NRF Draft 6/25/20 PRELIMINARY OFFICIAL STATEMENT DATED AS OF ______, 2020
NEW ISSUE–BOOK-ENTRY ONLY Rating: S&P: “______” (See “RATING” herein.) In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the San Diego Unified School District, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series A Notes is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. The amount treated as interest on the Series A Notes and excluded from gross income may depend upon the taxpayer’s election under Internal Revenue Notice 94-84. In the further opinion of Bond Counsel, interest on the Series A Notes is not a specific preference item for purposes of the federal alternative minimum tax. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series A Notes. See “TAX MATTERS” herein. $235,000,000* SAN DIEGO UNIFIED SCHOOL DISTRICT (San Diego County, California) 2020-2021 Tax and Revenue Anticipation Notes, Series A Dated: Date of Delivery Due: June 30, 2021
The 2020-21 Tax and Revenue Anticipation Notes, Series A (the “Series A Notes”) of the San Diego Unified School District (the “District”) will be issued in fully registered form, without coupons. The Series A Notes will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository of the Series A Notes. Individual purchases of Series A Notes will be made in book-entry form only in the minimum denomination of $5,000 or any integral multiple thereof. Purchasers of the Series A Notes will not receive certificates representing their ownership of the Series A Notes. Principal of and interest on the Series A Notes will be payable at maturity. The principal of and interest on each Series A Note will be payable when due on behalf of the District by the Treasurer-Tax Collector of the County of San Diego, as paying agent (the “Paying Agent”), to DTC, which in turn will remit such principal and interest to its DTC participants, which in turn will remit such principal and interest to the Indirect Participants or the Beneficial Owners of the Series A Notes, as described herein. See “THE SERIES A NOTES—Book-Entry Only System” herein. Principal Amount Interest Rate Priced to Yield CUSIP No.† $235,000,000* _.000% _.___% 797355___
The Series A Notes are not subject to redemption prior to maturity. The purpose of the District’s note program is to finance, in part, the District’s General Fund cash flow requirements during the 2020-21 Fiscal Year. The Notes (as defined herein), in accordance with California law, are general obligations of the District but are payable only out of taxes, income, revenue, cash receipts and other moneys of the District received in or attributable to the 2020-21 Fiscal Year and legally available for payment thereof (the “Unrestricted Revenues”). Pursuant to the Resolution (as defined herein), a special fund will be established for the Series A Notes, known as the “San Diego Unified School District 2020-21 Tax and Revenue Anticipation Note Repayment Fund” (the “Repayment Fund”), which will be held by the Paying Agent in trust for the benefit of the registered owners of the applicable Series of Notes, in order to segregate specific moneys (the “Pledged Revenues”) for the repayment of the Notes. The Pledged Revenues will be held in the Repayment Fund until the applicable Series of Notes mature. Said Pledged Revenues will consist of: (i) an amount not less than 60 percent (60%) of the principal amount of all Notes from the first Unrestricted Revenues received by the District in the period from December 15, 2020 to January 14, 2021, inclusive (the “First Set-Aside Period”), and (ii) from the first Unrestricted Revenues received by the District in the period from April 1, 2021 to April 30, 2021, inclusive (the “Second Set-Aside Period”), an amount that together with the amount then on deposit in the Repayment Fund is sufficient to pay the principal of and interest on the Notes when due and to make up any deficiency in the Repayment Fund, as further described herein. To the extent that the Notes cannot be repaid from the Pledged Revenues, they must be repaid from any other legally available funds of the District. See “SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES” herein. To the extent more fully described herein, the Notes are eligible to secure deposits of public moneys in California. THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT INTENDED TO BE A SUMMARY OF THE SECURITY OR TERMS OF THE ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. The Series A Notes are offered in book-entry form when, as and if issued, subject to the approval of their validity by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the District. Norton Rose Fulbright US LLP, Los Angeles, California, serves as Disclosure Counsel to the District. Certain other legal matters will be passed upon for the Underwriters by their counsel, Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. The Series A Notes will be available for delivery through the facilities of DTC in New York, New York, on or about August 6, 2020. UBS BofA Securities
Dated: July __, 2020
* Preliminary; subject to change. † CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the District nor the Underwriters take any responsibility for the accuracy of the CUSIP numbers, which are being provided for reference only.
89113854.11
No dealer, broker, salesperson or other person has been authorized by the District or the Underwriters to give any information or to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriters. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series A Notes by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.
This Official Statement is not to be construed as a contract with the purchasers of the Series A Notes. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts.
The information set forth herein has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriters. The information and expression of opinions herein are subject to change without notice, and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Series A Notes referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the District.
The Series A Notes have not been registered under the Securities Act of 1933, in reliance upon an exemption contained in such Act. The Series A Notes have not been registered under the securities laws of any state.
The Underwriters have provided the following sentence for inclusion in this Official Statement. “The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.”
By placing an order for the Notes with an Underwriter, you agree that if you are allocated Notes, the Underwriter may disclose your identity to the District as an initial purchaser of the Notes, unless you advise your sales representative otherwise.
IN CONNECTION WITH THIS INITIAL OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE SERIES A NOTES TO CERTAIN DEALERS AND BANKS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS.
Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”). Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words.
THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.
89113854.11 SAN DIEGO UNIFIED SCHOOL DISTRICT County of San Diego, California
BOARD OF EDUCATION
Name Position Term Ending
Dr. John Lee Evans President December 2020 Richard Barrera Vice President December 2020 Kevin Beiser Member December 2022 Dr. Michael McQuary Member December 2022 Dr. Sharon Whitehurst-Payne Member December 2020
DISTRICT ADMINISTRATORS
Cynthia Marten, Superintendent of Public Education Gregory K. Ottinger, Ed.D., Chief Business Officer Debbie Foster, Executive Director, Financial Planning and Development Jodie Macalos, Controller Andra M. Greene, General Counsel
UNDERWRITERS
UBS Financial Services Inc. BofA Securities, Inc.
BOND COUNSEL DISCLOSURE COUNSEL
Orrick, Herrington & Sutcliffe LLP Norton Rose Fulbright US LLP San Francisco, California Los Angeles, California
PAYING AGENT FISCAL AGENT
Treasurer-Tax Collector of the County of San Diego U.S. Bank National Association San Diego, California Los Angeles, California
MUNICIPAL ADVISOR
KNN Public Finance, LLC Los Angeles, California
89113854.11 TABLE OF CONTENTS
Page
INTRODUCTION ...... 1 The District ...... 1 Authority for Issuance; Purpose ...... 1 Security for the Series A Notes ...... 2 Risks Related to COVID-19 ...... 2 Continuing Disclosure ...... 6 THE SERIES A NOTES ...... 6 Authority for Issuance ...... 6 Description of the Notes ...... 7 Book-Entry Only System ...... 7 Use and Investment of Note Proceeds and Pledged Revenues ...... 9 SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES ...... 12 Available Sources of Payment...... 12 Lien in the Event of Bankruptcy ...... 13 CASH FLOW PROJECTIONS ...... 13 Sources of Alternate Liquidity ...... 19 Cash Management Legislation ...... 21 ISSUANCE OF ADDITIONAL NOTES ...... 21 Authorization; Limitations ...... 21 Security for Payment ...... 22 TAX MATTERS ...... 22 LEGAL AND OTHER MATTERS ...... 24 Legality For Investment In California ...... 24 Limitations On Remedies ...... 24 Litigation ...... 25 Cyber Incident ...... 25 MUNICIPAL ADVISOR ...... 26 RATING ...... 26 UNDERWRITING ...... 26 ADDITIONAL INFORMATION ...... 27
APPENDIX A FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT ...... A-1 APPENDIX B PROPOSED FORM OF OPINION OF BOND COUNSEL ...... B-1 APPENDIX C FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2019 ...... C-1 APPENDIX D PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE ...... D-1 APPENDIX E SAN DIEGO COUNTY INVESTMENT POOL ...... E-1
89113854.11 i
OFFICIAL STATEMENT
$235,000,000* San Diego Unified School District (San Diego County, California) 2020-21 Tax and Revenue Anticipation Notes, Series A
INTRODUCTION
This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Series A Notes to potential investors is made only by means of the entire Official Statement.
This Official Statement, which includes the cover page and appendices hereto, is provided to furnish information in connection with the sale of $235,000,000* aggregate principal amount of the San Diego Unified School District’s 2020-21 Tax and Revenue Anticipation Notes, Series A (the “Series A Notes”).
The District
The San Diego Unified School District (the “District”) serves an area of 211 square miles, encompassing most of the populated portion of the City of San Diego (the “City”). Approximately 85% of the City’s assessed valuation lies within the District. In terms of enrollment, the District is the second largest school district in the State of California with an estimated K-12 enrollment as of September 13, 2019 of 103,336 students (excluding charter school students and preschool students). For the charter schools that utilize the District’s enrollment reporting database, the charter school enrollment is 12,633.
The District is governed by a five-member Board of Education (the “Board” or “Board of Education”) nominated by District subareas and elected at large within the District to serve alternating four-year terms. The chief executive officer of the District is called the Superintendent of Public Education.
As of September 13, 2019, the District operated 108 elementary schools, 9 K-8 schools, 25 middle/junior high schools, 23 senior high schools, 12 atypical/alternative schools, 47 State preschool sites, 4 child development centers, 4 special education centers and is the sponsoring agency for 45 charter schools. On March 14, 2019, the State Board of Education voted to deny the renewal of charters of the four schools comprising Thrive Public Schools. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT.”
The District’s Fiscal Year 2019-20 budget for all funds as of July 1, 2019 provides for the employment of approximately 6,472 full-time equivalent certificated staff positions, 5,452 full-time equivalent classified employees and over 5,000 active hourly certificated and classified employees. The District’s budget for all funds for the 2019-20 Fiscal Year exceeds $1.98 billion. The District’s audited financial statements for the Fiscal Year ended June 30, 2019 are attached hereto as APPENDIX C.
Authority for Issuance; Purpose
The Series A Notes are being issued under the authority of Article 7.6, Chapter 4, Part 1, Division 2, Title 5 (commencing with Section 53850) of the California Government Code (the “Government Code”), and pursuant to a resolution adopted by the Board of Education of the District on [June 30, 2020] (the “Resolution”). Issuance of the Series A Notes and (if issued) the 2020-21 Tax and Revenue Anticipation Notes, Series B (the “Series B Notes” and, together with the Series A Notes, the “Notes”) will provide funds to meet Fiscal Year 2020-21 General Fund expenditures, including operating expenses, capital expenditures and the discharge of other obligations or indebtedness of the District. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT.” The Resolution authorizes the issuance of Notes in the total amount of
* Preliminary; subject to change.
