$7,935,000 MORONGO UNIFIED SCHOOL DISTRICT (San Bernardino County, California) 2012 General Obligation Refunding Bonds

Transcription

1 NEW ISSUE -- FULL BOOK-ENTRY RATING: Moody s: Aa3 See RATING herein In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, subject, however, to certain qualifications described herein, under existing laws, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Refunding Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended ( Code ). In the further opinion of Bond Counsel, interest on the Refunding Bonds is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, Bond Counsel observes that such interest is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation s alternative minimum tax liabilities. In the further opinion of Bond Counsel, interest on the Refunding Bonds is exempt from State of California personal income taxation. Bond Counsel expresses no opinion regarding or concerning any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Refunding Bonds. See TAX MATTERS. $7,935,000 MORONGO UNIFIED SCHOOL DISTRICT (San Bernardino County, California) 2012 General Obligation Refunding Bonds Dated: Date of Delivery Due: August 1, as shown on inside front cover Issuance. The Morongo Unified School District (San Bernardino County, California) 2012 General Obligation Refunding Bonds (the Refunding Bonds ), in the aggregate principal amount of $7,935,000, are being issued by the Morongo Unified School District (the District ) pursuant to a resolution of the Board of Education of the District adopted on October 16, 2012 (the Bond Resolution ) and certain provisions of the Government Code of the State of California for the purpose of advance refunding certain maturities of the District s outstanding General Obligation Bonds, 2005 Election, Series A, as described herein. See PLAN OF FINANCE. Security. The Refunding Bonds are general obligation bonds of the District payable solely from ad valorem taxes. The Board of Supervisors of San Bernardino County (the County ) has the power and is obligated to annually levy ad valorem taxes upon all property subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates) for the payment of principal of and interest on the Refunding Bonds. The District has other general obligation bond indebtedness which is similarly secured by ad valorem taxes. See SECURITY FOR THE REFUNDING BONDS and APPENDIX A attached hereto. Redemption. The Refunding Bonds are subject to optional redemption prior to maturity under certain circumstances, as described herein. See THE REFUNDING BONDS Optional Redemption. Book-Entry Only. The Refunding Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers will not receive physical certificates representing their interests in the Refunding Bonds. See THE REFUNDING BONDS - Book- Entry-Only System. Payments. Interest with respect to the Refunding Bonds accrues from the date of delivery and is payable semiannually on February 1 and August 1 of each year, commencing February 1, 2013, by check mailed to the person in whose name the Refunding Bond is registered. Payments of principal and interest on the Refunding Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., Los Angeles, California, as Paying Agent, to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Refunding Bonds. See THE REFUNDING BONDS Description of the Refunding Bonds. MATURITY SCHEDULE (see inside front cover) This cover page contains information for general reference only. It is not a summary of all the provisions of the Refunding Bonds. Investors must read the entire official statement to obtain information essential in making an informed investment decision. The Refunding Bonds are offered when, as and if issued, subject to the approval as to their legality by Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel. Jones Hall, A Professional Law Corporation, San Francisco, California is acting as Disclosure Counsel to the District. Nossaman, LLP, Irvine, California is serving as Underwriter s Counsel. It is anticipated that the Refunding Bonds in definitive form will be available for delivery through the facilities of DTC on or about November 29, The date of this Official Statement is November 14, 2012.

2 MATURITY SCHEDULE MORONGO UNIFIED SCHOOL DISTRICT (San Bernardino County, California) 2012 General Obligation Refunding Bonds Base CUSIP : Maturity Date (August 1) Principal Amount Interest Rate Yield CUSIP 2013 $150, % 0.350% JS , JT , JU , JV , JW , JX , JY , JZ , KA , KB , C KC , C KD , C KE , KF , KG , KH , KJ , KK8 C: Yield to par call on August 1, CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC on behalf of The American Bankers Association. These data are not intended to create a database and do not serve in any way as a substitute for the CUSIP services. Neither the District nor the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth above.

3 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the sale of the Refunding Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not a contract between any bond owner and the District or the Underwriter. No Offering Except by This Official Statement. No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriter. No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sale of the Refunding Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Information in Official Statement. The information set forth in this Official Statement has been furnished by the District and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District in any press release and in any oral statement made with the approval of an authorized officer of the District or any other entity described or referenced herein, the words or phrases will likely result, are expected to, will continue, is anticipated, estimate, project, forecast, expect, intend and similar expressions identify forward looking statements within the meaning of the Private Securities Litigation Reform Act of Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the District or any other entity described or referenced herein since the date hereof. Involvement of Underwriter. The Underwriter has provided the following statement for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the Federal Securities Laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Stabilization of and Changes to Offering Prices. The Underwriter may overallot or take other steps that stabilize or maintain the market prices of the Refunding Bonds at levels above that which might otherwise prevail in the open market. If commenced, the Underwriter may discontinue such market stabilization at any time. The Underwriter may offer and sell the Refunding Bonds to certain securities dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the inside cover page of this Official Statement, and those public offering prices may be changed from time to time by the Underwriter. Document Summaries. All summaries of the Bond Resolution or other documents referred to in this Official Statement are made subject to the provisions of such documents and qualified in their entirety to reference to such documents, and do not purport to be complete statements of any or all of such provisions. No Securities Laws Registration. The Refunding Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon exceptions therein for the issuance and sale of municipal securities. The Refunding Bonds have not been registered or qualified under the securities laws of any state. Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Refunding Bonds will, under any circumstances, give rise to any implication that there has been no change in the affairs of the District, the County, the other parties described in this Official Statement, or the condition of the property within the District since the date of this Official Statement. Website. The District maintains a website. However, the information presented on the website is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Refunding Bonds.

4 MORONGO UNIFIED SCHOOL DISTRICT COUNTY OF SAN BERNARDINO STATE OF CALIFORNIA DISTRICT BOARD OF EDUCATION J. Edward Will Jr., President Chris Proudfoot, Clerk Donna Munoz, Member Ron Palmer, Member Phyllis Swinnerton, Member DISTRICT ADMINISTRATION Jim Majchrzak, Superintendent David Price, Assistant Superintendent, Business Services FINANCIAL ADVISOR Isom Advisors, A Division of Urban Futures Inc. Walnut Creek, California BOND COUNSEL Bowie, Arneson, Wiles & Giannone Newport Beach, California DISCLOSURE COUNSEL Jones Hall, A Professional Law Corporation San Francisco, California UNDERWRITER S COUNSEL Nossaman, LLP Irvine, California PAYING AGENT, TRANSFER AGENT, AUTHENTICATION AGENT AND BOND REGISTRAR The Bank of New York Mellon Trust Company, N.A. Los Angeles, California VERIFICATION AGENT Causey Demgen & Moore P.C. Denver, Colorado

5 TABLE OF CONTENTS Page INTRODUCTION... 1 The District... 1 Sources of Payment for the Refunding Bonds... 1 Authority for Issuance of the Refunding Bonds... 1 Purpose of Issue... 1 Description of the Refunding Bonds... 2 Legal Matters... 2 Tax Matters... 2 Offering and Delivery of the Refunding Bonds... 3 Continuing Disclosure... 3 Other Information... 3 THE REFUNDING BONDS... 4 Authority for Issuance... 4 Purpose of Issue... 4 Security... 4 Description of the Refunding Bonds... 5 Paying Agent... 6 Optional Redemption... 6 Selection of Bonds for Redemption... 6 Notice of Redemption... 7 Contingent Redemption; Right to Rescind Notice of Redemption... 8 Payment of Redeemed Bonds... 8 Purchase In Lieu of Redemption... 9 Page Partial Redemption of Refunding Bonds... 9 Defeasance... 9 Book-Entry Only System Registration, Transfer and Exchange of Refunding Bonds PLAN OF FINANCE DEBT SERVICE SCHEDULE SOURCES AND USES OF FUNDS SECURITY FOR THE REFUNDING BONDS. 14 General Ad Valorem Property Taxation Assessed Valuations Land Use Appeals of Assessed Value Typical Tax Rates Teeter Plan Largest Property Owners Debt Obligations TAX MATTERS ABSENCE OF MATERIAL LITIGATION CONTINUING DISCLOSURE RATING VERIFICATION OF MATHEMATICAL ACCURACY UNDERWRITING ADDITIONAL INFORMATION APPENDIX A - General and Financial Information About the District APPENDIX B - Audited Financial Statements of the District for Fiscal Year Ended June 30, 2011 APPENDIX C - General Information about the City of Twentynine Palms and San Bernardino County APPENDIX D - Proposed Form of Opinion of Bond Counsel APPENDIX E - Form of Continuing Disclosure Certificate APPENDIX F - DTC and the Book-Entry System -i-

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7 $7,935,000 MORONGO UNIFIED SCHOOL DISTRICT (San Bernardino County, California) 2012 General Obligation Refunding Bonds INTRODUCTION This Official Statement, which includes the cover page and appendices hereto, provides information in connection with the sale and delivery by the Morongo Unified School District (the District ) of the Morongo Unified School District (San Bernardino County, California) 2012 General Obligation Refunding Bonds, in the principal amount of $7,935,000 (the Refunding Bonds ). This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Refunding Bonds to potential investors is made only by means of the entire Official Statement. The District The District is located in the Morongo Basin portion of the Mojave Desert, approximately 57 miles northeast of the City of Palm Springs, in San Bernardino County (the County ). The District provides public school services to the residents of the City of Twentynine Palms and the incorporated Town of Yucca Valley. The District also serves the nearby unincorporated communities of Morongo Valley, Launders, Flamingo Heights, Yucca Mesa, Joshua Tree and Wonder Valley. The District currently operates 11 elementary schools, 2 middle schools, 2 high schools and 2 continuation schools. See SECURITY FOR THE REFUNDING BONDS for a description of the assessed valuation and other information regarding property in the District. See also APPENDIX A General and Financial Information About the District and APPENDIX B Audited Financial Statement of the District for Fiscal Year Ended June 30, Sources of Payment for the Refunding Bonds The Refunding Bonds are general obligation bonds of the District payable from ad valorem taxes. The Board of Supervisors of the County has the power and is obligated to annually levy ad valorem taxes for the payment of the Refunding Bonds and the interest thereon upon all property within the District subject to taxation without limitation of rate or amount (except certain personal property which is taxable at limited rates). See SECURITY FOR THE REFUNDING BONDS herein. Authority for Issuance of the Refunding Bonds The Refunding Bonds will be issued pursuant to certain provisions of the Government Code of the State of California (the State ), and other applicable State law, and pursuant to a resolution adopted by the Board of Education of the District adopted on October 16, 2012 (the Bond Resolution ). See THE REFUNDING BONDS - Authority for Issuance. -1-

8 Purpose of Issue The net proceeds of the Refunding Bonds will be used to advance refund certain maturities of the District s outstanding General Obligation Bonds, 2005 Election, Series A, as described herein (the 2005 Series A Bonds, and the refunded portions being the Refunded Bonds ), as more particularly identified herein. See PLAN OF FINANCE and SOURCES AND USES OF FUNDS. Description of the Refunding Bonds Form of Refunding Bonds. The Refunding Bonds will be dated their date of delivery (the Dated Date ) and will be issued as fully registered bonds, without coupons, in the denominations of $5,000 or any integral multiple thereof. The Refunding Bonds will mature on August 1 in the years indicated on the inside cover page hereof. Redemption. The Refunding Bonds are subject to optional redemption prior to maturity as described in THE REFUNDING BONDS - Optional Redemption. Legal Matters Issuance of the Refunding Bonds is subject to the approving opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel ( Bond Counsel ), to be delivered in substantially the form attached hereto as Appendix D. Jones Hall, A Professional Law Corporation, San Francisco, California, will serve as Disclosure Counsel to the District ( Disclosure Counsel ). Certain matters will be passed upon for E. J. De La Rosa & Co., Inc. (the Underwriter ) by Nossaman LLP, Irvine, California ( Underwriter s Counsel ). Payment of the fees of Bond Counsel, Disclosure Counsel and Underwriter s Counsel is contingent upon issuance of the Refunding Bonds. See APPENDIX D Proposed Form of Opinion of Bond Counsel. Tax Matters In the opinion of Bond Counsel, subject, however, to certain qualifications described herein, and based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Refunding Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended ( Code ). In the further opinion of Bond Counsel interest on the Refunding Bonds is not an item of tax preference for purposes of the federal alternative minimum taxes imposed on individuals and corporations; however Bond Counsel observes that such interest is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation s alternative minimum tax liabilities. In the further opinion of Bond Counsel, interest on the Refunding Bonds is exempt from State personal income taxation. Bond Counsel expresses no opinion regarding or concerning any other tax consequences related to the ownership or disposition of the accrual or receipt of interest on the Refunding Bonds. See TAX MATTERS herein. -2-

9 Offering and Delivery of the Refunding Bonds The Refunding Bonds are offered when, as and if issued and received by the purchasers, subject to approval as to the legality by Bond Counsel. It is anticipated that the Bonds will be available for delivery through the facilities of DTC on or about November 29, Continuing Disclosure The District has covenanted and agreed that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate, dated the date of the Refunding Bonds and executed by the District (the Continuing Disclosure Certificate ). The form of the Continuing Disclosure Certificate is included in Appendix E hereto. See CONTINUING DISCLOSURE. Other Information For limiting factors about this Official Statement, see General Information About This Official Statement inside the cover hereof. Copies of documents referred to herein and information concerning the Refunding Bonds are available from the Superintendent of the District, Morongo Unified School District, 5715 Utah Trail, Twentynine Palms, California 92277; telephone (760) (the Superintendent's Office ). The District may impose a charge for copying, mailing and handling. [END OF INTRODUCTION] -3-

