ESTRADA HINOJOSA & COMPANY, INC. SAMCO CAPITAL MARKETS

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1 Ratings: S&P: A+ Moody s: Aa3 (See RATINGS herein) OFFICIAL STATEMENT Dated: February 2, 2011 TAXABLE NEW ISSUE: BOOK-ENTRY-ONLY Interest on the Notes (defined below) is not excludable from gross income under section 103 of the Code for federal income tax purposes. (See FEDERAL INCOME TAX TREATMENT OF NOTES herein.) $26,755,000 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Hidalgo County, Texas) LIMITED MAINTENANCE TAX QUALIFIED SCHOOL CONSTRUCTION NOTES, TAXABLE SERIES 2011 (DIRECT PAY SUBSIDY NOTES) Dated Date: February 1, 2011 (Interest Accrues from Delivery Date shown below) Due: See inside cover page The Pharr-San Juan-Alamo Independent School District (the District ) is issuing its $26,755,000 Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2011 (Direct Pay Subsidy Notes) (the Notes ) in accordance with the Constitution and general laws of the State of Texas, including particularly Section Texas Education Code, as amended, and the resolution authorizing the issuance of the Notes approved by the Board of Trustees (the Board ) on February 2, The Notes constitute direct obligations of the District and are payable as to principal and interest from the proceeds of a continuing, direct annual ad valorem tax levied for maintenance purposes by the District, within the limitations of the District s maintenance tax authority, against all taxable property located within the District (see TAX RATE LIMITATIONS Maintenance Tax herein). Interest on the Notes will accrue from the date they are initially delivered to the initial purchasers shown below (the Underwriters ) and will be payable on February 1 and August 1 of each year, commencing August 1, 2011, until stated maturity or prior redemption. The Notes will be issued in fully registered form in principal denominations of $5,000 or any integral multiple thereof within a maturity. Interest accruing on the Notes will be calculated on the basis of a 360-day year of twelve 30-day months (see THE NOTES General Description ). The District intends to use the Book-Entry-Only System of The Depository Trust Company, New York, New York ( DTC ), but use of such system could be discontinued. The principal of and interest on the Notes will be payable to Cede & Co., as nominee for DTC, by The Bank of New York Mellon Trust Company, N.A., as the initial Paying Agent/Registrar (the Paying Agent/Registrar ) for the Notes. No physical delivery of the Notes will be made to the beneficial owners thereof. Such Book- Entry-Only System will affect the method and timing of payment and the method of transfer of the Notes (see BOOK-ENTRY-ONLY SYSTEM ). The Notes are subject to redemption prior to stated maturity at the time and prices and in the amounts described herein (see THE NOTES Redemption Provisions ). The Notes are issued as qualified school construction bonds within the meaning of section 54F of the Internal Revenue Code of 1986, as amended (the Code ), and as qualified bonds within the meaning of section 6431(f) of the Code under and pursuant to the authority provided for in the federal American Recovery and Reinvestment Act of 2009, effective February 17, 2009, and the federal Hiring Incentives to Restore Employment Act, effective March 18, 2010, and in reliance on guidance released from time to time by the Internal Revenue Service. As a result of these elections and designations, the District is entitled to receive directly from the United States Department of the Treasury a refundable tax credit (the Refundable Tax Credit ) in an amount equal to the lesser of (1) the amount of interest payable on the Notes on such interest payment date and (2) the amount of interest that would have been payable on the Notes if such interest were determined at the applicable credit rate determined under section 54A(b)(3) of the Code. As a result of the District s designations and elections entitling it to the receipt of the Refundable Tax Credit, no owner of Notes will be entitled to a tax credit as a result of its ownership of a Note. (See THE NOTES Refundable Tax Credit Bonds herein.) Proceeds from the sale of the Notes will be used to renovate and equip school facilities in the District and to pay costs related to the issuance of the Notes, subject to the limitations imposed by state and federal law (see THE NOTES Authorization and Purpose ). The District has made application to municipal bond insurance companies to have the payment of the principal of and interest on the Notes insured by a municipal bond insurance policy (see BOND INSURANCE and BOND INSURANCE RISK FACTORS herein). CUSIP PREFIX: MATURITY SCHEDULE & 9 DIGIT CUSIP See Schedule on Page ii The Notes are offered for delivery when, as and if issued, and accepted by the Underwriters, subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by Ramirez & Guerrero, L.L.P., Bond Counsel, San Juan, Texas. Certain legal matters will be passed upon for the Underwriters by their co-counsel, The Perez Law Firm, PLLC, Pharr, Texas and Locke Lord Bissell & Liddell LLP, Dallas, Texas. The Notes are expected to be available for initial delivery through the services of DTC on or about February 22, 2011 (the Delivery Date ). SOUTHWEST SECURITIES ESTRADA HINOJOSA & COMPANY, INC. SAMCO CAPITAL MARKETS

2 CUSIP Prefix: (1) MATURITY SCHEDULE $26,755,000 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Hidalgo County, Texas) LIMITED MAINTENANCE TAX QUALIFIED SCHOOL CONSTRUCTION NOTES, TAXABLE SERIES 2011 (DIRECT PAY SUBSIDY NOTES) Maturity Date Principal Amount (2) Interest Rate Initial Yield CUSIP Suffix (1) February 1, 2021 $16,750, % 5.497% RY2 February 1, 2026 $10,005, % 6.247% RZ9 (Interest Accrues from Delivery Date) OPTIONAL REDEMPTION The Notes are subject to redemption prior to stated maturity at the times and prices and in the amounts described herein (see THE NOTES Redemption Provisions Optional Redemption ). MANDATORY REDEMPTION The District is required to redeem the Notes if 100% of proceeds are not expended for Qualified Purposes (see THE NOTES Redemption Provisions - Special Mandatory Redemption of Notes). (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of the American Bankers Association. CUSIP numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Notes. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP services. None of the District, the Financial Advisor nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. (2) The principal amount of the Notes is subject to the annual deposit by the District of Cumulative Sinking Fund Deposits. See THE NOTES Cumulative Sinking Fund Deposits herein. ii

3 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Term Expires Name (November) Occupation Reymundo Gonzalez, President 2014 Retired Educator Humberto Rodriguez, Vice President 2012 City Secretary City of San Juan Ben Garza Jr., Secretary-Treasurer 2014 Payroll Director, La Joya ISD Ronnie Cantu, Asst. Secretary-Treasurer 2014 Self Employed, Insurance Agent/Builder Gilberto Herrera 2012 Self Employed, Construction Pete Garcia 2012 Self Employed, Salesman Ramona Barron 2012 Coordinator, Texas Migrant Council CERTAIN DISTRICT OFFICIALS Years in Current Years of Name Position Position Experience Dr. Daniel King Superintendent 3 33 Ms. Janet Robles Assistant Superintendent for Finance CONSULTANTS AND ADVISORS Auditors Oscar R. Gonzalez C.P.A. & Associates, P.L.L.C. Pharr, Texas Bond Counsel Ramirez & Guerrero, L.L.P. San Juan, Texas Co-Financial Advisor RBC Capital Markets, LLC San Antonio, Texas Co-Financial Advisor First National Bank Edinburg, Texas For additional information regarding the District, please contact: Janet Robles Assistant Superintendent for Finance Pharr-San Juan-Alamo Independent School District 601 East Kelly Avenue Pharr, Texas (956) Robert V. Henderson or R. Dustin Traylor Saul Ortega or Cain Caceres RBC Capital Markets, LLC First National Bank Ironwood Building 100 West Cano 153 Treeline Park, Suite 100 Edinburg, Texas San Antonio, Texas Phone: (956) Phone: (210) iii

4 USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized to give any information, or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the District, the Financial Advisor or the Underwriters. This Official Statement is not to be used in connection with an offer to sell or the solicitation of an offer to buy in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the 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 or other matters described herein since the date hereof. See CONTINUING DISCLOSURE OF INFORMATION for a description of the undertaking of the District, to provide certain information on a continuing basis. THE NOTES ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE NOTES IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE NOTES HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED, SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. None of the District, the Financial Advisor, or the Underwriters make any representation or warranty with respect to the information contained in this Official Statement regarding The Depository Trust Company ( DTC ) or its Book-Entry-Only System as described under BOOK-ENTRY- ONLY SYSTEM as such information has been provided by DTC and the Insurer, if any, or its municipal bond insurance policy (see BOND INSURANCE and BOND INSURANCE RISK FACTORS herein). The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in the Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The agreements of the District and others related to the Notes are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Notes is to be construed as constituting an agreement with any purchaser of the Notes. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. THIS OFFICIAL STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. SEE FORWARD-LOOKING STATEMENTS HEREIN. iv

5 TABLE OF CONTENTS MATURITY SCHEDULE ii OFFICIALS, STAFF AND CONSULTANTS iii USE OF INFORMATION IN OFFICIAL STATEMENT iv TABLE OF CONTENTS v SELECTED DATA FROM THE OFFICIAL STATEMENT vi INTRODUCTORY STATEMENT THE NOTES Authorization and Purpose General Description Refundable Tax Credit Bonds Redemption Provisions Selection of Notes to be Redeemed Notice of Redemption Cumulative Sinking Fund Deposits Security Legality Payment Record Defeasance of the Notes Amendments Sources and Uses of Funds REGISTERED OWNERS REMEDIES BOOK-ENTRY-ONLY SYSTEM Use of Certain Terms in Other Sections of this Official Statement REGISTRATION, TRANSFER AND EXCHANGE Paying Agent/Registrar Future Registration Record Date for Interest Payment Limitation on Transfer of the Notes Replacement of the Notes AD VALOREM TAX PROCEDURES Property Tax Code and County-Wide Appraisal District Property Subject to Taxation by the District Valuation of Property for Taxation Residential Homestead Exemption District and Taxpayer Remedies Public Hearing and Rollback Tax Rate Levy and Collection of Taxes District s Rights in the Event of Tax Delinquencies THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT EMPLOYEES BENEFIT PLANS STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System-- 15 Funding Changes in Response to West Orange-Cove II Possible Effects of Litigation and Changes in Law on District Bonds CURRENT PUBLIC SCHOOL FINANCE SYSTEM General State Funding for Local School Districts Local Revenue Sources - Property Tax Authority Wealth Transfer Provisions Possible Effects of Wealth Transfer Provisions on the District s Financial Condition TAX RATE LIMITATIONS Maintenance Tax Unlimited Tax Bonds RATING LEGAL MATTERS FEDERAL INCOME TAX TREATMENT OF NOTES General Internal Revenue Service Circulate 230 Notice Stated Interest on the Notes Original Issue Discount Disposition of Notes and Market Discount Backup Withholding Withholding on Payments to Nonresident Alien Individuals and Foreign Corporations Reporting of Interest Payments LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS INVESTMENTS Legal Investments Investment Policies Additional Provisions Current Investments REGISTRATION AND QUALIFICATION OF NOTES FOR SALE-- 27 CONTINUING DISCLOSURE OF INFORMATION Annual Reports Mandatory Notices and Material Event Notices Availability of Information Limitations and Amendments Compliance with Prior Undertakings LITIGATION FINANCIAL ADVISOR UNDERWRITING FORWARD LOOKING STATEMENTS CONCLUDING STATEMENT MISCELLANEOUS FINANCIAL INFORMATION REGARDING THE DISTRICT GENERAL INFORMATION REGARDING THE DISTRICT AND ITS ECONOMY AUDITED FINANCIAL STATEMENT FOR THE YEAR ENDED AUGUST 31, 2009 FORM OF LEGAL OPINION OF BOND COUNSEL Appendix A Appendix B Appendix C Appendix D The cover page hereof, the section entitled Selected Data from the Official Statement, this Table of Contents and the Appendices attached hereto are part of this Official Statement. v

6 SELECTED DATA FROM THE OFFICIAL STATEMENT The selected data is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Notes to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this page from this Official Statement or to otherwise use it without the entire Official Statement. The Issuer The Notes Use of Proceeds Payment of Interest Paying Agent/Registrar Security Tax Matters Redemption Provisions Ratings Book-Entry-Only System Pharr-San Juan-Alamo Independent School District (the District ) is a political subdivision located in Hidalgo County, Texas. The District is governed by a seven-member Board of Trustees (the Board ). Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools, who is the chief administrator of the District. Support services are supplied by consultants and advisors. For more information regarding the District, see Appendix A Financial Information Regarding the Pharr-San Juan-Alamo Independent School District and Appendix B General Information Regarding the District and Its Economy. The District s $26,755,000 Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2011 (Direct Pay Subsidy Notes) (the Notes ) are being issued pursuant to the Constitution and general laws of the State, including particularly Section , Texas Education Code, as amended, and the resolution authorizing the issuance of the Notes adopted by the Board on February 2, 2011 (the Resolution ). Proceeds from the sale of the Notes will be used to renovate and equip school facilities in the District and to pay costs related to the issuance of the Notes subject to the limitations imposed by state and federal law (see THE NOTES Authorization and Purpose ). Interest on the Notes will accrue from the date of their initial delivery to the Underwriter (the Delivery Date ) and will be payable semiannually on February 1 and August 1 of each year, commencing August 1, 2011, until maturity or prior redemption (see THE NOTES General Description and THE NOTES Redemption Provisions ). The initial Paying Agent/Registrar for the Notes is The Bank of New York Mellon Trust Company, N.A., (see REGISTRATION, TRANSFER AND EXCHANGE Paying Agent/Registrar ). Initially, the District intends to use the Book-Entry-Only System of The Depository Trust Company (see BOOK- ENTRY-ONLY SYSTEM ). The Notes constitute direct obligations of the District and are payable as to principal and interest from the proceeds of a continuing, direct annual ad valorem tax levied for maintenance purposes by the District, within the limitations of the District s maintenance tax authority, against all taxable property located within the District, as provided in the Resolution. See THE NOTES Security, STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM and TAX RATE LIMITATIONS for a discussion of recent developments in State law affecting the financing of school districts in the State. Interest on the Notes is not excludable from gross income under section 103 of the Internal Revenue Code for federal income tax purposes. (See FEDERAL TAX TREATMENT OF NOTES herein.) The Notes are subject to redemption prior to stated maturity at the times and prices and in the amounts as described herein (see THE NOTES Redemption Provisions ). Moody s Investors Service ( Moody s ) and Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ), have assigned ratings of Aa3 and A+ respectively, to the Notes. See RATINGS herein. The definitive Notes will be initially registered and delivered only to Cede & Co., the nominee of DTC, pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Notes may be acquired in denominations of $5,000 of principal amount or integral multiples thereof. No physical delivery of the Notes will be made to the beneficial owners thereof. The principal of and interest on the Notes will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Notes (see BOOK-ENTRY-ONLY SYSTEM ). vi

7 Continuing Disclosure of Information Payment Record Legality Pursuant to the Resolution, the District is obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events to the Municipal Securities Rulemaking Board. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at (see CONTINUING DISCLOSURE OF INFORMATION ). The District has never defaulted on the payment of its tax supported indebtedness. Delivery of the Notes is subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality by Ramirez & Guerrero, L.L.P., Bond Counsel, San Juan, Texas. vii

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9 OFFICIAL STATEMENT RELATING TO PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT ( A political subdivision of the State of Texas located in Hidalgo County, Texas) $26,755,000 Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2011 (Direct Pay Subsidy Notes) INTRODUCTORY STATEMENT This Official Statement, including Appendices A, B and C, has been prepared by the Pharr-San Juan-Alamo Independent School District (the District ), a political subdivision of the State of Texas, located in Hidalgo County, Texas, in connection with the offering by the District of its Limited Maintenance Tax Qualified School Construction Notes, Taxable Series 2010 (Direct Pay Subsidy Notes) (the Notes ) identified on page ii hereof. All financial and other information presented in this Official Statement has been provided by the District from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information and is not intended to indicate future or continuing trends in the financial position or other affairs of the District. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future (see FORWARD-LOOKING STATEMENTS ). There follows in this Official Statement descriptions of the Notes and the Resolution (as defined herein), and certain other information about the District and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. A copy of such documents may be obtained upon request by electronic mail or upon payment of reasonable copying, mailing, and handling charges by writing the Pharr-San Juan-Alamo Independent School District, 601 East Kelly Avenue, Pharr, Texas 78577, and during the offering period, from the District s Financial Advisor, RBC Capital Markets, LLC, 153 Treeline Park, Suite 100, San Antonio, Texas This Official Statement speaks only as of its date and the information contained herein is subject to change. A copy of the final Official Statement will be submitted to the Municipal Securities Rulemaking Board and will be available through its Electronic Municipal Market Access system. See CONTINUING DISCLOSURE OF INFORMATION for a description of the undertaking of the District to provide certain information on a continuing basis. Authorization and Purpose THE NOTES The Notes are being issued pursuant to the Constitution and general laws of the State of Texas (the State ), including particularly Section , Texas Education Code, as amended, and a resolution (the Resolution ) authorizing the issuance of the Notes adopted by the Board of Trustees (the Board ) on February 2, Capitalized terms used herein have the same meanings assigned to such terms in the Resolution, except as otherwise indicated. Proceeds from the sale of the Notes will be used to renovate and equip school facilities in the District and to pay costs related to the issuance of the Notes subject to the limitations imposed by state law and federal law. General Description The Notes are to mature on the dates and in the principal amounts shown on page ii hereof. The Notes will each be issued as fully registered obligations in principal denominations of $5,000 or any integral multiple thereof within a maturity. Interest on the Notes will accrue from the date of initial delivery of the Notes to the Underwriters (the Delivery Date ) at the interest rate shown on page ii hereof and such interest shall be payable to the registered owners thereof on August 1, 2011 and semiannually thereafter on February 1 and August 1 in each year until stated maturity or prior redemption. The paying agent and transfer agent (the Paying Agent/Registrar ) for the Notes is initially The Bank of New York Mellon Trust Company, N.A. Initially, the Notes will be registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( DTC ) pursuant to the Book-Entry-Only System described below. No physical delivery of the Notes will be made to the beneficial owners. Principal of and interest on the Notes will be payable by the Paying Agent/Registrar to Cede & Co., which will distribute the amounts paid to the participating members of DTC for subsequent payment to the beneficial owners of the Notes. See BOOK-ENTRY-ONLY SYSTEM for a more complete description of such system. 1

10 Interest on the Notes will be payable to the registered owner whose name appears on the bond registration books of the Paying Agent/Registrar at the close of business on the Record Date (hereinafter defined) and such accrued interest will be paid by (i) check sent by United States mail, first class, postage prepaid, to the address of the registered owner appearing on such registration books of the Paying Agent/Registrar or (ii) such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. The record date (the Record Date ) for the interest payable on any interest payment date is the last business day of the month next preceding such interest payment date (see REGISTRATION, TRANSFER AND EXCHANGE Record Date for Interest Payment ). The principal of the Notes at maturity or on a prior redemption date will be payable only upon presentation of such Notes at the designated office of the Paying Agent/Registrar upon maturity or redemption, as applicable; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Notes, all payments will be made as described under Book-Entry- Only System herein. Refundable Tax Credit Bonds Under and pursuant to recently-enacted federal legislation, the American Recovery and Reinvestment Act of 2009, effective February 17, 2009 (the Stimulus Act ), and the Hiring Incentives to Restore Employment Act, effective March 18, 2010 (the HIRE Act ), and in accordance with guidance released from time to time by the Internal Revenue Service (the IRS ) concerning the same, the District will treat the Notes as qualified school construction bonds under section 54F of the Internal Revenue Code of 1986, as amended (the Code ). The election requires the application of the State of Texas volume cap allocation awarded to the District by the Texas Education Agency (the TEA ), and designation of the Notes as a qualified bond under section 6431(f) of the Code. Because of this designation as qualified bonds under the Code, the District becomes entitled to receive directly from the United States Department of the Treasury (the Treasury ) with respect to the Notes a refundable tax credit (the Refundable Tax Credit ) payable to the District upon payment of interest on the Notes and request for payment to the Treasury. The Code specifies that the Refundable Tax Credit will be an amount equal to the lesser of (1) the amount of interest payable on the Notes on such interest payment date and (2) the amount of interest that would have been payable on the Notes if such interest were determined at the tax credit bond rate determined under section 54A(b)(3) of the Code. As a result of the District s designations and elections entitling it to the receipt of the Refundable Tax Credit, no owner of Notes will be entitled to a tax credit as a result of its ownership of a Note. See FEDERAL INCOME TAX TREATMENT OF NOTES herein for a description of the effects upon the owners thereof resulting from the District s issuance of the Notes as obligations the interest on which is not excludable under section 103 of the Code for federal income tax purposes, permitting their designation as refundable tax credit bonds. Under State law, the Refundable Tax Credit is considered a general revenue of the District that may be used by the District for any lawful purpose. The Refundable Tax Credit is not directly pledged to the payment of the Notes; however, the District, in the appropriate form or forms to be filed with the IRS on the Delivery Date and from time to time thereafter notifying the Treasury of its elections with respect to the Notes described above, and the request for receipt of the Refundable Tax Credits, will direct the Refundable Tax Credits to be delivered from the Treasury directly to the Paying Agent/Registrar, for further deposit and allocation to a special interest and sinking subaccount on the books and records of the Paying Agent/Registrar. The agreement between the District and the Paying Agent/Registrar relating to the Notes provides that the amount held in such special interest and sinking subaccount shall be used to reduce the interest payment amount of the regularly scheduled debt service payments on the Notes that the District is required to make under the Resolution. The District anticipates that each Refundable Tax Credit will be available solely to off-set the scheduled debt service payment requirements attributable to the Notes. The District s continued receipt of the Refundable Tax Credit is subject to various requirements specified by the IRS. No assurances are given that the District will receive each of the Refundable Tax Credits. Refundable Tax Credits will only be paid by the Treasury if the Notes remain qualified in accordance with sections 54F and 6431(f), respectively, of the Code. For the Notes to be, and remain, designated as qualified bonds for which the Refundable Tax Credit will be received, the District must comply with certain covenants with respect to the Notes regarding the use and investment of proceeds thereof, the use of property financed therewith, making timely and proper filings with the IRS, and satisfying certain other requirements of the Code. Failure on the part of the District to comply with the conditions imposed by the Code and future guidance to be provided by the Treasury and the IRS may cause the District to fail to receive the Refundable Tax Credit for all or a portion of the remaining term of the Notes and it could subject the District to a federal claim for refund of previously received Refundable Tax Credits. Moreover, Refundable Tax Credits are subject to automatic offsets against certain amounts that may, for unrelated reasons, be owed by the District to the United States of America or an agency thereof. In addition, see THE NOTES Redemption of Notes herein for information concerning optional redemption of the Notes upon the occurrence of an extraordinary event (generally being the occurrence of an event that results in the loss of the right or opportunity of the District to receive all or part of a Refundable Tax Credit), as well as the requirement to mandatorily redeem Notes upon the District s failure to timely spend proceeds thereof. (See THE NOTES Redemption Provisions herein.) Redemption Provisions Optional Redemption The Notes slated to mature on February 1, 2026 are subject to redemption prior to maturity, at the option of the District, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2021 or any date thereafter, at a redemption price equal to the principal amount thereof plus accrued interest to the date fixed for redemption. 2