89113854.11 1
$280,000,000. After issuance of the Series A Notes in the principal amount of $235,000,000* the District is authorized to issue additional Notes in the principal amount of $45,000,000* as the Series B Notes. The District currently has no plans to issue the Series B Notes; accordingly, the issuance and sale of the Series B Notes would require further legislative action by the Board of Education and would be otherwise subject to certain limitations set forth in the Resolution. See “ISSUANCE OF ADDITIONAL NOTES – Authorization; Limitations” herein.
Security for the Series A Notes
The Series A Notes are general obligations of the District but are payable only from taxes, income, revenues, cash receipts and other moneys received by or attributable to the District for the General Fund of the District for the 2020-21 Fiscal Year and that are legally available for the payment of current expenses and other obligations of the District. Security for the Series A Notes is described under “SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES.” See also “CASH FLOW PROJECTIONS” herein.
Risks Related to COVID-19
Background. The outbreak of the respiratory disease caused by a new strain of coronavirus (“COVID-19”) has been declared a Pandemic by the World Health Organization, a National Emergency by President Trump (the “President”) and a State of Emergency by California State Governor Newsom (the “Governor”). The emergency has resulted in tremendous volatility in the financial markets in the United States and globally, and the likely onset of a U.S. and global recession. The District cannot predict the extent or duration of the outbreak or what impact it may have on the District’s financial condition or operations.
Federal Response. The President’s declaration of a National Emergency on March 13, 2020 made available more than $50 billion in federal resources to combat the spread of the virus. A multibillion-dollar Coronavirus relief package was signed into law by the President on March 18, 2020 providing for Medicaid expansion, unemployment benefits and paid emergency leave during the crisis. In an effort to calm the markets, the Federal Reserve lowered its benchmark interest rate to nearly zero, introduced a large bond-buying program and established emergency lending programs to banks and money market mutual funds.
CARES Act. In response to COVID-19, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020. The CARES Act appropriates over $2 trillion to (i) provide cash payments to individuals, (ii) expand unemployment assistance and eligibility, (iii) provide emergency grants and loans for small businesses, (iv) provide loans and other assistance to corporations, including the airline industry, (v) provide funding for hospitals and community health centers, (vi) expand funding for safety net programs, including child nutrition programs and (vii) provide aid to state and local governments. The CARES Act includes $13.2 billion in direct funding for elementary and secondary school emergency relief. California will receive approximately $1.65 billion, with 10 percent set aside for emergencies designated by the California Department of Education. School district distribution is based on a district’s share of federal Title I funding which uses a formula based primarily on the number of students whose family income is below the federal poverty threshold of $26,200 for a family of four and who receive Temporary Assistance for Needy Families. The District is estimated to receive $30,512,782 of CARES Act funding.
State Response. On March 15, 2020, the Governor ordered the closing of California bars and nightclubs, the cancellation of gatherings of more than 250 and confirmed continued funding for school districts that close under certain conditions. On March 16, 2020, the State legislature passed $1.1 billion in general purpose spending authority for emergency funds to respond to the coronavirus crisis. On March 19, 2020, Governor Newsom issued Executive Order N-33-20, a blanket shelter-in-place order, ordering all California residents to stay home except for certain necessities and other essential purposes, which is in effect until further notice.
Pursuant to the Governor’s Order N-60-20 of May 4, 2020, on May 7, 2020, the State’s Public Health Officer released an order supporting the gradual movement of the State from Stage 1 to Stage 2 of “California’s Pandemic Resilience Roadmap.” Effective as of May 8, 2020, the order allows for the return of certain kinds of retail, manufacturing and other “low risk” businesses if physical distancing measures are implemented, and
* Preliminary; subject to change.
89113854.11 2
identifies criteria and procedures for reducing restrictions by local officers that might be less restrictive than statewide measures. Local jurisdictions within the State also issued their own shelter-in-place orders. California Counties that have met certain readiness criteria and worked with the California Department of Public Health can open more workplaces and move further ahead according to the State’s resilience roadmap.
The COVID-19 outbreak is ongoing, and the ultimate geographic spread of the virus, the duration and severity of the outbreak, the economic impacts and actions that may be taken by governmental authorities to contain the outbreak or to treat its impacts are uncertain and cannot be predicted. Additional information with respect to events surround the outbreak of COVID-19 and responses thereto can be found on State and local government websites, including but not limited to: the Governor’s office (http://www.gov.ca.gov) and the California Department of Public Health (https://covid19.ca.gov/). The District has not incorporated by reference the information on such websites, and the District does not assume any responsibility for the accuracy of the information on such websites.
Impacts on State and Local Revenues. The COVID-19 public health emergency will have negative impacts on global and local economies, including the economy of the State and in the region of the District. The extent and duration of the COVID-19 emergency is currently unknown, and the reach of its impacts uncertain. The State has asserted that the State’s General Fund will be materially adversely impacted by the health-related and economic impacts of the COVID-19 pandemic and that the negative impact on revenues will be immediate, affecting the current fiscal year and running into several fiscal years in the future. Delayed deadlines for the filing and payment of personal income, corporation, and sales and use taxes have further created uncertainties for the State with respect to its General Fund cash flows. The State’s revenue sources are anticipated to be materially impacted by the COVID-19 pandemic, including with respect to reductions in personal income tax receipts and capital gains tax receipts. Economic uncertainty caused by the outbreak will significantly affect California’s near-term fiscal outlook, with a likely recession due to pullback in activity across wide swaths of the economy. The State released its May Revision to the proposed fiscal year 2020-21 State Budget on May 14, 2020, which projects significant declines in State revenues in both the current and budgeted fiscal years. In addition, in an attempt to mitigate the effects of the COVID-19 pandemic on State property taxpayers, on May 6, 2020, the Governor signed an executive order suspending penalties, costs or interest for the failure to pay secured or unsecured property taxes, or to pay a supplemental bill, before the date that such taxes become delinquent.
On March 24, 2020, the State Department of Finance indicated in a budget letter to State agency secretaries and State budget and accounting officials that, despite sustained efforts, COVID-19 continued to spread and was at that time impacting nearly all sectors of the State’s economy. The letter also indicated that these impacts included a severe drop in economic activity, with corresponding negative effects on anticipated revenues. As a result, the impact on revenues was expected to be immediate, affecting the 2019-20 fiscal year, and to produce impacts for the upcoming fiscal year 2020-21 and beyond. On April 5, 2020, the State Office of Legislative Analyst (the “LAO”) published an Update on State and School District Reserves, indicating that State revenues would be lower than estimated in the January 10, 2020 proposed fiscal year 2020-21 budget. The LAO indicated that the State at that time had $17.5 billion in reserves, including $16.5 billion in the Budget Stabilization Account (“BSA”) and $900 million in a reserve established to protect safety net services during a recession (the “Safety Net Reserve”). The LAO reported that due to a transfer of $1.3 billion from the Special Fund for Economic Uncertainties (“SFEU”) to its disaster fund to address the effects of COVID-19, the SFEU was then nearly depleted. However, the LAO expected the State to be reimbursed by the Federal government for most – if not all – of the funds transferred from the SFEU. The State may withdraw moneys from the BSA if a “budget emergency” is declared, and the LAO expected that if the State faces a budget deficit in either fiscal year 2019-20 or 2020-21, the conditions for the declaration of a budget emergency would likely exist. The LAO noted that the State made its first deposit into the Public School System Stabilization Account (“PSSSA”) in connection with the 2019-20 State Budget for approximately $377 million, representing less than one percent of State spending on schools in fiscal year 2019-20. The 2020-21 May Revision to the State Budget contemplates the withdrawal in full of amounts in the PSSSA. School districts, however, may also hold reserves in their local operating accounts, and although there is significant variation in the level of reserves held by the various school districts, the LAO indicates that school district reserves average seventeen percent of school funding statewide. According to the LAO, the median school district holds reserves equal to approximately twenty-two percent of its expenditures, although about twenty-five percent of school districts hold reserves that account for less than fourteen percent of their expenditures. As of June 8, 2020, the District held approximately $39.5 million in unrestricted reserves.
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As part of its Official Statement dated April 16, 2020, the State asserted that its General Fund would be materially adversely impacted by the health-related and economic impacts of the COVID-19 pandemic. The State recognized that efforts to respond to and mitigate the spread of COVID-19 have had a severe impact on the State and national economies, triggering a historic drop and ongoing volatility in the stock market, which it expected to lead to a recession. Delayed deadlines for the filing and payment of personal income, corporation, and sales and use taxes further created uncertainties for the State with respect to its General Fund cash flows. The State declared the projections of revenues and expenditures in the Governor’s January Proposed 2020-21 State Budget to be no longer operative due to significant changes in the May Revision (as defined herein). No information in the State’s Official Statement is incorporated herein. The May Revision includes significant reductions in school funding for fiscal year 2020-21 and in the future.
For more detail regarding the State’s current and proposed budgets, [the May Revision], and related reports and outlooks, see “APPENDIX A - “FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION - State Budget Process” herein.
Impacts on School Districts in California. Shelter in place orders have suspended in-person classroom instruction indefinitely throughout California schools. Most school districts (including the District) are undertaking distance learning efforts to provide continuing instruction to students. State law allows school districts to apply for a waiver to hold them harmless from the loss of State apportionment funding based on attendance and state instructional time penalties when they are forced to close schools due to emergency conditions. On March 13, 2020, Governor Newsom signed Executive Order N-26-20 under the provisions of Government Code Section 8571 (the “Order”) in an effort to mitigate the effects of the COVID-19 pandemic as it relates to California Local Educational Agencies (“LEAs”), including school districts, county offices of education, and charter schools. The Order provides that if an LEA closes its schools to address COVID-19, the LEA will continue to receive State funding to support the LEA to continue delivering services including distance learning and/or independent study; provide school meals in non-congregate settings through the Summer Food Service Program and Seamless Summer Option; arrange for, to the extent practicable, supervision for students during ordinary school hours; and continue to pay its employees. The order waives any State or local law that might be interpreted to prohibit an LEA from offering distance learning or independent study. Senate Bill 117 (“SB 117”) was passed on March 17, 2020, addressing attendance issues and instructional hour requirements, among other items, and effectively holds schools harmless from incurring funding losses that could result from these issues under existing funding formulas. SB 117 provides that for schools that comply with the Executive Order, only attendance during full school months from July 1, 2019 to and including February 29, 2020, will be reported for apportionment purposes. SB 117 also holds that certain minimum instructional day and minute requirements will be deemed to have been met during the period complying school districts are closed due to COVID-19, in order to prevent a loss of funding due to the COVID-19 outbreak.
On April 22, 2020, Governor Newsom signed Executive Order N-56-20, which extends the deadline for school districts to adopt their Local Control and Accountability Plan (“LCAP”) and budget overview, from July 1, 2020 to December 15, 2020 subject to certain conditions. One of the conditions to qualify for the extended deadline is for the governing board of the school district to adopt a written report to the community, during the same meeting at which it adopts the annual budget due by July 1, 2020, that explains how the school district has responded to COVID-19, including steps taken to deliver distance learning, provide school meals in non- congregated settings, and arrange for supervision of students during ordinary school hours. The decline in revenue as a consequence of the impacts of COVID-19 has significantly impacted the State and as such, a significant decline in revenue is expected to be available for funding school districts.