10 THE REFUNDING BONDS Authority for Issuance The Refunding Bonds are issued pursuant to the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (the Bond Law ), and other applicable State law, and pursuant to the Bond Resolution. The District currently has other outstanding general obligation bonds that are similarly payable from ad valorem taxes levied on taxable parcels in the District. See DEBT SERVICE SCHEDULES below, and Appendix A under the heading DISTRICT FINANCIAL INFORMATION Long-Term Debt for additional information. Purpose of Issue The Refunding Bonds are being issued for the purpose of refunding, on an advance basis, the Refunded Bonds and paying the related costs of issuance. See PLAN OF FINANCE. Security Ad Valorem Taxes. The Refunding Bonds are payable solely from ad valorem taxes. The Board of Supervisors of the County has the power and is obligated to levy ad valorem taxes for the payment of the Refunding Bonds and the interest thereon upon all property within the District subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates). Such taxes are required to be levied annually, in addition to all other taxes, during the period that the Refunding Bonds are outstanding in an amount sufficient to pay the principal and interest on the Refunding Bonds when due. Such taxes, when collected, will be deposited into an interest and sinking fund for the Refunding Bonds pursuant to the provisions of the Bond Resolution (the Debt Service Fund ), which is maintained by the County and which is created by statute for the payment of principal of and interest on the Refunding Bonds when due. Although the County is obligated to levy an ad valorem tax for the payment of the Refunding Bonds, and will maintain the Debt Service Fund pledged to the repayment of the Refunding Bonds, the Refunding Bonds are not a debt of the County. The moneys in the Debt Service Fund, to the extent necessary to pay the principal and interest on the Refunding Bonds as the same become due and payable, shall be transferred by the County to the Paying Agent (as defined below) which, in turn, shall pay such moneys to DTC to pay the principal and interest on the Refunding Bonds. DTC will thereupon make payments of principal and interest on the Refunding Bonds to the DTC Participants who will thereupon make payments of principal and interest to the beneficial owners of the Refunding Bonds. The rate of the annual ad valorem tax levied by the County to repay the Refunding Bonds will be determined by the relationship between the assessed valuation of taxable property in the District and the amount of debt service due on the Refunding Bonds. A reduction in the assessed valuation of taxable property in the District caused by economic factors beyond the District's control, such as economic recession, slower growth, or deflation of land values, a relocation out of the District by one or more major property owners, or the complete or partial destruction of such property caused by, among other eventualities, an earthquake, flood or -4-

11 other natural disaster, could cause a reduction in the assessed value of the District and necessitate an unanticipated increase in the annual tax levy. For further information regarding the District's tax base, tax rates, overlapping debt and other matters concerning taxation, see SECURITY FOR THE BONDS herein. Description of the Refunding Bonds General. The Refunding Bonds shall be issued in the denominations of $5,000 principal amount each or any integral multiple thereof. The Refunding Bonds mature on August 1, in the years and amounts set forth on the inside cover page hereof. The Refunding Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee for The Depository Trust Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York in its capacity as securities depository for the Refunding Bonds ( DTC ). Purchasers will not receive physical certificates representing their interest in the Refunding Bonds. Interest Payments. Interest with respect to the Refunding Bonds accrues from their Dated Date, and is payable semiannually on February 1 and August 1 of each year (each, an Interest Payment Date ) commencing February 1, Each Refunding Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless (i) it is authenticated as of a day during the period from the 16th day of the month next preceding any Interest Payment Date to the Interest Payment Date, inclusive, in which event it shall bear interest from such Interest Payment Date, or (ii) it is authenticated on or before the first Record Date in which event it shall bear interest from the date if issuance, computed using a year of 360 days, comprised of twelve 30-day months; provided, however, that if at the time of authentication of any Refunding Bond, interest is then in default thereon, such Refunding Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. Interest on the Refunding Bonds, including the final interest payment upon maturity, is payable by check of the Paying Agent (defined herein) mailed on the Interest Payment Date via first-class mail to the current registered holder of a Refunding Bond (the Owner ) thereof at such Owner s address as it appears on the bond register maintained by the Paying Agent at the close of business on the fifteenth (15th) day of the month preceding the Interest Payment Date (the Record Date ), or at such other address as the Owner may have filed with the Paying Agent for that purpose, or upon written request filed with the Paying Agent as of the Record Date by an Owner of at least $1,000,000 in aggregate principal amount of Refunding Bonds, by wire transfer. Principal Payments. Payments of principal of, and redemption premiums, if any, with respect to the Refunding Bonds, are payable at maturity or redemption upon surrender at the office of the Paying Agent. In the event the Paying Agent shall provide written notice of a change in the location for payment of Principal, redemption premiums and interest on the Refunding Bonds, the Paying Agent shall thereafter provide notice of such change to the Informational Services and Securities Depositories (as defined in the Bond Resolution) of such change. The Paying Agent is authorized in the Bond Resolution to pay the Refunding Bonds when duly presented for payment at maturity, and to cancel all Refunding Bonds upon payment thereof. -5-

12 Paying Agent The Bank of New York Mellon Trust Company, N.A., Los Angeles, California, will act as the registrar, transfer agent, authentication agent and paying agent for the Refunding Bonds (the Paying Agent ). As long as DTC is the registered owner of the Refunding Bonds and DTC's book-entry method is used for the Refunding Bonds, the Paying Agent will send any notice of redemption or other notices to owners only to DTC. Any failure of DTC to advise any DTC Participant, or of any DTC Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings relating to the redemption of the Refunding Bonds called for redemption or of any other action covered by such notice. The Paying Agent, the District, the County and the Underwriter of the Refunding Bonds identified on the cover page hereof have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership, of interests in the Refunding Bonds. Optional Redemption The Refunding Bonds maturing on or before August 1, 2022 are not subject to redemption prior to their respective stated maturities. The Refunding Bonds maturing on or after August 1, 2023, are subject to redemption prior to maturity, as a whole, or in part among maturities at the written direction of the District and in the absence of such direction in inverse order of maturity and by lot within a maturity, at the option of the District, from any available source of funds, on August 1, 2022 and on any date thereafter, at a redemption price equal to the principal amount thereof together with accrued interest thereon to the date fixed for redemption, without premium. For the purpose of selection for optional redemption, Refunding Bonds will be deemed to consist of $5,000 portions, and any such portion may be separately redeemed. Selection of Bonds for Redemption Whenever less than all of the Outstanding Refunding Bonds are to be redeemed, the Paying Agent, upon written direction from the District shall select the Refunding Bonds to be redeemed as so directed, and if not so directed in inverse order of maturity, and within a maturity, the Paying Agent shall select Refunding Bonds for redemption by lot. Redemption by lot shall be in such manner as the Paying Agent shall determine; provided, however, that the portion of any Refunding Bond to be redeemed in part shall be in the Principal Amount of $5,000 or any integral multiple thereof. The Paying Agent shall promptly notify the District of the Refunding Bonds so selected for redemption on such date. In the event that Term Bonds are subject to optional redemption there shall be pro rata reductions in the annual sinking fund payments due on such Outstanding Term Bonds. Outstanding as used herein means all Refunding Bonds except: (1) Refunding Bonds theretofore canceled by the District or surrendered to the District for cancellation; -6-

13 Notice of Redemption (2) Refunding Bonds for the transfer or exchange of or in lieu of or in substitution for which other Refunding Bonds shall have been authenticated and delivered by the District pursuant to the terms of the Bond Resolution; and (3) Refunding Bonds paid and discharged pursuant to the provisions of the Bond Resolution. Form of Notice. The Paying Agent is required to give notice of each designated redemption ( Redemption Notice ) of the Refunding Bonds at the expense of the District. Such Redemption Notice shall specify: (a) that the Refunding Bonds or a designated portion thereof are to be redeemed; (b) if less than all of the then outstanding Bonds are to be called for redemption, shall designate the numbers (or state that all Refunding Bonds between two stated numbers both inclusive have been called for redemption) and CUSIP numbers, if any, of the Refunding Bonds to be redeemed; (c) the date of notice and the date of redemption; (d) the place or places where the redemption will be made; and (e) descriptive information regarding the Refunding Bonds and the specific Refunding Bonds to be redeemed, including the dated date, interest rate and stated maturity date of each. Such Redemption Notice shall further state that on the specified date there shall become due and payable upon each Refunding Bond to be redeemed, the portion of the principal amount of such Refunding Bond to be redeemed, together with interest accrued, to the date of redemption, and redemption premium, if any, and that from and after such date interest with respect thereto shall cease to accrue. Provision of Notice of Redemption. Any Redemption Notice shall be mailed, by first class mail, postage prepaid, to the registered owners of the Refunding Bonds, to a Securities Depository and to the Informational Services (as such terms are defined in the Bond Resolution), and by first class mail, postage prepaid, to the District and County and the respective Owners of any registered Refunding Bonds designated for redemption at their addresses appearing on the Refunding Bond registration books, in every case at least thirty (30) days, but not more than sixty (60) days, prior to the designated redemption date; provided that neither failure to receive such notice nor any defect in any notice so mailed shall affect the sufficiency of the proceedings for the redemption of such Refunding Bonds nor entitle the Owner thereof to interest beyond the date given for redemption. A certificate provided by the Paying Agent that notice of such redemption has been given as herein provided shall be conclusive as against all parties, and it shall not be open to a Bond Owner to show that he or she failed to receive notice of such redemption. In case of the redemption, as permitted herein, of all the Outstanding Bonds of any one maturity, notice of redemption shall be given by mailing as herein provided, except that the notice of redemption need not specify the serial or CUSIP numbers of the Refunding Bonds of such maturity. Neither failure to receive or failure to send, to the Securities Depositories or Informational Services, any Redemption Notice nor any defect in any such Redemption Notice so given shall affect the sufficiency of the proceedings for the redemption of the affected Bonds. Neither the failure to receive such notice nor any defect in any notice so mailed shall affect the sufficiency of the proceedings for the redemption of such Refunding Bonds or the cessation of accrual of interest, represented thereby from and after the redemption date. -7-

14 Contingent Redemption; Right to Rescind Notice of Redemption Any redemption notice may specify that redemption of the Refunding Bonds designated for redemption on the specified date will be subject to the receipt by the District of monies sufficient to cause such redemption (and will specify the proposed source of such monies), and neither the District nor the County will have any liability to the Owners of any Refunding Bonds, or any other party, as a result of the District's failure to redeem the Refunding Bonds designated for redemption as a result of insufficient monies therefor. Additionally, the District may rescind any optional redemption of the Refunding Bonds, and notice thereof, for any reason on any date prior to the date fixed for such redemption by causing written notice of the rescission to be given to the owners of the Refunding Bonds so called for redemption. Notice of rescission of redemption shall be given in the same manner in which notice of redemption was originally given. The actual receipt by the owner of any Refunding Bond of notice of such rescission shall not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice shall not affect the validity of the rescission. Neither the District nor the Paying Agent will have any liability to the owners of any Refunding Bonds, or any other party, as a result of the District's decision to rescind a redemption of any Refunding Bonds. Payment of Redeemed Bonds When a Redemption Notice has been given substantially as provided for in the Bond Resolution, and, when the amount necessary for the redemption of the Refunding Bonds called for redemption (principal, interest and premium, if any) is set aside for that purpose in the Debt Service Fund, as provided herein, the Refunding Bonds designated for redemption shall become due and payable on the date fixed for redemption thereof and upon presentation and surrender of said Refunding Bonds at the place specified in the Redemption Notice, said Refunding Bonds shall be redeemed and paid at the redemption price from funds held in the Debt Service Fund. Each check issued or other transfer of funds made by the Paying Agent for the purpose of redeeming Refunding Bonds shall bear or include the CUSIP number identifying, by issue and maturity, the Refunding Bonds being redeemed with the proceeds of such check or other transfer. If on such redemption date, money for the redemption of all the Refunding Bonds to be redeemed as provided in this Section, together with interest to such redemption date, shall be available therefor on such redemption date, and if notice of redemption thereof shall have been given as aforesaid (and not rescinded), then from and after such redemption date, interest with respect to the Refunding Bonds to be redeemed shall cease to accrue. All money held for the redemption of Refunding Bonds shall be held in trust for the account of the registered Owners of the Refunding Bonds so to be redeemed. All unpaid interest payable at or prior to the designated redemption date shall continue to be payable to the respective Owners, but without interest thereon. -8-

15 Purchase In Lieu of Redemption In lieu of, or partially in lieu of, any mandatory sinking fund redemption of Refunding Bonds, monies in the Debt Service Fund may be used to purchase the outstanding Refunding Bonds that were to be redeemed with such funds in the manner hereinafter provided. Purchases of outstanding Refunding Bonds may be made by the District or the County through the Paying Agent prior to the selection of Refunding Bonds for redemption at public or private sale as and when and at such prices as the District may in its discretion determine but only at prices (including brokerage or other expenses) not more than par plus accrued interest. Any accrued interest payable upon the purchase of Refunding Bonds may be paid from the Debt Service Fund for payment of interest on the next following Interest Payment Date. Any Refunding Bond purchased in lieu of redemption shall be transmitted to the Paying Agent and shall be canceled by the Paying Agent upon surrender thereof, and shall not be re-issued or resold. Partial Redemption of Refunding Bonds Upon surrender of any Refunding Bond redeemed in part only, the Paying Agent shall authenticate and deliver to the Owner thereof a new Refunding Bond or Refunding Bond of like tenor and maturity and of authorized denominations equal in Transfer Amounts to the unredeemed portion of the Refunding Bond surrendered. Such partial redemption shall be valid upon payment of the amount required to be paid to such Owner, and the District shall be released and discharged thereupon from all liability to the extent of such payment. Defeasance The Refunding Bonds may be defeased prior to maturity in the following ways: (a) Cash: By irrevocably depositing with a bank or trust company, in escrow, an amount of cash which, together with amounts then on deposit in the Debt Service Fund, is sufficient to pay all Refunding Bonds Outstanding, including all principal and interest and premium, if any; or (b) Defeasance Obligations: By irrevocably depositing with a bank or trust company, in escrow, noncallable Defeasance Obligations, permitted under Section 149(d) of the Code; together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon and monies then on deposit in the Debt Service Fund, together with the interest to accrue thereon, be fully sufficient to pay and discharge all Refunding Bonds (including all Principal and interest represented thereby and redemption premiums, if any) at or before their maturity date. If the Refunding Bonds are defeased, then, notwithstanding that any Refunding Bonds shall not have been surrendered for payments, all obligations of the District or the County with respect to all Outstanding Refunding Bonds shall cease and terminate, except only the obligation of the Paying Agent to pay or cause to be paid from funds deposited pursuant to paragraphs (a) or (b) above, to the Owners of the Refunding Bonds not so surrendered and paid all sums due with respect thereto. Defeasance Obligations means direct and general obligations of the United States of America, or obligations that are unconditionally guaranteed as to principal and interest by the -9-