11 Special Mandatory Redemption of Notes - To the extent that 100% of the Available Project Proceeds (defined below) are not expended for Qualified Purposes (defined below) by the close of the Expenditure Period (defined below), the District shall redeem the Nonqualified Notes (defined below) in authorized denominations (rounded up to the next highest authorized denomination) within 90 days after the end of the Expenditure Period, at a redemption price equal to the principal amount of the Nonqualified Notes, plus accrued (but unpaid) interest on the Nonqualified Notes to the date of redemption, payable from such unexpended proceeds of sale of the Notes held by the District. Optional Redemption of the Notes at the Extraordinary Redemption Price - The Notes are also subject to redemption prior to stated maturity, at the option of the District and upon the occurrence of an Extraordinary Event (defined below), on any date, as a whole or in part, in principal amounts of $5,000 or any integral multiple thereof (and if in part, selected at random and by lot by the Paying Agent/Registrar) at the Extraordinary Redemption Price. Definition of Terms - For purposes of this section, capitalized terms used herein have the following meanings: Available Project Proceeds means the proceeds from the sale of the Notes less the costs of issuance financed by the Notes, plus any investment earnings on such amounts. Code means the Internal Revenue Code. Determination of Loss of Qualified School Construction Bond Status means a final determination by the IRS (after the District has exhausted all administrative appeal remedies) determining, or a non-appealable holding by a court of competent jurisdiction holding, that the Notes are no longer classified as qualified school construction bonds under section 54F of the Code. Expenditure Period means the three year period beginning on the Delivery Date, plus any extension of such period granted by the Secretary of the Treasury. Extraordinary Event means the occurrence of (a) the District s receipt of a Determination of Loss of Qualified School Construction Bond Status or (b) any of the following events, the result of which is the reduction or elimination of the Refundable Tax Credit from the amount or amounts expected by the District to be received from the Treasury with respect to the Notes: (i) a material adverse change under section 54F or 6431 of the Code, (ii) the publication by the IRS or the Treasury of any guidance with respect to such sections, or (iii) any other determination by the IRS or the Treasury, which determination is not the result of a failure of the District to satisfy certain requirements of the Resolution. The occurrence of an event described in item (iii) above is determined within the reasonable discretion of the District s Superintendent of Schools (or the designee thereof), which determination is conclusive upon the holders of the Notes. Extraordinary Redemption Price means an amount equal to the greater of (i) the issue price of the Notes set forth in the Resolution (but not less than 100%) of the principal amount of such Notes to be redeemed or (ii) the sum of the present value of the remaining scheduled payments of principal and interest on the Notes to be redeemed to the maturity date of such Notes, not including any portion of those payments of interest accrued and unpaid as of the date on which the Notes are to be redeemed, discounted to the date on which the Notes are to be redeemed on a semi-annual basis, assuming a 360-day year containing twelve 30-day months, at the Treasury Rate plus one-hundred (100) basis points, plus accrued interest on the Notes to be redeemed to the redemption date. Nonqualified Notes means the portion of the outstanding Notes in an amount that, if the remaining Notes were issued on the last day of the Expenditure Period, all of the Available Project Proceeds of the remaining Notes would have been used for Qualified Purposes within the Expenditure Period. Qualified Purposes means the construction, rehabilitation, or repair of a public school facility (including expenditures for the acquisition of equipment to be used in a portion of a public school facility being constructed, rehabilitated, or repaired with the proceeds of the Notes) or for the acquisition of land on which such a facility is to be constructed with a portion of the proceeds of the Notes. Treasury Rate means, with respect to any redemption date for a particular Note, the yield to maturity as of such redemption date of Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to the redemption date (excluding inflation indexed securities) (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to the maturity date of the Note to be redeemed; provided, however, that if the period from the redemption date to such maturity date is less than one year, the weekly average yield on actually traded Treasury securities adjusted to a constant maturity of one year will be used. 3

12 Selection of Notes to be Redeemed The Notes of a denomination larger than $5,000 may be redeemed in part (in increments of $5,000 or any integral multiple thereof). The Notes to be partially redeemed must be surrendered in exchange for one or more new Notes of the same series for the unredeemed portion of the principal. If less than all of the Notes are to be redeemed, the District will determine the amounts to be redeemed and will direct the Paying Agent/Registrar (or DTC while the Notes are in Book-Entry-Only form) to select, at random and by lot, the particular Notes, or portions thereof, to be redeemed. If a Note (or any portion of the principal sum thereof) will have been called for redemption and notice or such redemption will have been given, such Note (or the principal amount thereof to be redeemed), will become due and payable on such redemption date and interest thereon will cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. Notice of Redemption Not less than 30 days prior to a redemption date for the Notes, a notice of redemption will be sent by United States mail, first class postage prepaid, in the name of the District and at the District s expense, by the Paying Agent/Registrar, to each registered owner of a Note to be redeemed in whole or in part at the address of the registered owner appearing on the registration books at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED WILL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE NOTES CALLED FOR REDEMPTION WILL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY NOTE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH NOTE OR PORTION THEREOF WILL CEASE TO ACCRUE. All notices of redemption will (i) specify the date of redemption for the Notes, (ii) identify the Notes to be redeemed and, in the case of a portion of the principal amount to be redeemed, the principal amount thereof to be redeemed, (iii) state the redemption price, (iv) state that the Notes, or the portion of the principal amount thereof to be redeemed, will become due and payable on the redemption date specified, and the interest thereon, or on the portion of the principal amount thereof to be redeemed, will cease to accrue from and after the redemption date, and (v) specify that payment of the redemption price for the Notes, or the principal amount thereof to be redeemed, will be made at the designated corporate trust office of the Paying Agent/Registrar only upon presentation and surrender thereof by the registered owner. If a Note is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given or waived as provided in the Resolution, such Note (or the principal amount thereof to be redeemed) so called for redemption will become due and payable, and on the redemption date designated in such notice, interest on said Note (or the principal amount thereof to be redeemed) called for redemption will cease to accrue and such Note will not be deemed to be outstanding. The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System is used for the Notes, will send any notice of redemption, notice of proposed amendment to the Resolution or other notices with respect to the Notes only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the Notes called for redemption or any other action premised or any such notice. Redemption of portions of the Notes by the District will reduce the outstanding principal amount of such Notes held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Notes held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Notes from the Beneficial Owners. Any such selection of Notes to be redeemed will not be governed by the Resolution and will not be conducted by the District or the Paying Agent/Registrar. Neither the District nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Notes or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Notes for redemption. Cumulative Sinking Fund Deposits The Code provides that an issue of Qualified School Construction Bonds, which includes the Notes, shall not fail to satisfy the programmatic requirements for such obligations by reason of any fund that is expected to be used to repay such Qualified School Construction Bonds that (i) is funded at a rate not more rapid than equal annual installments, (ii) is funded in a manner reasonably expected to result in an amount not greater than the amount necessary to repay the obligations, and (iii) is invested at a yield that is not greater than the discount rate published by the U.S. Treasury on the date on which the District and the Underwriters enter into a binding obligation concerning the sale and purchase of the Notes (which discount rate for the Notes is 4.86%). The District has obligated itself under the Resolution to make mandatory deposits into the Cumulative Sinking Fund Deposit Account, which is a 4

13 subaccount of the Note Fund created under the Resolution, deposited with the Paying Agent/Registrar for the Notes on February 1 in each of the years and the respective amounts set forth below: The Notes Maturing February 1, 2021 Date of Sinking Fund Deposit (2/1) Amount of Sinking Fund Deposit 2012 $1,675, ,675, ,675, ,675, ,675, ,675, ,675, ,675, ,675, (1) 1,675,000 (1) Represents final maturity date of the Notes on which date the amounts in the Cumulative Sinking Fund Deposit Account will be used to repay the Notes. To the extent that the aggregate Cumulative Sinking Fund Deposits and interest thereon are not sufficient to pay the Notes in full at maturity, the District will contribute additional funds required to pay the Notes on the final maturity date. Any interest earnings from the investment of prior deposits will be applied as a credit against the next year s required Cumulative Sinking Fund Deposit Account deposit. Such deposits and any interest earned thereon (which is not used as a credit against periodic deposits) shall be used to pay the principal of the Notes at Stated Maturity or prior redemption and are pledged to pay the debt service requirements on the Notes. To the extent the aggregate cumulative sinking fund deposits and interest thereon total less than the principal amount of the Notes due on such date, the District will contribute additional funds required to pay the Notes upon prior redemption or on the final maturity date for the Notes. Security The Notes constitute direct obligations of the District and are payable as to principal and interest from the proceeds of a continuing, direct annual ad valorem tax levied for maintenance purposes by the District, within the limitations of the District s maintenance tax authority, against all taxable property located within the District, as provided in the Resolution (see STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM and TAX RATE LIMITATIONS for an explanation of factors affecting the financing of public school systems in Texas). The Notes are payable from a pledge of the District s maintenance tax revenues and the Cumulative Sinking Fund Deposits; they are not payable on a parity with the District s unlimited tax school bonds; are not guaranteed by the Permanent School Fund Guaranty and not subsidized by either the State s Instructional Facilities Allotment or the Existing Debt Allotment. The maintenance tax rate has been adopted by the District s electorate, and in recent years, has been the subject of much amendment by the Texas legislature. And it could face amendment in the current session of the Texas Legislature which convened on January 11, The District's electorate, pursuant to Article 2784e-1 (formally Chapter 528, Acts 1955, 54th Legislature, Regular Session), has approved and adopted a maintenance tax that empowers the District to levy and collect a tax at a rate not to exceed $1.50 on each $100 valuation of taxable property in the District for the maintenance of the free public schools within the District. Under Article 2784e-1 (the Act ), without reducing its maintenance tax levy within legal limits, the District may not issue unlimited tax debt if the principal amount of outstanding unlimited tax debt exceeds seven percent (7%) of the District s appraised valuation of taxable property. The governing board of the District has acknowledged that without the Instructional Facilities Allotment and Existing Debt Allotment from the State of Texas (see STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS ) to subsidize its unlimited tax debt, the District would be required to reduce its maintenance tax to satisfy the requirements of the Act (see TAX RATE LIMITATIONS ). The District is expressly authorized, under section of the Texas Education Code to undertake repair and remodeling projects and pay the principal and interest thereof from proceeds provisionary Notes payable from its maintenance tax revenues. Such notes may at no time exceed 75% of the District s previous year s maintenance tax income and are issued only after a budget has been adopted for the current school year. The Attorney General, in his examination of the transcript of proceedings for the Notes will 5 The Notes Maturing February 1, 2026 Date of Sinking Fund Deposit (2/1) Amount of Sinking Fund Deposit 2012 $100, , , , , , , , , , ,800, ,800, ,800, ,800, (1) 1,805,000

14 require a maintenance tax test which allows payment of the maximum annual debt service of the Notes with existing actual maintenance tax revenues given the State s maintenance tax ceiling restrictions. The District may make improvements within an existing structure, but it may not undertake expansions of those facilities. There is no express provision for the acquisition of land on which improvements may be constructed. But the District may improve parking lots, sidewalks and its athletic facilities within the expressed limitations. The District will be limiting the use of Note proceeds to these types of projects. In the resolution authorizing the Notes, the District has including the following provisions: The Series 2010 Notes Fund (the "Notes Fund") is hereby created, which shall be maintained at the District s depository, for the payment of debt service requirements of the Notes, and the amounts deposited to the credit of the Notes Fund shall not be diverted to or utilized for any other purpose. In accordance with the provisions of V.T.C.A., Education Code, Section , available funds of the District are hereby pledged to the payment of the principal of and interest on the Notes as the same shall become due and payable. The District covenants that each year the Notes are outstanding the annual budget of the District shall include as a separate line item an amount equal to the debt service requirements of the Notes due and payable in such budget year and to the extent other available funds of the District are not budgeted and set aside for such purposes to pay such debt service requirements, the District shall levy a tax each year within the District s maintenance taxing authority as authorized by Section sufficient to pay the Notes and such annual tax rate levied and assessed by the District for the payment of the Notes shall be identified and stated separately in the annual tax levy of the District from other taxes levied for maintenance purposes and debt service. If sufficient funds have been deposited or budgeted to be deposited in the Notes Fund at the time that taxes are levied for such year, to cover the debt service requirements of the Note for the ensuing fiscal year, including Cumulative Sinking Fund Depsoits, then the amount of taxes which otherwise would have been required to be levied to cover this debt service for the fiscal year, may be reduced to the extent and by the amount then on deposit or budgeted to be deposited in the Notes Fund during the fiscal year. The tax shall be annually levied, assessed and collected in due time, form and manner, and at the same time as other District taxes are assessed, levied and collected, in each year, beginning with the current year, upon all taxable property in the District, in an amount sufficient to pay in full the interest on the Notes as the same becomes due and to pay each installment of the principal of the Notes as the same matures, full allowance being made for delinquencies and costs of collection. The Superintendent of Schools, or any proper officer of the District, is hereby authorized and directed to cause to be transferred to the Paying Agent/Registrar, from funds on deposit in the Notes Fund, amounts sufficient to fully pay and discharge promptly each installment of principal and interest on the Notes as the same accrues or becomes due and payable; such transfer of funds to be made in such manner as will cause collected funds to be deposited with the Paying Agent/Registrar on or before each due date for an installment of principal and each interest payment date of the Notes. The District certifies that currently available funds of the District sufficient to make the interest payment due on August 5, 2011 will be deposited to the Notes Fund. The Board of Trustees hereby declares its purpose and intent to provide and levy a tax legally and fully sufficient, within the limited authorized by law, to pay the debt service requirements of the Notes taking into account the aforesaid matters, it having been determined that the existing and available taxing authority of the District and the other available funds for such purpose is adequate to permit a legally sufficient tax in consideration of all other obligations of the District. Legality The Notes are offered for delivery when, as and if issued, and subject to the approval of legality by the Attorney General of the State of Texas and the opinion of Ramirez & Guerrero L.L.P., San Juan, Texas, Bond Counsel (see LEGAL MATTERS and APPENDIX D FORM OF LEGAL OPINION OF BOND COUNSEL ). Payment Record The District has never defaulted with respect to the payment of its tax supported indebtedness. Defeasance of the Notes Any Note is deemed paid and no longer considered to be outstanding within the meaning of the Resolution when payment of the principal on such Note to its stated maturity or date of prior redemption has been made or provided for by depositing with a paying agent, in trust (1) money in an amount sufficient to make such payment, (2) Government Obligations (defined herein) having such maturities and interest payment dates and bearing such interest as will, without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom, be sufficient to make such payment, or (3) a combination of money and Government Obligations together sufficient to make such payment. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Government Obligations originally deposited, to reinvest the uninvested money on 6

15 deposit for such defeasance and to withdraw for the benefit of the District money in excess of the amount required for such defeasance. The term Government Obligations means the (1) direct noncallable obligations of the United States, including obligations that are unconditionally guaranteed by the United States of America; (2) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; and (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. Upon such deposit as described above, such Notes will no longer be regarded to be outstanding obligations for purposes of applying any limitation on indebtedness or for purposes of taxation. After firm banking and financial arrangements for the discharge and final payment of the Notes have been made as described above, all rights of the District to initiate proceedings to call the Notes for redemption or take any other action amending the terms of the Notes are extinguished; provided, however, that, in addition to the District s continuing obligation to fund, from lawfully available funds, any shortfall in amounts held in trust for the defeasance of the Notes as described above, which continuing obligation is memorialized in the Resolution, the District s right to redeem Notes defeased to stated maturity is not extinguished if the District has reserved the option, to be exercised at the time of the defeasance of the Notes, to call for redemption, at an earlier date, those Notes which have been defeased to their stated maturity date, if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Notes for redemption; (ii) gives notice of the reservation of that right to the owners of the Notes immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. Amendments The District may amend the Resolution without the consent of or notice to any registered owner in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, or formal defect or omission therein. The provisions of the Resolution may be amended at any time to ensure that the Notes continue to qualify as qualified school construction bonds and qualified bonds, pursuant to the provisions of the Resolution and the tax credit agreement (as further defined and described in the Resolution). In addition, the District may, with the written consent of the owners of a majority in aggregate principal amount of the Notes then outstanding and affected thereby, amend, add to, or rescind any of the provisions of the Resolution. Without the consent of the registered owners of all of the Notes affected, no such amendment, addition or rescission may (1) make any change in the maturity of any of the outstanding Notes; (2) amend the redemption price of the Notes; (3) reduce the rate of interest borne by any of the outstanding Notes; (4) reduce the amount of the principal or payable on any outstanding Notes; (5) modify the terms of payment of principal, or of interest on outstanding Notes or any of them or impose any condition with respect to such payment; or (6) change the minimum percentage of the principal amount of the Notes necessary for consent to such amendment. Sources and Uses of Funds The proceeds from the sale of the Notes, together with other available District funds, if any, will be applied approximately as follows: Sources: Principal Amount the Notes $ 26,755, Total Sources of Funds $ 26,755, Uses: Deposit to Project Fund $26,403, Costs of Issuance and Underwriter s Discount 351, Total Uses of Funds $26,755, REGISTERED OWNERS REMEDIES If the District defaults in the payment of principal, interest, or redemption price on the Notes when due, or if it fails to make payments into any fund or funds created by the Resolution, or defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Resolution, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Notes if there is no other available remedy at law to compel performance of the Notes or the Resolution, and the District s obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Notes in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Resolution does not provide for the appointment of a trustee to represent the interest of the Noteholders upon any failure of the District to perform in accordance with the terms of the Resolution, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in 7

16 Tooke v. City of Mexia, 197 S.W. 3d 325 (Tex. 2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in clear and unambiguous language. Because it is unclear whether the Texas legislature has effectively waived the District s sovereign immunity from a suit for, money damages, Noteholders may not be able to bring suit against the District for breach of the Notes or Resolution covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District s property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Notes. Furthermore, the District is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ( Chapter 9 ). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Noteholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Notes are qualified with respect to the customary rights of debtors relative to their creditors and by general principles of equity which permit the exercise of judicial discretion. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Notes is to be transferred and how the principal of, premium, if any and interest are to be paid to and credited by DTC while the Notes are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District, the Financial Advisor and the Underwriter believe the source of such information to be reliable, but neither the District, the Financial Advisor nor the Underwriter take any responsibility for the accuracy or completeness thereof. The District and the Underwriters cannot and do not give any assurance that (1) DTC will distribute payments of debt service on the Notes, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Notes), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Notes. The Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fullyregistered certificate will be issued for each maturity of Notes, as set forth on page ii hereof, each in the aggregate principal amount of such maturity and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at and Purchases of any Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC s records. The ownership interest of each actual purchaser of each Note ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants 8

17 acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued. To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC s records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Notes may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Notes, such as redemptions, defaults, and proposed amendments to the Note documents. For example, Beneficial Owners of Notes may wish to ascertain that the nominee holding the Notes for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Notes within a maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy). All payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent/Registrar, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. All payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Notes at any time by giving reasonable notice to the District or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, printed certificates for the Notes are required to be printed and delivered (see REGISTRATION, TRANSFER AND EXCHANGE Future Registration ). The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository.) In that event, Notes will be printed and delivered in accordance with the Resolution. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Notes are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Notes, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Resolution will be given only to DTC. Paying Agent/Registrar REGISTRATION, TRANSFER AND EXCHANGE The Bank of New York Mellon Trust Company, N.A. has been named to serve as initial Paying Agent/Registrar for the Notes. In the Resolution the District retains the right to replace the Paying Agent/Registrar. If the District replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar s records to the successor Paying Agent/Registrar, and the successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any successor Paying Agent/Registrar selected by the District shall be a legally qualified bank, trust company, 9

18 financial institution or other agency duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Notes. Upon any change in the Paying Agent/Registrar, the District has agreed to promptly cause a written notice thereof to be sent to each registered owner of the Notes by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Interest on the Notes will be paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (hereinafter defined), and such interest will be paid (i) by check sent United States mail, first class, postage prepaid to the address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Notes will be paid to the registered owner at the stated maturity or upon earlier redemption, as applicable, upon presentation to the designated payment/transfer office of the Paying Agent/Registrar. If the date for any payment on the Notes is a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the principal corporate trust office of the Paying Agent/Registrar is located are authorized to close, then the date for such payment will be the next succeeding day which is not such a day, and payment on such date will have the same force and effect as if made on the date payment was due. So long as Cede & Co. is the registered owner of the Notes, principal and interest on the Notes will be made as described in BOOK-ENTRY-ONLY SYSTEM above. Future Registration In the event the book-entry-only system is discontinued for the Notes, printed certificates will be delivered to the owners of the Notes and thereafter the Notes may be transferred, registered and assigned on the registration books only upon presentation and surrender of such printed certificates to the Paying Agent/Registrar, and such registration and transfer shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration and transfer. A Note may be assigned by the execution of an assignment form on such Note or by other instrument of transfer and assignment must be acceptable to the Paying Agent/Registrar. A new Note or Notes will be delivered by the Paying Agent/Registrar in lieu of the Note or Notes being transferred or exchanged at the designated office of the Paying Agent/Registrar, or sent by United States registered mail to the new registered owner at the registered owner s request, risk and expense. To the extent possible, new Notes issued in an exchange or transfer of Notes will be delivered to the registered owner or assignee of the registered owner in not more than three (3) business days after the receipt of the Notes to be canceled in the exchange or transfer and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Notes registered and delivered in an exchange or transfer shall be in authorized denominations and for a like kind and aggregate principal amount as the Note or Notes surrendered for exchange or transfer. See BOOK-ENTRY-ONLY SYSTEM for a description of the system to be utilized initially in regard to the ownership and transferability of the Notes. Record Date for Interest Payment The record date ( Record Date ) for the interest payable on any interest payment date for the Notes means the close of business on the 15 th of the month next preceding such interest payment date. In the event of a nonpayment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (the Special Payment Date which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each registered owner of a Note appearing on the books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. Limitation on Transfer of the Notes Neither the District nor the Paying Agent/Registrar shall be required to transfer or exchange any Note called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Note. Replacement of the Notes If any Note is mutilated, destroyed, stolen or lost, a new Note in the same principal amount as the Note so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Note, such new Note will be delivered only upon surrender and cancellation of such mutilated Note. In the case of any Note issued in lieu of and in substitution for a Note which has been destroyed, stolen or lost, such new Note will be delivered only (a) upon filing with the Paying Agent/Registrar of satisfactory evidence to the effect that such Note has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the District and the Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication and delivery of a new Note must pay such expenses as the Paying Agent/Registrar may incur in connection therewith. 10