Executive Orders N-26-20, N-30-20, N-45-20 have defined expectations for local educational agencies for service delivery during COVID-19 school closures, suspended state academic assessments for the 2019- 20 school year, increased programmatic flexibility for after school programs, and required local educational agencies to be transparent with their communities about actions taken to ensure continuity of student learning during the COVID-19 pandemic. Additional executive orders or legislation may be enacted in response to the pandemic, but the District cannot predict the nature or content of such orders, or the effect they will have on its operations or finances. In addition, certain of these executive orders have been challenged in the courts by affected plaintiffs. The District cannot predict the outcome of any such litigation or whether any resulting change to any executive order will affect the funding of school districts in the State, including the District.
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Plans to Re-open the Economy. On April 27, 2020 the Governors of the States of Colorado and Nevada joined in the coordinated plan announced on April 13, 2020 between the States of California, Washington and Oregon, to lift shelter-in-place orders and gradually re-open economic sectors of the State. The Governor has listed six factors that will be considered with respect to the State, including (1) expanding testing, (2) protecting high risk groups, including seniors, medically vulnerable people, and people in nursing homes and similar facilities, (3) ensuring hospitals have sufficient beds and supplies to care for patients, (4) progress in developing treatments, (5) the ability of schools and businesses to support physical distancing, and (6) the ability to decide when to reinstate stay-at-home orders, if needed. The Governor suggested that requirements being considered could alter the current practices and behaviors of schools and students, including by requiring staggered school start times, not allowing students to congregate during meal times or recess, limitations or reforms to procedures involving assemblies and physical education, and the potential disallowance of school sporting events, concerts or parent nights. The Governor also suggested that significant sanitation and deep cleaning would be necessary to prevent the spread of COVID-19 in schools and on playgrounds when campuses are reopened. The Governor is engaged in conversations with county public health officials throughout the State, the State Superintendent of Public Instruction, labor leaders, and other leaders in education, and expects to re-evaluate the situation as it evolves based on the rate of hospitalizations, availability of medical equipment, and development of a vaccine.
Impacts on the District. District schools closed effective March 16, 2020 and school physical facilities will remain closed until such time as public health officials declare it is safe for students to return. The formal launch of distance learning began on April 27, 2020 for traditional-calendar schools and May 11, 2020 for District year-round schools. The District is currently receiving guidance on COVID-19 from County health officials, the San Diego County Office of Education (the “Office of Education”) and the California Department of Education (“CDE”) which is monitoring the COVID-19 situation in accordance with COVID-19 guidelines for schools published by the Centers for Disease Control and Prevention.
In a letter to the State Legislature dated May 18, 2020, the superintendents of six large school districts in the State (including the District, Los Angeles Unified School District, San Francisco Unified School District, Oakland Unified School District, Long Beach Unified School District and Sacramento City Unified School District) indicated that the funding cuts described in the 2020-21 May Revision to the State Budget, combined with the additional expenses to restart schools with measures to prevent spreading the coronavirus among students and staff, will be untenable without additional funding. In addition, on May 20, 2020, the State Superintendent of Public Instruction indicated that due to the significant reductions in school funding described in the 2020-21 May Revision to the State Budget, certain school openings throughout the State may be delayed until additional funding for safety accommodations is received. On May 19, 2020, the Center for Disease Control (the “CDC”) released detailed guidance for reopening of schools during the COVID-19 pandemic. The guidelines provide a three-step approach on scaling up operations, promoting health hygiene practices and intense cleaning, training on social distancing protocols, and establishing a plan in the event someone becomes sick and/or schools require closing. Additional recommendations for schools include additional spacing of desks, staggered arrival times, additional protective equipment for staff, practicing daily health checks, and limiting large gatherings, among others. The District cannot predict costs associated with a potential infectious disease outbreak such as operational costs incurred to clean, sanitize and maintain its facilities either before or after an outbreak of an infectious disease.
The District is unable to predict at this time whether new proposals will be enacted or in what form they may take, or whether any new requirements related to reducing the spread of COVID-19 will materially impact its finances or operations. Additional information with respect to events surrounding the outbreak of COVID-19 and responses thereto can be found on Federal, State and local government websites, including but not limited to the CDC (https://www.cdc.gov), the Governor’s office (http://www.gov.ca.gov), the California Department of Public Health (http://cdph.ca.gov/) and the County (https://www.sandiegocounty.gov). The District has not incorporated by reference the information on such websites and the District does not assume any responsibility for the accuracy of the information on such websites.
As discussed herein under APPENDIX A - “FINANCIAL AND OPERATING INFORMATION - - Local Control Funding Formula (LCFF),” and “ - LCFF and the District,” the District receives much of its revenues from LCFF sources which are comprised of local property taxes and State moneys. As the State experiences a decline in revenue as a consequence of the impacts of COVID-19, there will be a resulting decline in revenue available for funding school districts. In addition, there may be unknown consequences of the COVID-19
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emergency, which the District is unable to forecast. The District cannot predict the extent or duration of the outbreak, the overall impact it may have on the District’s financial condition, operations, nor the impact of COVID- 19 on the assessed values of property within the District and the economy in general. Any financial information, including projections, forecasts and budgets presented herein may not account for the potential or wide-ranging effects of COVID-19.
Continuing Disclosure
The District will covenant for the benefit of the holders and beneficial owners of the Series A Notes to provide notices of the occurrence of certain enumerated events. The notices of the enumerated events will be filed by or on behalf of the District with the Municipal Securities Rulemaking Board’s electronic municipal market access system. The specific nature of the notices of material events is contained in APPENDIX D: “PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE.” The District has entered into a Continuing Disclosure Certificate for the benefit of the Owners with Digital Assurance Certification, L.L.C. (“DAC”) under which the District has designated DAC as Disclosure Dissemination Agent. These covenants are being made in order to assist the Underwriters in complying with S.E.C. Rule 15c2-12(b)(5).
THE SERIES A NOTES
Brief descriptions of the Series A Notes, the security and sources of payment for the Series A Notes and the District and its financial status follow. Such descriptions do not purport to be comprehensive or definitive. All references herein to various documents are qualified in their entirety by reference to the forms thereof, all of which are available for inspection at the office of the Chief Business Officer of the District.
Authority for Issuance
The Notes are issued pursuant to Article 7.6, Chapter 4, Part 1, Division 2, Title 5 (commencing with Section 53850) of the Government Code (the “Act”) and pursuant to the Resolution. Under the Act, the District may issue the Notes only if the principal of and interest on the Notes will not exceed 85% of the estimated amount of the then uncollected moneys legally available for the payment of the Notes. The amount needed to repay the Series A Notes and the interest thereon is approximately $______and the District estimates that funds available from the General Fund for payment of the Series A Notes will be in excess of such amount as required under the Act. See “SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES” and “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION – Significant Accounting Policies and Audited Financial Statements.”
On December 10, 2019, the Board of Education approved the First Interim Financial Report (the “1st Interim Report”) self-certifying its financial status with a “positive” certification. On March 10, 2020, the Board of Education approved the Second Interim Financial Report (the “2nd Interim Report”) self-certifying its financial status with a “qualified” certification. On May 12, 2020, the Board of Education approved a revised budget (the “3rd Interim Report”) self-certifying its budget plan with a “qualified” certification. Any school district that has a qualified or negative certification in any Fiscal Year may not issue tax and revenue anticipation notes, certificates of participation or any other debt instruments that do not require voter approval, unless the County Superintendent of Schools determines that the district’s repayment is probable. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION – AB 1200 Budget Requirements; County and State Oversight; Reports and Certifications” herein. On June 5, 2020, the San Diego County Office of Education (“SDCOE”) issued a letter to the District stating that in accordance with California Education Code Sections 42131 and 42133(a), and the California Department of Education’s Management Advisory No. 92-04 dated June 17, 1992, the SDCOE has reviewed the District’s financial condition, cash flow projections and projected budget for Fiscal Year 2020-21 as they relate to the 2020-21 Tax and Revenue Anticipation Notes, and has determined that the repayment of principal and interest on the Notes is probable.
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Description of the Notes
The District will issue Series A Notes in the aggregate principal amount of $235,000,000* on or about August 6, 2020. The Series A Notes will be dated the date of issuance thereof and will mature on June 30, 2021. The Series A Notes will be issued in registered form without coupons in denominations of $5,000 and integral multiples thereof and will bear interest at the rate set forth on the cover page hereof. The Series A Notes will bear interest from their date of issuance payable at maturity computed on the basis of a 360-day year composed of twelve 30-day months at the rate or rates specified on the cover page hereof.
Principal of and interest due at maturity on the Series A Notes shall be payable in lawful money of the United States of America to the persons in whose name such Series A Notes are registered on the registration books of the District, maintained by the Treasurer-Tax Collector of the County of San Diego (the “Paying Agent”) upon surrender thereof at the office of the Paying Agent in San Diego, California, upon the maturity thereof. No interest shall be payable on any Series A Note for any period after the maturity date during which the registered owner thereof fails to properly present such Series A Note for payment.
The District will offer the Series A Notes in registered form, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), with the maturity date and interest rate or rates shown on the cover page of this Official Statement. The Series A Notes will not be subject to redemption prior to maturity. As long as the Series A Notes are held by DTC or a successor securities depository, ownership of the Series A Notes will be evidenced by book-entry only as described below under “– Book-Entry Only System.”
Principal of and interest on the Series A Notes will be payable when due on behalf of the District by the Paying Agent to DTC, which will in turn remit such principal and interest to its Participants, which will in return remit such principal and interest to the respective Indirect Participants or the Beneficial Owners of the Series A Notes.
Registration, Transfer and Exchange of Notes. The Series A Notes are initially issued and registered in the name of “Cede & Co.,” as nominee of the Depository Trust Company. In the event the Series A Notes are not registered with a securities depository, any Series A Note may, in accordance with its terms, be transferred or exchanged for a like aggregate principal amount in authorized denominations, upon the registration book maintained by the Paying Agent pursuant to the Resolution, by the person in whose name it is registered, upon surrender of such Series A Note for cancellation, and, in the case of a transfer, accompanied by delivery of a written instrument of transfer, duly executed and in form approved by the Paying Agent.
Book-Entry Only System
DTC will act as securities depository for the Series A Notes. The Series A Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Series A Note certificate will be issued for each maturity and interest rate of the Series A Notes in the aggregate principal amount of such Series A Notes and will be deposited with DTC.
DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks,
* Preliminary; subject to change.
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trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a S&P Global Ratings rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. The foregoing internet addresses are included for reference only, and the information on these internet sites is not incorporated by reference herein.