16 United States of America, including (in the case of direct and general obligations of the United States of America) evidence of direct ownership or proportionate interests in future interest or principal payments of such obligations (which shall not be required to carry any particular or designated rating(s)). In the case of investments in such proportionate interests, such shall be limited to circumstances wherein: (a) a bank or trust company acts as custodian and holds the underlying Defeasance Obligations; (b) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying Defeasance Obligations; and (c) the underlying Defeasance Obligations are held in a special account, segregated from the custodian s general assets, and are not available to satisfy any claims of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated. The Bond Resolution also sets forth terms governing the partial defeasance of the Refunding Bonds. Book-Entry Only System The Refunding Bonds will be registered initially in the name of Cede & Co., as nominee of DTC, which has been appointed as securities depository for the Refunding Bonds, and registered ownership may not be transferred thereafter except as provided in the Bond Resolution. Purchasers will not receive certificates representing their interests in the Refunding Bonds. Principal of the Refunding Bonds will be paid by the Paying Agent to DTC, which in turn is obligated to remit such principal to its participants for subsequent disbursement to beneficial owners of the Refunding Bonds as described herein. See APPENDIX F DTC and the Book- Entry System. Registration, Transfer and Exchange of Refunding Bonds If the book entry system is discontinued, the District shall cause the Paying Agent to maintain and keep at its principal corporate trust office all books and records necessary for the registration, exchange and transfer of the Refunding Bonds. If the book entry system is discontinued, the person in whose name a Refunding Bond is registered on the Bond Register shall be regarded as the absolute owner of that Bond. Payment of the principal of and interest on any Refunding Bond shall be made only to or upon the order of that person; neither the District, the County nor the Paying Agent shall be affected by any notice to the contrary, but the registration may be changed as provided the Bond Resolution. Refunding Bonds may be exchanged at the principal corporate trust office of the Paying Agent in San Bernardino, California for a like aggregate principal amount of Refunding Bonds of authorized denominations and of the same maturity. Any Refunding Bond may, in accordance with its terms, but only if (i) the District determines to no longer maintain the book entry only status of the Refunding Bonds, (ii) DTC determines to discontinue providing such services and no successor securities depository is named or (iii) DTC requests the District to deliver Refunding Bond certificates to particular DTC Participants, be transferred, upon the books required to be kept pursuant to the provisions of the Bond Resolution, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Refunding Bond for cancellation at the office of the Paying Agent, accompanied by delivery of a written instrument of transfer in a form approved by the Paying Agent, duly executed. -10-

17 No exchanges of Refunding Bonds shall be required to be made (a) fifteen days prior to an Bond Payment Date or the date established by the Paying Agent for selection of Refunding Bonds for redemption until the close of business on the Bond Payment Date or day on which the applicable notice of redemption is given or (b) with respect to a Bond after such Bond has been selected or called for redemption in whole or in part. PLAN OF FINANCE The District received authorization at and election in the District held on November 8, 2005 and in accordance with Article XIIIA of the California Constitution to issue general obligation bonds, and pursuant to such authorization, the District has issued three series of general obligation bonds, including the 2005 Series A Bonds. The Refunding Bonds are being issued by the District to refund certain maturities of the 2005 Series A Bonds (collectively, the Refunded Bonds ) as identified in the following table. The 2005 Series A Bonds maturing on August 1, 2013 and August 1, 2014 are not being refunded with the proceeds of the Refunding Bonds and will remain outstanding following the issuance of the Refunding Bonds. See DEBT SERVICE SCHEDULES below. MORONGO UNIFIED SCHOOL DISTRICT Identification of Refunded Bonds Maturities to be Principal Amount Redemption Series Refunded Redeemed Date Redemption Price 2005 Series A Bonds 8/1/15 8/1/30 $7,580,000 08/01/ % With respect to the Refunded Bonds to be defeased and later redeemed, the District will deliver a portion of the proceeds of the Refunding Bonds to The Bank of New York Mellon Trust Company, N.A., as escrow agent (the Escrow Agent ), for deposit in an escrow fund (the "Escrow Fund ) established under the Escrow Agreement (the Escrow Agreement ), entered into by and between the District and the Escrow Agent for the defeasance of the Refunded Bonds. The Escrow Agent will invest all amounts deposited in the Escrow Fund, in the Escrow Investments as defined and set forth in the Escrow Agreement. From the maturing principal of the Escrow Investments, and the investment income and other earnings thereon, and any moneys held in cash in the Escrow Fund, the Escrow Agent will pay interest on the Refunded Bonds to and including August 1, 2014 (the Redemption Date ), on which date the Refunded Bonds will be redeemed at the redemption price set forth on the table identified above. Sufficiency of the deposits in the Escrow Fund for those purposes will be verified by Causey Demgen & Moore P.C., certified public accountants, Denver, Colorado (the Verification Agent ). See VERIFICATION OF MATHEMATICAL ACCURACY below. The amounts held and invested by the Escrow Agent in the Escrow Fund are pledged solely to the payment of the Refunded Bonds. Neither the funds deposited in the Escrow Fund, nor the interest on such invested funds, will be available for the payment of debt service with respect to the Refunding Bonds. -11-

18 DEBT SERVICE SCHEDULES Refunding Bonds. The following table shows the debt service schedule with respect to the Refunding Bonds (assuming no optional redemptions). MORONGO UNIFIED SCHOOL DISTRICT Annual Debt Service Schedule for Refunding Bonds Period Ending (August 1) Refunding Bond Principal Refunding Bond Interest Annual Debt Service 2013 $150,000 $167, $317, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 90, , ,000 72, , ,000 52, , ,000 28, , ,000 3, , Total $7,935,000 $2,821, $10,756,

19 Combined Debt Service Schedule. The following schedule shows the combined debt service with respect to outstanding general obligation bonds issued by the District, together with debt service on the Refunding Bonds (assuming no optional redemptions). Period Ending (Aug. 1) 2005 Election, Series A MORONGO UNIFIED SCHOOL DISTRICT Combined Debt Service Schedule General Obligation Bonds 2005 Election, Series B 2005 Election, Series C Refunding Bonds Aggregate Debt Service 2013 $161, $1,638, $396, $317, $2,514, , ,662, , , ,449, ,687, , , ,531, ,712, , , ,622, ,734, , , ,722, ,695, , , ,832, ,752, , , ,943, ,805, , , ,049, ,860, , , ,167, ,926, , , ,295, ,983, , , ,418, ,046, , , ,550, ,114, , , ,685, ,182, , , ,832, ,249, , , ,971, ,321, , , ,128, ,399, ,009, , ,287, ,099, ,434, , ,637, ,091, ,574, ,666, ,025, ,779, ,804, ,083, ,864, ,948, ,136, ,959, ,095, ,192, ,059, ,251, ,255, ,154, ,409, ,315, ,259, ,574, , ,119, ,745, ,924, ,924, ,107, ,107, ,299, ,299, ,487, ,487, TOTAL $343, $50,600, $51,256, $10,756, $112,612,

20 SOURCES AND USES OF FUNDS The sources and uses of funds with respect to the Refunding Bonds are as follows: Sources of Funds: Principal Amount of Refunding Bonds $7,935, Plus Net Original Issue Premium 454, Total Sources: $8,389, Uses of Funds: Deposit to Escrow Fund $8,191, Underwriter s Discount 71, Costs of Issuance (1) 126, Total Uses: $8,389, (1) Costs of Issuance include legal fees, financial advisory fees, printing costs, rating agency fee, verification fees, paying agent and escrow agent fees and other miscellaneous costs and expenses of issuing and delivering the Refunding Bonds. General SECURITY FOR THE REFUNDING BONDS The Refunding Bonds are general obligations of the District payable solely from certain property tax levies. The Board of Supervisors of the County has the power and is obligated to annually levy ad valorem taxes upon all property subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates) for the payment of principal of and interest on the Refunding Bonds. Such taxes are required to be levied annually, in addition to all other taxes, during the period that any Bonds are outstanding in an amount sufficient to pay the principal of and interest on the Refunding Bonds when due. Such taxes, when collected, will be deposited into the Debt Service Fund for the Refunding Bonds, which is maintained by the County and which is created by statute for the payment of principal of and interest on the Refunding Bonds when due. Although the County is obligated to levy an ad valorem tax for the payment of Bonds, and will maintain the Debt Service Fund pledged to the repayment of the Refunding Bonds, the Refunding Bonds are not a debt of the County. The moneys in the Debt Service Fund, to the extent necessary to pay the principal of and interest on the Refunding Bonds as the same become due and payable, will be transferred by the County to the Paying Agent which, in turn, will pay such moneys to DTC to pay the principal of and interest on the Refunding Bonds. DTC will thereupon make payments of principal of and interest on the Refunding Bonds to the DTC Participants who will thereupon make payments of principal of and interest to the beneficial owners of the Refunding Bonds. See THE REFUNDING BONDS The Book-Entry Only System. The amount of the annual ad valorem tax levied by the County to repay the Refunding Bonds will be determined by the relationship between the assessed valuation of taxable property in the District and the amount of debt service due on the Refunding Bonds. A reduction in the assessed valuation of taxable property in the District caused by economic factors beyond the District's control, such as economic recession, slower growth, or deflation of -14-

21 land values, a relocation out of the District by one or more major property owners, or the complete or partial destruction of such property caused by, among other eventualities, an earthquake, flood or other natural disaster, could cause a reduction in the assessed value of the District and necessitate an unanticipated increase in the annual tax levy. Ad Valorem Property Taxation Taxes are levied by the County for each fiscal year on taxable real and personal property which is situated in the District as of the preceding January 1. For assessment and collection purposes, property is classified either as secured or unsecured and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing State-assessed public utilities property and real property having a tax lien which is sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the unsecured roll. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. Property on the secured roll with respect to which taxes are delinquent becomes tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of a penalty of 1.5% per month to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is subject to sale by the Tax Collector and Treasurer. Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A 10% penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) bringing a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Clerk and County Recorder's office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements, or possessory interests belonging or assessed to the assessee. Assessed Valuations The assessed valuation of property in the District is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full value of the property, as defined in Article XIIIA of the California Constitution. The full value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area, or to reflect declines in property value caused by substantial damage, destruction or other factors, including assessment appeals filed by property owners. For a discussion of how properties currently are assessed, see Appendix A under the heading CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS. -15-

22 Certain classes of property, such as churches, colleges, not-for-profit hospitals, and charitable institutions, are exempt from property taxation and do not appear on the tax rolls. No reimbursement is made by the State for such exemptions. Assessed Valuation History. The following table sets forth recent assessed valuations in the District. MORONGO UNIFIED SCHOOL DISTRICT Assessed Valuations of All Taxable Property Fiscal Years to Year Local Secured Utility Unsecured Total $3,571,258,746 $1,059,337 $71,854,904 $3,644,172, ,851,242,506 1,059,337 82,701,619 3,935,003, ,604,980,406 1,063,201 95,182,934 3,701,226, ,383,735,209 1,063,201 99,748,384 3,484,546, ,385,092,880 1,063,201 86,658,978 3,472,815, ,368,922,661 1,063,201 79,487,452 3,449,473,314 Source: California Municipal Statistics, Inc. -16-

23 Assessed Valuation of Single Family Residential Parcels. The following table shows a breakdown of the assessed valuations of improved single-family residential parcels in the District, for fiscal year MORONGO UNIFIED SCHOOL DISTRICT Per Parcel Assessed Valuation of Single Family Homes No. of Average Median Parcels Assessed Valuation Assessed Valuation Assessed Valuation Single Family Residential 22,349 $2,142,399,698 $95,861 $82, No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels (1) Total % of Total Valuation Total % of Total $0 - $24, % 4.103% $ 16,340, % 0.763% $25,000 - $49,999 3, ,254, $50,000 - $74,999 5, ,989, $75,000 - $99,999 4, ,911, $100,000 - $124,999 2, ,858, $125,000 - $149,999 2, ,538, $150,000 - $174,999 1, ,832, $175,000 - $199, ,331, $200,000 - $224, ,405, $225,000 - $249, ,095, $250,000 - $274, ,841, $275,000 - $299, ,015, $300,000 - $324, ,345, $325,000 - $349, ,769, $350,000 - $374, ,746, $375,000 - $399, ,218, $400,000 - $424, ,214, $425,000 - $449, ,647, $450,000 - $474, ,120, $475,000 - $499, ,901, $500,000 and greater ,021, Total 22, % $2,142,399, % (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc. Assessed Value by Jurisdiction. The table below shows the assessed valuation in the District, by jurisdiction. MORONGO UNIFIED SCHOOL DISTRICT Assessed Valuation by Jurisdiction (1) Assessed Valuation % of Assessed Valuation % of Jurisdiction Jurisdiction: in School District School District of Jurisdiction in School District City of Twentynine Palms $ 816,571, % $816,571, % City of Yucca Valley 1,354,426, $1,354,426, % Unincorporated San Bernardino County 1,278,474, $26,382,391, % Total San Bernardino County $3,449,473, % $163,505,175, % (1) Before deduction of redevelopment incremental valuation. Source: California Municipal Statistics, Inc. -17-

24 Land Use The assessed value of property in the District derives predominantly from residential uses, with approximately 75% of assessed valuation of property in the District used for residential purposes, and 45% of all parcels used for residential purposes. A significant portion of the territory of the District is identified as vacant parcels and governmental land (52.46% of all parcels), which is attributable to the northern territory of the District containing a U.S. Marine Corps base, and the southern portion containing portions of a National Park (Joshua Tree). Federal lands are generally exempt from property taxation, and as noted in the below table, the assessed valuation by land use does not include assessed values of exempt properties. The following table shows a breakdown of local secured property assessed value and parcels within the District by land use for fiscal year MORONGO UNIFIED SCHOOL DISTRICT Local Secured Property Assessed Valuation and Parcels by Land Use Fiscal Year % of No. of % of Non-Residential: Assessed Valuation (1) Total Parcels Total Commercial $360,241, % % Industrial 34,773, Recreational 2,214, Government/Social/Institutional 12,008, Miscellaneous 4,034, Subtotal Non-Residential $413,272, % 1, % Residential: Single Family Residence $2,142,399, % 22, % Recreational/Cabin 51,480, , Condominium/Townhouse 3,173, Mobile Home 96,154, , Mobile Home Park 22,306, Residential Units 116,179, , Residential Units/Apartments 70,531, Miscellaneous Residential Improvements 8,463, Subtotal Residential $2,510,690, % 29, % Vacant Parcels $444,958, % 33, % Total $3,368,922, % 63, % (1) Local Secured Assessed Valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. Appeals of Assessed Value There are two types of appeals of assessed values that could adversely impact property tax revenues within the District. Appeals may be based on Proposition 8 of November 1978, which requires that for each January 1 lien date, the taxable value of real property must be the lesser of its base year value, annually adjusted by the inflation factor pursuant to Article XIIIA of the State Constitution, or its full cash value, taking into account reductions in value due to damage, destruction, depreciation, obsolescence, removal of property or other factors causing a decline in value. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS in Appendix A. -18-