19 Property Tax Code and County-Wide Appraisal District AD VALOREM TAX PROCEDURES The Texas Property Tax Code (the Property Tax Code ) provides for county-wide appraisal and equalization of taxable property values and establishes in each county of the State an appraisal district and an appraisal review board responsible for appraising property for all taxing units within the county. The Hidalgo County Appraisal District (the Appraisal District ) is responsible for appraising property within the District, generally, as of January 1 of each year. The appraised values set by the Appraisal District are subject to review and change by the Appraisal Review Board (the Appraisal Review Board ), the members of which are appointed by the Board of Directors of the Appraisal District. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the District in establishing its tax roll and tax rate. Property Subject to Taxation by the District Except for certain exemptions provided by State law, all real and certain tangible personal property with a tax situs in the District is subject to taxation by the District. Principal categories of exempt property (including certain exemptions which are subject to local option by the Board of Trustees of the District) include property owned by the State or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which the District has agreed to abate ad valorem taxes; certain household goods, family supplies and personal effects; farm products owned by the producers; certain property of a nonprofit corporation used in scientific research and educational activities benefiting a college or university, and designated historic sites. Other principal categories of exempt property include tangible personal property not held or used for production of income; solar and wind powered energy devices; most individually owned automobiles; $10,000 exemption to residential homesteads of disabled persons or persons ages 65 or over; an exemption from $5,000 to a maximum of $12,000 for real or personal property of disabled veterans or the surviving spouses or children of a deceased veteran who died while on active duty in the armed forces; effective January 1, 2009, a disabled veteran who receives 100% disability compensation from the United States Department of Veterans Affairs or its successor due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran s residence homestead; $15,000 in market value for all residential homesteads; and certain classes of intangible property. In addition, except for increases attributable to certain improvements, the District is prohibited by State law from increasing the total ad valorem tax of the residence homestead of persons who are 65 years of age or older and persons who are disabled above the amount of tax imposed in the year such residence qualified for an exemption based on age of the owner. The freeze on ad valorem taxes on the homesteads of persons who are 65 years of age or older and persons who are disabled is also transferable to a different residence homestead. Also, a surviving spouse of a taxpayer who qualifies for the freeze on ad valorem taxes is entitled to the same exemption so long as (i) the taxpayer died in a year in which he qualified for the exemption, (ii) the surviving spouse was at least 55 years of age when the taxpayer died and (iii) the property was the residence homestead of the surviving spouse when the taxpayer died and the property remains the residence homestead of the surviving spouse. A disabled person is one who is under a disability for purposes of payment of disability insurance benefits under the Federal Old Age, Survivors and Disability Insurance. Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons who are 65 years of age or over or persons who are disabled to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year (see CURRENT PUBLIC SCHOOL FINANCE SYSTEM General ). The school property tax limitation provided by the constitutional amendment and enabling legislation applied to the 2007 and subsequent tax years. Article VIII, Section 1-j of the Texas Constitution provides for an exemption from ad valorem taxation for freeport property, which is defined as goods detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Taxing units that took action prior to April 1, 1990 may continue to tax freeport property and decisions to continue to tax freeport property may be reversed in the future. However, decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of goods-in-transit. Goods-in-transit is defined by Section of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. Section permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in-transit during the following tax year. A taxpayer may only receive either the freeport exemption or the goods-in-transit exemption for items of personal property. See APPENDIX A FINANCIAL INFORMATION REGARDING THE DISTRICT and THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT for a schedule of exemptions allowed by the District. A city or county may create a tax increment financing district ( TIF ) within the city or county with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, 11

20 may agree with the city or county to contribute all or part of future ad valorem taxes levied and collected against the incremental value (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing taxing units. Prior to September 1, 2001, school districts were allowed to enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The school district in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. Effective September 1, 2001, school districts may not enter into tax abatement agreements under the general statute that permits cities and counties to initiate tax abatement agreements. In addition, credit will not be given by the Commissioner of Education in determining a district s property value wealth per student for (1) the appraised value, in excess of the frozen value, of property that is located in a TIF created after May 31, 1999 (except in certain limited circumstances where the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units that levy ad valorem taxes in the TIF of its intention to create the TIF and the TIF was created and had its final project and financing plan approved by the municipality prior to August 31, 1999), or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for school districts to grant limitations on appraised property values and provide ad valorem tax credits to certain corporations and limited liability companies to encourage economic development within the district. Generally, during the last eight years of the tenyear term of a tax limitation agreement, the school district may only levy and collect ad valorem taxes for maintenance and operation purposes on the agreed-to limited appraised property value. The taxpayer is entitled to a tax credit from the school district for the amount of taxes imposed during the first two years of the tax limitation agreement on the appraised value of the property above the agreed-to limited value. Additional State funding is provided to a school district for each year of such tax limitation in the amount of the tax credit provided to the taxpayer. During the first two years of a tax limitation agreement, the school district may not adopt a tax rate that exceeds the district s rollback tax rate (see AD VALOREM TAX PROCEDURES Public Hearing and Rollback Tax Rate ). Valuation of Property for Taxation Generally, property in the District must be appraised by the Appraisal District at market value as of January 1 of each year. In determining the market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal or the market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the District in establishing its tax rolls and tax rate. Assessments under the Property Tax Code are based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied. Effective January 1, 2010, State law requires the appraised value of a residence homestead to be based solely on the property s value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the property s market value in the most recent tax year in which the market value was determined by the Appraisal District or (2) the sum of (a) 10% of the property s appraised value for the preceding tax year, (b) the appraised value of the property for the preceding tax year; and (c) the market value of all new improvements to the property. The Property Tax Code permits land designated for agricultural use, open space or timberland to be appraised at its value based on the land s capacity to produce agricultural or timber products rather than at its fair market value. Landowners wishing to avail themselves of the agricultural use designation must apply for the designation, and the appraiser is required by the Property Tax Code to act on each claimant s right to the designation individually. If a claimant receives the designation and later loses it by changing the use of the property or selling it to an unqualified owner, the District can collect taxes for previous years based on the new value, including three years for agricultural use and five years for agricultural open-space land and timberland prior to the loss of the designation. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three years. The District, at its expense, has the right to obtain from the Appraisal District a current estimate of appraised values within the District or an estimate of any new property or improvements within the District. While such current estimate of appraisal values may serve to indicate the rate and extent of growth of taxable values within the District, it cannot be used for establishing a tax rate within the District until such time as the Appraisal District chooses to formally include such values on its appraisal roll. Residential Homestead Exemption Under Section 1-b, Article VIII of the Texas Constitution and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older or the disabled from all ad valorem taxes thereafter levied by the political subdivision. 12

21 Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual s spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. District and Taxpayer Remedies Under certain circumstances, taxpayers and taxing units, including the District, may appeal orders of the Appraisal Review Board by filing a petition for review in district court within 45 days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury, if requested by any party, or through binding arbitration, if requested by the taxpayer. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Property Tax Code. Public Hearing and Rollback Tax Rate In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district's rollback tax rate without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. For the fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district's state compression percentage for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of (1) the district's effective maintenance and operations tax rate, (2) the product of the district's state compression percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General for a description of the state compression percentage ). If for the preceding tax year a district adopted an M&O Tax rate that was less than its effective M&O Tax rate for that preceding tax year, the district's rollback tax for the current year is calculated as if the district had adopted an M&O Tax rate for the preceding tax year equal to its effective M&O Tax rate for that preceding tax year. The effective maintenance and operations tax rate for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. Section of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section of the Texas Education Code. Section (e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section (b), (c) and (d) and if such failure to comply was not in good faith. Section (e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Beginning September 1, 2009, a district may adopt its budget after adopting a tax rate for the tax year in which the fiscal year covered by the budget begins if the district elects to adopt its tax rate before receiving the certified appraisal roll. A district that adopts a tax rate before adopting its budget must hold a public 13

22 hearing on the proposed tax rate followed by another public hearing on the proposed budget rather than holding a single hearing on the two items. Levy and Collection of Taxes The District is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. Before the later of September 30 or the 60th day after the date that the certified appraisal role is received by the District, the rate of taxation must be set by the Board of Trustees of the District based upon the valuation of property within the District as of the preceding January 1 and the amount required to be raised for debt service and maintenance and operations purposes. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs a penalty from six percent (6%) to twelve percent (12%) of the amount of the tax, depending on the time of payment, and accrues interest at the rate of one percent (1%) per month. If the tax is not paid by the following July 1, an additional penalty of up to twenty percent (20%) may, under certain circumstances, be imposed by the District. The Property Tax Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances. District s Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property. The District has no lien for unpaid taxes on personal property but does have a lien for unpaid taxes on real property, which lien is discharged upon payment. On January 1 of each year, such tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The District s tax lien is on a parity with the tax liens of other such taxing units. A tax lien on real property takes priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. The automatic stay in bankruptcy will prevent the automatic attachment of tax liens with respect to postpetition tax years unless relief is sought and granted by the bankruptcy judge. Personal property, under certain circumstances, is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. Except with respect to taxpayers who are 65 years of age or older, at any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights, or by bankruptcy proceedings which restrict the collection of taxpayer debts. THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT The Hidalgo County Appraisal District ( Appraisal District ) has the responsibility for appraising property in the District as well as other taxing units in Hidalgo County. The Appraisal District is governed by a board of six directors appointed by voters of the governing bodies of various Hidalgo County political subdivisions. The District s taxes are collected by the District. The District grants a state mandated $15,000 general homestead exemption. The District grants a state mandated $10,000 residence homestead exemption for persons 65 years of age or older or disabled. The District does not tax non-business personal property. Ad valorem taxes are not levied by the District against the exempt value of residence homesteads for the payment of debt. The District does not grant a Freeport exemption. The District is not currently a participant in any tax increment financing zones. The District does not grant the goods-in-transit exemption. The District currently does not grant any tax abatements. The District has not granted a total tax freeze for persons 65 years of age or older or disabled. Charges for penalties and interest on the unpaid balance of delinquent taxes are as follows: 14

23 Cumulative Cumulative Date Penalty Interest Total February 6% 1% 7% March April May June July After July, the penalty for delinquent taxes remains at 12%, and interest increases at the rate of 1% each month. In addition, an additional penalty of 20% is assessed on July 1 in order to defray attorney collection expenses. Property within the District is assessed as of January 1 of each year (except business inventories which may be assessed as of September 1 and mineral values which are assessed on the basis of a twelve month average) and taxes become due October 1 of the same year and become delinquent on February 1 of the following year. Split payments of taxes are not permitted. Discounts for the early payment of taxes are not permitted. EMPLOYEES BENEFIT PLANS The District s employees participate in a retirement plan (the Plan ) with the State of Texas. The Plan is administered by the Teacher Retirement System of Texas ( TRS ). State contributions are made to cover costs of the TRS retirement plan up to certain statutory limits. The District is obligated for a portion of TRS costs relating to employee salaries that exceed the statutory limit. For the year ended August 31, 2010, the State contributed $10,078,666 and the District paid additional State contributions of $3,287,560 on the portion of the employees salaries that exceeded the statutory minimum. As a result of its participation in TRS and having no other postretirement benefit plans, the District has no obligations for other post-employment benefits within the meaning of Governmental Accounting Standards Board Statement No. 45. In addition to the TRS retirement plan, the District provides health care coverage for its employees. For a discussion of the TRS retirement plan and the District s medical benefit plan, see Notes H, I and J to the audited financial statements of the District that are attached hereto as Appendix C. Formal collective bargaining agreements relating directly to wages and other conditions of employment are prohibited by Texas law, as are strikes by teachers. There are various local, state and national organized employee groups who engage in efforts to improve the terms and conditions of employment of school employees. Some districts have adopted a policy to consult with employer groups with respect to certain terms and conditions of employment. Some examples of these groups are the Texas State Teachers Association, the Texas Classroom Teachers Association, the Association of Texas Professional Educators and the National Education Association. STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the District Court ) against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the Commissioner ) and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate (the M&O Tax ) had become in effect a state property tax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the Finance System ) was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the Texas Constitution, because the State of Texas (the State ) did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the Supreme Court ), which rendered decisions in the case on May 29, 2003 ( West Orange-Cove I ) and November 22, 2005 ( West Orange-Cove II ). After the remand by the Supreme Court back to the District Court in West Orange-Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated Article VIII, Section 1-e of the Texas Constitution because the statutory limit of $1.50 per $ of taxable assessed valuation on property taxes levied by school districts for maintenance and operation purposes had become both a 15

24 floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article VII, Section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve [a] general diffusion of knowledge" as required by Article VII, Section 1 of the Texas Constitution, because the Finance System was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange-Cove II, the Supreme Court s holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education system was adequate, since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of suitability, since the Finance System was suitable for adequately and efficiently providing a public education. In reversing the District Court s holding that the Finance System was unconstitutional under Article VII, Section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of Article VII, Section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ( Edgewood IV ) that such funding variances may not be unreasonable. The Supreme Court further stated that [t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that [e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system, and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a general diffusion of knowledge without additional facilities. Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature (the Legislature ) enacted House Bill 1 ( HB 1 ), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the State treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the Reform Legislation ). The Reform Legislation generally became effective at the beginning of the fiscal year of each district. Possible Effects of Litigation and Changes in Law on District Bonds The Reform Legislation did not alter the provisions of Chapter 45, Texas Education Code, which authorizes districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service tax as security for payment of the Notes. Reference is made, in particular, to the information under the heading THE NOTES Security in the Official Statement. 16

25 In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past State funding systems. Among other possibilities, a district s boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. In Edgewood IV, the Supreme Court stated that any future determination of unconstitutionality would not, however, affect the district s authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system s unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions (collectively, the Contract Clauses ). Consistent with the Contract Clauses, in the exercise of its police powers, the State may make such modifications in the terms and conditions of contractual covenants related to the payment of the bonds as are reasonable and necessary for the attainment of important public purposes. Although, as a matter of law, the Notes, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of future legislation or litigation, or how such legislation or future court orders may affect the District s financial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address school funding in Texas could substantially adversely affect the financial condition, revenues or operations of the District, as noted herein, the District does not anticipate that the security for payment of the Notes, specifically, the District s obligation to levy a limited debt service tax would be adversely affected by any such litigation or legislation. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM. General CURRENT PUBLIC SCHOOL FINANCE SYSTEM The following description of the Finance System is a summary of the Reform Legislation and the changes made by the State Legislature to the Reform Legislation since its enactment, including modifications made during the regular session of the 81st Texas Legislature (the 2009 Regular Legislative Session ). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon s Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded were intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately 11% in fiscal year and approximately another 22% in fiscal year , subject to local referenda that may increase local M&O Tax levies, thus offsetting a part of the compression in local M&O Tax levies (see TAX RATE LIMITATIONS ). Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board projected that the Reform Legislation would be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years through , however State surpluses have been appropriated to offset the revenue shortfall in fiscal year and for the and State biennia. Under the Finance System, as modified during the 2009 Regular Legislative Session, a school district that imposes an M&O Tax at least equal to the product of the state compression percentage" (as defined below) multiplied by the district s M&O Tax rate is entitled to at least the amount of State funding necessary to provide the district with the sum of (A) the amount of State and local revenue per weighted average daily attendance ( WADA ) to which the school district would be entitled for the school year as calculated under the law as it existed on January 1, 2009, (B) an additional $120 per WADA, (C) an amount to which the district is entitled based on supplemental payments owed to any tax increment fund for a reinvestment zone and (D) any amount due to the district to the extent the district contracts for students residing in the district to be educated in another district (i.e., tuition allotment). If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the fiscal year, the district s guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments (each as hereinafter defined) and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the fiscal year. The state compression percentage is a basic component of the funding formulas. The state compression percentage was 66.67% for fiscal years , , and For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to such district s adopted M&O Tax rate for the fiscal year, as a result of State funds appropriated for 17

26 distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. For fiscal year , the Commissioner determined the State compression percentage to be 66.67%. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the equalized wealth level" (described under Wealth Transfer Provisions ) to reduce their wealth to the equalized wealth level or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for enrichment" of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ( Tier One ) and (2) State guaranteed revenues per student for each cent of local tax effort that exceeds the compressed tax rate to provide operational funding for an enriched" educational program ( Tier Two ). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ( EDA ), the Instructional Facilities Allotment ( IFA ), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts at a tax rate of the state compression percentage multiplied by the lesser of (a) $1.50 or (b) the district s 2005 M&O Tax to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. The cost of the basic program is based on an allotment per student known as the Tier One Basic Allotment. The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the "cost of education index. In addition, a district-size adjustment further adjusts the Tier One Basic Allotment for districts that (i) have not more than 1,600 students in average daily attendance (with alternative formulas established for such districts that contain at least 300 square miles and those districts that contain less than 300 square miles) or (ii) offer a kindergarten through grade 12 program and have less than 5,000 students in average daily attendance. For fiscal year , the Tier One Basic Allotment was $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort, and for fiscal year , the Tier One Basic Allotment was $3,218 based upon a guaranteed yield of $37.42 for each cent of tax effort. For the through school years, the basic allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and, thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district s compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 Regular Legislative Session limits, beginning with school year, the annual increases in a district s M&O Tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the school year, the revenue increases are limited to the funds that a district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two funds. Tier Two currently provides two levels of enrichment with different guaranteed yields depending on the district s local tax effort. For fiscal year , the first six cents of tax effort that exceeds the compressed tax rate will generate a guaranteed yield equivalent to (a) that of the Austin Independent School District or (b) the amount of tax revenue per WADA received on that tax effort in the previous year, whichever is greater. The second level of Tier Two is generated by tax effort that exceeds the compressed tax rate plus six cents and has a guaranteed yield per penny of local tax effort of $ Before , Tier Two consisted of a district s M&O Tax levy above $0.86. For fiscal year , State funding to equalize local M&O Tax levies above $0.86, up to a district s compressed rate, was funded at a guaranteed yield of $37.42 per student in WADA for each cent of tax effort; any amount above a district s compressed rate up to $0.04 was funded at a guaranteed yield of $50.98 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a rollback election was funded at a guaranteed yield 18

27 of $31.95 per WADA for each cent of tax effort above a district s compressed rate plus $0.04. See CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General for a discussion of the state compression percentage. The IFA guarantees each school district a specified amount per student (the IFA Guaranteed Yield ) in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. If the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State s fiscal biennium; however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the EDA Yield ), which for the State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district s bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final school year of the preceding State fiscal biennium or (ii) levied taxes to pay the principal of and interest on the bonds for that school year. Access to EDA funding will be determined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district s Tier Two State funding. Local Revenue Sources - Property Tax Authority The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. The former provision of the Education Code, Section , that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed value, was replaced by the Reform Legislation with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the and fiscal years, districts were permitted to generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts generated equalized funding dollars from the State under the Tier Two program. In fiscal year and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in rate. See TAX RATE LIMITATIONS herein. The governing body of a school district cannot adopt an annual tax rate which exceeds the district s rollback tax rate without submitting such proposed tax rate to the voters at a referendum election. See AD VALOREM TAX PROCEDURES-Public Hearing and Rollback Tax Rate herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ( wealth per student ) for each school year to no greater than the equalized wealth level", determined in 19

28 accordance with a formula set forth in the Reform Legislation. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The wealth level that required wealth reduction measures for fiscal year was $319,500 per student in average daily attendance. For that wealth level was increased to $364,500 per student in average daily attendance with respect to that portion of a district s M&O tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district s local tax effort that was beyond its compressed rate plus $.04. For that wealth level was further increased to $374,200 per student in average daily attendance with respect to that portion of a district s M&O Tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district s local tax effort that was beyond its compressed rate plus $0.06. For that wealth level was increased to, and for that wealth level will remain at, $476,500 per student in average daily attendance with respect to that portion of a district s M&O Tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district s local tax effort that is beyond its compressed rate plus $.06. Property wealthy districts may also be able to levy up to an additional six cents per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) A district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O Taxes or both M&O Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property-poor district. (4) A district may educate students from other districts who transfer to the district without charging tuition to such students. A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase attendance credits by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving elections by the transferring district s qualified voters. Third, a wealthy district may reduce its wealth by paying tuition to a non-wealthy district for the education of students that reside in the wealthy district. A district may not adopt a tax rate until its effective wealth per student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner. If a district fails to exercise a permitted option, the Commissioner must reduce the district s property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district s existing debt. Possible Effects of Wealth Transfer Provisions on the District s Financial Condition The District's wealth per student for the school year is less than the equalized wealth value. Accordingly, the District has not been required to exercise one of the permitted wealth equalization options. As a district with wealth per student less than the equalized wealth value, the District may benefit in the future by agreeing to accept taxable property or funding assistance from or agreeing to consolidate with a property-rich district to enable such district to reduce its wealth per student to the permitted level. A district's wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District's wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district's combined property tax base, and the District's ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district. 20