Purchases of Series A Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series A Notes on DTC’s records. The ownership interest of each actual purchaser of each Series A Note (each, a “Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series A Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series A Notes, except in the event that use of the book-entry system for the Series A Notes is discontinued.
To facilitate subsequent transfers, all Series A Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series A Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series A Notes: DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series A Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Payment of principal of and interest on the Series A Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or the Paying Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
With respect to Series A Notes registered in the name of Cede & Co., the District and the Paying Agent have no responsibility or obligation to any Direct Participant or to any Beneficial Owner of such Series A Notes. Without limiting the immediately preceding sentence, the District and the Paying Agent have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any Direct Participant with respect to any beneficial ownership interest in the Series A Notes, (ii) the delivery to any Direct Participant, Beneficial Owner or other person, other than DTC, of any notice with respect to the Series A Notes, (iii) the payment to any Direct Participant, Beneficial Owner or other person, other than DTC, of any amount with respect to the principal of, or any interest on, the Series A Notes, or (iv) any consent given or other action taken by
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DTC as owner of the Series A Notes. The District and the Paying Agent may treat DTC as, and deem DTC to be, the absolute owner of each Series A Note for all purposes whatsoever, including (but not limited to) (i) payment of the principal of, and interest on, each such Series A Note, (ii) giving notices of any matters with respect to such Series A Notes, and (iii) registering transfers with respect to such Series A Notes. The Paying Agent shall pay the principal of, and interest on, all Series A Notes only to or upon the order of DTC, and all such payments shall be valid and effective to fully satisfy and discharge the District’s obligations with respect to such principal and interest to the extent of the sum or sums so paid.
DTC may discontinue providing its services as securities depository with respect to the Series A Notes at any time by giving reasonable notice to the District or the Paying Agent. Under such circumstances, and in the event that a successor securities depository is not obtained, Series A Note certificates are required to be prepared and delivered in accordance with the terms of the Resolution.
The District may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). Discontinuance of use of the system of book-entry transfers through DTC may require the approval of DTC Participants under DTC’s operational arrangements. In that event, Series A Note certificates will be printed and delivered to DTC.
NEITHER THE DISTRICT NOR THE PAYING AGENT SHALL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY DTC PARTICIPANT, ANY BENEFICIAL OWNER OR ANY OTHER PERSON CLAIMING A BENEFICIAL OWNERSHIP INTEREST IN THE SERIES A NOTES UNDER OR THROUGH DTC OR ANY DTC PARTICIPANT, OR ANY OTHER PERSON WHICH IS NOT SHOWN ON THE REGISTRATION BOOKS OF THE PAYING AGENT AS BEING AN OWNER, WITH RESPECT TO THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE SERIES A NOTES; ANY NOTICE WHICH IS PERMITTED OR REQUIRED TO BE GIVEN TO OWNERS UNDER THE RESOLUTION; ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS OWNER; OR ANY OTHER PROCEDURES OR OBLIGATIONS OF DTC UNDER THE BOOK- ENTRY SYSTEM.
SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE SERIES A NOTES, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE NOTEHOLDERS OR REGISTERED HOLDERS OF THE SERIES A NOTES SHALL MEAN CEDE & CO., AS AFORESAID, AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE SERIES A NOTES.
The foregoing description of the procedures and recordkeeping with respect to beneficial ownership interests in the Series A Notes, payment of principal, interest and other payments on the Series A Notes to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in such Series A Notes and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters, and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.
Use and Investment of Note Proceeds and Pledged Revenues
All of the Series A Note proceeds not needed to pay costs of issuance of the Series A Notes will be deposited by the District into the San Diego Unified School District 2020-21 Tax and Revenue Anticipation Note Proceeds Fund (the “Proceeds Fund”) established under the Resolution and held by the Paying Agent and invested in the County of San Diego Investment Pool or, at the written direction of the District, in Permitted Investments (as defined below). Moneys on deposit in the Proceeds Fund will be withdrawn and expended by the District for any purpose for which the District is authorized to expend funds from its General Fund, but (except for costs related to the issuance of the Notes) only after exhausting funds otherwise available for such purposes (which are not restricted funds), and only to the extent that on any given day such other funds are not then available; provided, however, that the District may treat as unavailable amounts that are held or set aside in a reasonable working capital reserve not exceeding the amount set forth in the tax certificate to be executed by the District in connection with the issuance of
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the Notes (and in any event not exceeding five percent of the District’s total working capital expenditures from its available funds in Fiscal Year 2019-20).
Pursuant to the Resolution, all moneys in the Repayment Fund will be invested at the written direction of the District by the Paying Agent in Permitted Investments (hereinafter defined) or, if the District does not provide such written direction, in the County of San Diego Investment Pool. The term “Permitted Investments” is defined in the Resolution as any of the following:
1. “United States Treasury and Agency Obligations,” meaning:
a. direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America,
b. obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America,
c. obligations of or fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America, which obligations are rated at least “AA” by S&P Global Ratings, a business unit of Standard & Poor’s Financial Services LLC (“S&P”); or
d. evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated.
2. Money market funds rated at least “AAm” or “AAmG” by S&P.
3. Forward purchase and delivery agreements (i) the securities delivered under which are described above in item (1.) above, and (ii) entered into with, or the obligations of which are guaranteed by, a domestic bank, financial institution, broker, dealer or insurance company the financial capacity to honor its senior obligations of which is rated at least “AA-” by S&P.
4. Investment agreements with or the obligations of which are guaranteed by (a) a domestic bank, financial institution or insurance company the financial capacity to honor its senior obligations of which is rated at least “AA-” by S&P; or (b) a foreign bank the long-term debt of which is rated at least “AA-“ by S&P (a “Qualified Provider”); provided, that, by the terms of the investment agreement:
a. if for the Repayment Fund, interest and principal payments are to be made to the Paying Agent at times and in amounts as necessary to pay debt service on the Notes;
b. if for the Proceeds Fund, the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven days’ prior notice (which notice may be amended or withdrawn at any time prior to the specified withdrawal date); provided, that the Paying Agent shall give notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;
c. the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof;
d. a fixed guaranteed rate of interest is to be paid on invested funds and all future deposits, if any, required to be made to restore the amount of such funds to the level specified under the Resolution;
e. the term of the investment agreement does not exceed the term of the Notes;
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f. the District or the Paying Agent receives the opinion of domestic counsel (which opinion shall be addressed to the District and the Paying Agent) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms;
g. the investment agreement shall provide that if during its term the provider’s (or, if guaranteed, the guarantor’s) rating by S&P falls below “AA-,” the provider must, within 10 business days, assign the investment agreement to a Qualified Provider reasonably acceptable to the District or collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the District, the Paying Agent or a third party acting solely as agent therefor (the “Holder of the Collateral”) United States Treasury and Agency Obligations that are free and clear of any third-party liens or claims at the Collateral Levels set forth below in clause (j);
h. the investment agreement shall state that the Holder of the Collateral will have a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof;
i. the investment agreement must provide that if during its term:
(i) the provider shall default in its payment obligations, the provider’s obligations under the investment agreement shall, at the direction of the District or the Paying Agent, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or the Paying Agent, as appropriate; and
(ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations shall be accelerated upon the conditions specified in the investment agreement and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or the Paying Agent, as appropriate; and
j. the Collateral of United States Treasury and Agency Obligations securing the investment agreement, if any, shall be maintained at such levels and valued at such frequencies as shall be necessary to maintain the short-term rating on the Notes by S&P.
5. Repurchase agreements with respect to obligations listed in paragraph (1.) above if entered into with a nationally or state-chartered bank (including the Paying Agent and its affiliates), trust company or a broker or dealer (as defined by the Securities Exchange Act of 1934, as amended) which is a member of the Securities Investors Protection Corporation if (i) such obligations that are the subject of such repurchase agreement are delivered to the Paying Agent or are supported by a safekeeping receipt issued by a depository satisfactory to the District, provided that such repurchase agreement must provide that the value of the underlying obligations shall be maintained at current market value, calculated no less frequently than monthly, of not less than the repurchase price, (ii) a prior perfected security interest in the obligations which are the subject of such repurchase agreement has been granted to the Paying Agent, and (iii) such obligations are free and clear of any adverse third-party claims.
6. The County of San Diego Investment Pool.
7. The Local Agency Investment Fund or similar pooled fund operated by or on behalf of the State of California.
At any time that the Paying Agent holds money under the Resolution and has not received direction from the District as to the investment thereof, the Paying Agent shall invest such moneys in the County of San Diego Investment Pool.
Generally, moneys of the District are invested with the Treasurer-Tax Collector of the County of San Diego (in such capacity, the “County Treasurer”) in the County of San Diego Investment Pool. A summary of the County of San Diego Investment Pool is set forth in APPENDIX E hereto. The summary set forth in
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APPENDIX E was provided by the County, and neither the District nor the Underwriters take any responsibility for the accuracy or completeness thereof.
SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES
Available Sources of Payment
The principal of and interest on the Notes are payable from taxes, income, revenue, cash receipts and other moneys received by or attributable to the District for the General Fund of the District for Fiscal Year 2020-21 and that are lawfully available for the payment of current expenses and other obligations of the District (the “Unrestricted Revenues”). As security for the payment of the principal of and interest on the Series A Notes, the District has pledged to transfer to the Paying Agent for deposit in trust in a special fund designated as the “San Diego Unified School District 2020-21 Tax and Revenue Anticipation Note Repayment Fund” (the “Repayment Fund”), which fund the District will establish and maintain with the Paying Agent while any Notes are outstanding. The amounts pledged by the District for transfer to the Paying Agent for deposit into the Repayment Fund from the Unrestricted Revenues received during each indicated period are hereinafter called the “Pledged Revenues.” The Pledged Revenues will be held in the Repayment Fund until the Notes mature. Said Pledged Revenues will consist of: (i) an amount not less than sixty percent (60%) of the principal amount of all Notes from the first Unrestricted Revenues received by the District in the period from December 15, 2020 to January 14, 2021, inclusive (the “First Set-Aside Period”), and (ii) from the first Unrestricted Revenues received by the District in the period from April 1, 2021 to April 30, 2021, inclusive (the “Second Set-Aside Period”) an amount that together with the amount then on deposit in the Repayment Fund is sufficient to pay the principal of and interest on the Notes when due and to make up any deficiency in the Repayment Fund; provided that if the District issues Notes with maturities on or before April 1, 2021, then the amount deposited to the Repayment Fund in the First Set Aside Period will be not less than one hundred percent (100%) of the principal amount of and all interest paid on any Notes maturing on or prior to April 1, 2021 and the amount deposited to the Repayment Fund in the Second Set Aside Period will equal not less than one hundred percent (100%) of the principal amount of and all interest paid on any Notes maturing after April 1, 2021 and an amount sufficient to make up any deficiency in the Repayment Fund.