25 Under California law, property owners may apply for a reduction of their property tax assessment by filing a written application, in form prescribed by the State Board of Equalization, with the County board of equalization or assessment appeals board. In most cases, the appeal is filed because the applicant believes that present market conditions (such as residential home prices) cause the property to be worth less than its current assessed value. Proposition 8 reductions may also be unilaterally applied by the County Assessor. Any reduction in the assessment ultimately granted as a result of such appeal applies to the year for which application is made and during which the written application was filed. These reductions are subject to yearly reappraisals and are adjusted back to their original values when market conditions improve. Once the property has regained its prior value, adjusted for inflation, it once again is subject to the annual inflationary factor growth rate allowed under Article XIIIA. See CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS in Appendix A hereto. A second type of assessment appeal involves a challenge to the base year value of an assessed property. Appeals for reduction in the base year value of an assessment, if successful, reduce the assessment for the year in which the appeal is taken and prospectively thereafter. The base year is determined by the completion date of new construction or the date of change of ownership. Any base year appeal must be made within four years of the change of ownership or new construction date. The District cannot predict the changes in assessed values that might result from pending or future appeals by taxpayers. Any reduction in aggregate District assessed valuation due to appeals, as with any reduction in assessed valuation due to other causes, will cause the tax rate levied to repay the Refunding Bonds to increase accordingly, so that the fixed debt service on the Refunding Bonds (and other outstanding general obligation bonds, if any) may be paid. -19-

26 Typical Tax Rates Below are historical typical tax rates in one of the tax rate areas within the District for the years through MORONGO UNIFIED SCHOOL DISTRICT Typical Tax Rates per $100 of Assessed Valuation Fiscal Years through TRA (1) General % % % % % % Morongo Unified School District Copper Mountain Community College Total All Property Mojave Water Agency Mojave Water Agency, I.D. M Total Land and Improv.Tax Rate Mojave Water Agency, I.D. No Total Land Only Tax Rate (1) assessed valuation of TRA is $774,000,867. Source: California Municipal Statistics, Inc. Teeter Plan The District s total secured tax collections and delinquencies are apportioned on a County-wide basis, according to the District s designated tax rate amount. Therefore, the total secured tax levies, as well as collections and delinquencies reported, do not represent the actual secured tax levies, collections and delinquencies of tax payers within the tax areas of the District. In addition, the District s total secured tax levy does not include special assessments, supplemental taxes or other charges which have been assessed on property within the District or other tax rate areas of the County. The County has adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan") as provided for in the State Revenue and Taxation Code, which requires the County to pay 100% of secured property taxes due to local agencies in the fiscal year such taxes are due. Pursuant to these provisions, each county operating under the Teeter Plan establishes a delinquency reserve and assumes responsibility for all secured delinquencies, assuming that certain conditions are met. Because of this method of tax collection, the K-12 districts located in counties operating under the Teeter Plan and participating in the Teeter Plan, including the District, are assured of 100% collection of their secured tax levies if the conditions established under the applicable county s Teeter Plan are met. However, such districts are no longer entitled to share in any penalties due to delinquent payments. This method of tax collection and distribution is subject to future discontinuance at the County s option or if demanded by the participating taxing agencies. -20-

27 Largest Property Owners The following table shows the 20 largest owners of taxable property in the District as determined by secured assessed valuation in fiscal year Each taxpayer listed below is a unique name listed on the tax rolls. The District cannot determine from County assessment records whether individual persons, corporations or other organizations are liable for tax payments with respect to multiple properties held in various names that in aggregate may be larger than is suggested by the table below. A large concentration of ownership in a single individual or entity results in a greater amount of tax collections which are dependent upon that property owner s ability or willingness to pay property taxes. MORONGO UNIFIED SCHOOL DISTRICT Largest Local Secured Taxpayers Fiscal Year % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Home Depot USA Inc. Commercial $ 10,750, % 2. Wal-Mart Realty Co. Commercial 9,151, Netreit Yucca Valley LLC Commercial 6,700, K Partners Twenty Nine Palms LP Hotel/Motel 6,208, Shamrock Millco-Aztec LLC Mobile Home Park 6,149, Yashraj Hospitality Inc. Hotel/Motel 5,516, Bisram Hospitality Inc. Hotel/Motel 5,395, Salsha Enterprises LLC Commercial 4,840, Robert J. Ruehman II, Trust Commercial 4,364, Stater Bros. Markets Commercial 4,131, Motel 6 Operating LP Hotel/Motel 4,119, Depierro Development LLC Undeveloped 4,117, Oakcrest Manor Industrial 4,056, Pacific/Costanzo-Lewis Commercial 4,046, Hospitality Ventures #1 LP Hotel/Motel 4,038, Jack A. and Pamela L. Domingue Industrial 4,031, VN Hospitality Hotel/Motel 3,966, Apache Mobilehome Park Mobile Home Park 3,903, Yucca Development LLC Commercial 3,774, Susan Sandelman, Trust Commercial 3,695, $102,957, % (1) Local Secured Assessed Valuation: $3,368,922,661 Source: California Municipal Statistics, Inc. Debt Obligations Set forth below is a direct and overlapping debt report (the Debt Report ) prepared by California Municipal Statistics, Inc. and with respect to debt issued as of November 1, The Debt Report is included for general information purposes only. The District has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith. -21-

28 The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District in whole or in part. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency Assessed Valuation:$3,449,473,314 MORONGO UNIFIED SCHOOL DISTRICT Statement of Direct and Overlapping Bonded Debt For Debt Issued as of November 1, 2012 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 11/1/12 Copper Mountain Community College District 100. % $18,205,430 Morongo Unified School District ,832,652 (2) Mojave Water Agency ,610,772 Mojave Water Agency, I.D. M ,274,549 Joshua Basin Water District, I.D. No ,000 Joshua Basin County Water District, A.D. No ,459,000 Twenty Nine Palms Water District Assessment District ,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $92,797,403 OVERLAPPING GENERAL FUND DEBT: San Bernardino County General Fund Obligations 2.700% $15,647,445 San Bernardino County Pension Obligations ,033,121 San Bernardino County Flood Control District General Fund Obligations ,827,035 Hi Desert County Water District Authority ,695,000 TOTAL OVERLAPPING GENERAL FUND DEBT $35,202,601 OVERLAPPING TAX INCREMENT DEBT: Twentynine Palms Redevelopment Agency Four Corners Project Area 100. % $11,545,000 Yucca Valley Redevelopment Project No ,935,000 TOTAL TAX INCREMENT DEBT $21,480,000 COMBINED TOTAL DEBT $149,480,004 (3) (1) Based on ratios. (2) Excludes general obligation bonds to be sold. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to Assessed Valuation: Direct Debt ($44,832,652) % Total Direct and Overlapping Tax and Assessment Debt % Combined Total Debt % Ratios to Redevelopment Incremental Valuation ($388,421,259): Total Tax Increment Debt % Source: California Municipal Statistics, Inc. -22-

29 TAX MATTERS Opinion of Bond Counsel. In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, subject to certain qualifications described herein, under existing laws, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Refunding Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ). In the further opinion of Bond Counsel, interest on the Refunding Bonds is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, Bond Counsel observes that such interest is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation s alternative minimum tax liabilities. The opinions of Bond Counsel set forth in the preceding paragraph are subject to the condition that the District comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Refunding Bonds in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the Date of Issuance. In the further opinion of Bond Counsel, interest on the Refunding Bonds is exempt from State of California personal income taxation. Although Bond Counsel has rendered an opinion that interest on the Refunding Bonds is excluded from gross income for federal income tax purposes, the accrual or receipt of interest on the Refunding Bonds may otherwise affect the recipient s federal or state tax liability. The nature and extent of these other tax consequences will depend upon the recipient s particular tax status and other items of income or deduction. Bond Counsel expresses no other opinion regarding or concerning any other tax consequences related to the ownership or disposition of the accrual or receipt of interest on the Refunding Bonds. Certain requirements and procedures contained or referred to in the Bond Resolution and other relevant documents may be changed and certain actions may be taken, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with an approving opinion of nationally recognized bond counsel. Bond Counsel expresses no opinion as to the effect on any Refunding Bond or the interest thereon if any such change occurs or action is taken upon advice or approval of bond counsel other than Bond Counsel. See APPENDIX D for the proposed form of opinion of Bond Counsel. Bond Counsel s engagement with respect to the Refunding Bonds ends with the issuance of the Refunding Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the District or the Beneficial Owners of the Refunding Bonds regarding the tax-exempt status of the Refunding Bonds in the event of an audit examination by the Internal Revenue Service. Under current procedures, parties other than the District and its appointed counsel, including the Beneficial Owners of the Refunding Bonds, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent -23-

30 review of Internal Revenue Service positions with which the District legitimately disagrees may not be practicable. Any action of the Internal Revenue Service, including but not limited to selection of the Refunding Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Refunding Bonds, and may cause the District or the Beneficial Owners to incur significant expense. Original Issue Discount; Premium Bonds. If the initial public offering price of the Refunding Bonds is less than the amount payable with respect to such Bonds at maturity, an amount not less than the difference between the initial public offering price of a Bond and the amount payable at the maturity of such Bond constitutes original issue discount. Original issue discount on a tax-exempt obligation, such as the Refunding Bonds, accrues on a compounded basis. The amount of original issue discount that accrues to the owner of a Refunding Bond issued with original issue discount will be excludable from such owner s gross income and will increase the owner s adjusted basis in such Refunding Bonds, potentially affecting the amount of gain or loss realized upon the owner s sale or other disposition of such Refunding Bonds. The amount of original issue discount that accrues in each year is not included as a tax preference for purposes of calculating alternative minimum taxable income and may therefore affect a taxpayer s alternative minimum tax liability. Consequently, taxpayers owning the Refunding Bonds issued with original issue discount should be aware that the accrual of original issue discount in each year may result in an alternative minimum tax liability although the taxpayer has not received cash attributable to such original issue discount in such year. Purchasers should consult their personal tax advisors with respect to the determination for federal income tax purposes of the amount of original issue discount properly accruable with respect to the Refunding Bonds, other federal income tax consequences of owning tax-exempt obligations with original issue discount and any state and local consequences of owning the Refunding Bonds. The Refunding Bonds purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Refunding Bonds, the interest on which is excluded from gross income for federal income tax purposes. However a purchaser s basis in a Premium Bond, and under Treasury Regulations, the amount of tax exempt interest received will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Refunding Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners of the Refunding Bonds from realizing the full current benefit of the tax status of such interest. For example, Congress has considered in the past, is currently considering and may consider in the future, legislative proposals, including some that carry retroactive effective dates, that, if enacted, would alter or eliminate the exclusion from gross income for federal income tax purposes of interest on municipal securities, such as the Refunding Bonds. -24-

31 The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Refunding Bonds. Prospective purchasers of the Refunding Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation as to which Bond Counsel expresses no opinion. Internal Revenue Service Audit of Tax-Exempt Securities Issues. The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt securities issues, including both random and target audits. It is possible that the Refunding Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Refunding Bonds might be affected as a result of such an audit of the Refunding Bonds (or by an audit of similar securities). Information Reporting and Backup Withholding. Information reporting requirements apply to interest (including original issue discount) paid after March 31, 2007, on tax-exempt obligations, including the Refunding Bonds. In general, such requirements are satisfied if the interest recipient completes, and provides the payor with, a Form W-9, "Request for Taxpayer Identification Number and Certification," or unless the recipient is one of a limited class of exempt recipients, including corporations. A recipient not otherwise exempt from information reporting who fails to satisfy the information reporting requirements will be subject to "backup withholding," which means that the payor is required to deduct and withhold a tax from the interest payment, calculated in the manner set forth in the Code. For the foregoing purpose, a "payor" generally refers to the person or entity from whom a recipient receives its payments of interest or who collects such payments on behalf of the recipient. If an owner purchasing Bonds through a brokerage account has executed a Form W-9 in connection with the establishment of such account, as generally can be expected, no backup withholding should occur. In any event, backup withholding does not affect the excludability of the interest on the Refunding Bonds from gross income for federal income tax purposes. Any amounts withheld pursuant to backup withholding would be allowed as a refund or a credit against the owner's federal income tax once the required information is furnished to the Internal Revenue Service. ABSENCE OF MATERIAL LITIGATION No litigation is pending or threatened concerning the validity of the Refunding Bonds, and a certificate to that effect will be furnished to the Underwriter at the time of the original delivery of the Refunding Bonds. The District is not aware of any litigation pending or threatened that (i) questions the political existence of the District, (ii) contests the District's ability to receive ad valorem taxes or to collect other revenues or (iii) contests the District's ability to issue and retire the Refunding Bonds. The District may be or may become a party to lawsuits and claims which are unrelated to the Refunding Bonds or actions taken with respect to the Refunding Bonds and which have arisen in the normal course of operating the District. The District maintains certain insurance policies which provide coverage under certain circumstances and with respect to certain types of incidents. There currently are no claims or actions pending which are not covered in part or in whole by insurance and could have a material adverse affect on the financial position or -25-

