% 0.02% $4,183,196,149 $4,186,058,594 $2,862, % (1) Managed by Chandler Asset Management, Inc. Fund Commingled Investment Pool Retiree Health Fixed Income Worker's Compensation Weighted Yield Summary of Yields* for Select Santa Clara County Investment Funds Jul 31 Aug 31 Sep 30 Sep % 0.48% 0.48% 0.54% 0.66% 1.22% 0.03% 1.22% 0.03% 1.22% 3.32% NA 0.50% 0.48% 0.48% 0.65% **Cost Value is the amortized book value of the securities as of the date of this report.

166 The turmoil in the world at this time has many ramifications politically and economically. Ukraine, Iraq and Syria could have major long-term economic impacts because of the energy resources involved and the potential consequences for countries such as Russia and Europe. Because the massive expansion of the U. S. energy program has mitigated our dependence on Middle East oil, the Saudis are reducing the price of oil in order to retain market share and will have a very different impact than it had in the 1970s. Lower energy prices will, however, have significant impact on the Soviet economy and other countries dependent on energy revenues. On the flip side is the economic stimulus that lower energy prices will provide. How all this plays out remains to be seen. In addition, the economies of Europe, China and Japan are slowing and the upheaval in Hong Kong remains to be resolved. The U. S. economy continues to give mixed signals although showing much better results than Europe. While there seems to be some momentum towards improvement in areas such as employment and car sales, others areas such as housing and participation in the work force show continued weakness. Inflation numbers also are a mixed bag with the reported numbers showing very little increase but high food prices are hitting the consumer daily, offset somewhat by the rapid decline in gasoline prices. The majority view remains that the Federal Reserve will begin to raise rates in mid As mentioned last month, the multitude of hot spots in the world appears to have taken over the U. S. Treasury market in a flight to quality as rates remain very low. Three month Treasury rates are about 2 basis points. One year Treasury bills yield 9 basis points. The overnight repo rates are about 3 to 4 basis points. Making money in this environment is a real challenge. In line with the consensus, we will stay mainly in short term securities in anticipation of Federal Reserve action next year. Extending at this time with rates as low as they are does not appear to be prudent. If the interest rates are raised 25 to 50 basis points, we will be well positioned to move upward with our portfolio s shorter average life. 2 Santa Clara County Commingled Pool and Segregated Investments Portfolio Strategy September 30, 2014

167 3 Santa Clara County Commingled Pool and Segregated Investments Portfolio Compliance, Review, and Monitoring September 30, 2014 Yield and Weighted Average Maturity The yield of the Commingled Pool is 0.48% and the weighted average life is 406 days. Compliance Investment transactions were executed in accordance with the California State Government Code and the County's Investment Policy, as indicated in the attached report from the County Internal Audit Division. The County Treasurer believes the Commingled Pool contains sufficient cash flow liquidity to meet the next six months of expected expenditures. Review and Monitoring FTN Financial Main Street Advisors, the County s investment advisor, currently monitors the Treasury Department s investment activities. Additional Information Securities are purchased with the expectation that they will be held to maturity, so unrealized gains or losses are not reflected in the yield calculations. The market values of securities were taken from pricing services provided by the Bank of New York Mellon, Bloomberg Analytics, dealer quotes, and an independent pricing service.

168 LAIF 1.0% MMF 3.3% NCUA 0.1% MBS 0.0% 4 Santa Clara County Commingled Pool Allocation by Security Types September 30, 2014 Sector 9/30/2014 6/30/2014 % Chng Federal Agencies Corporate Bonds Repurchase Agreements Commercial Paper Asset-Backed Securities Municipal Securities U.S. Treasuries Negotiable CDs LAIF Money Market Funds NCUA Corporate Bonds** Mortgage-Backed Securities Total 73.23% 3.60% 0.00% 4.88% 4.31% 1.40% 4.52% 3.66% 0.98% 3.30% 0.12% 0.00% % 70.65% 3.51% 2.68% 2.14% 4.29% 1.26% 5.05% 4.29% 0.86% 5.16% 0.11% 0.00% % 2.6% 0.1% -2.7% 2.7% 0.0% 0.1% -0.5% -0.6% 0.1% -1.9% 0.0% 0.0% CP 4.9% Repo 0.0% Corp 3.6% ABS 4.3% Muni 1.4% Tsy 4.5% CDs 3.7% Sector Federal Agencies Corporate Bonds Repurchase Agreements Commercial Paper Asset-Backed Securities Municipal Securities U.S. Treasuries Negotiable CDs LAIF Money Market Funds NCUA Corporate Bonds** Mortgage-Backed Securities 9/30/2014 2,999,866, ,435, ,999, ,544,297 57,543, ,112, ,000,645 40,000, ,075,335 4,998,785-6/30/2014 3,293,674, ,450, ,000,000 99,970, ,148,494 58,787, ,256, ,001,283 40,000, ,777,481 4,998,350 - * Amounts are in base upon book value Total 4,096,575,855 4,662,065,343 Agy 73.2% **Bonds are guaranteed by the NCUA (National Credit Union Association)