In the event that there have been insufficient Unrestricted Revenues received by the District by the last business day of any such period to permit the transfer to the Paying Agent for deposit into the Repayment Fund of the full amount of the Pledged Revenues required to be deposited with respect to such period, then the amount of any deficiency in the Repayment Fund will be satisfied and made up from any other moneys of the District lawfully available for the payment of the principal of the Notes and the interest thereon (all as provided in Sections 53856 and 53857 of the Government Code) (the “Other Pledged Moneys”) on such date or thereafter on a daily basis, when and as such Pledged Revenues and Other Pledged Moneys are received by the District.
The Repayment Fund will be held by the Paying Agent, in trust, and applied only for the purposes and as directed in the Resolution. Any moneys deposited in the Repayment Fund will be for the benefit of the owners of the Notes. All amounts in the Repayment Fund will be held by the Paying Agent, as trustee and pledge holder for the benefit of the owners of the Notes.
On behalf of the District, the County levies and receives ad valorem property taxes for the payment of general obligation bonds of the District which funds are legally restricted to the payment of such bonds and are not available for payment of the Series A Notes.
See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT” for a discussion of available sources of payment of the Notes and the limitations thereon, including constitutional limitations on the District’s ability to levy ad valorem taxes and “LEGAL AND OTHER MATTERS – Limitations on Remedies” herein for a discussion of possible effects of a District bankruptcy proceeding on payment of and security for the Notes.
The District’s Resolution authorizing the issuance of the Series A Notes, states that, in order to satisfy obligations of the District in Fiscal Year 2020-21, the County of San Diego (the “County”) may make a temporary transfer of funds from the County (the “County Loan”) to the District in an amount not exceeding eighty- five percent (85%) of the amount of money which will accrue to the school district during Fiscal Year 2020-21,
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pursuant to Section 42620 et seq. of the California Education Code (the “Education Code”), to the extent that the Series A Notes are not sold, or as otherwise necessary for the District to meet current expenses. If such County Loan is extended, the first moneys thereafter accruing to the District during and attributable to Fiscal Year 2020-21, shall be transferred to the County for repayment of the County Loan, pursuant to Section 42620 et seq. of the Education Code, such transfer taking priority over any transfers to the Repayment Fund for the Series A Notes established under the Resolution.
Lien in the Event of Bankruptcy
The Treasurer-Tax Collector of the County of San Diego acts as Paying Agent for the Notes and holds the Repayment Fund as well as other funds of the District, the County and other public entities located in the County.
A March 1995 ruling of the United States Bankruptcy Court for the Central District of California, concerning an issue of Orange County tax and revenue anticipation notes issued in 1994 under the same statutory authority as the Notes, held that the lien securing the Orange County notes did not attach to revenues received by Orange County after the filing of its bankruptcy petition on December 6, 1994, and therefore, Orange County was not required to set aside the revenues pledged under the note resolution following the bankruptcy, because the lien was a consensual security interest rather than a statutory lien. In July 1995, the United States District Court for the Central District of California reversed the decision of the Bankruptcy Court. Orange County appealed the decision of the District Court to the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”). Before the Ninth Circuit rendered a decision, the parties settled their disputes. Accordingly, it is not clear if the District (or a State-appointed trustee acting on behalf of the District) were to file for bankruptcy, whether a court would require it to set aside revenues as described above.
Because the County Treasurer is in possession of the taxes and other revenues that will be set aside to pay the Notes and may invest these funds in the pooled investment fund, should the District become a debtor in a bankruptcy proceeding, a court might hold that the owners of the Notes do not have a valid lien on the set-aside funds. In that case, unless the Beneficial Owners could “trace” the funds, the Beneficial Owners would be merely unsecured creditors of the District. There can be no assurance that the Beneficial Owners could successfully “trace” the Pledged Revenues or Other Pledged Moneys.
CASH FLOW PROJECTIONS
The District has prepared the accompanying monthly General Fund cash flow statements covering the 2019-20 Fiscal Year and the projected 2020-21 Fiscal Year. The General Fund is used to finance the ordinary operations of the District and is available for any legal authorized purposes. While expenditures generally occur evenly throughout the Fiscal Year, cash receipts occur unevenly. As a result, the General Fund cash balance, absent the use of Note proceeds, tends to show a deficit during parts of the Fiscal Year.
[TO BE UPDATED, pending approval/release of State Budget] The cash flows set forth in the following pages represent the current best estimates of the District of the amount and timing of revenues and expenditures for Fiscal Years 2019-20 and 2020-21, based on information available as of [June 23, 2020, including the May Revision to the Proposed 2020-21 State Budget.] Disbursements for Fiscal Year 2020-21 are based on the District’s Original Adopted Budget which was approved by the Board of Education on June 30, 2020. [Although Governor Gavin Newsom has signed the 2020-21 State Budget into law, due to certain notice requirements and administrative planning, the District’s 2020-21 Budget adopted on June 30, 2020 may be revised to include changes from the State adopted budget. Should that occur, the District will present an amended 2020-21 Budget to its Board for approval within 45 days from the State adopted budget that will incorporate relevant State Budget data.] Additionally, due to the spread of the novel strain of coronavirus, the filing deadline for federal and California tax returns was extended from April 15, 2020 to July 15, 2020. Accordingly, the State’s adopted budget may not reflect the receipt of personal income tax and corporation tax payments received after the State’s budget adoption date.
Fiscal Year 2019-20. Fiscal Year 2019-20 began with a Fiscal Year 2018-19 ending fund balance of $155.5 million. This was $1.6 million above the original projection, due to slight increases in both revenue and expenditures. The increase in revenue related to changes in State aid and property taxes, as well as an increase in
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Lottery due to timing of the 3rd quarter payment. The increase in expenditures related to increases in salaries and benefits, however, the majority of the increase was offset by reimbursements from other funds. In July 2019, the Fiscal Year 2019-20 cash flows had a projected ending fund balance of $172.6 million and the current projections show a $186.6 million ending fund balance.
Key factors affecting the Fiscal Year 2019-20 cash flows include:
1. Local Control Funding Formula (“LCFF”) Revenues, Property Tax Revenues, Redevelopment Agency (“RDA”) Payments; State Apportionment Updates. LCFF revenues are reflecting an increase of approximately $35.9 million over original projections. On June 15, 2020, the California Legislature passed Assembly Bill 76, which amended California Education Code Section 14041.5, deferring the final P-2 payment from June 2020 to July 2020. For the District, the receipt of higher than projected property taxes results in a reduction to the final LCFF State aid payment calculated at P-2. Due to the deferral, the timing of the reduction will be reflected in the cash flows for Fiscal Year 2020-21 in the month of July 2020. The current projections for LCFF revenue have been reduced to reflect increases in property taxes which is the result of higher assessed valuation rates and revenues received for the Redevelopment Property Tax Trust Fund and Asset Liquidation Fund. Note that, when tax revenues increase, the State apportionment for LCFF will decrease and vice versa. The District receives Proposition 30 Education Protection Account (“EPA”) revenues on a quarterly basis. Payments will equal 25 percent of the annual EPA entitlement and future payments may be adjusted for average daily attendance (“ADA”) changes and changes in local tax revenues, as well as previous over and under payments of EPA funds for the prior year. For Fiscal Year 2019-20 the 4th quarter EPA payment is also deferred to July 2020.
2. Increase in Federal Impact Aid. The District received $13.8 million for Federal Impact Aid which was an increase of $3.8 million over projections. The majority of the increase is the result of the close- out for Fiscal Year 2016-17 in the amount of $0.8 million, the close-out for Fiscal Year 2017-18 in the amount of $1.8 million, and an initial payment for Fiscal Year 2018-19 that was $1.2 million more than projected.
3. Increase in Other State Revenues, General Purpose. The District received $13.2 million for the Special Education Early Intervention Preschool Grant which could be used at the discretion of the District. At the time of budget adoption for Fiscal Year 2019-20, this funding was estimated to be $24.0 million and it was thought to be restricted. For cash flow purposes, it was projected as part of the categorical programs.
4. Decrease in Lottery. Lottery revenues are estimated to decrease by approximately $4.0 million due to the economic slowdown as a result of the COVID-19 pandemic.
5. Decrease in Categorical Programs. The decrease in Categorical Programs is mostly attributed to the reduction of $24.0 million that was included in the 2019-20 budget proposal for funding local education agencies with a higher-than-average concentration of students with disabilities. The original estimate was $14,549 per eligible pupil and at the time the estimate of eligible pupils was 1,678. Based on the information provided in the May Revision for Fiscal Year 2019-20, it was originally budgeted as a categorical program, however, it was later changed to have less restrictions and became part of the general purpose revenues. Additionally, the estimated funding decreased by approximately one half.
6. Decrease in Special Education AB 602 and Special Education Infants. The State apportionment for Special Education AB 602 and Special Education Infants is projecting a decrease of $6.3 million due to the deferral of the June 2020 State apportionment. The revenue is projected to be received in July 2020.
7. Increase in Interest Revenue. An increase of $2.9 million is estimated for Fiscal Year 2019-20 due to increases in the interest rate at the County Treasury.
8. Increase to Salaries and Benefits. The increase to Salaries and Benefits is attributed to a Memorandum of Understanding (“MOU”) with the individual employee groups related to the COVID-19 pandemic. The MOU states that effective March 16, 2020, employees who are required to report to a school or department and/or are required to come into contact with the public or other employees be compensated for their service at one and a half (1.5) times their standard rate of pay for the hours worked each day they report to work.
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9. Increase to Commercial Payments. The increase to Commercial Payments is mostly due to a $3.0 million prior fiscal year transfer to the County Office of Education for average daily attendance for Fiscal Year 2018-19 relating to students that attended The Monarch School, a private school located within the boundaries of the District. The remaining increase is related to an overall general increase in materials and supplies not accounted for in the original budget.
Fiscal Year 2020-21. The 2020-21 cash flow projections include a beginning cash balance of $186.6 million. The Fiscal Year 2020-21 cash flow projections incorporate the assumptions provided in the Governor’s budget which maintains the LCFF funding at the 2019-20 levels, utilizing a zero cost-of-living adjustment (“COLA”), LCFF funding at 100% full implementation, and an ADA hold harmless provision for 2020- 21 that relies on adjusted ADA for 2019-20. EPA payments are estimated to be $19.4 million. Local taxes are projected to increase by 3%, however, the decrease in projected RDA payments exceeded the projected 3% increase. Property tax transfers to charter schools are projected to increase due to an increase in the rate paid per ADA. In addition to the foregoing, the Fiscal Year 2020-21 cash flow projections include the following significant assumptions:
1. LCFF Deferrals from Prior Year. The 2020-21 cash flow projections for the month of July 2020 include a decrease of $41.4 million for the June 2020 deferral for LCFF and an increase of $4.8 million for EPA. State aid is comprised of three components, LCFF entitlement, EPA funds, and local property taxes. For Fiscal Year 2019-20 the revenue received for property taxes, specifically for the Redevelopment Property Tax Trust Fund, offset the State apportionment and resulted in an overpayment. The adjustment for the overpayment was deferred to July 2020.