32 operations of the District. The District cannot predict what types of claims may arise in the future. CONTINUING DISCLOSURE The District has covenanted for the benefit of holders and beneficial owners of the Refunding Bonds to provide certain financial information and operating data relating to the District by not later than nine (9) months following the end of the District s fiscal year (which currently would be by March 31 each year based upon the June 30 end of the District s fiscal year), commencing March 31, 2013, with the report for the Fiscal Year (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. The Annual Report and any event notices will be filed by the District with the Municipal Securities Rulemaking Board (the MSRB ). The specific nature of the information to be contained in an Annual Report or the notices of material events is set forth below under the caption APPENDIX E - Form of Continuing Disclosure Certificate. These covenants have been made in order to assist the Underwriters in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). The District has existing disclosure undertakings that have been made pursuant to the Rule in connection with the issuance of its outstanding 2005 Series A Bonds, its General Obligation Bonds, 2005 Election, Series B (the 2005 Series B Bonds ) and its General Obligation Bonds, 2005 Election, Series C. In the last five years, annual reports were filed in a timely manner pursuant to such undertakings, but did not include information regarding largest taxpayers in the District for fiscal years through The District is in the process of making supplemental filings with this information. In addition, with respect to the 2005 Series A Bonds and the 2005 Series B Bonds, which were issued with bond insurance, the District did not file event notices regarding downgrades of bond insurance companies that insured such bonds in a timely manner, although supplemental filings regarding rating changes have been made. In order to assist it in complying with its disclosure undertakings for its outstanding bonds and the Refunding Bonds, the District has engaged Isom Advisors, A Division of Urban Futures, Inc., its Financial Advisor, to serve as its initial dissemination agent with respect to its each of its disclosure undertakings, including the Continuing Disclosure Certificate to be executed in connection with the Refunding Bonds. RATING Moody s Investors Service ( Moody s ) has assigned the Refunding Bonds a rating of Aa3. This rating reflects only the view of Moody s, and an explanation of the significance of this rating, and any outlook assigned to or associated with this rating, should be obtained from Moody s. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. The District has provided certain additional information and materials to Moody s (some of which does not appear in this Official Statement). There is no assurance that this rating will continue for any given period of time or that this rating will not be revised downward or withdrawn entirely by Moody s, if in the judgment of the rating agency, circumstances so warrant. The District has not undertaken any responsibility either to bring to the attention of the owners of the Refunding Bonds any proposed change in or -26-

33 withdrawal of a rating, or to oppose any such proposed revision or withdrawal. Any such downward revision or withdrawal of any rating on the Refunding Bonds may have an adverse effect on the market price or marketability of the Refunding Bonds. VERIFICATION OF MATHEMATICAL ACCURACY The Verification Agent, upon delivery of the Refunding Bonds, will deliver a report of the mathematical accuracy of certain computations, contained in schedules provided to them on behalf of the District, relating to (a) the sufficiency of the anticipated amount of proceeds of the Refunding Bonds and other funds available to pay, when due, the principal, whether at maturity or upon prior redemption, interest and redemption premium requirements of the Refunded Bonds and (b) the yields on the amount of proceeds held and invested prior to redemption of the Refunded Bonds and on the Refunding Bonds considered by Bond Counsel in connection with the opinion rendered by Bond Counsel that the Refunding Bonds are not arbitrage bonds within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended. The report of the Verification Agent will include the statement that the scope of their engagement is limited to verifying mathematical accuracy, of the computations contained in such schedules provided to them, and that they have no obligation to update their report because of events occurring, or data or information coming to their attention, subsequent to the date of their report. UNDERWRITING The Refunding Bonds were sold to E. J. De La Rosa & Co., Inc. (the Underwriter ), pursuant to a bond purchase agreement for the Refunding Bonds. The Underwriter has agreed to purchase the Refunding Bonds at a price of $8,317, which is equal to the initial principal amount of the Refunding Bonds of $7,935,000, plus a net original issue premium of $454, less an Underwriter s discount of $71, The purchase contract relating to the Refunding Bonds provides that the Underwriter will purchase all of the Refunding Bonds (if any are purchased), and provides that the Underwriter s obligation to purchase is subject to certain terms and conditions, including the approval of certain legal matters by counsel. The Underwriter may offer and sell Refunding Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. The offering prices may be changed by the Underwriter. ADDITIONAL INFORMATION The reference herein to the Bond Resolution and the Continuing Disclosure Certificate are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and for full and complete statements of such provisions reference is made to said documents. Copies of the documents mentioned under this heading are available from the Underwriter and following delivery of the Refunding Bonds will be on file at the offices of the Paying Agent in Los Angeles, California. -27-

34 References are also made herein to certain documents and reports relating to the District; such references are brief summaries and do not purport to be complete or definitive. Copies of such documents are available from upon written request to the District. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Refunding Bonds. The execution and delivery of this Official Statement have been duly authorized by the District. MORONGO UNIFIED SCHOOL DISTRICT By: /s/ Jim Majchrzak Superintendent -28-

35 APPENDIX A GENERAL AND FINANCIAL INFORMATION FOR THE MORONGO UNIFIED SCHOOL DISTRICT GENERAL DISTRICT INFORMATION The information in this and other sections concerning the District's operations and operating budget is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Refunding Bonds is payable from the general fund of the District. The Refunding Bonds are payable from the proceeds of an ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof. See "THE REFUNDING BONDS Security for the Refunding Bonds" in the front half of the Official Statement. General Information The District is located in the Morongo Basin portion of the Mojave Desert, approximately 57 miles northeast of Palm Springs. The District provides public school services to the residents of the City of Twentynine Palms and the incorporated Town of Yucca Valley. The District also serves the nearby unincorporated communities of Morongo Valley, Launders, Flamingo Heights, Yucca Mesa, Joshua Tree and Wonder Valley. The District is the home of Joshua Tree National Park and host of the world s largest United States Marine Corps Base, the Marine Corps Air Ground Combat Center at Twentynine Palms. The District currently operates 11 elementary schools, 2 middle schools, 2 high schools, 2 continuation schools and an independent study program, and had enrollment in of approximately 8,885 students and has enrollment of approximately 8,595 students in Student to teacher ratios in the District are 23:1 for kindergarten through second grade, 30:1 for grades three through six and 29.9:1 for grades seven through twelve. Administration Board of Education. The District is governed by a five-member Board of Education, each member of which is elected to a four-year term. Elections for positions to the Board are held every two years, alternating between two and three available positions. Current members of the Board of Education, together with their office and the date their term expires, are listed below: Name Office Current Term Expires J. Edward Will Jr. President December, 2012 Chris Proudfoot Clerk December, 2014 Donna Munoz Member December, 2014 Ron Palmer Member December, 2012 Phyllis Swinnerton Member December, 2012 Superintendent and Administrative Personnel. The day-to-day operations are managed by a board-appointed Superintendent of Schools. Jim Majchrzak is currently serving as Superintendent and David Price is serving as Assistant Superintendent, Business Services. The District does not expect any changes in senior management in the foreseeable future. A-1

36 Recent Enrollment Trends The following table shows recent enrollment history for the District. ANNUAL ENROLLMENT Fiscal Years through Morongo Unified School District School Year Enrollment Change in Enrollment % Change , , ,628 (102) (1.0) , , ,545 (177) (1.8) ,233 (312) (3.3) ,885 (348) (3.7) (1) 8,595 (290) (3.3) (1) Budgeted. Source: California Department of Education for through ; District for and The District attributes declining enrollment commencing in fiscal year with the general economic recession and reduction in construction jobs, which caused families to relocate out of the District in pursuit of employment. In addition, a public charter school opened in the District in September, 2011 and has enrollment of approximately 325 students, some of which would be eligible to attend District schools. The District has been proactively addressing declining enrollment with staffing layoffs, attrition, reduction in working hours for certain employees, a closed school and offering a supplemental retirement plan to its employees. Employee Relations The following table summarizes the number of employees in the District and their collective bargaining arrangements. COLLECTIVE BARGAINING UNITS Morongo Unified School District Bargaining Unit Type of Employee Number of Employees Expiration Date of Current Contract* Morongo Teachers Association Certificated 404 June 30, 2012 California Schools Employees Assn. Classified 449 June 30, 2012 Total: 953 *The District operates pursuant to terms of expired contracts during renegotiations. Source: Morongo Unified School District. District Retirement Systems District employees are covered under multiple-employer retirement plans maintained by agencies of the State. Certificated employees are members of California State Teachers Retirement System ( STRS ) and classified employees are members of the California Public Employees Retirement System ( PERS ). See also Note 12 set forth in Appendix B hereto. A-2

37 STRS. The District participates in STRS. This plan covers basically all full-time certificated employees. Active plan members are required to contribute 8.0% of their salary and the District is to contribute an actuarially determined rate, which was 8.25% of payroll for the fiscal year. The District s contribution to STRS for fiscal year was $2,712,933, for fiscal year was $2,759,795 (unaudited actual), and for fiscal year , $2,624,591 is budgeted. PERS. The District also participates in PERS. This plan covers all classified personnel who are employed four or more hours per day. Active plan members are required to contribute 7.0% of their salary and the District is required to contribute an actuarially determined rate, which was % of annual payroll for In addition, since 2007, the District contributes 2.3% on behalf of employees represented by CSEA, the classified bargaining unit. The District s contribution to PERS for fiscal year was $957,263, for fiscal year was $1,022,079 (unaudited actual), and for fiscal year , $1,028,211 is budgeted. PARS. The District contributes to the Public Agency Retirement System ( PARS ), which is a defined contribution pension plan that provides pension benefits in return for services rendered, provides and individual account for each participant, and specific how contributions to the individual s account are to be determined instead of specifying the amount of benefits the individual is to receive. Benefits received depend solely on the amount contributed to the participant s account, the returns on those investments, and forfeitures of other participants benefits that may be allocated to such participant s account. PARS is the alternative plan for employees who do not participate in STRS or PERS. The District contributes 6.05 percent for classified bargaining unit employees and 3.75 percent of all other employees gross earnings. Classified employees contribute percent of their gross earnings. For year ended June 30, 2011, the District s required and actual contributions were $167,702. The amounts for fiscal year and will be identified in the District s audit. For budgeting purposes, this item is combined with other costs. State Pensions Trusts. Both the PERS and STRS systems are operated on a statewide basis. District contribution rates to these two retirement systems vary annually depending on changes in actuarial assumptions and other factors, such as liability. STRS has a substantial State unfunded actuarial liability, being $64.5 billion as of June 30, Since this liability has not been broken down by the state agency, information is not available showing the District's share. Both STRS and PERS issue separate comprehensive financial reports that include financial statements and required supplemental information. Copies of such reports may be obtained from STRS and PERS, respectively, as follows: (i) STRS, P.O. Box 15275, Sacramento, California ; (ii) PERS, P.O. Box , Sacramento, California More information regarding STRS and PERS can also be obtained at their websites, and respectively. However, information in the financial reports and on the websites is not incorporated in this Official Statement by reference. See also the following paragraph on recent pension reform legislation. Pension Reform Act of 2013 (Assembly Bill 340). On September 12, 2012, Governor Brown signed AB 340, a bill that will enact the California Public Employees Pension Reform Act of 2013 ( PEPRA ) and that will also amend various sections of the California Education and Government Codes. AB 340 (i) increases the retirement age for new State, school, and city and local agency employees depending on job function, (ii) caps the annual PERS and STRS pension benefit payouts, (iii) addresses numerous abuses of the system, and (iv) requires State, school, and certain city and local agency employees to pay at least half of the costs of their A-3

38 PERS pension benefits. PEPRA will apply to all public employers except the University of California, charter cities and charter counties (except to the extent they contract with PERS.) The provisions of AB 340 will go into effect on January 1, 2013 with respect to new State, school, and city and local agency employees hired on that date and after; existing employees who are members of employee associations, including employee associations of the District, will have a five-year window to negotiate compliance with AB 340 through collective bargaining. If no deal is reached by January 1, 2018, a city, public agency or school district could force employees to pay their half of the costs of PERS pension benefits, up to 8 percent of pay for civil workers and 11 percent or 12 percent for public safety workers. PERS has predicted that the impact of AB 340 on employers, including the District and other employers in the STRS system, and employees will vary, based on each employer s current level of benefits. To the extent that the new formulas lower retirement benefits, employer contribution rates could decrease over time as current employees retire and employees subject to the new formulas make up a larger percentage of the workforce. This change would, in some circumstances, result in a lower retirement benefit for employees than they currently earn. Additionally, PERS has noted that changes arising from AB 340 could ultimately have an adverse impact on public sector recruitment in areas that have historically experienced recruitment challenges due to higher pay for similar jobs in the private sector. The District is unable to predict what the amount of STRS liabilities will be in the future or the amount of the STRS contributions which the District may be required to make, all as a result of the implementation of AB 340, and as a result of negotiations with its employee associations. More information about AB 340 can be accessed through the PERS s web site at pca=st and through the STRS web site at AB340_detailed_impact_analysis.pdf. The references to these internet websites are shown for reference and convenience only; the information contained within the websites may not be current and has not been reviewed by the District and is not incorporated herein by reference. Health Care Plan for Retirees The District does not provide a post-retirement benefit health care plan. District retirees may, up to the age of 65, participate in the District s health plan, however the retiree is responsible for 100% of the associated premiums. However, since retiree contributions are based on average rates that include active employees, Governmental Accounting Standards Board ( GASB ) Statement No. 45 requires that a valuation be done to reflect the implicit rate subsidy, being the difference between the cost of retiree benefits and the rates charged retirees. As of June 30, 2011, there were 82 retirees receiving implicit subsidies through the District s benefits plan. For fiscal year ending June 30, 2011, the actuarially determined amount contributed by the District as an implicit rate subsidy to retirees was $105,708. See Note 11 to the District s Audited Financial Statement for Year Ending June 30, 2011, attached as Appendix B hereto. A-4

39 Public Entity Risk Pools The District is a member of the Hi Desert and Inland Employee and Employer Trust, Southern California Schools Employees Benefit Association, Schools Excess Liability Fund and Southern California Schools Risk Management public entity risk pools. The District pays annual premiums to each entity for health, vision and dental, excess liability and workers compensation coverage. See Note 14 to the District s Audited Financial Statement for Year Ending June 30, 2011 attached as Appendix B hereto. DISTRICT FINANCIAL INFORMATION The information in this and other sections concerning the District's operations and operating budget is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Refunding Bonds is payable from the general fund of the District. The Refunding Bonds are payable from the proceeds of an ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof. Accounting Practices The accounting practices of the District conform to generally accepted accounting principles in accordance with policies and procedures of the California School Accounting Manual. This manual, according to Section of the California Education Code, is to be followed by all California school districts. The financial resources of the District are divided into separate funds for which separate accounts are maintained for recording cash, other resources and all related liabilities, obligations and equities. The major fund classification is the general fund which accounts for all financial resources not required to be accounted for in another fund. The District's fiscal year begins on July 1 and ends on June 30. All governmental funds and fiduciary funds are maintained on the modified accrual basis of accounting. As such, revenues are recognized when they become susceptible to accrual, that is, both measurable and available to finance expenditures for the current period. For more information on the District s accounting method, see Note 1 of APPENDIX A MORONGO UNIFIED SCHOOL DISTRICT AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR attached hereto. The Governmental Accounting Standards Board ( GASB ) published its Statement No. 34 Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments on June 30, Statement No. 34 provides guidelines to auditors, state and local governments and special purpose governments such as school districts and public utilities, on new requirements for financial reporting for all governmental agencies in the United States. Generally, the basic financial statements and required supplementary information should include (i) Management s Discussion and Analysis; (ii) financial statements prepared using the economic measurement focus and the accrual basis of accounting and (ii) fund financial statements prepared using the current financial resources measurement focus and the modified accrual method of accounting and (iii) required supplementary information. A-5