29 TAX RATE LIMITATIONS Maintenance Tax A school district is authorized to levy maintenance and operation taxes ( M&O Tax ) subject to approval of a proposition submitted to district voters. The maximum M&O Tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. The maximum voted M&O Tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on November 21, 1964 pursuant to Article 2784e-1, Texas Revised Civil Statues Annotated, as amended ( Article 2784e-1 ). Article 2784e-1 limits the District s annual M&O Tax rate based upon a comparison between the District s outstanding bonded indebtedness and the District s taxable assessed value per $100 of assessed valuation. Article 2784e-1 provides for a reduction of $0.10 for each one percent (1%) or major fraction thereof increase in bonded indebtedness beyond seven percent (7%) of assessed valuation of property in the District. This limitation is capped when the District s bonded indebtedness is ten percent (10%) (or greater) of the District s assessed valuation which would result in an annual M&O Tax rate not to exceed $1.20. Lastly, the Texas Attorney General in reviewing the District s transcript of proceedings will allow the District to reduce the amount of its outstanding bonded indebtedness by the amount of funds (on a percentage basis) that the District receives in State assistance for the repayment of this bonded indebtedness (for example, if the District anticipates that it will pay 75% of its bonded indebtedness from State assistance, for the purposes of Article 2784e-1, the Texas Attorney General will assume that only 25% of the District s bonded indebtedness is outstanding and payable from local ad valorem taxes). The bonded indebtedness of the District after the issuance of the Notes will be approximately 23.53% of the District s current taxable assessed valuation of property (without consideration of State funding assistance). See APPENDIX A - Table 2 General Obligation Debt Outstanding herein. The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50, or such lower rate as described in the preceding paragraph, and (B) the sum of (1) the rate of $0.17, and (2) the product of the state compression percentage multiplied by $1.50. The state compression percentage was 66.67% for fiscal years , , and For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year which is based on the amount of State funds appropriated for distribution to the District for the current fiscal year. For fiscal year , the Commissioner has determined to maintain the State compression percentage at 66.67%. For a more detailed description of the state compression percentage, see CURRENT PUBLIC SCHOOL FINANCE SYSTEM General. Furthermore, a school district cannot annually increase its tax rate in excess of the district s rollback tax rate without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. See AD VALOREM TAX PROCEDURES - Public Hearing and Rollback Tax Rate. The Notes are payable from the District s M&O Tax, levied and collected within the limitations of the District s maintenance tax authority, and are not secured by an unlimited ad valorem tax. Therefore, issuance of the Notes is not subject to evidence of compliance with the limitations described below that pertain to unlimited tax bonds. Chapter , as amended, Texas Education Code, however, requires that a district incurring indebtedness pursuant to the authority granted thereunder limit such indebtedness to not more than 75% of the previous year s income (which includes M&O Tax collections as well as Tier One basic allotments). In addition, prior to the issuance of such indebtedness, the Texas Attorney General requires that the district demonstrate the prospective ability to pay maximum annual debt service on all outstanding indebtedness secured by M&O Taxes, after taking into consideration the proposed indebtedness. In demonstrating this ability, the Attorney General permits the use of the Tier One basic allotment. The District will evidence compliance with these requirements in connection with its issuance of the Notes. Unlimited Tax Bonds A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of one or more propositions submitted to the voters under Section (b)(1), Texas Education Code, as amended, which provides a tax unlimited as to rate or amount for the support of school district bonded indebtedness. Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding new debt of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduces the district s local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt service on bonds approved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. In addition, taxes levied to pay refunding bonds issued pursuant to Chapter 1207, Texas Government Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds are included in the calculation of the $0.50 tax rate test as applied to subsequent issues of new debt. Under current law, a district may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier 21

30 of the tax year five years after the current tax year or the tax year in which the final payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax at a rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used projected property values to satisfy this threshold test. RATING Moody s Investors Service ( Moody s ) and Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) have assigned ratings of Aa3 and A+, respectively, on the Notes. An explanation of the significance of any rating may be obtained from the company furnishing the rating. The rating reflects only the view of such organization and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating company, if in the judgment of such company, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Notes. LEGAL MATTERS The District will furnish to the Underwriters a complete transcript of proceedings incident to the authorization and issuance of the Notes, including the unqualified approving legal opinion of the Attorney General of the State of Texas to the effect that the Notes are valid and legally binding obligations of the District, and based upon examination of such transcript of proceedings, the approving legal opinion of Ramirez & Guerrero, L.L.P., Bond Counsel, with respect to the Notes being issued in compliance with the provisions of the Resolution. The form of Bond Counsel s opinion is attached hereto as Appendix D. Though it represents the Financial Advisor and the Underwriters from time to time in matter unrelated to the issuance of the Notes, Bond Counsel has been engaged by, and only represents, the District in the issuance of the Notes. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under the captions, THE NOTES (except under the subcaptions Payment Record and Sources and Uses of Funds ), REGISTRATION, TRANSFER AND EXCHANGE, STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM (except under the subcaption Possible Effects of Wealth Transfer Provisions on the District s Financial Condition ), TAX RATE LIMITATIONS (except the last two sentences of the first paragraph thereof), LEGAL MATTERS (except the last two sentences of the second paragraph thereof), FEDERAL INCOME TAX TREATMENT OF NOTES, LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS, REGISTRATION AND QUALIFICATION OF NOTES FOR SALE and CONTINUING DISCLOSURE OF INFORMATION (except under the subcaption Compliance With Prior Undertakings ) and such firm is of the opinion that the information relating to the Notes and legal matters contained under such captions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Notes, such information conforms to the Resolution. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Notes is contingent upon the sale and delivery of the Notes. The legal opinion of Bond Counsel will accompany the Notes deposited with DTC or will be printed on the definitive Notes in the event of the discontinuance of the Book-Entry-Only System. Certain legal matters will be passed upon for the Underwriters by their co-counsel, The Perez Law Firm, PLLC, Pharr, Texas and Locke Lord Bissell & Liddell LLP, Dallas, Texas. The legal fees of such firms are contingent upon the sale and delivery of the Notes. The legal opinion to be delivered concurrently with the delivery of the Notes expresses the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. General FEDERAL INCOME TAX TREATMENT OF NOTES The following is a general summary of certain United States federal income tax consequences of the purchase and ownership of the Notes. The discussion is based upon laws, Treasury Regulations, rulings and decisions now in effect, all of which are subject to change (possibly, with retroactive effect) or possibly differing interpretations. No assurances can be given that future changes in the law will not alter the conclusions reached herein. The discussion below does not purport to deal with United States federal income 22

31 tax consequences applicable to all categories of investors. Further, this summary does not discuss all aspects of United States federal income taxation that may be relevant to a particular investor in the Notes in light of the investor s particular personal investment circumstances or to certain types of investors subject to special treatment under United States federal income tax laws (including insurance companies, tax exempt organizations, financial institutions, broker-dealers, and persons who have hedged the risk of owning the Notes). The summary is therefore limited to certain issues relating to initial investors who will hold the Notes as capital assets within the meaning of section 1221 of the Code, and acquire such Notes for investment and not as a dealer or for resale. This summary addresses certain federal income tax consequences applicable to beneficial owners of the Notes who are United States persons within the meaning of section 7701(a)(3) of the Code ( United States persons ) and, except as discussed below, does not address any consequences to persons other than United States persons. Prospective investors should note that no rulings have been or will be sought from the IRS with respect to any of the United States federal income tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES. Internal Revenue Service Circulate 230 Notice You should be aware that: (i) the discussion with respect to United States federal tax matters in this Official Statement was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer; (ii) such discussion was written to support the promotion or marketing (within the meaning of IRS Circular 230) of the transactions or matters addressed by such discussion; and (iii) each taxpayer should seek advice based on his or her particular circumstances from an independent tax advisor. This notice is given solely for purposes of ensuring compliance with IRS Circular 230. Stated Interest on the Notes The stated interest on the Notes will be included in the gross income, as defined in section 61 of the Code, of the beneficial owners thereof and be subject to U.S. federal income taxation when paid or accrued, depending on the tax accounting method applicable to the beneficial owners thereof. Original Issue Discount If a substantial amount of the Notes of any stated maturity is purchased at original issuance for a purchase price (the Issue Price ) that is less than their face amount by more than one quarter of one percent times the number of complete years to maturity, the Notes of any stated maturity will be treated as being issued with original issue discount. The amount of the original issue discount will equal the excess of the principal amount payable on such Notes at maturity over their Issue Price, and the amount of the original issue discount on such Notes will be amortized over the life of Notes using the constant yield method provided in the Treasury Regulations. As the original issue discount accrues under the constant yield method, the beneficial owners of such Notes, regardless of their regular method of accounting, will be required to include such accrued amount in their gross income as interest. This can result in taxable income to the beneficial owners of the Notes that exceeds actual cash distributions to the beneficial owners in a taxable year. The amount of any original issue discount that accrues on the Notes each year will be reported annually to the IRS and to the beneficial owners. The portion of the original issue discount included in each beneficial owner s gross income while the beneficial owner holds the Notes will increase the adjusted tax basis of the Notes in the hands of such beneficial owner. Disposition of Notes and Market Discount A beneficial owner of Notes will generally recognize gain or loss on the redemption, sale or exchange of the Notes equal to the difference between the redemption or sales price (exclusive of the amount paid for accrued interest) and the beneficial owner s adjusted tax basis in the Notes. Generally, the beneficial owner s adjusted tax basis in the Notes will be the beneficial owner s initial cost, increased by any original issue discount previously included in the beneficial owner s income to the date of disposition. Any gain or loss generally will be capital gain or loss and will be long-term or short-term, depending on the beneficial owner s holding period for the Notes. 23

32 Under current law, a purchaser of Notes who did not purchase the Notes in the initial public offering (a subsequent purchaser ) generally will be required, on the disposition of the Notes, to recognize as ordinary income a portion of the gain, if any, to the extent of the accrued market discount. In general, market discount is the amount by which the price paid for the Notes by a subsequent purchaser is less than the principal amount payable at maturity (or, in the case of Notes issued with original issue discount, the sum of the Issue Price and the amount of original issue discount previously accrued on the Notes), except that market discount is considered to be zero if it is less than one quarter of one percent of the principal amount times the number of complete remaining years to maturity. The Code also limits the deductibility of interest incurred by a subsequent purchaser on funds borrowed to acquire Notes with market discount. As an alternative to the inclusion of market discount in income upon disposition, a subsequent purchaser may elect to include market discount in income currently as it accrues on all market discount instruments acquired by the subsequent purchaser in that taxable year or thereafter, in which case the interest deferral rule will not apply. The recharacterization of gain as ordinary income on a subsequent disposition of Notes could have a material effect on the market value of the Notes. Backup Withholding Under section 3406 of the Code, a beneficial owner of the Notes who is a United States person may, under certain circumstances, be subject to backup withholding of current or accrued interest on the Notes or with respect to proceeds received from a disposition of the Notes. This withholding applies if such beneficial owner of Notes: (i) fails to furnish to the payor such beneficial owner s social security number or other taxpayer identification number ( TIN ); (ii) furnishes the payor an incorrect TIN; (iii) fails to report properly interest, dividends, or other reportable payments as defined in the Code; or (iv) under certain circumstances, fails to provide the payor with a certified statement, signed under penalty of perjury, that the TIN provided to the payor is correct and that such beneficial owner is not subject to backup withholding. Backup withholding will not apply, however, with respect to payments made to certain beneficial owners of the Notes. Beneficial owners of the Notes should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedures for obtaining such exemption. Withholding on Payments to Nonresident Alien Individuals and Foreign Corporations Under sections 1441 and 1442 of the Code, nonresident alien individuals and foreign corporations are generally subject to withholding at the current rate of 30% (subject to change) on periodic income items arising from sources within the United States, provided such income is not effectively connected with the conduct of a United States trade or business. Assuming the interest income of such a beneficial owner of the Notes is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will be subject to 30% withholding, or any lower rate specified in an income tax treaty, unless such income is treated as portfolio interest. Interest will be treated as portfolio interest if: (i) the beneficial owner provides a statement to the payor certifying, under penalties of perjury, that such beneficial owner is not a United States person and providing the name and address of such beneficial owner; (ii) such interest is treated as not effectively connected with the beneficial owner s United States trade or business; (iii) interest payments are not made to a person within a foreign country which the IRS has included on a list of countries having provisions inadequate to prevent United States tax evasion; (iv) interest payable with respect to the Notes is not deemed contingent interest within the meaning of the portfolio debt provision; (v) such beneficial owner is not a controlled foreign corporation, within the meaning of section 957 of the Code; and (vi) such beneficial owner is not a bank receiving interest on the Notes pursuant to a loan agreement entered into in the ordinary course of the bank s trade or business. Assuming payments on the Notes are treated as portfolio interest within the meaning of sections 871 and 881 of the Code, then no withholding under section 1441 and 1442 of the Code and no backup withholding under section 3406 of the Code is required with respect to beneficial owners or intermediaries who have furnished Form W-8 BEN, Form W-8 EXP or Form W-8 IMY, as applicable, provided the payor does not have actual knowledge or reason to know that such person is a United States person. Reporting of Interest Payments Subject to certain exceptions, interest payments made to beneficial owners with respect to the Notes will be reported to the IRS. Such information will be filed each year with the IRS on Form 1099 which will reflect the name, address, and TIN of the beneficial owner. A copy of Form 1099 will be sent to each beneficial owner of a Note for U.S. federal income tax purposes. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Under the Texas Public Security Procedures Act (Texas Government Code, Chapter 1201), the Notes (i) are negotiable instruments, (ii) are investment securities to which Chapter 8 of the Texas Business and Commerce Code applies, and (iii) are legal and authorized investments for (A) an insurance company, (B) a fiduciary or trustee, or (C) a sinking fund of a municipality or other political subdivision or public agency of the State of Texas. The Notes are eligible to secure deposits of any public funds of the State, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. For 24

33 political subdivisions in Texas which have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Texas Government Code, Chapter 2256), the Notes may have to be assigned a rating of at least A or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds (see RATINGS ). In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Notes are legal investments for state banks, savings banks, trust companies with at least $1 million of capital and savings and loan associations. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Notes for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Notes for such purposes. The District has made no review of laws in other states to determine whether the Notes are legal investments for various institutions in those states. INVESTMENTS The District invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Board of Trustees of the District. Both state law and the District s investment policies are subject to change. Legal Investments Under the Texas Public Funds Investment Act (the Act ), the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit and share certificates issued by a state or national bank domiciled in the State of Texas, a savings bank domiciled in the State of Texas, or a state or federal credit union domiciled in the State of Texas, that are guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor, or are secured as to principal by obligations described in clauses (1) through (5), or in any other manner and amount provided by law for District deposits, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), require securities be pledged to the District, held in the District s name and deposited at the time the investment is made with the District or with a third party selected and approved by the District, and placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State of Texas, (9) a securities lending program that meets the following conditions: (i) the value of securities loaned under the program must be not less than 100 percent collateralized, including accrued income; (ii) a loan made under the program must allow for termination at any time; (iii) a loan made under the program must be secured by: (A) pledged securities described by clauses (1) through (6); (B) pledged irrevocable letters of credit issued by banks (I) organized and existing under the laws of the United States or any other state; and (II) continuously rated by at least one nationally recognized investment rating firm at not less than A or its equivalent; or (III) cash invested in accordance with clauses (1) through (8); (iv) the terms of a loan made under the program must require that the securities being held as collateral be: (I) pledged to the investing entity; (II) be held in the investing entity's name; and (III) deposited at the time the investment is made with the District or with a third party selected by or approved by the District; (v) a loan made under the program must be placed through: (A) a primary government securities dealer, or (B) a financial institution doing business in this state; and (vi) an agreement to lend securities that is executed under this section must have a term of one year or less. (10) certain banker s acceptances with the remaining term of 270 days or fewer, from the date of issuance, and will be, in accordance with their terms, liquidated in full at maturity, are eligible for collateral for borrowing from a Federal Reserve Bank, and are accepted by a state or federal bank) if the short-term obligations of the accepting bank or its parent are rated at least A-1or P-1 or an equivalent rating by at least one nationally recognized credit rating agency, (11) commercial paper that has a stated maturity of 270 days or fewer from the date of its issuance, rated at least A-1 or P-1 or an equivalent rating by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a United States or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that provide the School District with a prospectus and other information required by the Securities Exchange Act of 1934 or the Investment Company Act of 1940 and that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the preceding clauses, are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent, and conform to the requirements relating to the eligibility of investment pools to receive and invest funds, (14) if specifically adopted by the District in its investment policy as authorized investments, guaranteed investment contracts that have a defined termination date, are secured by obligations of the United States or its agencies or instrumentalities, are pledged to the 25

34 District and deposited with the District or with a third party selected and approved by the District; are acquired through bids from at least three separate bidders with no material interest in the bonds, represent the highest yielding guaranteed investment contract, takes into account the reasonably expected drawdown schedule for the bond proceeds to be invested, and the provider certifies its administrative costs other than the prohibited obligations described in the next succeeding paragraph, and the District may invest its funds and funds under its control through an eligible investment pool if the board of trustees of the District by rule, order or resolution, as appropriate, authorizes investment in the particular pool. To be eligible, an investment pool must invest the funds it receives from the District in authorized investments permitted by the Act, and must furnish to the District s investment officer or other authorized representative of the District an offering circular or other similar disclosure instrument that contains, at a minimum, the following information: the types of investments in which money is allowed to be invested; the maximum average dollarweighted maturity allowed, based on the stated maturity date, of the pool; the maximum stated maturity date any investment security within the portfolio has; the objectives of the pool; the size of the pool; the names of the members of the advisory board of the pool and the dates their terms expire; the custodian bank that will safe keep the pool's assets; whether the intent of the pool is to maintain a net asset value of one dollar and the risk of market price fluctuation; whether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment; the name and address of the independent auditor of the pool; the requirements to be satisfied for a District to deposit funds in and withdraw funds from the pool and any deadlines or other operating policies required for the District to invest funds in and withdraw funds from the pool; and the performance history of the pool, including yield, average dollarweighted maturities, and expense ratios. In order to maintain eligibility to receive funds from and invest funds on behalf of the District, an investment pool must also furnish to the investment officer or other authorized representative of the District: investment transaction confirmations; and a monthly report that contains, at a minimum, the following information: (A) the types and percentage breakdown of securities in which the pool is invested; (B) the current average dollar-weighted maturity, based on the stated maturity date, of the pool; (C) the current percentage of the pool's portfolio in investments that have stated maturities of more than one year; (D) the book value versus the market value of the pool's portfolio, using amortized cost valuation; (E) the size of the pool; (F) the number of participants in the pool; (G) the custodian bank that is safekeeping the assets of the pool; (H) a listing of daily transaction activity of the District participating in the pool; (I) the yield and expense ratio of the pool; (J) the portfolio managers of the pool; and (K) any changes or addenda to the offering circular. The District may delegate to an investment pool the authority to hold legal title as custodian of investments purchased with its local funds. A public funds investment pool created to function as a money market mutual fund must: mark its portfolio to market daily, and, to the extent reasonably possible, stabilize at a $1 net asset value. If the ratio of the market value of the portfolio divided by the book value of the portfolio is less than or greater than 1.005, portfolio holdings shall be sold as necessary to maintain the ratio between and 1.005; must have an advisory board composed: (A) equally of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for a public funds investment pool managed by a state agency; or (B) of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for other investment pools; and must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to changes in a market index. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service or no lower than investment grade by at least one nationally recognized rating service with a weighted average maturity no greater than 90 days. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to changes in a market index. Investment Policies Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment 26

35 management; and that includes a list of authorized investments for District funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with District funds, and a requirements for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis. All District funds must be invested consistent with a formally adopted Investment Strategy Statement that specifically addresses each fund s investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, District investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived. At least quarterly, the investment officers of the District shall submit an investment report detailing: (1) the investment position of the District on the date of the report, (2) be prepared jointly by all investment officers of the District (3) be signed by each investment officer of the District (4) contain a summary statement, prepared in compliance with generally accepted accounting principles, of each pooled frsnd group that states the: (a) beginning market value for the reporting period, (b) additions and changes to the market value during the period, (c) ending market value for the period, and (d) fully accrued interest for the reporting period, (5) state the book value and market value of each separately invested asset at the beginning and end of the reporting period by the type of asset and fund type invested, (6) state the maturity date of each separately invested asset that has a maturity date, (7) state the account or fund or pooled group fund of the District for which each individual investment was acquired, and (8) state the compliance of the investment portfolio of the District as it related to (a) the investment strategy expressed in the District s investment policy, and (b) state law. No person may invest District funds without express written authority from the Board of Trustees. Additional Provisions Under Texas law, the District is additionally required to (1) annually review its adopted investment policies and strategies; (2) require any District investment officer with personal business relationships or relatives with firms seeking to sell securities to the District to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (3) require the principal of firms seeking to sell securities to the District to: (a) receive and review the District s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perform an annual audit of the management controls on investments and adherence to the District s investment policy; (5) provide specific investment training for the Treasurer, the Chief Financial Officer, and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse security repurchase agreement; (7) restrict the investment in mutual funds in the aggregate to no more than 15% of the District s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. The Board of Trustees or the investment committee of the District shall annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. Current Investments Please see Table 14 in Appendix A for the District s current investments as of November 30, REGISTRATION AND QUALIFICATION OF NOTES FOR SALE No registration statement relating to the Notes has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2). The Notes have not been approved or disapproved by the Securities and Exchange Commission, nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of the Official Statement. The Notes have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Notes been registered or qualified under the securities acts of any other jurisdiction. The District assumes no responsibility for registration or qualification of the Notes under the securities laws of any jurisdiction in which the Notes may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Notes shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions. CONTINUING DISCLOSURE OF INFORMATION In the Resolution, the District has made the following agreement for the benefit of the holders and beneficial owners of the Notes. The District is required to observe the agreement while it remains obligated to advance funds to pay the Notes. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and the timely 27