2. State Apportionment Deferrals. The District has included the proposed State deferrals in the Fiscal Year 2020-21 projections. If there sufficient federal funds are received, the Director of Finance has the authority to determine if they will be used to offset the deferral payments. Currently the language in Assembly Bill 77 (“AB 77”) breaks down the deferrals as follows:
$1.54 billion from February to be paid in November $2.38 billion from March to be paid in October $2.38 billion from April to be paid in September $2.38 billion from May to be paid in August $2.38 billion from June to be paid in July
3. Loans from Other Funds/Inter-fund Borrowing. The District has included $56.5 million in inter-fund borrowing due to the State deferrals. Each year a resolution is adopted by the Board of Education giving the authority to temporarily transfer money from another fund to cover payment obligations. The amounts transferred shall be repaid either in the same fiscal year, or in the following fiscal year, if the transfer takes place within the final 120 calendar day of a fiscal year.
4. Lottery Revenues. Lottery revenue remains flat. Lottery rates have not increased and there is speculation that due to the economic slowdown, lottery revenues may decline. The current rates are $153 for unrestricted ADA and $54 for restricted ADA.
5. Special Education. Increase in revenue for the Special Education Program (also known as AB 602) of $3.7 million due to the Governor’s proposed funding reform which provides an increase to the base rates per ADA as well as funding for low-incidence. The current projection for Fiscal Year 2020-21 is $63.8 million, however, the funding is also subject to deferrals at the same level as the LCFF apportionment.
6. Learning Loss Mitigation Funding. Increase in revenue for one-time funding for the Coronavirus Aid, Relief, and Economic Security Act. Local Educational Agencies (“LEAs”) can expect to receive funding based on three subsets. Students with Disabilities (“SWD”) based on the Fall 1 Census enrollment of SWDs ages 3 to 22, the LEAs proportion of supplemental and concentration grant funding using the 2019-20 second principal apportionment, and LCFF as of the 2019-20 principal apportionment which is approximately $165 per average daily attendance. Included in the cash flows is the estimate of $16.2 million for LCFF and $28.3 million for
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SWD. While the allocation for the supplemental and concentration grant funding is known, it is still yet to be determined how the funding can be used, currently the assumption is that it will be restricted.
7. Salaries and Benefits. Increase in salaries and benefits are due to the regular step and column increase of 1.45%, the annual increases to health and welfare benefits of 6% which occurs in January of each calendar year, and adjustments for rate changes to CalSTRS and CalPERS. Also included in the projections is the agreement for a longevity stipend for teachers effective June 30, 2020. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION – Employment” for additional information related to each bargaining unit.
The following Fiscal Year 2020-21 cash flows include the issuance of $235,000,000* aggregate principal amount of Series A Notes which, together with premium will generate proceeds of approximately $______(net of costs of issuance). The assumptions and estimates underlying the Fiscal Year 2020-21 projected cash flows are uncertain and, though considered reasonable by the management of the District as of the date hereof, are subject to a wide variety of risks and uncertainties that could cause actual results to differ materially from those contained in the projected cash flows. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT” and “LEGAL AND OTHER MATTERS - Limitations On Remedies” herein. Accordingly, there can be no assurance that the projected results are indicative of the future performance of the District or that actual results will not be materially higher or lower than those contained in the projected cash flows. Inclusion of the projected cash flows in this Official Statement should not be regarded as a representation by any person that the results contained in the projected cash flows will be achieved. As shown in the cash flows, utilizing a variety of assumptions, including those described above, the District projects that it will have an ending fund balance of $133.8 million. Therefore, in the event that any of the District’s assumptions prove to be materially incorrect, such circumstances could have a material adverse effect on the cash position and ending fund balance for Fiscal Year 2020-21.
* Preliminary; subject to change.
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SAN DIEGO UNIFIED SCHOOL DISTRICT FINANCIAL OPERATIONS DIVISION FINANCIAL ACCOUNTING DEPARTMENT TRANS ACTUAL/PROJECTED CASH FLOW – FY 2019-2020
Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Projected Projected JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DEC. 01-09 DEC. 10-31 JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTAL
BEGINNING UNRESTRICTED CASH BALANCE 155,472,532 75,331,120 88,398,845 80,126,974 63,347,869 54,608,802 36,993,915 121,686,148 264,746,311 195,712,087 126,325,184 242,453,704 197,091,575
RECEIPTS
LCFF STATE APPORTIONMENT 18,622,747 18,622,747 38,559,015 33,520,943 33,721,374 0 38,458,804 34,005,893 29,065,611 33,976,617 29,065,611 29,386,155 0 337,005,517 LOCAL TAXES 3,371,852 12,118,412 4,040,450 7,658,617 27,114,087 0 252,885,843 146,910,977 17,597,546 0 287,146,985 14,655,929 88,087,732 861,588,429 HOMEOWNERS' EXEMPTIONS 0 0 0 0 0 0 728,044 1,697,377 0 0 0 1,697,795 727,629 4,850,846 MISCELLANEOUS 0 0 0 0 0 0 0 3,145,574 0 0 0 2,654,144 370,675 6,170,393 TRANSFERS TO CHARTER SCHOOLS (11,601,885) (7,598,903) (15,197,808) (10,213,327) (10,156,935) 0 (10,156,937) (10,156,937) (10,024,984) (19,688,838) (9,691,646) (9,691,646) (9,691,646) (133,871,492)
TOTAL LCFF 10,392,714 23,142,256 27,401,657 30,966,233 50,678,526 0 281,915,754 175,602,884 36,638,173 14,287,779 306,520,950 38,702,378 79,494,390 1,075,743,693
OTHER GENERAL PURPOSE 5,156,027 2,983,230 1,776,525 8,251,865 4,509,409 1,603,423 12,151,370 26,884,466 1,439,721 7,014,489 4,710,125 7,124,833 6,467,026 90,072,509 CATEGORICAL PROGRAMS 17,609,301 6,372,891 5,626,925 5,704,041 6,144,253 48,396 5,593,566 6,797,066 6,006,237 6,463,604 13,662,617 5,991,816 485,826 86,506,540 SPECIAL PROJECTS 3,820,823 747,184 1,918,693 4,208,217 106,297 0 476,339 9,417,426 286,453 11,627,434 1,785,597 3,000,000 3,000,000 40,394,463 PROPERTY SALES 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS FROM RESTRICTED RESOURCES 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS & NOTES 0 57,620,668 60,000,000 50,000,000 60,000,000 0 0 0 0 0 0 0 0 227,620,668 LOANS FROM OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 INTEREST ON LOANS & NOTES 0 587,984 0 1,164,028 0 0 0 752,864 0 402,889 0 0 182,000 3,089,766
TOTAL RECEIPTS 36,978,865 91,454,213 96,723,799 100,294,384 121,438,485 1,651,819 300,137,029 219,454,705 44,370,585 39,796,195 326,679,289 54,819,027 89,629,242 1,523,427,638
DISBURSEMENTS
PAYROLL 71,694,204 55,793,884 67,661,938 73,600,914 81,825,798 7,352,691 62,978,219 62,307,211 72,110,038 75,743,701 72,743,248 73,666,710 76,208,430 853,686,986 PAYROLL BENEFITS 34,197,965 27,470,563 26,202,986 33,443,567 39,347,439 8,513,949 21,140,809 28,939,757 35,355,656 33,151,555 33,784,531 29,096,500 26,564,777 377,210,054 COMMERCIAL PAYMENTS 10,684,492 11,770,715 9,997,960 9,835,044 5,658,699 3,400,066 3,419,917 6,198,101 7,866,247 5,869,240 11,904,097 2,917,946 2,848,517 92,371,040 TRANSFERS TO OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 REIMB. FROM/TO OTHER FUNDS (341,591) (19,337,461) (2,883,842) (2,361,297) (3,751,272) 0 (9,800,148) (25,227,566) (6,527,787) (7,565,004) (8,354,053) (8,500,000) (8,500,000) (103,150,021) SPECIAL PROJECTS 885,207 2,688,787 4,016,628 2,555,261 7,096,889 0 5,706,000 4,177,039 4,600,653 1,983,608 2,175,723 3,000,000 3,000,000 41,885,795 LOANS DUE RESTRICTED RESOURCES 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS DUE OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS & NOTES 0 0 0 0 0 0 132,000,000 0 0 0 98,297,222 0 0 230,297,222
TOTAL DISBURSEMENTS 117,120,276 78,386,489 104,995,670 117,073,489 130,177,552 19,266,706 215,444,796 76,394,542 113,404,808 109,183,099 210,550,768 100,181,156 100,121,724 1,492,301,077
ENDING UNRESTRICTED CASH BALANCE 75,331,120 88,398,845 80,126,974 63,347,869 54,608,802 36,993,915 121,686,148 264,746,311 195,712,087 126,325,184 242,453,704 197,091,575 186,599,094
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SAN DIEGO UNIFIED SCHOOL DISTRICT FINANCIAL OPERATIONS DIVISION FINANCIAL ACCOUNTING DEPARTMENT TRANS PROJECTED CASH FLOW – FY 2020-2021
Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected
JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DEC. 01-09 DEC. 10-31 JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTAL
BEGINNING UNRESTRICTED CASH BALANCE 186,599,094 76,686,152 243,912,949 159,443,456 88,922,521 30,624,309 11,440,505 267,830,873 243,314,955 161,090,072 92,706,388 205,292,453 143,298,001
RECEIPTS
LCFF STATE APPORTIONMENT (24,256,876) 14,664,285 31,255,178 26,395,713 26,596,144 0 31,255,178 26,606,609 19,986,834 21,372,623 16,513,158 16,673,428 21,372,623 228,434,899 LOCAL TAXES 3,473,008 12,481,964 4,161,663 7,888,375 27,927,510 0 260,457,246 150,833,082 18,125,472 18,125,472 295,761,394 26,377,798 25,597,482 851,210,468 HOMEOWNERS' EXEMPTIONS 0 0 0 0 0 0 749,886 1,748,299 0 0 0 1,803,243 694,944 4,996,371 MISCELLANEOUS 0 0 0 0 0 0 0 3,145,574 0 0 0 1,854,426 0 5,000,000 TRANSFERS TO CHARTER SCHOOLS (9,691,646) (8,347,453) (16,694,906) (11,129,937) (11,129,937) 0 (11,129,937) (11,129,937) (11,129,937) (19,477,391) (9,738,695) (9,738,695) (9,738,695) (139,077,168)
TOTAL LCFF (30,475,514) 18,798,796 18,721,935 23,154,151 43,393,717 0 281,332,372 171,203,627 26,982,369 20,020,705 302,535,857 36,970,200 37,926,355 950,564,570
OTHER GENERAL PURPOSE 8,094,525 817,026 1,979,526 6,686,899 4,449,862 0 50,758,387 29,257,214 2,075,179 3,962,919 7,957,214 2,075,179 6,902,679 125,016,607 CATEGORICAL PROGRAMS 23,648,029 4,363,395 6,118,936 6,118,936 6,727,857 0 6,243,936 7,142,396 4,672,458 4,484,658 11,557,129 3,875,737 4,609,658 89,563,124 SPECIAL PROJECTS 3,820,823 747,184 1,918,693 4,208,217 106,297 0 476,339 9,417,426 286,453 11,627,434 1,785,597 3,000,000 3,000,000 40,394,463 PROPERTY SALES 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS FROM RESTRICTED RESOURCES 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS & NOTES 0 242,587,918 0 0 0 0 0 0 0 0 0 0 0 242,587,918 LOANS FROM OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 56,475,673 56,475,673 INTEREST ON LOANS & NOTES 0 476,457 0 1,035,000 0 0 0 750,000 0 400,000 0 0 180,000 2,841,457
TOTAL RECEIPTS 5,087,863 267,790,776 28,739,090 41,203,203 54,677,733 0 338,811,034 217,770,663 34,016,459 40,495,716 323,835,797 45,921,115 109,094,364 1,507,443,812
DISBURSEMENTS