40 Financial Statements General. The District's general fund finances the legally authorized activities of the District for which restricted funds are not provided. General fund revenues are derived from such sources as State school fund apportionments, taxes, use of money and property, and aid from other governmental agencies. The District's Audited Financial Statements for the fiscal year ending fiscal year were prepared by Vavrinik, Trine, Day & Co., LLP, Certified Public Accountants, Rancho Cucamonga, California. Audited financial statements for the District for the fiscal year ended June 30, 2011 and prior fiscal years are on file with the District and available for public inspection at the Superintendent s Office. See Appendix A hereto for the Audited Financial Statements of the District. The District has not requested nor did the District obtain permission from Vavrinik, Trine, Day & Co., LLP to include the audited financial statements as an appendix to this Official Statement. Accordingly, Vavrinik, Trine, Day & Co., LLP has not performed any post-audit review of the financial condition or operations of the District. The District s audited financial statement for fiscal year is currently expected to be approved by the District Board on or about December 11, General Fund Revenues, Expenditures and Changes in Fund Balance. The District's general fund is the primary operating fund of District. All general revenues are contained in this general fund, including State operational dollars, specific categorical grants from both State and Federal sources, lottery funds, and locally generated dollars (interest, rents, etc.). Expenses for instructional personnel, support personnel, supplies, books, utilities, transportation, Special Education, maintenance, etc., are incorporated in this general fund. Some funds within the District s general fund are legally restricted, (such as Special Education, Title I, and EIA), and can be used only for the designated programs or expenses. The following table shows the audited general fund income and expense statements for the District for the fiscal years through A-6

41 Morongo Unified School District General Fund Revenues, Expenditures and Changes in Fund Balance Fiscal Years through (Audited) Audited Audited Audited Revenues Revenue limit sources $ 51,495,347 $45,310,194 $46,891,191 Federal sources 11,008,718 9,669,327 9,861,360 Other State sources 17,020,907 17,030,021 17,776,847 Other local sources 1,829,604 1,471,319 1,160,109 Total Revenues 81,354,576 73,480,861 75,689,507 Expenditures Instruction 50,420,968 46,515,676 43,710,984 Instruction-related services: Supervision of instruction 2,548,722 2,018,529 2,315,265 Library, media and technology 629, , ,777 School site administration 5,604,220 5,231,661 5,270,115 Pupil services: Home-to-school transportation 3,707,543 3,619,854 3,565,123 All other pupil services 3,360,530 3,404,488 3,439,624 Administration: Data processing 725, , ,891 Other general administration 3,625,288 3,352,503 3,574,673 Plant services 8,195,703 7,715,011 7,736,611 Facility acquisition, construction 59, , ,760 Ancillary services 328, , ,643 Community services 161, , ,076 Other outgo 65,104 35,968 54,716 Debt Service Principal ,283 Debt Service Interest and Other ,534 Total Expenditures 79,432,213 73,524,873 71,447,457 Excess of Revenues Over/(Under) Expenditures 1,922,363 (44,012) 4,242,050 Other Financing Sources (Uses) Interfund transfers in , Other sources ,723 Interfund transfers out (398,141) Total Other Fin. Source(Uses) (398,141) 299,910 38,723 Net change in fund balance 1,524, ,898 4,280,773 Fund Balance, July 1* 18,293,303 19,817,525 20,073,423 Fund Balance, June 30 $19,817,525 $20,073,423 $24,354,196 *Beginning balance as restated. Source: Morongo Unified School District Audited Financial Statements. A-7

42 District s General Fund Unaudited Actuals and Budgeted Figures. The following table shows the Unaudited Actual figures for fiscal year , a well as the budgeted amounts for for the District s General Fund. The Unaudited Actual and Adopted Budget presentations differ from the audit reports; for budgeting purposes expenses are presented by object, not function. Morongo Unified School District General Fund Revenues, Expenditures and Changes in Fund Balance For Fiscal Years Ended June 30, 2012 and June 30, 2013 (Unaudited Actuals and Budgeted) Original Budget Unaudited Actuals Budgeted * REVENUES Revenue Limit Sources $45,678,608 $44,051,652 $41,136,385 Federal 9,292,788 11,368,609 8,383,946 Other State 14,237,020 15,002,219 14,882,519 Other Local 920, , ,728 Total Revenues 70,128,639 $71,363,288 $65,021,578 EXPENDITURES Certificated Salaries 33,424,358 33,727,943 31,651,202 Classified Salaries 10,813,614 10,792,277 10,262,083 Employee Benefits 13,527,291 13,564,639 13,498,355 Books and Supplies 4,028,768 4,158,756 3,974,436 Services, other operating expenses 10,217,066 10,681,314 10,470,007 Capital Outlay 24,300 73,384 97,330 Other Outgo 92, , ,436 Other Outgo Debt Service -- 53,546 52,325 Other Outgo - Transfers of Indirect Costs (175,000) (93,762) (85,000) Total Expenditures 71,952,722 73,079,515 70,028,174 Revenues Over (Under) Expends (1,824,083) (1,716,228) (5,006,596) Net Change in Fund Balance (1,824,083) (1,716,228) (5,006,596) Fund Balance, July 1 18,028,707 24,354,196 22,637,968 Fund Balance, June 30 $16,204,624 $22,637,968 $17,631,372 *The Budget includes an assumption that Proposition 30, the Governor s initiative on the November 6, 2012 ballot, would not pass resulting in trigger reductions in State education funding, therefore includes a reduction in average daily attendance of $457 per ADA. However, Proposition 30 was approved by a majority of State voters on November 6, 2012 therefore such trigger reductions will not occur. See State Budget below. Source: Morongo Unified School District. Board Adopted Policy Regarding Reserves During fiscal year , the District Board adopted a minimum fund balance policy for the General Fund in order to protect the District against revenue shortfalls or unpredicted onetime expenditures. The policy requires a reserve for economic uncertainties consisting of unassigned amounts (unrestricted fund balance) equal to no less than 3 percent of General Fund expenditures and other financing uses. The District s ending general fund balance of $22,637,968 consisted of $3,211,533 in available reserves, being unassigned fund balances plus all amounts expressly reserved for economic uncertainties in the General Fund, which was 4.5% of expenditures. Based on the District s Budget for , the District anticipates an ending general fund A-8

43 balance of $17,631,372, of which $3,543,063 consists of reserves for economic uncertainties and unassigned amounts. District s Steps to Address Reductions in State Education Spending Due to the unprecedented cuts to revenue limit funds received from the State, the District has taken numerous actions to reduce its expenses, as presented in the income and expense statements and budgets presented above. The District has not transferred moneys to its Deferred Maintenance Fund for building repair for three consecutive fiscal years, though it hopes to again contribute in Fiscal Year The Board has also considered reductions in personnel numbers, increases to class sizes, the closing of Monument High School, restructuring of transportation, and a supplemental retirement program for District employees to reduce expenditures in the school year. District Budget and Interim Financial Reporting Budgeting the Interim Reporting Procedures. State law requires school districts to maintain a balanced budget in each fiscal year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. Under current law, a school district governing board must adopt and file with the county superintendent of schools a tentative budget by July 1 in each fiscal year. The District is under the jurisdiction of the San Bernardino County Superintendent of Schools (the "County Superintendent"). The County Superintendent must review and approve or disapprove the budget no later than August 15. The County Superintendent is required to examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance with the established standards. If the budget is disapproved, it is returned to the District with recommendations for revision. The District is then required to revise the budget, hold a public hearing thereon, adopt the revised budget and file it with the County Superintendent no later than October 13. Pursuant to State law, the County Superintendent has available various remedies by which to impose and enforce a budget that complies with State criteria, depending on the circumstances, if a budget is disapproved. After approval of an adopted budget, the school district's administration may submit budget revisions for governing board approval. Subsequent to approval, the County Superintendent will monitor each district under its jurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis if the district can meet its current or subsequent year financial obligations. If the County Superintendent determines that a district cannot meet its current or subsequent year obligations, the County Superintendent will notify the district's governing board of the determination and may then do either or both of the following: (a) assign a fiscal advisor to enable the district to meet those obligations or (b) if a study and recommendations are made and a district fails to take appropriate action to meet its financial obligations, the County Superintendent will so notify the State Superintendent of Public Instruction, and then may do any or all of the following for the remainder of the fiscal year: (i) request additional information regarding the district's budget and operations; (ii) after also consulting with the district's board, develop and impose revisions to the budget that will enable the district to meet its financial obligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the County Superintendent may not abrogate any provision of a collective bargaining agreement A-9

44 that was entered into prior to the date upon which the County Superintendent assumed authority. A State law adopted in 1991 ("A.B. 1200") imposed additional financial reporting requirements on school districts, and established guidelines for emergency State aid apportionments. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the County Superintendent (on December 15, for the period ended October 31, and by mid-march for the period ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The County Superintendent reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that is deemed unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years. Under California law, any school district and office of education that has a qualified or negative certification in any fiscal year may not issue, in that fiscal year or in the next succeeding fiscal year, certificates of participation, tax anticipation notes, revenue bonds or any other debt instruments that do not require the approval of the voters of the district, unless the applicable county superintendent of schools determines that the district s repayment of indebtedness is probable. District s Budget Approval/Disapproval and Certification History. The District s Budget was submitted to the County Superintendent prior to the July 1, 2012 deadline, and was conditionally approved. The County Superintendent reviewed the budget and asked that $457 per ADA be removed from the Revenue Limit of the Budget Year and two succeeding years and that no cost of living adjustment was to be applied to any program for the and school years. The Revised Budget was thereafter submitted and approved by the County. There was a workshop on the revised budget at a Board Meeting on August 21, 2012, and the Board of Education adopted a revised Budget after a public hearing at the regularly scheduled Board meeting on September 4, Prior to the Fiscal Year, each of the District s adopted budgets had been approved by the County Superintendent and the District has received positive certifications on all of its interim reports. Copies of the District s budget, interim reports and certifications may be obtained upon request from the District Office at 5715 Utah Trail, Twentynine Palms, California 92277, Phone: (760) The District may impose charges for copying, mailing and handling. A-10

45 General Long-Term Debt General Obligation Bonds. On November 8, 2005, an election was held at which the requisite 55 percent of the voters in the District approved Measure O, which authorized the issuance and sale of $48,150,000 of general obligation bonds. The outstanding general obligation bonds of the District are the following (excluding the Refunding Bonds being issued): Issue Date 2005 Authorization Amount of Original Principal Outstanding 11/1/12 Final Maturity 4/25/ Election, Series A* $10,000,000 $7,890,000 8/1/ /12/ Election, Series B 21,000,000 19,795,000 8/1/2038 4/11/ Election, Series C 17,147,652 17,147,652 8/1/2042 Total $48,147,652 $44,832,652 *$7,580,000 principal amount of the outstanding 2005 Series A Bonds are being defeased with Refunding Bond proceeds. Short Term Borrowing The District does not currently have any short-term debt outstanding. State Funding of Education and Revenue Limitations Annual State apportionments of basic and equalization aid to school districts for general purposes are computed up to a revenue limit per unit of average daily attendance ( ADA ). Such apportionments will, generally speaking, amount to the difference between the District s revenue limit and the District s local property tax allocation. Revenue limit calculations are adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among California school districts. In the event that a school district s property tax revenue exceeds its calculated revenue limit entitlement, that school district retains all of its property tax revenue, and State apportionments to that district are limited to the minimum basic aid amount of $120 per ADA set forth in the Constitution. Currently the State allocates basic aid funding to categorical entitlements that would have been received in any event. Such districts are commonly known as Basic Aid Districts. The District is not a Basic Aid District, but rather is a Revenue Limit District, which is described in the preceding paragraph. A-11

46 A schedule of the District s recent ADA is set forth below. MORONGO UNIFIED SCHOOL DISTRICT AVERAGE DAILY ATTENDANCE Fiscal Years through (budgeted) Fiscal Year P-2 ADA Change in ADA Percent Change , ,859 (188) (2.1) ,570 (289) (3.3) (1) 8,264 (306) (3.6) (2) 8,055 (209) (2.5) (1) Budgeted; The District is monitoring this figure, according to the First Interim Report, for possible reductions reflecting decreased enrollment. (2) Projected in Budget. Source: Morongo Unified School District. California school districts receive a significant portion of their funding from State appropriations and as a result, decreases in State revenues may affect appropriations made by the Legislature to school districts. Revenue Sources Revenue Limit Sources. Since fiscal year , California school districts have operated under general purpose revenue limits established by the State Legislature. In general, revenue limits are calculated for each school district by multiplying (1) the average daily attendance for such district by (2) a base revenue limit per unit of ADA. The revenue limit calculations are adjusted annually in accordance with a number of factors designated primarily to provide cost of living increases and to equalize revenues among all California school districts of the same type. Funding of the District's revenue limit is provided by a mix of local property taxes and State apportionments of basic and equalization aid. Generally, the State apportionments will amount to the difference between the District's revenue limit and its local property tax revenues. Beginning in , Proposition 13 and its implementing legislation provided for each county to levy and collect all property taxes, and prescribed how levies on county-wide property values are to be shared with local taxing entities within each county. Federal Revenues. The federal government provides funding for several District programs, including special education entitlements and grants, programs under No Child Left Behind, and other federal revenue. Other State Revenues. As discussed above, the District receives State apportionment of basic and equalization aid in an amount equal to the difference between the District's revenue limit and its property tax revenues. In addition to such apportionment revenue, the District receives substantial other State revenues. These other State revenues are primarily restricted revenues funding items such as home-to-school transportation, Economic Impact Aid, Special Education Transportation, and Class-Size Reduction. A-12