36 notice of specified material events to the Municipal Securities Rulemaking Board ( MSRB ) via the Electronic Municipal Market Access system ( EMMA ) through an internet website accessible at Annual Reports The District will provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement in APPENDIX A - FINANCIAL INFORMATION REGARDING THE DISTRICT (Tables 1 and 3-14) and in APPENDIX C. The District will update and provide this information within six months after the end of each fiscal year. The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by Rule 15c2-12. The updated information will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the District may be required to employ from time to time pursuant to State law or regulation. The District s current fiscal year end is August 31. Accordingly, it must provide updated information by the last day of February in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify the MSRB of the change. Mandatory Notices and Material Event Notices The District will also provide notice not later than 10 business days after the occurrence of certain events to the MSRB. The District will provide notice of the following events with respect to the Notes: (1) principal and interest payment delinquencies, (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled payments by entities provided credit or liquidity support for the Notes (i.e. a bond insurer or a bank providing a letter of credit or a standby bond purchase agreement) or a substitution of such entities or a failure to perform; (5) defeasance of the Notes; (6) changes in the rating of the Notes; (7) tender offers; (8) rating changes; (9) bankruptcy, insolvency, receivership or similar events of the District; and (10) merger, consolidation or acquisition of the District. (Neither the Notes nor the Resolution makes any provision for debt service reserves.) The District will provide timely notice of any of the following events to the MSRB if such event is material within the meaning of federal securities laws: (1) events affecting the tax status of the Notes; (2) modifications of the rights of holders of the Notes; (3) release, substitution or sale of property securing repayment of the Notes; (4) appointment of a successor or additional Paying Agent/Registrar or change in the name of the Paying Agent/Registrar; and (5) Note calls. In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under Annual Reports. The District will provide each notice described in this paragraph to the MSRB. Availability of Information Effective July 1, 2009 (the EMMA Effective Date ), the SEC implemented amendments to Rule 15c2-12 which approved the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities information repositories with respect to filings made in connection with undertakings made under Rule 15c2-12 after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the District in accordance with its undertaking made for the Notes will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. With respect to debt of the District issued prior to the EMMA Effective Date, the District remains obligated to make annual required filings, as well as notices of material events, under its continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information depository (the SID )). Prior to EMMA Effective Date, the Municipal Advisory Council of Texas (the MAC ) had been designated by the State and approved by the SEC staff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRB pursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documents and related information posted to EMMA s website simultaneously with such posting. Until the District receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the District has determined, in reliance on guidance from the MAC, that making its continuing disclosure filings solely with the MSRB will satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to the EMMA Effective Date. 28

37 Limitations and Amendments The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Notes at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Notes may seek a writ of mandamus to compel the District to comply with its agreement. The District may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Notes in the offering described herein in compliance with Rule 15c2-12, taking into account any amendments or interpretations of Rule 15c2-12 to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Notes consent to the amendment or (b) any person unaffiliated with the District (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the registered owners of the Notes. The District may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Notes in the primary offering of the Notes. If the District so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under Annual Reports an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Compliance with Prior Undertakings In the last five years, the District has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. LITIGATION The District is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the financial condition or operations of the District. At the time of the initial delivery of the Notes, the District will provide the Underwriters with a certificate to the effect that no litigation of any nature has been filed or is then pending challenging the issuance of the Notes or that affects the payment and security of the Notes or in any other manner questioning the issuance, sale or delivery of the Notes. FINANCIAL ADVISOR First National Bank, Edinburg, Texas and RBC Capital Markets, LLC (the Co-Financial Advisors ) are employed as Co-Financial Advisors to the District. The fees paid the Co-Financial Advisors for services rendered in connection with the issuance and sale of the Notes are based on the amount of Notes actually issued, sold and delivered, and therefore such fees are contingent on the sale and delivery of the Bonds. The Financial Advisors have provided the following sentence for inclusion in this Official Statement. The Financial Advisors have reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the District and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisors do not guarantee the accuracy or completeness of such information. UNDERWRITING The Underwriters have agreed, subject to certain customary conditions, to purchase the Notes at a price equal to the initial offering prices to the public, as shown on the inside cover page, less an Underwriters discount of $189, and no accrued interest. The Underwriters obligations are subject to certain conditions precedent, and it will be obligated to purchase all of the Notes if any Notes are purchased. The Notes may be offered and sold to certain dealers and others at prices lower than such public offering prices and such public prices may be changed, from time to time, by the Underwriters. 29

38 The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. FORWARD LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical are forward-looking statements, including statements regarding the District s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. It is important to note that the District s actual results could differ materially from those in such forward-looking statements. The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. CONCLUDING STATEMENT The information set forth herein has been obtained from the District s records, audited financial statements and other sources which are considered by the District to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will ever be realized. All of the summaries of the statutes, documents and the Resolution contained in this Official Statement are made subject to all of the provisions of such statutes, documents, and the Resolution. These summaries do not purport to be complete statements of such provisions and reference is made to such summarized statutes, documents and the Resolution for further information. Reference is made to official documents in all respects. MISCELLANEOUS The Resolution authorizing the issuance of the Notes will approve the use of this Official Statement and any addenda, supplement or amendment thereto in the reoffering of the Notes by the Underwriters in accordance with the provisions of the United States Securities and Exchange Commission s rule codified at 17 C.F.R c2-12, as amended. ATTEST: Reymundo Gonzalez President, Board of Trustees Ben Garza, Jr. Secretary, Board of Trustees 30

39 APPENDIX A FINANCIAL INFORMATION REGARDING PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT

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41 FINANCIAL INFORMATION FOR THE PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT Table 1- Valuations, Exemptions and Tax Supported Debt 2010/11 Market Valuation Established by Hidalgo County Appraisal District (excluding totally exempt property) $ 4,042,374,273 Less Exemptions/Reductions at 100% Market Value Residential Homestead 277,239,366 Over 65/Disabled 46,088,651 Disabled/Deceased Veterans 19,739,996 Historical Exemption 87,741 10% Per Year Cap on Homesteads 14,098,586 Productivity Loss/Other 239,676, ,930, /11 Net Taxable Assessed Valuation $ 3,445,443,471 District Funded Debt Payable from Ad Valorem Taxes: Unlimited Tax Bonds Outstanding (as of February 1, 2011) $ 391,935,000 (1) Limited Tax Bonds Outstanding (as of February 1, 2011) $ - The Notes 26,755,000 Total $ 418,690,000 Ratio District Funded Debt/2010/11 to Net Taxable Assessed Valuation 12.15% Unaudited Interest and Sinking Fund Balance on August 31, 2010 $ 11,702, /11 Scholastic Enrollment 31,508 (2) 2010 Estimated Population 96,430 Per Capita Taxable Assessed Valuation $ 35,730 Per Capita Debt Payable from Ad Valorem Taxes $ 4,342 (1) 66.27% of the Pharr-San Juan-Alamo Independent School District Unlimited Tax School Building Bonds, have been qualified for an Instructional Facilities Allotment or Existing Debt Allotment Program of the Texas Education Agency. The amount of state aid for debt service may substantially differ from year to year depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas legislature from time to time. (2) As of October 29, Table 2 - Estimated Overlapping Debt Statement of the District Percentage Amount Taxing Body Amount As of Overlapping Overlapping Alamo, City of $ 6,700,000 2/1/ % $ 6,700,000 Hidalgo County 197,250,000 2/1/ % 24,044,775 Hidalgo DD#1 96,675,000 2/1/ % 12,219,720 McAllen, City of 32,130,000 2/1/ % 2,078,811 Pharr, City of 13,541,250 2/1/ % 11,615,684 San Juan, City of 16,490,227 2/1/ % 16,490,227 South Texas College District 69,770,002 2/1/ % 7,744,470 Total Overlapping Debt $ 80,893,687 The District $ 418,690,000 2/1/ % 418,690,000 (1) Total Direct and Overlapping Debt $ 499,583,687 Ratio Direct and Overlapping Debt to Net Taxable Assessed Valuation 14.50% Ratio Direct and Overlapping Debt to Market Valuation 12.36% Per Capita Direct and Overlapping Debt 5, (1) Includes Limited and Unlimited Tax supported debt. Includes the Notes. A-1

42 Table 3 - Taxable Assessed Valuation by Category Taxable Appraised Value for Fiscal Year Ended August 31, % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single Family $ 1,831,195, % $ 1,817,517, % $ 1,792,059, % Real, Residential, Multi-Family 172,819, % 177,709, % 171,947, % Real, Vacant Lots/Tracts 244,597, % 269,496, % 253,030, % Real, Acreage (Land Only) 281,201, % 282,376, % 282,928, % Real, Farm and Ranch Improvements 25,674, % 24,809, % 24,216, % Real, Commercial and Industrial 942,443, % 923,281, % 825,552, % Real, Minerals and Oil 41,368, % 29,019, % 42,828, % Real, Tangible Personal, Utilities 57,345, % 61,014, % 62,286, % Tangible Personal, Commercial and Industrial 360,372, % 366,560, % 328,434, % Tangible Personal, Other 50,128, % 51,382, % 56,884, % Real, Inventory 14,803, % 20,312, % 27,132, % Special Inventory 20,424, % 25,943, % 20,506, % Total Appraised Value Before Exemptions $ 4,042,374, % $ 4,049,425, % $ 3,887,809, % Less: Total Exemptions/ Reductions 596,930, ,255, ,204,024 Taxable Assessed Value $ 3,445,443,471 $ 3,452,169,965 $ 3,300,605,876 Taxable Appraised Value for Year Ended August 31, % of % of Category Amount Total Amount Total Real, Residential, Single Family $ 1,555,844, % $ 1,356,345, % Real, Residential, Multi-Family 130,053, % 87,401, % Real, Vacant Lots/Tracts 219,502, % 207,096, % Real, Acreage (Land Only) 228,189, % 238,929, % Real, Farm and Ranch Improvements 22,362, % 18,546, % Real, Commercial and Industrial 727,156, % 667,435, % Real, Minerals and Oil 38,474, % 49,151, % Real, Tangible Personal, Utilities 60,211, % 62,154, % Tangible Personal, Commercial 341,574, % 318,733, % Tangible Personal, Other 63,169, % 66,763, % Real, Inventory 11,342, % 11,513, % Special Inventory 17,345, % 13,680, % Total Appraised Value Before Exemptions $ 3,415,227, % $ 3,097,751, % Less: Total Exemptions/ Reductions 523,546, ,588,676 Taxable Assessed Value $ 2,891,681,402 $ 2,597,163,076 Valuations shown are certified taxable values reported by the Hidalgo County Appraisal District to the State of Texas Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the appraisal district updates records. A-2

43 Table 4 - Valuation and Tax Supported Debt History Fiscal Taxable Taxable Debt Tax Year Taxable Assessed Outstanding Ratio of Supported Ended Estimated Assessed Valuation at End Bond Debt to Debt Per 8/31 Population (1) Valuation (2) Per Capita of Year TAV Capita ,155 $ 1,111,216,652 $ 17,055 $ 55,145, % ,960 1,198,658,168 18,173 53,115, % ,744 1,243,416,893 18, ,690, % 1, ,103 1,436,044,804 20, ,095, % 1, ,082 1,682,253,446 22,708 99,340, % 1, ,164 1,940,437,552 24,825 94,355, % 1, ,694 2,183,214,354 26,724 89,115, % 1, ,197 2,358,677,810 28, ,480, % 1, ,360 2,597,163,076 29, ,565, % 2, ,612 2,891,681,402 32, ,985, % 2, ,187 3,300,605,876 35, ,990, % 3, ,538 3,452,169,965 36, ,460, % 3, ,430 3,445,443,471 35, ,710,000 (3) 11.83% 4, (1) Source: The Municipal Advisory Council of Texas. (2) As reported by the Hidalgo County Appraisal District on District's annual State Property Tax Board Reports. (3) Includes Limited and Unlimited Tax supported debt. Includes the Notes. Table 5 - Tax Rate, Levy and Collection History Fiscal Year Tax Tax Local I&S Total % Current % Total Ended Year Rate Maintenance Fund Tax Levy Collections Collections 8/ $ $ $ $ 18,729, % 96.90% 08/31/ ,770, % 88.08% 08/31/ ,473, % % 08/31/ ,652, % 95.41% 08/31/ ,648, % 99.98% 08/31/ ,818, % 99.71% 08/31/ ,351, % 98.95% 08/31/ ,052, % 97.00% 08/31/ ,402, % 99.90% 08/31/ ,734, % % 08/31/ ,950, % 98.07% 08/31/ ,923, % (1) 99.39% (1) 08/31/ ,754,668 (In Process of Collection) 08/31/2011 (1) Unaudited. Table 6 - Ten Largest Taxpayers 2010/11 % of Total Nature of Taxable Assessed Taxable Assessed Name of Taxpayer Property Valuation Valuation Shell Western E&P Oil & Gas $ 32,203, % AEP Texas Central Co. Electric Utility 23,163, % Wilder Corporation Real Estate Development 18,261, % Wal-Mart Stores Inc. Discount Retailer 16,444, % Weingarten Las Tiendas Retailer 15,700, % HIC Texas LLC Real Estate Development 15,044, % Southwestern Bell Telephone Telephone Utility 12,178, % Wal-Mart Real Estate Trust Discount Retailer 11,748, % McAllen Hospitals LP Hospital 11,574, % Central Power & Light Electric Utility 10,276, % Total $ 166,595, % Source: Hidalgo County Appraisal District and State Property Tax Reports. A-3

44 Table 7 - Unlimited Tax Debt Service Table 8-Tax Adequacy Fiscal Year Ended Outstanding Unlimited Tax Debt Service 8/31 Principal Interest Total 2011 $ 10,980,000 $ 18,300,828 $ 29,280, ,050,000 18,396,813 29,446, ,515,000 17,941,988 29,456, ,020,000 17,439,763 29,459, ,570,000 16,902,913 29,472, ,155,000 16,319,013 29,474, ,775,000 15,720,772 29,495, ,370,000 15,203,194 25,573, ,255,000 14,314,559 25,569, ,830,000 13,746,456 25,576, ,440,000 13,132,866 25,572, ,100,000 12,474,222 25,574, ,790,000 11,780,734 25,570, ,530,000 11,050,331 25,580, ,290,000 10,281,225 25,571, ,735,000 9,583,453 21,318, ,355,000 8,965,306 21,320, ,005,000 8,319,272 21,324, ,680,000 7,639,450 21,319, ,390,000 6,924,306 21,314, ,120,000 6,193,478 21,313, ,875,000 5,446,672 21,321, ,655,000 4,662,419 21,317, ,485,000 3,838,878 21,323, ,345,000 2,974,075 21,319, ,615,000 2,108,056 19,723, ,050,000 1,354,325 15,404, ,120, ,550 12,868, ,800, ,400 6,157, ,035, ,700 6,155,700 TOTAL $ 391,935,000 $ 292,242,015 $ 684,177,015 Unaudited Interest and Sinking Fund Balance on August 31, 2010 $ 11,702,772 Estimated State Aid (EDA and IFA) 19,404,404 $ Interest and Sinking Fund Tax Levy at 90% Collection 9,829,850 Total Available Funds $ 40,937,027 Less: Principal and Interest Requirements for Fiscal Year Ending 2011 $ 29,280,828 Estimated Interest & Sinking Fund Balance, as of August 31, 2011 $ 11,656,199 Table 9 - Authorized But Unissued Unlimited Tax Bonds The District has no authorized but unissued Unlimited Tax Bonds. A-4

45 Table 10 - Limited Tax Debt Service Fiscal Outstanding Year Outstanding Total Ended Limited Tax The Notes (1) Limited Tax 8/31 Debt Service Principal Interest Less: Subsidy (2) Total Debt Service 2011 $ - $ 682,710 $ (634,662) $ 48,048 $ 48, $ 1,775,000 1,545,760 (1,436,744) 1,884,017 1,884, ,775,000 1,545,760 (1,436,744) 1,884,017 1,884, ,775,000 1,545,760 (1,436,744) 1,884,017 1,884, ,775,000 1,545,760 (1,436,744) 1,884,017 1,884, ,775,000 1,545,760 (1,436,744) 1,884,016 1,884, ,775,000 1,545,760 (1,436,744) 1,884,016 1,884, ,775,000 1,545,760 (1,436,744) 1,884,016 1,884, ,775,000 1,545,760 (1,436,744) 1,884,016 1,884, ,775,000 1,545,760 (1,436,744) 1,884,016 1,884, ,775,000 1,085,386 (987,007) 1,873,380 1,873, ,800, ,012 (537,269) 1,887,743 1,887, ,800, ,012 (537,269) 1,887,743 1,887, ,800, ,012 (537,269) 1,887,743 1,887, ,800, ,012 (537,269) 1,887,743 1,887, ,805, ,506 (268,634) 1,848,872 1,848,872 TOTAL $ - $ 26,755,000 $ 18,492,494 $ (16,970,071) $ 28,277,423 $ 28,277,423 (1) The Notes will mature on 2/1/2021 and 2/1/2026. The District is required to make annual installment payments as listed above to the paying agent. The installment payments will be used to pay off the Notes at maturity or a prior redemption. Interest earned in the cumulative sinking fund may be used to offset future sinking fund payments. See "THE NOTES - Cumulative Sinking Fund Deposits." (2) Represents a subsidy, estimated at 5.37% of the interest payments on the Notes, which is expected to be paid to the District by the federal government. Failure on the part of the District to comply with the conditions imposed by the Internal Revenue Service, may cause the District to fail to receive the Federal Subsidy for the Notes. Moreover, the Federal Subsidy payments are subject to automatic offsets against cetain amounts that may, for unrelated reasons, be owed by the District to agency of the United States of America. The District has not pledged the Federal Subsidy to secure the Notes. See "THE NOTES - Designation as Qualified School Construction Bonds - Direct Subsidy." Table 11 - Tax Adequacy for Limited Tax Obligations Projected Maximum Principal and Interest Requirements, Year 2022 (1) $ 1,887,743 $ Tax 90% Collection Produces 1,887,827 (1) Includes the Notes. A-5

46 Table 12- Other Obligations Capital Leases Commitments under capitalized lease agreements for facilities and equipment provide for minumum future lease payments as of August 31, 2009, as follows: Year Ended 8/31 Principal Interest Total 2010 $ 86,994 $ 15,710 $ 102, ,147 7,999 72, ,755 3,851 39, ,070 1,289 22, , ,511 Total $ 214,326 $ 29,000 $ 243,326 Source: District's Audited Financial Statements. A-6

47 Table 13 - General Fund Comparative Statement of Revenues and Expenses Fiscal Years As of August (1) Fund Balance - Beginning of Year $ 79,637,939 $ 84,516,481 $ 85,809,779 $ 80,637,858 $ 72,943,317 Revenues: Local & Intermediate Revenues $ 39,319,888 $ 40,924,966 $ 38,533,137 $ 46,086,970 $ 42,737,254 State Program Revenues 184,550, ,420, ,859, ,499, ,446,010 Federal Program Revenues 21,995,097 19,207,253 17,933,708 17,772,531 18,761,179 Total Revenues $ 245,865,571 $ 236,552,540 $ 227,326,543 $ 219,359,212 $ 201,944,443 Expenditures: Instruction and Instruction Related Service $ 140,519,536 $ 136,517,117 $ 125,905,138 $ 115,817,707 $ 107,198,979 Instruction and School Leadership 15,681,126 17,239,664 14,636,652 14,306,200 13,949,120 Support Services - Student (Pupil) 42,758,553 40,513,634 43,524,269 37,879,897 35,402,363 Administrative Support Services 6,735,099 6,621,234 6,541,947 6,306,741 5,879,821 Support Services - Nonstudent Based 26,278,492 35,643,284 32,694,393 31,245,850 28,679,905 Ancillary Services 327,749 1,316,285 1,238,599 1,149,994 1,273,007 Debt Service 88, , , , ,185 Capital Outlay 1,257,520 1,983,908 1,420, , ,717 Intergovernmental Charges 846, , , , ,543 Total Expenditures $ 234,492,287 $ 240,827,713 $ 226,531,493 $ 207,786,839 $ 193,767,640 Excess/(Deficiency) of Revenues Over Expenditures $ 11,373,284 $ (4,275,173) $ 795,050 $ 11,572,373 $ 8,176,803 Other Sources and Uses (1,435) (603,369) (2,173,661) (6,402,420) (482,561) Balance Restatement 16,986-85,313 1, Ending Fund Balance - August 31* $ 91,026,774 $ 79,637,939 $ 84,516,481 $ 85,809,779 $ 80,637,858 Source: District's Audited Financial Statements. (1) Unaudited. Table 14 - Current Investments (Unaudited, As of November 30, 2010) % of Total Investment Type Amount Purchase Price TexPool $ 240,779, % Texas Term 23, % Certificates of Deposit 72,722, % Money Market Accounts 45,627, % Source: The District. 359,153, % A-7

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49 APPENDIX B GENERAL INFORMATION REGARDING THE DISTRICT AND ITS ECONOMY

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51 GENERAL INFORMATION REGARDING THE DISTRICT AND ITS ECONOMY Pharr-San Juan-Alamo Independent School District is located in the City of Pharr, Texas and additionally, serves the cities of San Juan and Alamo. The District operates as an independent school district under the laws of the State of Texas and is governed by a seven member Board of Trustees (the Board ). The Board of Trustees serve four-year staggered terms with at large elections being held every two years. Board policy and decisions are decided by a majority vote of the Board. The Board selects the Superintendent of Schools; other District officials are employed as a result of action by the Superintendent and the Board. The total area of the District is 89 square miles. The District s physical plant consists of twenty-six elementary schools (grades K through 5), five middle schools (grades 6 through 8), and eight high schools (grades 9 through 12). Elementary Schools 27 Middle Schools 8 High Schools 8 Total 43 School facilities include libraries and media centers staffed by trained personnel; remedial reading and English labs in secondary schools: cafeteria services in all schools, offering nutritious hot meals for all students through provision one; complete competitive athletic programs for both boys and girls in grades 9 through 12; completely equipped science laboratories. Homebound teachers are assigned to help students temporarily out of school. Comprehensive special education provides programs and services in all areas for exceptional students, ages three through twenty-one. Identifications and class instructions are provided for auditory and speech handicapped, visually impaired, mentally retarded, physically handicapped, emotionally handicapped and other health impaired students. Education Program While the District is recognized as a leader in teaching the fundamentals of reading, writing and mathematics, a comprehensive educational program including fine arts, vocational education, special education, and gifted and advanced level programs are available to meet the individual needs of students. Student performance meets state, regional and national norms on all evaluative tests. DISTRICT ENROLLMENT INFORMATION Scholastic Enrollment History Year Enrollment Increase/(Decrease) Percent Change ,491 1, % , % ,344 1, % ,518 1, % ,088 1, % , % ,307 1, % , % ,329 (A) % ,508 (B) % (A) Enrollment as of October 27, This is the official enrollment date taken by the Texas Education Agency. (B) Enrollment as of October 27, B-1