PAYROLL 75,794,950 60,358,509 76,250,123 72,029,128 73,278,822 7,624,134 62,214,049 74,807,899 76,152,155 77,149,715 74,986,893 72,478,238 80,608,435 883,733,051 PAYROLL BENEFITS 33,206,125 29,622,987 32,112,018 34,025,263 32,646,212 8,159,636 23,782,222 35,145,401 35,116,593 35,333,237 34,863,198 34,587,132 36,237,096 404,837,121 COMMERCIAL PAYMENTS 5,114,523 17,393,696 10,329,814 9,343,327 9,454,021 3,400,034 3,218,395 8,156,243 9,371,940 5,412,840 3,263,916 5,850,198 5,780,769 96,089,717 TRANSFERS TO OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 REIMB. FROM/TO OTHER FUNDS 0 (9,500,000) (9,500,000) (6,228,842) (9,500,000) 0 (12,500,000) (21,000,000) (9,000,000) (11,000,000) (6,500,000) (9,000,000) (8,000,000) (111,728,842) SPECIAL PROJECTS 885,207 2,688,787 4,016,628 2,555,261 7,096,889 0 5,706,000 4,177,039 4,600,653 1,983,608 2,175,723 4,000,000 4,000,000 43,885,795 LOANS DUE RESTRICTED RESOURCES 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS DUE OTHER FUNDS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LOANS & NOTES 0 0 0 0 0 0 0 141,000,000 0 0 102,460,000 0 0 243,460,000
TOTAL DISBURSEMENTS 115,000,805 100,563,979 113,208,584 111,724,137 112,975,945 19,183,804 82,420,666 242,286,581 116,241,342 108,879,400 211,249,731 107,915,568 118,626,300 1,560,276,842
ENDING UNRESTRICTED CASH BALANCE 76,686,152 243,912,949 159,443,456 88,922,521 30,624,309 11,440,505 267,830,873 243,314,955 161,090,072 92,706,388 205,292,453 143,298,001 133,766,065
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Sources of Alternate Liquidity
The District has moneys in certain accounts which are designated for certain uses but from which, however, moneys can be borrowed on a temporary basis for its other obligations. Pursuant to Education Code Section 42603, the District could temporarily borrow, for cash flow purposes, up to 75 percent of the maximum of moneys held in any fund or account for the benefit of the General Fund. Such funds include those listed on the following page. The actual amount available to be borrowed at any given time will depend on a variety of factors, including the actual revenues and expenditures attributable to such funds over the course of the Fiscal Year, and any prior borrowings from such funds the District may undertake. There can be no assurances that funds available for borrowing will be sufficient to make up any deficiencies in the Repayment Fund.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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SAN DIEGO UNIFIED SCHOOL DISTRICT ESTIMATE OF ALTERNATE LIQUIDITY(1)(2) FISCAL YEAR 2020-21 TRANs
April 30, 2020 May 31, 2020 June 30, 2020 January 31, 2021 April 30, 2021 June 30, 2021 Actual Projected Projected Projected Projected Projected
Worker’s Comp/Insurance Fund $109,135,012.63 $106,082,810.00 $110,030,726.19 $113,103,363.36 $114,420,207.86 $115,298,104.19 Stores Revolving 915,817.45 1,716,437.00 2,482,144.83 2,000,000.00 1,500,000.00 2,500,000.00 Property Management Fund 14,751,889.68 15,930,999.00 14,421,528.96 13,257,815.29 13,412,652.29 13,515,876.96 County School Facilities Fund 58,465,459.64 59,221,358.00 53,412,019.05 53,659,574.05 53,765,669.05 48,836,399.05 Capital Facilities Fund(2) 53,226,288.66 63,741,580.00 37,734,889.49 - - - Retiree Medical Benefits Funds 3,234,682.86 2,820,439.00 3,157,955.86 3,290,385.94 3,347,141.69 3,384,978.86 Redevelopment Agencies’ Facilities Fund/SIM Revolving 17,316,655.18 6,730,326.00 31,892,662.31 14,252,084.06 9,575,114.31 16,305,543.31 State Preschool Fund 4,086,285.85 6,051,903.96 4,496,096.08 6,872,162.00 5,917,123.00 4,947,097.00
TOTAL $261,132,091.95 $262,295,852.96 $257,628,022.77 $206,435,384.70 $201,937,908.20 $204,787,999.37 ______(1) The General Fund has the ability to borrow monies from any of the above Funds at any time during the Fiscal Year up to 75% of the available balance. The money is accounted for as a temporary borrowing and shall be repaid either in the same Fiscal Year or in the following Fiscal Year if the transfer occurs within the final 120 calendar days of a Fiscal Year. (2) The Capital Facilities Fund will not be available for alternate liquidity purposes for Fiscal Year 2020-21.
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Cash Management Legislation
The District’s operating income consists primarily of two components: a State portion funded from the State’s general fund and a locally-generated portion derived from the District’s share of the 1% local ad valorem property tax authorized by the State Constitution. School districts may be eligible for other special categorical funding, including for State and federal programs. The District received approximately $492.5 million or 37.12% of its general fund revenues from the State (comprised of LCFF and other State Revenue), for Fiscal Year 2018-19. For Fiscal Year 2019-20, the District budgeted to receive approximately 44.8% or $537.8 million general fund revenues from the State, and for Fiscal Year 2020-21, the District budgeted to receive approximately 36.8% or $521.8 million general fund revenues from the State. Accordingly, decreases or deferrals in State revenues, or in State legislative appropriations made to fund education, may significantly affect District operations. Job losses, recession and the abrupt halting of economic activity due to COVID-19 will affect State revenues and in turn, State funding of schools. See “INTRODUCTION - Risks Related to COVID-19” and “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION - State Budget Process – Fiscal Year 2020-21 May Revision” herein.
State funding is guaranteed to a minimum level for school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs under “Proposition 98,” a constitutional and statutory initiative amendment adopted by the State’s voters in 1988, and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution). See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – CONSTITUTIONAL AND STATUTORY INITIATIVES – Proposition 98 and Proposition 111.”
Historically, from time to time, there has been significant volatility in State personal income taxes, sales and use taxes, and corporate taxes, making it difficult for the State to meet its Proposition 98 funding mandate (normally approximately 45% of all State general fund revenues), while providing for other fixed State costs and priority programs and services. Because education funding constitutes such a large part of the State’s general fund expenditures, it was frequently the subject of significant annual budget negotiations and adjustments. In the early 2000’s, the State engaged in the practice of deferring certain apportionments to school districts in order to manage the State’s cash flow. This practice included deferring certain apportionments within a Fiscal Year from one month to a subsequent month as well as deferring certain apportionments from one Fiscal Year to the next.
Due to the Governor’s commitment to buy back deferrals, there were no deferrals for Fiscal Years 2018-19. However, due to COVID-19 and the state of the economy, deferrals are currently scheduled for Fiscal Years 2019-20 and 2020-21.
ISSUANCE OF ADDITIONAL NOTES
Authorization; Limitations
The Resolution contemplates the issuance of an additional series of Notes designated as the Series B Notes, should the District determine such additional borrowing is necessary. The District currently has no plans to issue the Series B Notes, and if authorized and issued, the terms of sale of the Series B Notes would be determined by subsequent action of the Board of Education, subject to the limitations set forth in the Resolution.
Limitations on the issuance of the Series B Notes set forth in the Resolution are as follows: (a) the Series B Notes would be required to be dated the date of issuance thereof, mature on one or more dates (without option of prior redemption) not more than thirteen months thereafter and mature on a date or dates on or after the final maturity date of the Series A Notes; (b) would bear interest payable not more than one year after the date of issuance and at maturity computed on the basis of a 360-day year composed of twelve 30-day months at the rate or rates specified in the note purchase agreement related thereto; and (c) the issuance of the Series B Notes would be subject to the receipt of confirmation from S&P (the “Rating Agency”) (if such Rating Agency rated the Series A Notes) to the effect that the issuance of the Series B Notes would not cause a reduction or withdrawal in such Rating Agency’s then-current rating on the Series A Notes. After issuance of the Series A Notes in the principal amount of
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$235,0000,000,* the District is authorized to issue additional Notes in the principal amount of $45,000,000* as the Series B Notes.
Security for Payment
The Series A Notes and the Series B Notes, if issued, are payable on a parity with each other; provided, that, if for any reason amounts in the Repayment Fund are insufficient to pay both series of Notes in full, such amounts will be applied to the payment of principal of and interest payable upon each series of Notes in the order of the due dates thereof.
TAX MATTERS
In the opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel to the District (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series A Notes is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. The amount treated as interest on the Series A Notes and excluded from gross income may depend upon the taxpayer’s election under Internal Revenue Notice 94-84. Bond Counsel is of the further opinion that interest on the Series A Notes is not a specific preference item for purposes of the federal alternative minimum tax. A complete copy of the proposed form of opinion of Bond Counsel is set forth in “APPENDIX B – PROPOSED FORM OF OPINION OF BOND COUNSEL” hereto.
Notice 94-84, 1994-2 C.B. 559, states that the Internal Revenue Service (“IRS”) is studying whether the amount of the payment at maturity on debt obligations such as the Series A Notes that is excluded from gross income for federal income tax purposes is (i) the stated interest payable at maturity, or (ii) the difference between the issue price of the Series A Notes and the aggregate amount to be paid at maturity of the Series A Notes (the “original issue discount”). For this purpose, the issue price of any maturity of the Series A Notes is the first price at which a substantial amount of such maturity of the Series A Notes is sold to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). Until the IRS provides further guidance, taxpayers may treat either the stated interest payable at maturity or the original issue discount as interest that is excluded from gross income for federal income tax purposes. However, taxpayers must treat the amount to be paid at maturity on all tax exempt debt obligations with a term that is not more than one year from the date of issue in a consistent manner. Taxpayers should consult their own tax advisors with respect to the tax consequences of ownership of the Series A Notes if original issue discount treatment is elected.