47 The District receives State aid from the California State Lottery (the "Lottery"), which was established by a constitutional amendment approved in the November 1984 general election. Lottery revenues must be used for the education of students and cannot be used for non-instructional purposes such as real property acquisition, facility construction, or the financing of research. Moreover, State Proposition 20 approved in October 1600 requires that 50% of the increase in lottery revenues over levels must be restricted to use on instructional materials. Lottery revenues generally comprise approximately 2% of general fund revenues. Other Local Revenues. In addition to property taxes, the District receives additional local revenues from items such as interest earnings, leases and rentals, and other local sources. Investment of District Funds In accordance with Government Code Section et seq., the San Bernardino County Treasurer manages funds deposited with it by the District. The County is required to invest such funds in accordance with California Government Code Sections et seq. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code. For further information concerning the County investment policy and recent investment reports, access the County s website at under the heading Treasurer. The information contained in such website has not been reviewed by the District and is not incorporated in this Official Statement by reference. Effect of State Budget on Revenues Public school districts in California are dependent on revenues from the State for a large portion of their operating budgets. California school districts generally receive the majority of their operating revenues from various State sources. The primary source of funding for school districts is the revenue limit, which is a combination of State funds and local property taxes (see State Funding of Education and Revenue Limitations above). State funds typically make up the majority of a district s revenue limit. School districts also receive substantial funding from the State for various categorical programs. The availability of State funds for public education is a function of constitutional provisions affecting school district revenues and expenditures (see CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ), the condition of the State economy (which affects total revenue available to the State general fund), and the annual State budget process. State Funding of Education and Recent State Budgets General. The State requires that from all State revenues there first shall be set apart the moneys to be applied for support of the public school system and public institutions of higher education. Public school districts in California are dependent on revenues from the State for a large portion of their operating budgets. California school districts receive an average of about 55% of their operating revenues from various State sources. The primary source of funding for school districts is the revenue limit, which is a combination of State funds and local property taxes (see State Funding of Education and Revenue Limitations above). State funds A-13

48 typically make up the majority of a district s revenue limit. School districts also receive substantial funding from the State for various categorical programs. The availability of State funds for public education is a function of constitutional provisions affecting school district revenues and expenditures (see CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS below), the condition of the State economy (which affects total revenue available to the State general fund), and the annual State budget process. Decreases in State revenues may significantly affect appropriations made by the legislature to school districts. The following information concerning the State s budgets for the current and most recent preceding years has been compiled from publicly-available information provided by the State. None of the District, the County or the Financial Advisor is responsible for the information relating to the State s budgets provided in this section. Further information is available from the Public Finance Division of the State Treasurer s Office. The Budget Process. The State s fiscal year begins on July 1 and ends on June 30. The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the Governor s Budget ). Under State law, the annual proposed Governor s Budget cannot provide for projected expenditures in excess of projected revenues and balances available from prior fiscal years. Following the submission of the Governor s Budget, the Legislature takes up the proposal. Under the State Constitution, money may be drawn from the State Treasury only through an appropriation made by law. The primary source of the annual expenditure authorizations is the Budget Act as approved by the Legislature and signed by the Governor. The Budget Act must be approved by a majority vote of each House of the Legislature. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each House of the Legislature. Appropriations also may be included in legislation other than the Budget Act. Bills containing appropriations (including for K-14 education) must be approved by a majority vote in each House of the Legislature, unless such appropriations require tax increases, in which case they must be approved by a two-thirds vote of each House of the Legislature, and be signed by the Governor. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution. Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt. Recent State Budgets Certain information about the State budgeting process and the State Budget is available through several State of California sources. A convenient source of information is the State s website, where recent official statements for State bonds are posted. The references to internet websites shown below are shown for reference and convenience only, the information contained within the websites may not be current and has not been reviewed by the District and is not incorporated herein by reference. A-14

49 The California State Treasurer Internet home page at under the heading Bond Information, posts various State of California Official Statements, many of which contain a summary of the current State Budget, past State Budgets, and the impact of those budgets on school districts in the State. The California State Treasurer s Office Internet home page at under the heading Financial Information, posts the State s audited financial statements. In addition, the Financial Information section includes the State s Rule 15c2-12 filings for State bond issues. The Financial Information section also includes the Overview of the State Economy and Government, State Finances, State Indebtedness, Litigation from the State s most current Official Statement, which discusses the State budget and its impact on school districts. The California Department of Finance s Internet home page at under the heading California Budget, includes the text of proposed and adopted State Budgets. The State Legislative Analyst s Office prepares analyses of the proposed and adopted State budgets. The analyses are accessible on the Legislative Analyst s Internet home page at under the heading Subject Area Budget (State). State IOUs and Deferrals of Education Funding. In recent years, fiscal stress and difficulties in achieving a balanced State budget have resulted in actions which include the State issuing IOUs (defined below) to its creditors, and the deferral of school funding. On July 2, 2009, as a result of declines in State revenues commencing in fiscal years , the State Controller began to issue registered warrants (or IOUs ) for certain lower priority State obligations in lieu of warrants (checks) which could be immediately cashed. The registered warrants, the issuance of which did not require the consent of recipients, bore interest. With enactment of an amended budget in late July, 2009, the State was able to call all its outstanding registered warrants for redemption on September 4, The issuance of state registered warrants in 2009 was only the second time the State has issued state registered warrants to such types of state creditors since the 1930s. Furthermore, commencing in fiscal year , to better manage its cash flow in light of declining revenues, the State has enacted several statutes deferring amounts owed to public schools, until a later date in the fiscal year, or even into the following fiscal year, in order to more closely align the State s revenues with its expenditures. This technique has been used several times through the enactment of budget bills in fiscal years through Some of these statutory deferrals were made permanent, and others were implemented only for one fiscal year. Fiscal stress and cash pressures currently facing the State may continue or become more difficult, and continuing declines in State tax receipts or other results of the current economic recession may materially adversely affect the financial condition of the State. The Department of Finance has projected that multi-billion dollar budget gaps will occur annually for several years in the future, although the Budget described below includes measures A-15

50 that are intended to address these budgetary difficulties. Information on State Economic Challenges, Prior Year State Budgets and Related Events. The State s financial condition and budget policies affect communities, local public agencies and school districts throughout California. The State of California is experiencing significant financial and budgetary stress. Exacerbating the State s challenges, as the State entered recession in 2008, annual revenues generally were less than annual expenses, creating a structural budget deficit. This structural deficit is due in part to overreliance on temporary budgetary remedies in prior State Budget years, including one-time revenues, internal borrowing, payment deferrals, accounting shifts and expenditure reduction proposals that have not materialized. In recent years, the State Budget was also, repeatedly, not passed and signed in a timely manner. Frequently, school district budgets have been revised after the delivery of delayed State Budgets to reflect necessary changes in revenues and expenditures. Delays in the delivery of State budgets cause an element of uncertainty for local governments, such as school districts. Delayed payments from the State to the District, which are more common during periods in which the State faces economic challenges, also subject the District to additional risk. In recent years, Governor Edmund G. Brown Jr. has employed a strategy of proposing revenue raising measures coupled with automatic expenditure and service cuts into his State budget packages, wherein cuts go into effect if the revenue raising measures are not approved by the State Legislature or State voters. The State s Budget (the Budget ) relied on $4 billion of additional tax revenue, which when not realized, automatically triggered nearly $1 billion further cuts to universities, welfare, courts and schools (the Trigger Cuts ). Tier 1 Trigger Cuts would be triggered if, by January 2012, State revenues fell short of projections by $1-2 billion. Tier 1 Trigger Cuts related to cuts in university, social services and library funding and would total approximately $600 million. Tier 2 Trigger Cuts would be triggered if, by January 2012, revenues were projected to fall short by more than $2 billion. Tier 2 Trigger Cuts related to K-12 revenue limit funding and home-to-school transportation and were to total approximately $1.9 billion. On December 13, 2011, Governor Brown announced the State would fall $2.2 billion short of the revenue forecast contained in the Budget, and that $980 million in Trigger Cuts, comprised of all Tier 1 Trigger Cuts and a portion of Tier 2 Trigger Cuts, would be implemented. Effective January 1, 2012, Trigger Cuts to funding for University of California, California State University, community colleges, developmental services, local libraries and state-subsidized child care and K-12 school bus service funding, among others, became effective. Effective February 1, 2012, Trigger Cuts to general revenue limit funding for K-12 school districts totaling $79.6 million were implemented. The Budget was also premised on $2.8 billion in deferrals to K-12 schools and community colleges and $1.7 billion to be directed from State redevelopment agency funds pursuant to ABx1 27. ABx1 27 was passed together with ABx1 26, which restricted redevelopment agency actions to create new debt and then dissolved them. On December 29, 2011, the State Supreme Court issued its decision in California Redevelopment Assoc. v. Matosantos, a case brought to determine the constitutionality of ABx1 26 and ABx1 27, ruling that ABx1 26 was constitutional and ABx1 27 was not. By February 1, 2012 all redevelopment agencies were to cease operations and dismantle, and no additional payments from communities with redevelopment agencies to fund school expenditures are thereafter A-16

51 constitutionally permissible. Other challenges or delays relating to the implementation of these statutes cannot be predicted at this time. Moreover, the Budget included decreases in Proposition 98 funding to $48.7 billion, including $32.8 billion from the State general fund, which reflected a decrease from the prior year of $1.1 billion. This decrease was a net figure reflective of all budgetary actions taken with respect to the State s share of Proposition 98 funding, including increases in baseline revenues, redirection of certain sales tax revenues related to the realignment of public safety programs, and the rebenching of the Proposition 98 minimum funding guarantee. The Budget also made a significant, one-time modification to State budgeting requirements for school districts, requiring them to project the same level of revenue per student in as in , as well as to maintain staffing and program levels commensurate with such level of funding. A related provision of the Budget provided that school districts would only be required to budget for the current year, and will not be required to demonstrate that they can meet their financial obligations for the subsequent two fiscal years ( and ). Finally, the Budget contained the numerous significant measures with respect to K-12 education, including: (i) an additional apportionment deferral of $1.2 billion in education spending in order to maintain programmatic funding at the fiscal year level, (ii) a decrease of $62.3 million to part-day preschool spending to reflect a reduction of income eligibility levels to 70% of the State median Income and across-the-board reductions to provider contracts, (iii) $11 million in supplemental categorical funding to charter schools that begin operations between and , (iv) $3.2 million of increased funding for clean technology and renewable energy job training, career technical education and the Dropout Prevention Program, each of which were designed to provide at-risk high school students with occupational training in areas such as conservation, renewable energy and pollution reduction, (v) a decrease of $180.4 million to child care and development programs, including reductions to license-exempt provider rates, reductions of income eligibility levels to 70% of the State median Income and across-the-board reductions to provider contracts, (vi) a decrease of $2.1 million to reflect elimination of funding for the California Longitudinal Teacher Integrated Data System (CALTIDES), a program that was intended to provide a central State information depository regarding the teaching workforce, and (vii) projected savings of $1.6 million through the elimination of the Office of the Secretary of Education State Budget On June 15, 2012, the Legislature passed a $92 billion General Fund State Budget that closed the State s then-remaining $15.7 billion deficit and rebuilt a $1 billion General Fund reserve. The State Budget relied on a plan to submit to the voters at a regular election on November 6, 2012 the Schools and Local Public Safety Protection Act, a $6.9 billion tax increase, known as Proposition 30 (the Proposition 30 ). Proposition 30, which obtained the requisite majority vote based on semi-official results obtained from the website of the California Secretary of State, enacts temporary increases on high-income earners by raising income taxes by up to three percent on earnings over $250,000 for seven years, and increases the State sales tax by one-quarter of one cent for four years. The Budget also contains reductions in expenditures from prior years spending totaling $8.1 billion, including reductions caused by elimination of the Healthy Families program and by reforms relating to the CalWORKs, Medi-Cal, Judiciary and Cal Grant programs. The Budget expects that $1.5 billion in savings will be generated as the result of the transfer of cash assets previously held by redevelopment agencies to cities, counties and special districts to fund core public services and to schools to offset State General Fund costs. An additional $1.9 billion in savings A-17

52 will arise due to prepayment of the State s Proposition 98 funding as required by a court settlement. Governor Brown signed the Budget on June 27, The complete State Budget is available on the California Department of Finance website at The District can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated in this Official Statement by such reference. The information referred to above should not be relied upon in making an investment decision with respect to the Refunding Bonds. The execution of the Budget may be affected by numerous factors, including but not limited to: (i) national, State and international economic conditions, (ii) litigation risk associated with proposed spending reductions, (iii) failure to generate expected savings as a result of the transfer of cash assets previously held by redevelopment agencies and (iv) other factors, all or any of which could cause the revenue and spending projections made in Budget to be unattainable. The District cannot predict the impact that the Budget, or subsequent budgets, will have on its own finances and operations. Additionally, the District cannot predict the accuracy of any projections made in the State s Budget. Uncertainty Regarding Future State Budgets. The District cannot predict what actions will be taken in future years by the State Legislature and the Governor to address the State s current or future budget deficits. Future State budgets will be affected by national and state economic conditions and other factors over which the District has no control. The District cannot predict what impact any future budget proposals will have on the financial condition of the District. To the extent that the State budget process results in reduced revenues to the District, the District will be required to make adjustments to its budgets. The State has not entered into any contractual commitment with the District, the County, or the Owners of the Refunding Bonds to provide State budget information to the District or the owners of the Refunding Bonds. Although it believes the State sources of information listed above are reliable, the District does not assume any responsibility for the accuracy of the State Budget information set forth or referred to in this Memorandum or incorporated herein. However, the Refunding Bonds are secured by ad valorem taxes levied and collected on taxable property in the District, without limit as to rate or amount, and are not secured by a pledge of revenues of the District or its general fund. Legal Challenges to State Funding of Education The application of Proposition 98 and other statutory regulations has been the subject of various legal challenges in recent years, and is likely to be further challenged in the future. For a discussion of how the provisions of Proposition 98 have been applied to school funding see - State Funding of Education" and "-Recent State Budgets above Robles-Wong Litigation. On May 20, 2010, a plaintiff class of numerous current California public school students and several school districts, together with the California Congress of Parents, Teachers & Students, the Association of California School Administrators and the California School Boards Association filed suit in Alameda County Superior Court challenging the system of financing for public schools in California as unconstitutional. In Maya Robles-Wong, et al. v. State of California, plaintiffs seek declaratory and injunctive relief, including a permanent injunction compelling the State to abandon the existing system of public school finance. On July 16, 2010, the California Teachers Association filed a Complaint in A-18