52 (A) Estimated PEIMS enrollment. Projected Student Enrollment Percent Change Year (A) Enrollment Increase/(Decrease) , % , % , % , % , % , % EMPLOYMENT OF THE DISTRICT The District employs a staff of approximately 4,247. Beginning with the school year, entry-level teachers without advanced degrees earn $41,620 annually. Teachers with advanced degrees and longevity can earn up to $70,402 annually. All teachers receive life and health insurance benefits worth approximately $494 monthly. The table below summarizes the employees of the District covered under the Teacher Retirement System of Texas. Teachers 2,038 Administrators and Other Professionals 412 Teacher Aids & Secretaries and other paraprofessionals 1,032 Auxiliary Employees 765 Tax Office 0 Total Number of Employees 4,247 B-2

53 PRESENT SCHOOL FACILITIES Location Grades Served Present Enrollment (A) Capacity PSJA High School ,175 2,000 PSJA Memorial High School ,160 2,000 PSJA North High School ,329 2,000 Teenage Alternative Center PSJA Options High School CCT Academy PSJA Southwest High School ,000 T-Stem Early College High School Total High Schools 7,566 9,070 Alamo Middle School ,100 Austin Middle School ,000 LBJ Middle School ,000 Liberty Middle School ,100 San Juan Middle School ,000 Kennedy Middle School ,200 Escalante Middle School (B) Audie Murphy Middle School (C) Total Middle Schools 5,980 6,658 Bowie Elementary School PK Buckner Elementary School PK Carman Elementary School PK Carnahan Elementary School PK Cesar Chavez Elementary School PK Clover Elementary School PK Doedyns Elementary School PK Farias Elementary School PK Ford Elementary School PK Franklin Elementary School PK Garcia Elementary School PK Garza-Pena Elementary School PK Guerra Elementary School PK Long Elementary School PK Longoria Elementary School PK Napper Elementary School PK North Alamo Elementary School PK North San Juan Elementary School PK Palmer Elementary School PK Pharr Elementary School PK PSJA Early Elementary Start PK Ramirez Elementary School PK Reed-Mock Elementary School PK Sorensen Elementary School PK Trevino Elementary School PK Whitney Elementary School PK South Pharr Elementary PK Elementary School Total 16,718 17,400 Total 30,264 33,128 (A) Enrollment as of August 27, (B) Escalante Middle School is currently housed at PSJA Southwest High School. (C) Under construction. B-3

54 HIDALGO COUNTY, TEXAS ECONOMIC AND DEMOGRAPHIC INFORMATION The County Hidalgo County was created in 1852 from Cameron County. It was organized in the same year and at the time had an area of 2,356 square miles. When first organized, the County extended almost as far north as Nueces County; however, later reductions to form counties to its north and east have reduced the County to its present area of 1,541 square miles. Hidalgo County is bordered on the east by Kenedy, Willacy and Cameron Counties. Brooks County is to its north. Starr County lies on its western boundary. On its southern boundary, the Rio Grande River separates Hidalgo County from the Republic of Mexico The governing body of the County is its Commissioners Court. The Court has five members. The County Judge is its Chairman and the commissioner from each of the four road and bridge precincts is also a member. Each member of the Commissioners Court is elected for a four-year term of office. One of the most important duties of the Commissioners Court is management of the finances of the County. Economy The area economy is diversified by the tourist industry, agribusiness and international trade with Mexico. The Texas Almanac designates cotton, grain, vegetable, citrus, and sugar cane as principal sources of agricultural income. The County is a leading producer of cotton and sorghum. Minerals produced in the County include gas, sand and gravel. The County is a popular tourist center located in the lush Lower Grande Valley with access to Old Mexico and facilities catering to thousands of summer and winter visitors. Transportation McAllen acts as a regional air transportation center serving the fourth-fastest growing metropolitan area in the United States. Frequent daily flights to major air transportation hubs in Dallas and Houston are provided by the airport. The airport is served by American Airlines and Continental Airlines jet aircraft, which through connections in Dallas and Houston, can provide service to more than 200 markets. Retail Sales in the Rattail Trade and All Industries Categories in Hidalgo County are shown for the past ten years in the table below: (1) Source: Texas State Comptroller Quarterly Sales Tax Report Gross Sales (1) Year Retail Trade All Industries 2000 $ 4,961,009,854 $ 8,281,443, ,310,783,628 8,898,742, ,226,079,858 9,553,287, ,609,500,338 9,947,174, ,234,334,647 10,631,936, ,595,827,747 11,898,315, ,160,577,619 13,133,199, ,892,577,619 14,771,355, ,087,872,448 15,232,353, ,366,034,204 13,239,553,262 Foreign Trade Zone The McAllen Foreign Trade Zone (FTZ) is located south of McAllen between McAllen and Reynosa. Commissioned in 1973, it was the first inland FTZ in the United States and continuously ranks among the most active FTZ s in the nation. Products can be brought into the FTZ duty-free. While in the trade zone, components can be assembled, processed, packaged or stored. Duty is charged only when these items enter U.S. commerce. The original McAllen FTZ encompasses 80 acres of fully developed land and contains more than 200,000 square feet of FTZ-owned warehouse and air-conditioned office space. The FTZ also offers complete public B-4

55 warehousing services. It is managed by the McAllen Economic Development Corporation-FTZ Board and monitored by the U.S. Customs Service. The advantages to using a FTZ include (1) Duties are charged only when a product is distributed into the domestic market. No duties are owed on labor, overhead or profit attributed to a FTZ production operation. Customs duties are not paid on merchandise exported from a FTZ to another country other than the United States, (2) goods can be stored indefinitely, allowing you to surpass the quota of your product, then release the merchandise when quotas become available, (3) leasing space at market prices with full 24-hour security and customs assistance, (4) no property taxes on inventories, (5) cash flow enhancement, (6) lower transportation costs, (7) prime location just north of Texas-Mexico border and one mile south of the McAllen International Airport, and (8) access to rail service with Union Pacific and Rio Valley Railroads. The McAllen FTZ has expanded to 695 acres. Hunt Oil Company and its subsidiary, Woodbine Development Corp. have begun the development of their first phase of a 900-acre Class-A Business Park adjacent to McAllen s existing Southwest Industrial District. It is located in McAllen s CrossPort and Foreign Trade Zone. The McAllen Crossport includes hundreds of acres of land with infrastructure in place which includes the McAllen International Airport, the McAllen FTZ, the South Texas Community College s Center for advanced and Applied Technology, two international bridges and a third in the planning stages, an International Produce Market for imports and exports of produce and other perishable commodities, rail served industrial sites with on-site switching capabilities, Enterprise Zone incentive packages, and a distance of 65 miles from McAllen to the Sea Port of Brownsville. Population Trend Hidalgo County 741, , , , ,780 State of Texas 24,782,302 24,326,974 23,843,432 23,407,629 22,843,999 Source: Labor Market Information Department, Texas Workforce Commission. HIDALGO COUNTY LABOR FORCE STATISTICS Labor Force History 2010 (A) Labor Force 305, , , , ,586 Employed 271, , , , ,749 Unemployed 34,365 31,327 20,668 17,876 19,837 Percent of Labor Force Unemployed 11.2% 10.6% 7.3% 6.6% 7.4% (A) As of September 2010 Source: Labor Market Information Department, Texas Workforce Commission Comparative Unemployment Rates 2010 (A) Hidalgo County 11.1% 10.6% 7.3% 6.6% 7.4% State of Texas 7.9% 7.6% 4.9% 4.3% 4.9% United States of America 9.2% 9.3% 5.8% 4.6% 4.5% As of September 2010 Source: Labor Market Information Department, Texas Workforce Commission B-5

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57 APPENDIX C AUDITED FINANCIAL STATEMENT FOR THE YEAR ENDED AUGUST 31, 2009

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59 Pharr-San Juan-Alamo Independent School District Annual Financial Report For the Fiscal Year Ended August 31, 2009

60 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED AUGUST 31, 2009

61 Introductory Section

62 Pharr-San Juan-Alamo Independent School District Annual Financial Report For The Year Ended August 31,2009 TABLE OF CONTENTS Page Exhibit INTRODUCTORY SECTION List of Principal Officials. Certificate of Board. 1 2 FINANCIAL SECTION Independent Auditor's Report on Financial Statements. Management's Discussion and Analysis (Required Supplementary Information) 3 5 Basic Financial Statements Government-wide Financial Statements: Statement of Net Assets. Statement of Activities. Fund Financial Statements: Balance Sheet - Governmental Funds. Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets.. Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds.... Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Statement of Net Assets - Internal Service Funds. Statement of Revenues, Expenses, and Changes in Fund Net Assets - Internal Service Funds. Statement of Cash Flows - Proprietary Funds. Statement of Fiduciary Net Assets - Fiduciary Funds. Notes to the Financial Statements. 11 A-1 12 B-1 13 C-1 15 C-1R 16 C-2 18 C E-1 23 Required Supplementary Information: Budgetary Comparison Schedules: General Fund. Combining Statements as Supplementary Information: Combining Balance Sheet - All Nonmajor Governmental Funds. Combining Statement of Revenues, Expenditures and Changes in Fund Balances - All Nonmajor Governmental Funds.. Special Revenue Funds: Combining Balance Sheet - Nonmajor Special Revenue Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds G-1 H-1 H-2 H-3 H-4

63 Pharr-San Juan-Alamo Independent School District Annual Financial Report For The Year Ended August 31,2009 TABLE OF CONTENTS Page Exhibit Permanent Funds: Combining Balance Sheet - Nonmajor Permanent Funds.... Combininq Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Permanent Funds Internal Service Funds: Combining Statement of Net Assets.. Combining Statement of Revenues, Expenses and Changes in Fund Net Assets. Combining Statement of Cash Flows.. OTHER SUPPLEMENTARY INFORMATION SECTION H-5 H-6 H-7 H-8 H-9 Schedule of Delinquent Taxes Receivable Indirect Cost Computation Schedule... Fund Balance and Cash Flow Calculation Worksheet (Unaudited)-General Fund. Budgetary Comparison Schedules Required by the Texas Education Agency: Interest & Bonded. 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. Report on Compliance with Requirements Applicable To each Major Program and Internal Control over Compliance In Accordance With OMB Circular A Schedule of Findings and Questioned Costs.... Summary Schedule of Prior Audit Findings. Corrective Action Plan..... Schedule of Expenditures of Federal Awards.... Notes to the Schedule of Expenditures of Federal Awards. Schedule of Required Responses to Selected School First Indicators. 64 J-1 66 J-2 67 J-3 68 J K K-2

64 CERTIFICATE OF BOARD pharr-8m Juan-Alamo Indepelli1ent Scho.Q[W!:k;i Name of School District J:!Ldillgg County ~ Co.-Dist. Number We, the undersigned, certify that the attached annual financial reports of the above named school district were reviewed and (check one) --.i._approved _. disapproved for the year ended August 31, 2009, at a meeting of the board of trustees of such school district on the /2!.tb'-day of fr~,?.q1.i?-. JdI~ Signature of Board Secretary Signature of Board President If the board of trustees disapproved of the auditor's report, the reason(s) for disapproving It is (are): (attach list as necessary) 2

65 Financial Section

66 Oscar J7(, 9onzalez, G!P!7I tic!7issociafes Gerli}'ed,rpu6Iic :JIccounlanls 208 W. :Jeryuson Qinil #1!YJian; Jexas 7rJS77 :lei (956) 7& !lax.. (956) 7& Independent Auditor's Report on Financial Statements Board of Trustees Pharr-San Juan-Alamo Independent School District P.O. Box 769 Pharr, Texas Members of the Board of Trustees: I have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Pharr-San Juan-Alamo Independent School District as of and for the year ended August 31, 2009, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of Pharr-San Juan-Alamo Independent School District's management. My responsibility is to express opinions on these financial statements based on my audit. I conducted my audit in accordance with audit'lng standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government AUditing Standards, issued by the.comptroller General of the United States. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinions. In my opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Pharr-San Juan-Alamo Independent School District as of August 31, 2009, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, I have also issued my report dated January 7, 2010, on my consideration of Pharr-San Juan-Alamo Independent School District's internai control over financial reporting and on my 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 my testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government AUditing Standards and should be considered in assessing the results of my audit. The Management's Discussion and Analysis and the budgetary comparison information identified as Required Supplementary Information in the table of contents are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. I have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, I did not audit the information and express no opinion on it. 3

67 My audit was performed for the purpose of forming opinions on the financial statements which collectively comprise the Pharr-San Juan-Alamo Independent School District's basic financial statements. The accompanying schedule of expenditures of federal awards required by U. S. Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations and the combining financial statements and supporting schedules listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information, except for that portion marked "unaudited" on which I express no opinion, has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in my opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a dj ~'?)7 CA'~ Oscar R. Gonzalez, CPA January 7,

68 Management's Discussion and Analysis

69 MANAGEMENT S DISCUSSION AND ANALYSIS This section of Pharr-San Juan-Alamo Independent School District s annual financial report presents our discussion and analysis of the District s financial performance during the fiscal year ended August 31, Please read it in conjunction with the District s financial statements, which follow this section. FINANCIAL HIGHLIGHTS The District s total combined net assets were $260,134,001 for fiscal year ending August 31, During the year, the District s expenses were $4,543,318 less than the $221,823,761 generated in taxes and other revenues for governmental activities. The net change in general fund balance was ($4,878,542). This decrease was due to the district choosing to make some much needed district repairs, purchase of the PEDC building for our College, Career, and Technology Academy and Options High School and bus replacements. The general fund reported an unreserved fund balance this year of $36,140,534. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts management s discussion and analysis (this section), the basic financial statements, and required supplementary information. The basic financial statements include two kinds of statements that present different views of the District: Figure A-1F, Required Components of the District s Annual Financial Report The first two statements are government-wide financial statements that provide both long-term and short-term information about the District s overall financial status. The remaining statements are fund financial statements that focus on individual parts of the government, reporting the District s operations in more detail than the government-wide statements. The governmental funds statements tell how general government services were financed in the short term as well as what remains for future spending. Proprietary fund statements offer short and long-term financial information about the activities the government operates like businesses, such as food service. Fiduciary fund statements provide information about the financial relationships in which the District acts solely as a trustee or agent for the benefit of others, to whom the resources in question belong. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements. Figure A-1 shows how the required parts of this annual report are arranged and related to one another. 5

70 Figure A-2 summarizes the major features of the District s financial statements, including the portion of the District government they cover and the types of information they contain. The remainder of this overview section of management s discussion and analysis explains the structure and contents of each of the statements. Government-wide Statements The government-wide statements report information about the District as a whole using accounting methods similar to those used by privatesector companies. The statement of net assets includes all of the government s assets and liabilities. All of the current year s revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. Fund Statements Type of Statements Government-wide Governmental Funds Proprietary Funds Fiduciary Funds Entire Agency s government The activities of the district Activities the district that are not proprietary or operates similar to private fiduciary businesses: self insurance Scope Figure A-2. Major Features of the District s Government-wide and Fund Financial Statements Required financial statements Accounting basis and measurement focus Type of asset/liability information Type of inflow/outflow information (except fiduciary funds) and the Agency's component units Instances in which the district is the trustee or agent for someone else's resources Statement of net assets Balance sheet Statement of net assets Statement of fiduciary net assets Statement of activities Statement of revenues, Statement of revenues, Statement of changes expenditures & changes expenses and changes in in fiduciary net assets in fund balances fund net assets Statement of cash flows Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, short-term and long-term All revenues and expenses during year, regardless of when cash is received or paid Modified accrual accounting and current financial resources focus Only assets expected to be used up and liabilities that come due during the year or soon thereafter; no capital assets included Revenues for which cash is received during or soon after the end of the year; expenditures when goods or services have been received and payment is due during the year or soon thereafter Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, and short-term and longterm All revenues and expenses during year, regardless of when cash is received or paid Accrual accounting and economic resources focus All assets and liabilities, both short-term and longterm; the Agency's funds do not currently contain capital assets, although they can All revenues and expenses during year, regardless of when cash is received or paid The two government-wide statements report the District s net assets and how they have changed. Net assets the difference between the District s assets and liabilities is one way to measure the District s financial health or position. Over time, increases or decreases in the District s net assets are an indicator of whether its financial health is improving or deteriorating, respectively. The government-wide financial statements of the District include the Governmental activities. Most of the District s basic services are included here, such as instruction, curriculum and staff development, school district administrative support services and general administration. Grants and charges for services finance most of these activities. Fund Financial Statements The fund financial statements provide more detailed information about the District s most significant funds not the District as a whole. Funds are accounting devices that the District uses to keep track of specific sources of funding and spending for particular purposes. Some funds are required by State law. The Board of Trustees establishes other funds to control and manage money for particular purposes or to show that it is properly using certain grants and local sources. The District has the following kinds of funds: Governmental funds Most of the District s basic services are included in governmental funds, which focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental fund statements provide a detailed short-term view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the District s programs. Because this information does not encompass the additional long-term focus of the government-wide statements, we provide additional information at the bottom of the governmental funds statement, or on the subsequent page, that explain the relationship (or differences) between them. Proprietary funds Services for which the District charges customers a fee are generally reported in proprietary funds. Proprietary funds, like the government-wide statements, provide both long-term and short-term financial information. 6

71 We use internal service funds to report activities that provide supplies and services for the District s other programs and activities. Fiduciary funds The District is the trustee, or fiduciary, for certain funds. It is also responsible for other assets that because of a trust arrangement can be used only for the trust beneficiaries. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of the District s fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. We exclude these activities from the District s government-wide financial statements because the District cannot use these assets to finance its operations. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net assets. The District s combined net assets were $260,134,001 on August 31, (See Table A-1). Table A-1 Pharr-San Juan-Alamo Independent School District Governmental Governmental Activities 2008 Activities 2009 Current Assets: Cash and cash equivalents $ 208,328,609 $ 291,175,229 Current Investments 150, ,387 Property taxes receivable(net of allowance) 8,970,282 9,181,188 Due from other governments 9,869,176 11,691,171 Accrued Interest 154, ,520 Other receivables (Net) 1,163,880 1,123,315 Inventories 2,421,127 1,870,912 Deferred expenditures 1 - Total Current Assets 231,058, ,751,722 Noncurrent Assets: Capitalized Bond and Other Debt Issuance Costs -6,727,381 4,812,102 Land 15,967,577 15,967,579 Building, net 202,432, ,196,074 Furniture and equipment, net 16,367,198 14,801,173 Capital Leases (Net) 593, ,653 Constrution in progress 26,813,307 42,518,487 Infrastructure (Net) 1,395,263 1,395,263 Total Noncurrent Assets 256,841, ,284,331 Total Assets 487,899, ,036,053 Current Liabilities: Accounts Payable 1,075,099 9,707,843 Short Term Debt Payable 13,755 - Interest Payable 808,799 1,212,918 Accrued Liabilities 12,856,676 14,640,751 Due to other governments 1,347, ,713 Due to student groups 440, ,891 Deferred revenue 881,774 1,024,589 Total Current Liabilities 17,423,874 27,732,705 Long-Term Liabilities: Due with in a year 5,988,828 8,601,800 Due in more than one year 209,208, ,567,547 Total Liabilities 232,620, ,902,052 Net Assets: Invested in Capital Assets, Net of Related Debt 63,429, ,462,336 Restricted for State and Federal Programs 1,795, ,803 Restricted for Debt Service 13,412,654 16,812,218 Restricted for Capital Projects 111,221,005 0 Other Purposes -1,704,804 16,107,269 Unrestricted Net Assets 67,125,011 64,020,375 Total Net Assets $ 255,279,222 $ 260,134,001 7

72 Changes in net assets. The District s total revenues were $221,823,761. A significant portion, (78%), of the District s revenue comes from grants and contributions (See Figure A-3.). The total cost of all programs and services was $298,024,871; of these costs 74.2% are for instruction and instructional related services and student services. Governmental Activities Investment earnings decreased due to the decrease in interest rates. Property taxes increased due to an increase in the debt service tax rate. Table A-2 Changes in the District's Net Assets Governmental Governmental Activities 2008 Activities 2009 Program Revenues: Charges for services $ 576,641 $ 719,202 Operating grants and contributions 56,079,004 68,261,643 Capital Grants and Contributions 15,022,661 11,763,583 Property taxes 37,825,952 44,163,838 Grants and contributions not restricted 165,765, ,251,538 Investment Earnings 8,834,338 5,299,275 Miscellaneous revenue 218, ,110 Extraordinary Items 21,020 0 Total Revenues 284,343, ,568,189 8