169 5 Santa Clara County Commingled Pool Allocation by Ratings September 30, 2014 Moody's Rating P-1 Aaa Aa1 Aa2 Aa3 A1 A2 A3 LAIF*** Repo** Not Rated* Total Portfolio $ 579,729,937 3,254,267,746 14,964,214 39,026, ,015,371 4,999, ,000,000-57,573,209 4,096,575,855 Portfolio % 14.2% 79.4% 0.4% 1.0% 2.6% 0.1% 0.0% 0.0% 1.0% 0.0% 1.4% 100.0% Aa1 0.4% LAIF*** 1.0% A1 0.1% A2 0.0% Aa3 2.6% Aa2 1.0% Repo** 0.0% Not Rated* 1.4% P % Aaa 79.4% *Not Rated by Moody's but A-1+ by S&P **Repurchase Agreements are not rated, but are collateralized by U.S. Treasury securities ***LAIF is not rated, but is comprised of State Code allowable securities Amounts are based on book values

170 6 Santa Clara County Commingled Pool Holdings by Issuer - Percent of Commingled Pool September 30, 2014 FNMA NOTES FHLB NOTES FHLMC NOTES FFCB NOTES U.S. TREASURY NOTES DREYFUS CASH MANAGEMENT U S BANK TOYOTA MOTOR CREDIT CALIFORNIA ST GENERAL ELECTRIC TORONTO DOMINION BANK BANK OF NOVA SCOTIA VOLKSWAGEN AUTO LOAN ENHANCED LOCAL AGENCY INVEST FUND TOYOTA AUTO REC OWNER TRUST CHASE ISSUANCE TRUST (ABS) JOHNSON & JOHNSON MERCEDES-BENZ AUTO LEASE TRUST WALMART RABOBANK NATIONAL AUSTRALIA-BK-NY COLGATE-PALMOLIVE CO CHEVRON CORP. HONDA AUTO RECEIVABLES OWNER T BMW VEHICLE LEASE TRUST EXXON MOBIL CORP BERKSHIRE HATHWY JOHN DEERE OWNER TRUST IBM NCUA GUARANTEED NOTE BANK OF AMERICA AUTO TRUST Amounts are based upon book values 4.5% 3.3% 2.4% 1.8% 1.4% 1.3% 1.2% 1.2% 1.2% 1.0% 0.8% 0.7% 0.7% 0.7% 0.7% 0.6% 0.6% 0.4% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.1% 15.3% 14.1% 18.4% 25.5% 0% 5% 10% 15% 20% 25% 30%

171 7 Santa Clara County Commingled Pool Historical Month End Book Values September 30, 2014 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 Jul-2009 Sep-2009 Nov-2009 Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Nov-2010 Jan-2011 Mar-2011 May-2011 Jul-2011 Sep-2011 Nov-2011 Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Billions Fiscal Year Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY 2010 $3.541 $3.373 $3.307 $3.307 $3.408 $4.175 $3.307 $3.408 $3.687 $4.463 $4.384 $3.536 FY 2011 $3.230 $3.032 $3.143 $2.898 $3.227 $3.943 $3.695 $3.551 $3.712 $4.339 $4.179 $3.935 FY 2012 $3.801 $3.736 $3.637 $3.555 $3.805 $4.567 $4.097 $4.040 $4.032 $4.926 $4.525 $3.833 FY 2013 $3.508 $3.517 $3.515 $3.469 $3.645 $4.600 $3.918 $3.982 $4.606 $5.286 $4.952 $4.521 FY 2014 $4.133 $4.052 $3.975 $3.758 $4.271 $5.419 $5.019 $4.520 $4.461 $5.386 $5.487 $5.108 FY 2015 $4.267 $4.194 $4.096 Amounts in billions

172 8 Santa Clara County Commingled Pool Distribution by Maturity September 30, 2014 Maturity Amount* Overnight 190,075, Days 378,568, Days 94,998, Days 1,421,449,788 1Yr-2Yr 1,559,865,368 2Yr-3Yr 379,296,414 3Yr-4Yr 57,256,242 4Yr-5Yr 15,066,178 4,096,575,855 $1,600,000,000 $1,400,000,000 $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000,000 $0 Distribution By Maturity Dollars Overnight 1-30 Days Days Days 1Yr-2Yr 2Yr-3Yr 3Yr-4Yr 4Yr-5Yr Maturity Amount* Overnight 4.64% 1-30 Days 9.24% Days 2.32% Days 34.70% 1Yr-2Yr 38.08% 2Yr-3Yr 9.26% 3Yr-4Yr 1.40% 4Yr-5Yr 0.37% % *Amounts are based on book value 40% 35% 30% 25% 20% 15% 10% 5% 0% Distribution By Maturity Percentages Overnight 1-30 Days Days Days 1Yr-2Yr 2Yr-3Yr 3Yr-4Yr 4Yr-5Yr