53 Intervention, making the same allegations and seeking the same declaratory and injunctive relief. On January 14, 2011, the court dismissed certain of the causes of action, including causes of action that alleged a constitutional right to a particular level of education funding and violations of equal protection of the law, based on certain State constitutional provisions. On July 26, 2011, the Superior Court rejected the plaintiff s amended complaint as not stating an equal protection claim. On January 25, 2012, the plaintiffs filed an appeal in the 1st Appellate District. The District cannot predict the ultimate outcome of the Robles-Wong litigation. However, if successful, the lawsuit could result in changes to the implementation of school finance in the State of California CSBA Litigation. The California School Boards Association, the Association of California School Administrators, the Los Angeles Unified School District, the San Francisco Unified School District and the Turlock Unified School District announced on August 28, 2011 that they were filing a lawsuit (the CSBA Lawsuit ) in the Superior County of the City and County of San Francisco, seeking to restore more than $2 billion that had been designated to California public schools under Proposition 98, but was cut from the State Budget. The Superior Court has rejected the CSBA Lawsuit, however the plaintiffs may appeal the decision. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS Principal of and interest on the Refunding Bonds are payable from the proceeds of an ad valorem tax levied by the County for the payment thereof. Articles XIIIA, XIIIB, XIIIC, and XIIID of the State Constitution, Propositions 62, 98, 111, 187 and 218, and certain other provisions of law discussed below, are included in this section to describe the potential effect of these Constitutional and statutory measures on the ability of the District to levy taxes and spend tax proceeds for operating and other purposes, and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the District to levy taxes for payment of the Refunding Bonds. The tax levied by the County for payment of the Refunding Bonds was approved by the District's voters in compliance with Article XIIIA and all applicable laws. Article XIIIA of the California Constitution Basic Property Tax Levy. On June 6, 1978, California voters approved Proposition 13 ("Proposition 13"), which added Article XIIIA to the State Constitution ("Article XIIIA"). Article XIIIA limits the amount of any ad valorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii) (as a result of an amendment to Article XIIIA approved by State voters on June 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-thirds of the voters on such indebtedness (which provided the authority for the issuance of the Refunded Bonds), and (iii) (as a result of an amendment to Article XIIIA approved by State voters on November 7, 2000) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Article XIIIA defines full cash value to mean "the county assessor s valuation of real property as shown on the tax bill under full cash value, or thereafter, the appraised value of real A-19

54 property when purchased, newly constructed, or a change in ownership have occurred after the 1975 assessment". This full cash value may be increased at a rate not to exceed 2% per year to account for inflation. Article XIIIA has subsequently been amended to permit reduction of the "full cash value" base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the "full cash value" base in the event of reconstruction of property damaged or destroyed in a disaster and in other minor or technical ways. Both the United States Supreme Court and the California State Supreme Court have upheld the general validity of Article XIIIA. Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The 1% property tax is automatically levied by the county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the annual adjustment not to exceed 2% are allocated among the various jurisdictions in the taxing area based upon their respective situs. Any such allocation made to a local agency continues as part of its allocation in future years. Inflationary Adjustment of Assessed Valuation. As described above, the assessed value of a property may be increased at a rate not to exceed 2% per year to account for inflation. On December 27, 2001, the Orange County Superior Court, in County of Orange v. Orange County Assessment Appeals Board No. 3, held that where a home s taxable value did not increase for two years, due to a flat real estate market, the Orange County assessor violated the 2% inflation adjustment provision of Article XIIIA, when the assessor tried to "recapture" the tax value of the property by increasing its assessed value by 4% in a single year. The assessors in most California counties, including the County, use a similar methodology in raising the taxable values of property beyond 2% in a single year. The State Board of Equalization has approved this methodology for increasing assessed values. On appeal, the Appellate Court held that the trial court erred in ruling that assessments are always limited to no more than 2% of the previous year s assessment. On May 10, 2004 a petition for review was filed with the California Supreme Court. The petition has been denied by the California Supreme Court. As a result of this litigation, the recapture provision described above may continue to be employed in determining the full cash value of property for property tax purposes. A-20

55 Unitary Property Some amount of property tax revenue of the District is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions ( unitary property ). Under the State Constitution, such property is assessed by the State Board of Equalization ( SBE ) as part of a going concern rather than as individual pieces of real or personal property. State-assessed unitary and certain other property is allocated to the counties by SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year. Constitutional Appropriations Limitation Article XIIIB ( Article XIIIB ) of the State Constitution, as subsequently amended by Propositions 98 and 111, respectively, limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and in population and for transfers in the financial responsibility for providing services and for certain declared emergencies. For fiscal years beginning on or after July 1, 1990, the appropriations limit of each entity of government shall be the appropriations limit for the fiscal year adjusted for the changes made from that fiscal year under the provisions of Article XIIIB, as amended. The appropriations of an entity of local government subject to Article XIIIB limitations include the proceeds of taxes levied by or for that entity and the proceeds of certain state subventions to that entity. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to the entity from (a) regulatory licenses, user charges and user fees (but only to the extent that these proceeds exceed the reasonable costs in providing the regulation, product or service), and (b) the investment of tax revenues. Appropriations subject to limitation do not include (a) refunds of taxes, (b) appropriations for debt service, (c) appropriations required to comply with certain mandates of the courts or the federal government, (d) appropriations of certain special districts, (e) appropriations for all qualified capital outlay projects as defined by the legislature, (f) appropriations derived from certain fuel and vehicle taxes and (g) appropriations derived from certain taxes on tobacco products. Article XIIIB includes a requirement that all revenues received by an entity of government other than the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be returned by a revision of tax rates or fee schedules within the next two subsequent fiscal years. Article XIIIB also includes a requirement that 50% of all revenues received by the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be transferred and allocated to the State School Fund under Section 8.5 of Article XVI of the State Constitution. A-21

56 Article XIIIC and Article XIIID of the California Constitution On November 5, 1996, the voters of the State of California approved Proposition 218, popularly known as the Right to Vote on Taxes Act. Proposition 218 added to the California Constitution Articles XIIIC and XIIID (respectively, Article XIIIC and Article XIIID ), which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges. According to the Title and Summary of Proposition 218 prepared by the California Attorney General, Proposition 218 limits the authority of local governments to impose taxes and property-related assessments, fees and charges. Among other things, Article XIIIC establishes that every tax is either a general tax (imposed for general governmental purposes) or a special tax (imposed for specific purposes), prohibits special purpose government agencies such as school districts from levying general taxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote; and also provides that the initiative power will not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIIC further provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. On November 2, 2010, Proposition 26 was approved by State voters, which amended Article XIIIC to expand the definition of tax to include any levy, charge, or exaction of any kind imposed by a local government except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor s burdens on, or benefits received from, the governmental activity. Article XIIID deals with assessments and property-related fees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development. Proposition 218 does not affect the ad valorem property taxes to be levied by the County to pay debt service on the Refunding Bonds. A-22

57 Proposition 62 A statutory initiative ( Proposition 62 ) was adopted by the voters at the November 4, 1986, general election which (a) requires that any new or higher taxes for general governmental purposes imposed by local governmental entities such as the District be approved by a twothirds vote of the governmental entity s legislative body and by a majority vote of the voters of the governmental entity voting in an election on the tax, (b) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters of the governmental entity voting in an election on the tax, (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (e) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities, and (f) requires that any tax imposed by a local governmental entity on or after August 1, 1985, be ratified by a majority vote of the voters voting in an election on the tax within two years of the adoption of the initiative or be terminated by November 15, California appellate court cases have overturned the provisions of Proposition 62 pertaining to the imposition of taxes for general government purposes. However, the California Supreme Court upheld Proposition 62 in its decision on August 28, 1995, in Fresno County Transportation Authority v. Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regarding Proposition 62 were not addressed in the Supreme Court s decision, such as what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62, and whether the decision applies to charter cities. The District has not experienced any substantive adverse financial impact as a result of the passage of this initiative. Proposition 98 On November 8, 1988, California voters approved Proposition 98, a combined initiative constitutional amendment and statute called the Classroom Instructional Improvement and Accountability Act (the Accountability Act ). Certain provisions of the Accountability Act have, however, been modified by Proposition 111, discussed below, the provisions of which became effective on July 1, The Accountability Act changes State funding of public education below the university level and the operation of the State s appropriations limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (hereinafter referred to collectively as K-14 school districts ) at a level equal to the greater of (a) the same percentage of general fund revenues as the percentage appropriated to such districts in , and (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The Accountability Act permits the Legislature to suspend this formula for a oneyear period. The Accountability Act also changes how tax revenues in excess of the State appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 school districts. Any such transfer to K-14 school districts would be excluded from the appropriations limit for K-14 school districts and the K-14 school district appropriations limit for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K 14 school districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article A-23

58 XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to K 14 school districts is 4% of the minimum State spending for education mandated by the Accountability Act. Proposition 111 On June 5, 1990, the voters approved Proposition 111 (Senate Constitutional Amendment No. 1) called the Traffic Congestion Relief and Spending Limit Act of 1990 ( Proposition 111 ) which further modified Article XIIIB and Sections 8 and 8.5 of Article XVI of the State Constitution with respect to appropriations limitations and school funding priority and allocation. The most significant provisions of Proposition 111 are summarized as follows: Annual Adjustments to Spending Limit. The annual adjustments to the Article XIIIB spending limit were liberalized to be more closely linked to the rate of economic growth. Instead of being tied to the Consumer Price Index, the change in the cost of living is now measured by the change in California per capita personal income. The definition of change in population specifies that a portion of the State s spending limit is to be adjusted to reflect changes in school attendance. Treatment of Excess Tax Revenues. Excess tax revenues with respect to Article XIIIB are now determined based on a two-year cycle, so that the State can avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year are under its limit. In addition, the Proposition 98 provision regarding excess tax revenues was modified. After any two-year period, if there are excess State tax revenues, 50% of the excess are to be transferred to K-14 school districts with the balance returned to taxpayers; under prior law, 100% of excess State tax revenues went to K-14 school districts, but only up to a maximum of 4% of the schools minimum funding level. Also, reversing prior law, any excess State tax revenues transferred to K-14 school districts are not built into the school districts base expenditures for calculating their entitlement for State aid in the next year, and the State s appropriations limit is not to be increased by this amount. Exclusions from Spending Limit. Two exceptions were added to the calculation of appropriations which are subject to the Article XIIIB spending limit. First, there are excluded all appropriations for qualified capital outlay projects as defined by the Legislature. Second, there are excluded any increases in gasoline taxes above the 1990 level (then nine cents per gallon), sales and use taxes on such increment in gasoline taxes, and increases in receipts from vehicle weight fees above the levels in effect on January 1, These latter provisions were necessary to make effective the transportation funding package approved by the Legislature and the Governor, which expected to raise over $15 billion in additional taxes from 1990 through 2000 to fund transportation programs. Recalculation of Appropriations Limit. The Article XIIIB appropriations limit for each unit of government, including the State, is to be recalculated beginning in fiscal year It is based on the actual limit for fiscal year , adjusted forward to as if Proposition 111 had been in effect. School Funding Guarantee. There is a complex adjustment in the formula enacted in Proposition 98 which guarantees K-14 school districts a certain amount of State general fund revenues. Under prior law, K-14 school districts were guaranteed the greater of (1) 40.9% of A-24

59 State general fund revenues (the first test ) or (2) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the second test ). Under Proposition 111, schools will receive the greater of (1) the first test, (2) the second test, or (3) a third test, which will replace the second test in any year when growth in per capita State general fund revenues from the prior year is less than the annual growth in California per capita personal income (the third test ). Under the third test, schools will receive the amount appropriated in the prior year adjusted for change in enrollment and per capita State general fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test will become a credit to schools which will be paid in future years when State general fund revenue growth exceeds personal income growth. Proposition 1A and Proposition 22 On November 2, 2004, California voters approved Proposition 1A, which amended the State constitution to significantly reduce the State's authority over major local government revenue sources. Under Proposition 1A, the State cannot (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-thirds approval of both houses of the State Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Under Proposition 1A, beginning, in , the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (i) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (ii) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also amended the State Constitution to require the State to suspend certain State laws creating mandates in any year that the State does not fully reimburse local governments for their costs to comply with the mandates. This provision does not apply to mandates relating to schools or community colleges or to those mandates relating to employee rights. Proposition 22, a constitutional initiative entitled the Local Taxpayer, Public Safety, and Transportation Protection Act of 2010, approved on November 2, 2010, superseded many of the provisions of Proposition 1A. This initiative amends the State constitution to prohibit the legislature from diverting or shifting revenues that are dedicated to funding services provided by local government or funds dedicated to transportation improvement projects and services. Under this proposition, the State is not allowed to take revenue derived from locally imposed taxes, such as hotel taxes, parcel taxes, utility taxes and sales taxes, and local public transit and transportation funds. Further, in the event that a local governmental agency sues the State alleging a violation of these provisions and wins, then the State must automatically appropriate the funds needed to pay that local government. This Proposition was intended to, among other things, stabilize local government revenue sources by restricting the State s control over local property taxes. Proposition 22 did not prevent the California State Legislature from dissolving State redevelopment agencies pursuant to AB 1X26, as confirmed by the decision of the California Supreme Court decision in California Redevelopment Association v. Matosantos (2011). Because Proposition 22 reduces the State s authority to use or reallocate certain A-25

60 revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget, such as reducing State spending or increasing State taxes, and school and college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State s general fund. Application of Constitutional and Statutory Provisions; Recent Lawsuit The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. For a discussion of how the provisions of Proposition 98 have been applied to school funding see DISTRICT FINANCIAL INFORMATION - State Funding of Education and Recent State Budgets. In addition, a lawsuit is pending against the State with respect to the existing system of public school finance. See DISTRICT FINANCIAL INFORMATION Legal Challenge to State Funding of Education. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID of the California Constitution and Propositions 98, 111 and 22 were each adopted as measures that qualified for the ballot under the State s initiative process. From time to time other initiative measures could be adopted further affecting District revenues or the District s ability to expend revenues. The nature and impact of these measures cannot be anticipated by the District. A-26

61 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2011 B-1

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