73 Program Expenses: 11 Instruction 148,013, ,262, Instructional resources media services 5,087,244 6,175, Curriculum dev. and instructional staff dev. 5,404,911 6,974, Instructional leadership 4,358,690 6,533, School leadership 12,569,704 13,056, Guidance, counseling, and evaluation services 9,451,796 10,264, Social work services 2,313,930 2,580, Health services 2,398,101 2,551, Transportation 6,741,666 5,645, Food services 17,198,661 16,638, Curricular/Extracurricular activities 6,268,025 6,954, General administration 6,725,262 1,718, Plant maintenance and operations 28,901,901 31,470, Security and monitoring 2,975,248 3,414, Data processing services 1,167,573 1,405, Community services 1,945,385 1,932, Debt Service 10,601,886 15,283, Bond Issuance Cost and Fees 16,115 19, Facilities acquisition and construction 1,241,417 1,292, Payments Related to Shared Services Arrangements 312, , Payments to JJAEP 36,972 38, Other Intergovernmental Charges - 518,482 Total Expenditures 273,731, ,024,871 Increase (Decrease) in Net Assets $ 10,612,451 $ 4,543,318 Table A-3 presents the cost of each of the District s largest functions. The cost of all governmental activities this year was $217,280,442. Those who directly benefited from program activities paid some of the cost. Other programs and services activities were paid by grants contributions. Table A-3 Cost of Selected District's Functions Total Cost of Total Cost of Services 2008 Services 2009 Instruction $ 148,013,884 $ 163,262,561 Plant, Maintenance & Operations 28,901,901 31,470,407 Food Service 17,198,661 16,638,521 School Leadership 12,569,704 13,056,112 FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS Revenues from governmental fund types totaled $302,346,084. The decrease in local revenues is a result of decreased maintenance and operations tax rate. The increase in state revenues is a result of increased state aid. General Fund Budgetary Highlights Over the course of the year, the District revised its budget several times. In addition, the school board approved several increases in appropriations to prevent budget overruns. The budget was also amended to perform deferred maintenance projects, new software for the textbook department, weight room equipment for the three high schools, furniture and networking for new portables and fingerprinting of all employees. With these adjustments, actual expenditures were below final budget amounts. 9

74 CAPITAL ASSETS At the end of fiscal year 2009, the District had invested $294,472,228 in a broad range of capital assets, including land, equipment, buildings, and vehicles. (See Table A-4.) Table A-4 Governmental Governmental Activities 2008 Activities 2009 Capital Assets: Land $ 15,967,579 $ 15,967,579 Buildings & Improvements 250,501, ,953,039 Furniture & Equipment 23,428,715 24,326,561 Vehicles 12,242,505 12,592,545 Construction in Progress 26,813,306 42,518,487 Infrastructure 11,187,201 11,187,201 Total Capital Assets at Historical Cos 340,140, ,545,412 Less: Accumulated Depreciation (76,571,356) (86,073,184) Net of Capital Assets $ 263,569,310 $ 294,472,228 More detailed information about the District s capital assets is presented in the notes to the financial statements. LONG TERM OBLIGATION ACTIVITY Table A-5 Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the period ending August 31, 2009, are as follows: Amt Due in Governmental Activities: Beginning Balance Increases Decreases Ending Balance One Year Rating General Obligation Bonds $ 199,180,000 $ 104,725,000 $ 7,915,000 $ 295,990,000 $ 8,510,000 AAA Accretion $ 1,020,998 $ 303,048 $ - $ 1,324,046 $ - Capital Leases (Restated) $ 177,301 $ 128,342 $ 83,028 $ 222,615 $ 91,800 Sick Leave $ 14,540,933 $ 1,986,889 $ - $ 16,527,822 $ - Total Governmental Activities $ 214,919,232 $ 107,143,279 $ 7,998,028 $ 314,064,483 $ 8,601,800 ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES Appraised value used for the 2010 budget preparation is up $417 million, or 14% from $2.892 billion. The District s 2010 refined average daily attendance is expected to be 28,310 up 1.6%. These indicators were taken into account when adopting the general fund budget for Amounts available for appropriation in the general fund budget are $281 million, a slight increase over the original 2009 budget of $234 million. Property values continue to rise. State revenues will increase as the student population grows but will otherwise remain constant due to the new state funding formulas and the hold harmless calculation used in state funding. In addition, the state funded a portion of the district s state revenues in 2010 from federal stimulus funds. The District will use any increases in revenues to finance programs we currently offer. Expenditures are budgeted to rise to $281 million in the general fund. The largest increments are increased staffing, and teacher salary schedule adjustments. These competitive salary schedule adjustments allowed the District to open the 2010 school year with few teacher vacancies. The District has continued our highly successful College, Career and Technology Academy and added a second year to T-Stem Early College High School. Increased wage and cost of living adjustments were also made to all salary schedules. If these estimates are realized, the District s budgetary general fund s fund balance is not expected to change appreciably by the close of CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, customers, and investors and creditors with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the District s Business Office. 10

75 Basic Financial Statements

76 PHARR SAN JUAN ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS AUGUST 31, 2009 EXHIBIT A 1 Data Control Governmental Codes Activities ASSETS: 1110 Cash and Cash Equivalents $ 291,175, Current Investments 150, Property Taxes Receivable (Net) 9,181, Due from Other Govemments 11,691, Accrued Interest 559, Other Receivables (Net) 1,123, Inventories 1,870, Capitalized Bond and Other Debt Issuance Costs 4,812,102 Capital Assets: 1510 Land 15,967, Buildings and Improvements, Net 219,196, Furniture andequipment, Net 14,801, Capital Lease Assets, Net 593, Construction in Progress 42,518, Infrastructure, Net 1,395, Total Assets 615,036,053 LIABILITIES: 2110 Accounts Payable 9,707, Interest Payable 1,212, Accrued Liabilities 14,640, Due to Other Governments 720, Due to Student Groups 425, Unearned Revenue 1,024,589 Noncurrent Liabilities: 2501 Due Within One Year 8,601, Due in More Than One Year 318,567, Total Liabilities 354,902,052 NET ASSETS 3200 Invested in Capital Assets, Net of Related Debt 162,462,336 Restricted For: 3820 State and Federal Programs 731, Debt Service 16,812, Other Purposes 16,107, Unrestricted The accompanying notes are an integral part of this statement. 11

77 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31, 2009 EXHIBIT B-1 Net (Expense) Revenue and Changes in Program Revenues Net Assets Data Operating Capital Control Chargesfor Grants and Grants and Governmental Codes Functions/Programs Expenses Services Contributions Contributions Govern-mental Activities: Activities 11 Instruction $ 163,262,561 $ 54,880 $ 31,670,551 $ 295,791 $ (131,241,339) 12 Instructional Resources and Media Services 6,175,567 2,738 1,167,117 1,143 (5,004,569) 13 Curriculum and StaffDevelopment 6,974,373 3,011 3,559,313 9,201 (3,402,848) 21 Instructional Leadership 6,533,478 2,173 1,649, (4,880,543) 23 SchoolLeadership 13,056,112 6,197 1,151,622 89,242 (11,809,051) 31 Guidance, Counseling, & Evaluation Services 10,264,483 2,609 2,785, ,838 (7,205,405) 32 Social Work Services 2,580,834 1, , (2,234,881) 33 Health Services 2,551,769 1, , (2,352,197) 34 Student Transporlation 5,645,259 2, ,405 1,203 (5,224,768) 35 Food service 16,638, ,719 17,066, , CocurricwarA:xifacurricu~rAclivff~$ 6,954, , , (6,413,428) 41 GeneralAdministration 1,718,511 3, ,381 1,449 (1,323,210) 51 PlantMaintenance and Operations 31,470,407 25,968 1,990,813 6,813 (29,446,813) 52 Security and Monitoring Services 3,414,625 16, , (3,177,360) 53 Data Processing Services 1,405, , (1,338,144) 61 Community Services 1,932, ,565 97,211 (1,357,839) 72 Interest on Lcnq-term Debt 15,283, ,832,606 10,987, , BondIssuance Costsand Fees 19,703 (19,703) 81 Capital Outlay 1,292,488 (1,292,488) 93 Payments Relatedto Shared Services Arrangement: 291, , (272,153) 95 Payments to Juvenile Justice Alternative Ed. PrograJ 38, (37,823) 99 OtherIntergovernmental Charges 518, , (510,896) TG Total Governmental Activities 298,024, ,202 68,261,643 11,763,583 (217,280,443) TP Total Primary Government $. 298,024,871 $ 719,202 $..68,261,643 $ 11,763,583 (217,280,443) 298,024, ;202 68,261,643 lu63,583 (217,280,442) General Revenues: MT Properly Taxes, Leviedfor General Purposes 36,186,426 DT Property Taxes, LeviedforDebt Service 7,977,412 IE Investment Earnings 5,299,275 GC Grants and Contributions Not Restricted to Specific Programs 172,251,538 MI Miscellaneous 109,110 TR Total General Revenues 221,823,761 CN 4,543,318 NB 255,279,222 PA Prior Period Adjustment 311,461 Net Assets - Beginning, as Restated 255,590,683 NE Net Assets - Ending $ 260,134,001 The accompanying notes are an integral partof this statement. 12

78 PHARR SAN JUAN ALAMO INDEPENDENT SCHOOL DISTRICT BALANCE SHEET - GOVERNMENTAL FUNDS AUGUST 31, Data Debt Control General Service Codes Fund Fund ASSETS: 1110 Cash and Cash Equivalents $ 84,735,305 $ 10,849, Current Investments 8, Taxes Receivable, Net 7,908,028 1,273, Due from Other Governments 5,367, Accrued Inlerest 230,569 37, Due from Other Funds 5,875,994 25,033, Other Receivables 866, Inventories LIABILITIES: Current Liabilities: 2110 Accounts Payable $ 3,020,786 $ 2150 Payroll Deductions & Withholdings 1,083, Accrued Wages Payable 11,896, Due to Other Funds 2,686,750 25,425, Due to Other Governments 11, , Due to Student Groups 2300 Unearned Revenue 8,522,531 1,273, Total Liabilities 27,222,292 21,324,540 FUND BALANCES: Reserved Fund Balances: 3410 Investments in Inventory 1,868, Debt Service 9,868, Reserve for Food Service 1,275, OtherReserves offund Balance Designated Fund Balance: 3510 Construction 11,000, Capital Expenditures for Equipment 6,000, Other Designated Fund Balance 23,352, Unreserved 36,140,534 Unreserved, Reported in Nonmajor: 3630 Permanent Funds 3000 Total Fund Balances 79,637,939 9,868, TotaiLiabilities and Fund Balances The accompanying notes are an integral part of this statement. 13

79 EXHIBIT C other Total Construction Governmental Governmental Fund Funds Funds $ 179,118,477 $ 1,266,396 $ 275,969,488 8,387 9,181,188 6,323,907 11,691, ,426 1, ,520 5,609,898 99,949 36,619, , ,092 1 $ 5,273,952 $ 1,039,091 $ 9,333,829 (238) 1,083,162 1,654,230 13,551,102 4,626,427 3,757,448 36,495, , , , , ,085 10,205,776 9,900,621 7,368,807 71,816, ,024 1,868,666 9,868,554 1,275, , ,118, ,118,180 6,000,000 23,352,899 36,140, ,118,180 8, ,019 8, ,053,692 14

80 This page is left blank intentionally.

81 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS AUGUST 31,2009 EXHIBIT C 1R Total fund balances - governmental funds balance sheet $ 265,053,692 Amounts reported for governmental activities in the statement of net assets ("SNA") are different because: Capital assets used in governmental activities are not reported in the funds. Property taxes receivable unavailable to pay for current period expenditures are deferred in the funds. The assets and liabilities of internal service funds are included in governmental activities in the SNA. Payables for bond principal which are not due in the current period are not reported in the funds. Payables for capital leases which are not due in the current period are not reported in the funds. Payables for bond interest which are not due in the current period are not reported in the funds. Payables for compensated absences which are not due in the current period are not reported in the funds. Other long-term assets are not available to pay for current period expenditures and are deferred in the funds. Rounding difference Net assets of governmental activities - statement of net assets 294,463,223 9,181,188 14,997,771 (296,220,000) (214,327) (2,306,964) (16,527,822) (8,292,763) 3 $ 260,134,001 The accompanying notes are an integral part of this statement. 15

82 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS FOR THE YEAR ENDED AUGUST 31, Data Debt Control General Service Codes Fund Fund REVENUES: 5700 Local and Intermediate Sources $ 40,924,966 $ 7,950, State Program Revenues 176,420,321 15,760, Federal Program Revenues 19,207, Total Revenues 236,552,540 EXPENDITURES: Current: 0011 Instruction 127,882, Instructional Resources and Media Services 5,291, Curriculum andstaffdevelopment 3,342, Instructional Leadership 4,985, School Leadership 12,254, Guidance, Counseling, & Evaluation Services 7,096, Social Work Services 2,311, Health Services 2,399, Student Trenspotieiion 5,679, Food Service 16,131, Cocuntcuter/Iixtrecunicuter Activities 6,895, General Administration 6,621, Plant Maintenance and Operations 30,944, Security and Monitoring Services 3,296, Data Processing Services 1,402, Community Services 1,316, Principal on Long-term Debt 77,367 7,915, Interest on Long-term Debt 67,560 14,502, Bond Issuance Costs and Fees 60, Capital Outlay 1,983, Payments to Shared Service Arrangements 291, Payments to Juvenile Justice Altermatlve 0095 Education Programs 37, Other Intergovernmental Charges 518, Total Expenditures 246;1327,113 22,477, Excess (Deficiency) of Revenues Over (Under) 1100 Expenditures (4,275,173) 1,234,038 Other Financing Sources and (Uses): 7911 Capital-Related Debt Issued (Regular Bonds) 531, Sale ofreal or Personal Property 11, Proceeds from Capital Leases 128, Transfers In 12,394, Premium or Discount on Issuance ofbonds 7917 Prepaid Interest 8911 Transfers Out (13,137,678) 7080 Total Other Financing Sources and (Uses) (603,369) 531, Net Change in Fund Balances (4,878,542) 1,765, Fund Balances - Beginning 8,103, Funql'lalances Enqing ${ L?;jl~, $4 The accompanying notes are an integral part of this statement. 16

83 EXHIBIT C Other Total Construction Governmental Governmental Fund Funds Funds $ 3,139,708 $ 233,584 $ 52,249,091 9,826, ,007,734 28,882,006 48,089,259 3,139,708 38,942, ,346,084 28,790, ,673, ,670 6,123,619 3,421,471 6,763,858 1,411,853 6,397, ,813 12,662,025 2,857,835 9,954, ,161 2,502,934 75,158 2,474,577 5,679,178 19,744 16,150,870 38,083 6,933,397 21, ,643,209 14,422 43,619 31,002,353 14,907 3,311,558 1,402, ,134 1,874,419 7,992,367 7,154 14,576,721 1,099,246 1,159,803 37,173,854 39,157, ,970 37, ,481 38,308,728 38,669, ,283,728. (35,169,020) 272,513 (37,937,642) 104,193, ,725,001 11, , ,909 13,137,677 2,178,196 2,178, , ,286 (13,137,678) 107,642, ,570,023 72,473, ,513 69,1332,381 17

84 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT RECONCILIATlON OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED AUGUST 31, 2009 EXHIBIT C-3 Net change in fund balances - total governmental funds Amounts reported for governmental activities in the statement of activities ("SOA") are different because: Capital outlays are not reported as expenses in the SOA. The depreciation of capital assets used in governmental activities is not reported in the funds. Certain property tax revenues are deferred in the funds. This is the change in these amounts this year. Repayment of bond principal is an expenditure in the funds but is not an expense in the SOA. Repayment of capital lease principal is an expenditure in the funds but is not an expense in the SOA. Bond issuance costs and similar items are amortized in the SOA but not in the funds. The accretion of interest on capital appreciation bonds is not reported in the funds. (Increase) decrease in accrued interest from beginning of period to end of period. The net revenue (expense) of internal service funds is reported with governmental activities. Compensated absences are reported as the amount earned in the SOA but as the amount paid in the funds. Proceeds of bonds do not provide revenue in the SOA, but are reported as current resources in the funds. Bond premiums are reported in the funds but not in the SOA. Bond discounts are reported in the funds but not in the SOA. Proceeds of leases do not provide revenue in the SOA, but are reported as current resources in the funds. Rounding difference Change in net assets of governmental activities - statement of activities $ $ 69,632,381 40,706,658 (9,824,109) 210,906 7,915,000 77,367 1,140,100 (303,048) (404,119) 4,937,896 (1,986,889) (104,725,000) (2,178,196) (527,286) (128,342) 4,543,318 The accompanying notes are an integral part of this statement. 18

85 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STA TEMENT OF NET ASSETS INTERNAL SERVICE FUNDS AUGUST 31, 2009 EXHIBIT D-1 Data Internal Control Service Codes Funds ASSETS: Current Assets: 1110 Cash and Cash Equivalents $ 15,205, Investments 142,000 Receivables: 1260 Due from Other Funds 17, Other Receivables (net) 151, Inventories, at Cost 2,245 Total Current Assets 15,518,634 Noncurrent Assets: Capital Assets: 1530 Furniture and Equipment 89, Accumulated Depreciation (80,053) Total Noncurrent Assets 9, Total Assets $ 15,527,640 LIABILITIES: Current Liabilities: 2110 Accounts Payable $ 374, Capital Leases Payable 4, Accrued Wages Payable 6, Due to Other Funds 141,076 Total Current Liabilities 526,387 Noncurrent Liabilities: 2500 Bonds, Notes and Loans Payable 3,483 Total Noncurrent Liabilities 3, Total liabilities 529,870 NET ASSETS: 3800 Restricted Net Assets The accompanying notes are an integral part of this statement. 19

86 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS -INTERNAL SERVICE FUNDS FOR THE YEAR ENDED AUGUST 31,2009 EXHIBIT 0-2 Data Control Codes OPERATING REVENUES: 5700 Local and Intermediate Sources 5020 Total Revenues Internal Service Funds $ 29,484,050 29,484, OPERATING EXPENSES: Payroll Costs Professional and Contracted Services Supplies and Materials Other Operating Costs Debt Service Total Expenses Change in Net Assets 230,059 23,925, , , ,546,155 4,937,895 The accompanylnq notes are an integral part of this statement. 20

87 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED AUGUST 31, 2009 EXHIBIT D-3 Cash Flows from Operating Activities: Cash Received from Customers Cash Received from Grants Cash Receipts (Payments) for Quasi-external Operating Transactions with Other Funds Cash Payments to Employees for Services Cash Payments to Other Suppliers for Goods and Services Cash Payments for Grants to Other Organizations Other Operating Cash Receipts (Payments) Net Cash Provided (Used) by Operating Activities Cash Flows from Non-capital Financing Activities: Proceeds (Payments) from (for) Borrowings Transfers From (To) Other Funds Net Cash Provided (Used) by Non-capital Financing Activities Cash Flows from Capital and Related Financing Activities: Proceeds from Sale of Capital Assets Principal and Interest Paid Contributed Capital Net Cash Provided (Used) tor Capital & Related Financing Activities $ Internal Service Funds 31,572,522 (228,219) (252,016) (25,371,099) 5,721,188 (5,661) Cash Flows from Investing Activities: Interest and Dividends on Investments Net Cash Provided (Used) for Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating Income (Loss) Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities Depreciation Change in Assets and Liabilities: Decrease (Increase) in Receivables Increase (Decrease) in Accounts Payable Increase (Decrease) in Payroll Deductions Increase (Decrease) in Interfund Payables Increase (Decrease) in Due to Other Governments Increase (Decrease) in Unearned Revenue Total Adjustments Net Cash Provided (Used) by Operating Activities $ $ 5,715,527 9,490,220 15,205,747 4,933,089 4,501 2,093, ,707 1,840 (1,666,227) The accompanying notes are an integral part of this statement. 21

88 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS AUGUST 31, 2009 Agency Fund EXHIBIT E-1 Data Control Codes ASSETS: 1110 Cash and Cash Equivalents 1000 Total Assets LIABILITIES: Current Liabilities: 21gO Due to Student Groups 2000 Total Liabilities Student Activity $ 1,493,826 s 1,493,826 $ 1,493,826 1,493,826 NET ASSETS 3000 Total Net Assets The accompanying notes are an integral part of this statement. 22

89 PHARR SAN JUAN ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 A. Summary of Significant Accounting Policies The basic financial statements of Pharr-San Juan-Alamo Independent School District (the "District") have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") applicable to governmental units in conjunction with the Texas Education Agency's Financial Accountability System Resource Guide ("Resource Guide"), The Governmental Accounting Standards Board ("GASB") is the accepted standard setting body for establishing governmental accounting and financial reporting principles, 1, Reporting Entity The Board of School Trustees ("Board"), a seven-member group, has governance responsibilities over all activities related to public elementary and secondary education within the jurisdiction of the District. The Board is elected by the public and has the exclusive power and duty to govern and oversee the management of the public schools of the District. All powers and duties not specifically delegated by statute to the Texas Education Agency ("TEA") or to the State Board of Education are reserved for the Board, and the TEA may not substitute its judgment for the lawful exercise of those powers and duties by the Board, The District receives funding from local, state and federal government sources and must comply with the requirements of those funding entities, However, the District is not included in any other governmental "reporting entity" as defined by the GASB in its Statement No, 14, "The Financial Reporting Entity," as revised by GASB Statement No,39, and there are no component units included within the reporting entity, 2, Basis of Presentation, Basis of Accounting a. Basis of Presentation Government-wide Financial Statements: The statement of net assets and the statement of activities include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double-counting of internal activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions, The statement of activities presents a comparison between direct expenses and program revenues for each function of the District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. The District does not allocate indirect expenses in the statement of activities. Program revenues include (a) fees, fines, and charges paid by the recipients of goods or services offered by the programs and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the District's funds, with separate statements presented for each fund category, The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities. The District reports the following major governmental funds: General Fund: This is the District's primary operating fund. It accounts for all financial resources of the District except those required to be accounted for in another fund. In addition, the District reports the following fund types: Internal Service Funds: These funds are used to account for revenues and expenses related to services provided 23

90 PHARR SAN JUAN ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 to parties inside the District. These funds facilitate distribution of support costs to the users of support services on a cost-reimbursement basis. Because the principal users of the internal services are the District's governmental activities, this fund type is included in the "Governmental Activities" column of the government-wide financial statements. Agency Funds: These funds are used to report student activity funds and other resources held in a purely custodial capacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary investment, and remittance of fiduciary resources to individuals, private organizations, or other governments. Fiduciary funds are reported in the fiduciary fund financial statements. However, because their assets are held in a trustee or agent capacity and are therefore not available to support District programs, these funds are not included in the government-wide statements. b. Measurement Focus, Basis of Accounting Government-wide, Proprietary, and Fiduciary Fund Financial Statements: These financial statements are reported using the economic resources measurement focus. The government-wide and proprietary fund financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the District gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, entitlements, and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental Fund Financial Statements: Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The District considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year-end. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as otherfinancing sources. When the District incurs an expenditure or expense for which both restricted and unrestricted resources may be used, it is the District's policy to use unrestricted resources first, then restricted resources. Under GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," all proprietary funds will continue to follow Financial Accounting Standards Board ("FASB") standards issued on or before November 30, However, from that date forward, proprietary funds will have the option of either 1) choosing not to apply future FASB standards (including amendments of earlier pronouncements), or 2) continuing to follow new FASB pronouncements unless they conflict with GASB guidance. The District has chosen to apply future FASB standards. 3. Financial Statement Amounts a. Cash and Cash Equivalents For purposes of the statement of cash flows, highly liquid investments are considered to be cash equivalents if they 24

91 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 have a maturity of three months or less when purchased. b. Property Taxes Property taxes are levied by October 1 on the assessed value listed as of the prior January 1 for all real and business personal property in conformity with Subtitle E, Texas Property Tax Code. Taxes are due on receipt of the tax bill and are delinquent if not paid before February 1 of the year following the year in which imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. Property tax revenues are considered available (1) when they become due or past due and receivable within the current period and (2) when they are expected to be collected during a 60-day period after the close of the fiscal year. Allowances for uncollectible tax receivables within the General and Debt Service Funds are based upon historical experience in collecting property taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the District is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature. c. Inventories and Prepaid Items Inventories of supplies on the balance sheet are stated at weighted average cost, while inventories of food commodities are recorded at market values supplied by the Texas Department of Human Services. Inventory items are recorded as expenditures when they are consumed. Supplies are used for almost all functions of activity, while food commodities are used only in the food service program. Although commodities are received at no cost, their fair market value is supplied by the Texas Department of Human Services and recorded as inventory and deferred revenue when received. When requisitioned, inventory and deferred revenue are relieved, expenditures are charged, and revenue is recognized for an equal amount. Inventories also include plant maintenance and operation supplies as well as instructional supplies. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. d. Capital Assets Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated fixed assets are recorded at their estimated fair value at the date of the donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. A capitalization threshold of $5,000 is used. Capital assets are being depreciated using the straight-line method over the following estimated useful lives: Asset Class Infrastructure Buildings Building Improvements Vehicles Office Equipment Computer Equipment Estimated Useful Lives e. Receivable and Payable Balances The District believes that sufficient detail of receivable and payable balances is provided in the financial statements to avoid the obscuring of significant components by aggregation. Therefore, no disclosure is provided which disaggregates those balances. There are no significant receivables which are not scheduled for collection within one year of year end. 25

92 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 f. Compensated Absences On retirement or death of certain employees, payment to such employee or his/her estate. to receive the lump sum payments. the District pays any accrued sick leave in a lump case Individuals employed after October 1, 1985 are not eligible g Interfund Activity Interfund activity results from loans, services provided, reimbursements or transfers between funds. Loans are reported as interfund receivables and payables as appropriate and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers In and Transfers Out are netted and presented as a single "Transfers" line on the government-wide statement of activities. Similarly, interfund receivables and payables are netted and presented as a single "Internal Balances" line of the government-wide statement of net assets. h. Use of Estimates The preparation of financial statements in conformity with GAAP requires the use of management's estimates. i. Data Control Codes Data Control Codes appear in the rows and above the columns of certain financial statements. The TEA requires the display of these codes in the financial statements filed with TEA in order to insure accuracy in building a statewide database for policy development and funding plans. B. Compliance and Accountability 1. Finance-Related Legal and Contractual Provisions In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of financerelated legal and contractual provisions, if any, are reported below, along with actions taken to address such violations: Violation None reported Action Taken Not applicable 2. Deficit Fund Balance or Fund Net Assets of Individual Funds Following are funds having deficit fund balances or fund net assets at year end, if any, along with remarks which address such deficits: Deficit Fund Name None reported Amount Not applicable Remarks Not applicable C. Deposits and Investments The District's funds are required to be deposited and invested under the terms of a depository contract. The depository bank deposits for safekeeping and trust with the District's agent bank approved pledged securities in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation ("FDIC") insurance. 26

93 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, Cash Deposits: At August 31, 2009, the carrying amount of the District's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $119,613,616 and the bank balance was $116,841,370. The District's cash deposits at August 31, 2009 and during the year ended August 31, 2009, were entirely covered by FDIC insurance or by pledged collateral held by the District's agent bank in the District's name. In addition, the following is disclosed regarding coverage of combined balances on the date of highest deposit: a. Depository: BBVA Compass b. The market value of securities pledged as of the date of the highest combined balance on deposit was $169,780,000. c. The highest combined balances of cash, savings and time deposit accounts amounted to $132,326,612 and occurred during the month of June, d. Total amount of FDIC coverage at the time of the largest combined balance was $332, Investments: The District is required by Government Code Chapter 2256, The Public Funds Investment Act, to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit. The Public Funds Investment Act ("Act") requires an annual audit of investment practices. Audit procedures in this area conducted as a part of the audit of the basic financial statements disclosed that in the areas of investment practices, management reports and establishment of appropriate policies, the District adhered to the requirements of the Act. Additionally, investment practices of the District were in accordance with local policies. The Act determines the types of investments which are allowable for the District. These include, with certain restrictions, 1) obligations of the U.S. Treasury, U.S. agencies, and the State of Texas, 2) certificates of deposit, 3) certain municipal securities, 4) securities lending program, 5) repurchase agreements, 6) bankers acceptances, 7) mutual funds, 8) investment pools, 9) guaranteed investment contracts, and 10) commercial paper. The District's investments at August 31,2009 are shown below. Investment.orInvestmentType Texpool Texas Term Certificates of Deposit Certificates of Deposit-Other Investments Total Investments Fair Value $ 159,202,788 $ 14,547, ,825, ,387 $ 290,576,028 $ Cost 159,202,788 14,547, ,825, , ,576,028 Terms Maturity 0-3 Months 0-3 Months 0-7 Months 0-3 Months Percent of Portfolio % 5.007% % 0.052% % This schedule does not inciude checking accounts included in the Statement of Net Assets as Cash and Cash equivalents. 3. Analysis of Specific Deposit and Investment Risks GASB Statement No. 40 requires a determination as to whether the District was exposed to the following specific investment risks at year end and if so, the reporting of certain related disclosures: a. Credit Risk 27

94 PHARR SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The ratings of securities by nationally recognized rating agencies are designed to give an indication of credit risk. At year end, the District was not significantly exposed to credit risk. At August 31, 2009, the District's investments, other than those which are obligations of or guaranteed by the U. S, Government, are rated as to credit quality as follows: b. Custodial Credit Risk Deposits are exposed to custodial credit risk if they are not covered by depository insurance and the deposits are uncollateralized, collateralized with securities held by the pledging financial institution, or collateralized with securities held by the pledging financial institution's trust department or agent but not in the District's name. Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the government, and are held by either the counterparty or the counterparty's trust department or agent but not in the District's name. At year end, the District was not exposed to custodial credit risk. c. Concentration of Credit Risk This risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. At year end, the District was not exposed to concentration of credit risk. d. Interest Rate Risk This is the risk that changes in interest rates will adversely affect the fair value of an investment. At year end, the District was not exposed to interest rate risk. e. Foreign Currency Risk This is the risk that exchange rates will adversely affect the fair value of an investment. At year end, the District was not exposed to foreign currency risk. tnvestmentaccountoopollcy The District's general policy is to report money market investments and short-term participating interest-earning investment contracts at amortized cost and to report nonparticipating interest-earning investment contracts using a cost-based measure. However, if the fair value of an investment is significantly affected by the impairment of the credit standing of the issuer or by other factors, it is reported at fair value. All other investments are reported at fair value unless a legal contract exists which guarantees a higher value, The term "short-term" refers to investments which have a remaining term of one year or less at time of purchase. The term "nonparticipating" means that the investment's value does not vary with market interest rate changes. Nonnegotiable certificates of deposit are examples of nonparticipating interest-earning investment contracts. D. CapitaLAssets Capital asset activity for the year ended August 31, 2009, was as follows: GovernmentaL.activities: Capital assets not being depreciated: Land Construction in progress Total capital assets not being depreciated Beginning Ending Balances Increases Decreases Balances $ 15,967,579 $ $ $ 15,967,579 26,813,307 39,156,859 23,451,679 42,518,487 42,180,886 39,156,859 23,451,679 58,486,066 28

95 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STA TEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 Capital assets being depreciated: Buildings and improvements Equipment Vehicles Infrastructure Total capital assets being depreciated 250,501,360 23,428,715 12,242,506 11,187, ,359,782 23,451, , ,922 25,026,347 94, , ,953,039 24,326,561 12,592,545 11,187, ,059,346 Less accumulated depreciation for: Buildings and improvements Equipment Vehicles Infrastructure Total accumulated depreciation Total capital assets being depreciated, net Governmental activities capital assets, net $ (48,069,045) (13,146,982) (5,563,391 ) (9,791,939) (76,571,357) 220,788, ,569,311 $ (6,687,918) (2,172,339) (968,353) (9,828,610) 15,197,737 54,354,596 (94,900) (231,883) (326,783) $ (54,756,963) (15,224,421) (6,299,861 ) (9,791,939) (86,073,184) 235,986, ,472,228 Depreciation was charged to functions as follows: Instruction Instructional Resources and Media Services Curriculum and Staff Development Instructional Leadership School Leadership Guidance, Counseling, & Evaluation Services Social Work Services Health Services Student Transportation Food Services Extracurricular Activities General Administration Plant Maintenance and Operations Security and Monitoring Services Data Processing Services Community Services Facilities Acquisition and Construction Payments to other School Districts under the Public Education Grant Program $ $ 4,877, , , , , ,824 77,900 77, , , , , , ,067 43,645 58,339 1,218,727 1,158 9,824,109 E. Interfund Balances and Activities 1. Due To and From Other Funds Interfund payables and receivables for the period ended August 31, 2009, are as follows: Fund General Fund: General Fund Special Revenue Fund Debt Service Fund Capital Projects Fund Internal Service Fund Permanent Fund Total General Fund Receivable $ 1,131,981 $ 3,647, , ,810 99,946 5,875,995 Payable 1,131, , ,500 17,384 89,785 2,686,750 29

96 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 Special Revenue Fund: General Fund Internal Service Fund Permanent Fund Total Special Revenue Fund ,647,798 9,704 3,657,502 Debt Service Fund: General Fund Debt Service Fund Total Debt Service Fund 462,906 24,570,695 25,033, ,468 24,570,695 25,425,163 Capital Projects Fund: General Fund Capital Projects Fund Internal Service Fund Total Capital Projects Fund 984,500 4,625,399 5,609,899' 992 4,625, ,626,427 Internal Service Fund: General Fund Special Revenue Fund Capital Projects Fund Permanent Fund Total Internal Service Fund 17, , , ,076 Permanent Fund General Fund Special Revenue Fund Internal Service Fund Total Permanent Fund Total $ 89,785 9, ,566 36,636,864 $ 99,946 99,946 36,636, Transfers To and From Other Funds Transfers to and from other funds at August 31, 2009, consisted of the following: Transfers From Transfers To Amount Reason General Fund Capital Projects Fund $ 742,910 Provide resources for capital proje General Fund General Fund Total $ 12,394,678 Supplement other fund sources 13,137,588 F. Long-Term Obligations The District has entered into a continuing disclosure undertaking to provide Annual Reports and Material Event Notices to the State Information Depository of Texas, which is the Municipal Advisory Council. This information is required under SEC Rule 15c2-12 to enable investors to analyze the financial condition and operations of the District. 30

97 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 Unlimited Tax Building Bonds (UTBB) Description UTBB, Series 2000 UTBB, Series 2006 UTBB, Series 2007 UTBB, Series 2007 UTBB, Series 2007/ Accretion UTBB, Series 2008 Total Bonds Payable Original Issue 09/14/00 10/26/06 07/15/07 07/15/07 07/15/07 09/08/08 Outstanding Final Coupon Original Balance Maturity Rate % Issue 09/01/08 02/01/ $ 58,000,000 $ 3,540,000 08/01/ ,040, ,655,000 02/01/ ,810,000 29,810, / ,190,000 5,175,000 08/01/18 724,972 1,020, / ,725,000 $ 365,489,972 Interest paid on bonded indebtness during the current year was $ 14,576,721 Outstanding Outstanding Amounts Balance Issued Accretion Retired Balance Due Within Description 09/01/08 Current Current Current 08/31/09 One Year UfBB,Series20bb $3,540,000 $ $ $ 1,725,000 $ 1,815,000 $ 1,815,000 UTBB, Series ,655,000 4,130, ,525,000 4,340,000 UTBB, Series ,810,000 29,810,000 UTBB, Series ,175,000 5,175, ,000 UTBB, Series 2007/ Accret 1,020, ,048 1,324,046 UTBB, Series ,725,000 2,060, ,665,000 1,695,000 Subtotal 200,200, ,725, ,048 7,915, ,314,046 8,510,000 Premium & Discount 10,873,148 2,705, ,766 13,104,864 Total Bonds Payable $211,074,146 $ 107,430,482 $ '8,388;766 $,310,418,910 Cost of Issuance (4,142,766),(1,099,245) (4,812,102) 1. Long-Term Obligation Activity Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the year ended August 31, 2009, are as follows: Amount Beginning Ending Due Within Governmental Activities Balance Increases Decreases Balance One Year General Obligation Bonds $ 199,180,000 $ 104,725,000 $ 7,915,000 $ 295,990,000 $ 8,510,000 Accretion 1,020, ,048 1,324,046 Capital Leases (Restated) 163, ,342 77, ,326 86,994 Capital Leases Internal Service Fund 13,950 5,661 8,289 4,806 Sick and Vacation Leave 14,540,933 1,986,889 16,527,822 Subtotal 214,919, ;143,279 7,998, ,064,483 8,601,800 Premium & Discount 10,873,148 2,705, ,766 13,104,864 Total Governmental Activities $ 225,792,380 $ 109,848,761 $ 8,471,794 $ 327,169,347 $ 8,601,800 Other long-term liabilities The funds typically used to liquidate other long-term liabilities in the past are as follows: Liability Compensated absences Claims and judgments Activity Type Governmental Governmental Fund General General 2. Debt Service Requirements 31

98 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 Debt service requirements on long-term debt at August 31, 2009, are as follows: Year Ending August 31, 2010 $ Subtotal Principai CIB 7,850,000 $ 8,230,000 8,620,000 9,050,000 9,495,000 48,005,000 52,155,000 48,695,000 57,595,000 41,120,000 $290,815,000 $ CAB 660,000 $ 585, , , ,000 2,195,000 5,175,000 $ Interest 14,555,018 $ 14,179,838 13,785,438 13,366,788 12,922,463 57,253,030 44,940,267 31,374,211 18,211,631 3,568, ,157,290 Accretion 230,000 $ 300, , , ,000 1,355,000 2,805,CI00$ Total 23,295,018 23,294,838 23,290,438 23,301,788 23,302, ,808,030 97,095,267 80,069,211 75,806,631 44,688, ,952,290 CIB CAB Current Accretion Total Bonds Payable $ 290,815,000 5,175,000 1,324, ,314, Capital Leases Commitments under capitalized lease agreements forfacilities and equipment provide for minimum future lease payments as of August 31, 2009, as follows: Year Ending August 31, Total Governmental Activities Principal Interest 86,994 15,710 64,147 7,999 35,755 3,851 21,070 1, Internal Service Fund Principal Interest 6, , Total 109,280 74,338 39,606 22,359 1 The effective interest rate on capital leases is 5.500%. G. BiskMaDagement The District is exposed to various risks of loss related to torts, theft, damage or destruction of assets, errors and omissions, injuries to employees, and natural disasters. During fiscal year 2009, the District purchased commercial insurance to cover general liabilities. There were no significant reductions in coverage in the past fiscal year and there were no settlements exceeding insurance coverage for each of the past three fiscal years. H. Pension Plan 1. Plan Description The District contributes to the Teacher Retirement System of Texas (the "System"), a public employee retirement system. It is a cost-sharing, multiple-employer defined benefit pension plan with one exception: all risks and costs are not shared by the District, but are the liability of the State of Texas. The System provides service retirement and disability retirement benefits, and death benefits to plan members and beneficiaries. The System operates primarily under the provisions of the Texas Constitution and Texas Government Code, Title 8, Subtitle C. The Texas legislature has the authority to establish or amend benefit provisions. The System issues a publicly available financial report that 32

99 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2009 includes financial statements and required supplementary information for the District. That report may be obtained by writing the Teacher Retirement System of Texas, 1000 Red River Street, Austin, TX or by calling (800) Funding Policy Under provisions in State law, plan members are required to contribute 6.4% of their annual covered salary and the State of Texas contributes an amount equal to 6.58% of the District's covered payroll. The District's employees' contributions to the System for the years ending August 31, 2009, 2008 and 2007 were $10,727,203, $9,748,886 and $9,071,902, respectively, and were equal to the required contributions for each year. Other contributions made from federal and private grants and from the District for salaries above the statutory minimum for the years ending August 31, 2009, 2008 and 2007 were $3,190,393, $2,579,350 and $2,159,544, respectively, and were equal to the required contributions for each year. The amount contributed by the State on behalf of the District was $9,514,637 for the year ended August 31,2009. I. Retiree Health Care Plan 1. Plan Description The District contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple-employer defined benefit postemployment health care plan administered by the Teacher Retirement System of Texas (TRS). TRS-Care Retired Plan provides health care coverage for certain persons (and their dependents) who retired under the Teacher Retirement System of Texas. The statutory authority for the program is Texas Insurance Code, Chapter Section grants the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants. The TRS issues a publicly available financial report that includes financial statements and required supplementary information for TRS-Care. That report may be obtained by visiting the TRS web site at by writing to the Communications Department of the Teacher Retirement System of Texas at 1000 Red River Street, Austin, Texas 78701, or by calling Funding Policy Contribution requirements are not actuarially determined but are legally established each biennium by the Texas Legislature. Texas Insurance Code, Sections , 203, and 204 establish state, active employee, and public school contributions, respectively. The State of Texas and active public school employee contribution rates were 1.0% and 0.65% of public school payroll, respectively, with school districts contributing a percentage of payroll set at 0.55% for fiscal years 2009, 2008 and Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. For the years ended August 31, 2009, 2008, and 2007, the State's contributions to TRS-Care were $1,484,058, $1,344,015, and $1,240,454, respectively, the active member contributions were $192,069, $179,251, and $177,034, respectively, and the District's contributions were $921,875, $837,811, and $779,622, respectively, which equaled the required contributions each year. The Medicare Prescription Drug, Improvement, and MOdernization Act of 2003, which was effective January 1, 2006, estblished prescription drug coverage for Medicare beneficiaries known as Medicare Part D. One of the provisions of Medicare Part 0 allows for the Texas Public School Retired Employee Group Insurance Program (TRS-Care) to receive retiree drug subsidy payments from the federal government to offset certain prescription drug expenditures for eligible TRS-Care participants. For the fiscal years ended August 31, 2009, 2008, and 2007, the subsidy payments received by TRS-Care on behalf of the District were $411,084, $382,737, and $310,104, respectively, J. Employee Health Care COverilge During the year ended August 31, 2009, employees of the District were covered by a health insurance plan (the Plan). 33

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101 APPENDIX D FORM OF LEGAL OPINION OF BOND COUNSEL

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103 RAMIREZ & GUERRERO, L.L.P. Attorneys at Law Ebony Park, Suite B 700 N. Veterans Blvd. San Juan, Texas Phone: (956) Fax: (956) February 22, 2011 PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT LIMITED MAINTENANCE TAX QUALIFIED SCHOOL CONSTRUCTION NOTES, TAXABLE SERIES 2011, DATED FEBRUARY 1, 2011 IN THE AGGREGATE PRINICIPAL AMOUNT OF $26,755,000 WE HAVE ACTED as Bond Counsel for the PHARR-SAN JUAN-ALAMO INDEPENDENT SCHOOL DISTRICT (the "District") in connection with issuance of the captioned obligations (the "Notes") for the purpose of rendering an opinion with respect to the legality and validity of the Notes under the Constitution and laws of the State of Texas and for no other purpose. In rendering the opinions herein, we have relied upon a transcript of certain certified proceedings pertaining to the issuance of the Notes as described in the District's resolution authorizing the Notes (the "Resolution"). The transcript contains certified copies of certain proceedings of the District and certain certifications and representations, other material facts within the knowledge and control of the District, an opinion of the Attorney General of Texas to the effect that the initial Notes are valid and binding obligations of the District, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Notes. We have also examined executed Note No. T-l and a specimen of Notes to be authenticated and delivered in exchange for the Note. THE NOTES are being issued to provide funds to be used to pay costs in connection with the paying all or a portion of the District's obligations to be incurred in connection with the renovation and equipping of school facilities in the District and paying costs of issuance of the Notes. BASED ON SUCH EXAMINATION, our opinion is as follows: The transcript of certified proceedings evidences complete legal authority for the issuance of the Notes in full compliance with the Constitution and laws of the State of Texas presently in effect and constitute valid and legally binding obligations of the District in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Notes may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases. The Notes are payable, both as to principal and interest, from available funds of the District as the same shall become due and payable. Available funds include revenues from the District s maintenance tax. While the Notes or any part of the principal thereof or interest thereon remain outstanding and unpaid, the District has pledged to levy a tax within the limits of the District's maintenance and operation taxing authority. The tax shall be annually levied, assessed and collected in due time, form and manner, and at the same time as other District taxes are assessed, levied and collected, in each year, beginning with the year , upon all taxable property in the District, in an amount sufficient to pay in full the interest on the

104 Notes as the same becomes due and to pay each installment of the principal of the Notes as the same matures, full allowance being made for delinquencies and costs of collection. IT IS OUR FURTHER OPINION THAT interest on the Notes is not excludable from income for federal income tax purposes under existing law. EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Notes. Prospective purchasers of should consult their own tax advisors as to the consequences of investing in the Notes. The opinions set forth above are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the District or the disclosure thereof in connection with the sale of the Notes. Respectfully submitted, RAMIREZ & GUERRERO, LLP

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