Series A Notes purchased, whether at original issuance or otherwise, for an amount higher than the principal amount payable at maturity (“Premium Series A Notes”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of obligations, like the Premium Series A Notes, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Noteholder’s basis in a Premium Series A Note, will be reduced by the amount of amortizable bond premium properly allocable to such Noteholder. Holders of Premium Series A Notes should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.
The Code imposes various restrictions, conditions, and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series A Notes. The District has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Series A Notes will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Series A Notes being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Series A Notes. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or
* Preliminary; subject to change.
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not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Series A Notes may adversely affect the value of, or the tax status of interest on, the Series A Notes. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.
One of the covenants of the District referred to above requires the District to reasonably and prudently calculate the amount, if any, of excess investment earnings on the proceeds of the Series A Notes which must be rebated to the United States, to set aside from lawfully available sources sufficient moneys to pay such amounts and to otherwise do all things necessary and within its power and authority to ensure that interest on the Series A Notes is excluded from gross income for federal income tax purposes. Under the Code, if the District spends 100% of the proceeds of the Series A Notes within six months after issuance, there is no requirement that there be a rebate of investment profits in order for interest on the Series A Notes to be excluded from gross income for federal income tax purposes. The Code also provides that such proceeds are not deemed spent until all other available moneys (less a reasonable working capital reserve) are spent. The District expects to satisfy this expenditure test or, if it fails to do so, to make any required rebate payments from moneys received or accrued during the 2020-21 Fiscal Year. To the extent that any rebate cannot be paid from such moneys, California law is unclear as to whether such covenant would require the District to pay any such rebate. This would be an issue only if it were determined that the District’s calculation of expenditures of Series A Notes proceeds or of rebatable arbitrage profits, if any, was incorrect.
Although Bond Counsel is of the opinion that interest on the Series A Notes is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the Series A Notes may otherwise affect a Noteholder’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Noteholder or the Noteholder’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.
Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series A Notes to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Noteholders from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Series A Notes. Prospective purchasers of the Series A Notes should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion.
The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Series A Notes for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the District, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The District has covenanted, however, to comply with the requirements of the Code.
Bond Counsel’s engagement with respect to the Series A Notes ends with the issuance of the Series A Notes, and, unless separately engaged, Bond Counsel is not obligated to defend the District or the Noteholders regarding the tax-exempt status of the Series A Notes in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its appointed counsel, including the Noteholders, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of the IRS’s positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the Series A Notes 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 Series A Notes, and may cause the District or the Noteholders to incur significant expense.
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LEGAL AND OTHER MATTERS
Legality For Investment In California
Under the provisions of the State of California Financial Code, the Series A Notes are legal investments for commercial banks in the State to the extent that the Series A Notes, in the informed opinion of the bank, are prudent for the investment of funds of its depositors, and under provisions of the Government Code, the Series A Notes are eligible to secure deposits of public moneys in the State.
Limitations On Remedies
General. Following is a discussion of certain considerations in the event that the District should become a debtor in a bankruptcy proceeding. It is not an exhaustive discussion of the potential application of bankruptcy law to the District. The discussion is based on the United States Bankruptcy Code (the “Bankruptcy Code”) as now in effect and the few relevant judicial decisions to date. The Bankruptcy Code could be amended or construed differently in future judicial decisions (including as a result of possible future decisions in the pending analogous insolvency proceedings for the Commonwealth of Puerto Rico). Any such action could affect the possible application of bankruptcy law to the District.
State law contains a number of safeguards to protect the financial solvency of school districts. See “APPENDIX A – FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT – FINANCIAL AND OPERATING INFORMATION – AB 1200 Budget Requirements; County and State Oversight; Reports and Certifications.” If the safeguards are not successful in preventing a school district from becoming insolvent, the State Superintendent of Public Instruction (the “State Superintendent”), operating through an administrator appointed by the State Superintendent, may be authorized under State law to file a petition under Chapter 9 of the United States Bankruptcy Code (the “Bankruptcy Code”) on behalf of the District for the adjustment of its debts, assuming that the District meets certain other requirements contained in the Bankruptcy Code necessary for filing such a petition. Under current State law, the District is not itself authorized to file a bankruptcy proceeding, and it is not subject to an involuntary bankruptcy proceeding.
Bankruptcy courts are courts of equity and as such have broad discretionary powers. A District bankruptcy proceeding could result in delays or reductions in payments on the Series A Notes. Regardless of any specific adverse determinations in any District bankruptcy proceeding, the fact of a District bankruptcy proceeding could have an adverse effect on the marketability and value of the Notes.
Statutory Lien. The pledge of Unrestricted Revenues to secure the Notes may be a statutory lien entitled to the protection afforded to such liens under the federal Bankruptcy Code. Section 53856 of the California Government Code provides that the resolution authorizing the Notes must specify what taxes, income, revenue, cash receipts or other moneys are pledged for the payment of the Notes, and that the Notes (including interest on the Notes) “shall be a first lien and charge against, and shall be payable from the first moneys received by the local agency from, such pledged moneys.” In a 1995 decision rendered in a bankruptcy proceeding involving Orange County, California, as debtor, the United States District Court for the Central District of California, reversing a bankruptcy court decision, held that Section 53856 imposed a statutory lien on pledged revenues securing the county’s tax and revenue anticipation notes. An appeal from the decision was settled before being heard by the Ninth Circuit. Accordingly, it is not clear if the District (or a State-appointed trustee acting on behalf of the District) were to file for bankruptcy, whether a court would require it to set aside revenues to pay the Notes. See “SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES - Lien in the Event of Bankruptcy.”
Automatic Stay on Remedies. The Unrestricted Revenues do not qualify as “special revenues” under the Bankruptcy Code. Consequently, the automatic stay provisions of the Bankruptcy Code would apply, preventing Noteholders from taking any action to collect any amount from the District or to enforce any obligation of the District, without the bankruptcy court’s permission. In addition, Chapter 9 prevents a bankruptcy court from interfering with the political or governmental powers of a political subdivision debtor, any of its property or revenues or the use or enjoyment of its income producing property, unless the political subdivision debtor confirms a plan of adjustment to that effect or otherwise consents to that action. Accordingly, payments that become due and owing on the Notes during the pendency of a Chapter 9 proceeding could be delayed, unless the District chooses to
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pay them on time. It is also possible that the bankruptcy court could approve an alternate use of the Unrestricted Revenues, if the Noteholders are afforded adequate protection.
Risks in a Plan of Adjustment. If the District should become a debtor in a Chapter 9 proceeding, then it must propose a plan of adjustment of its debts. In a plan, the District may be able to alter the priority, interest rate, principal amount, payment terms, collateral, maturity dates, payment sources, covenants (including tax-related covenants), and other terms or provisions of the Notes and other transaction documents related to the Notes, if the bankruptcy court determines that the plan is fair, equitable, not unfairly discriminatory and is in the best interests of creditors and otherwise complies with the Bankruptcy Code. Chapter 9 of the Bankruptcy Code does not limit or impair the power of a state to control, by legislation or otherwise, a political subdivision of the state in the exercise of its political or governmental powers, including expenditures for the exercise.
Amounts Held in County Treasury Pool. The County on behalf of the District is expected to be in possession of the moneys held in the Repayment Fund to repay the Notes and to invest these funds in the County’s Treasury Pool, as described in “SECURITY FOR AND SOURCES OF PAYMENT OF THE NOTES” and “APPENDIX E – SAN DIEGO COUNTY INVESTMENT POOL.” Should those investments suffer losses, there may be delays or reductions in payments on the Notes. See “SECURITY FOR AND SOURCES OF PAYMENTS OF THE NOTES - Lien in the Event of Bankruptcy” above.
Opinion of Bond Counsel Qualified. The proposed form of opinion of Bond Counsel, attached hereto as APPENDIX B, is qualified by reference to bankruptcy, insolvency and other laws relating to or affecting creditor’s rights.
Litigation
No litigation is pending or threatened concerning the validity of the Series A Notes, and a certificate of the District to that effect will be furnished to the Underwriters at the time of the original delivery of the Series A Notes. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the District’s ability to receive pledged revenues or contesting the District’s ability to issue the Series A Notes.
There are a number of lawsuits and claims pending against the District. In the opinion of the District, the aggregate amount of the uninsured liabilities of the District under these lawsuits and claims will not materially affect the finances of the District.
Cyber Incident
In October 2018, the District investigated multiple reports of phishing emails that were attempting to gather the log-in information of District staff members. In the course of completing the investigation, the District discovered that an unauthorized person or unauthorized persons were gathering network access log-in information from staff to gain entry to the District's network, which includes the District's student database. Depending on the login access level, the student database offers complete access to personal identifying information, health information, scheduling and grade information of the District's students. The District believes that this database breach occurred in January 2018, and it is possible that personal data of students and staff was exposed to unauthorized persons between January 2018 and November 1, 2018. When the District became aware of the threat to student and staff data, the District promptly took steps to secure the system and identify the scope of the incident with the assistance of law enforcement. The District considered and implemented additional security measures, reviewed and audited its practices in order to reduce the risk that another data breach might occur in the future, and coordinated its investigation and response to the incident with law enforcement to bring the perpetrator of the incident to justice. On December 21, 2018, the District informed students and their parents that the personal data of students may have been compromised as a result of the data breach. The District has not suffered any material financial consequences to date as a result of the incident. There can be no assurance that the District’s additional security measures will be successful in thwarting future breaches. Successful breaches could result in, for example, unauthorized access to, disclosure, modification, misuse, theft, loss, or destruction of student or other third party data; the loss of access to critical data or systems through ransomware, destructive attacks or other means; unauthorized transfers of District funds; and delays, service or system disruptions or denials of service.
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MUNICIPAL ADVISOR
KNN Public Finance, LLC (“KNN”) has been employed by the District to perform municipal advisory services in relation to the sale and delivery of the Series A Notes (the “Municipal Advisor”). KNN will not participate in the underwriting of the Series A Notes. The Municipal Advisor is not contractually obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. Fees charged by the Municipal Advisor are not contingent upon the sale of the Series A Notes.
RATING
The District has obtained from S&P Global Ratings, a business unit of Standard & Poor’s Financial Services LLC (“S&P”) a rating of “______” on the Series A Notes. Certain information was supplied by the District to S&P to be considered in evaluating the Series A Notes. The rating reflects only the view of S&P and any explanation of the significance of such rating may be obtained only from S&P, at the following address: S&P, 55 Water Street, New York, New York 10041, telephone: (212) 438-2000. There is no assurance that the rating will be retained for any given period of time or that the same will not be revised downward or withdrawn entirely by the rating agency if, in its judgment, circumstances so warrant. The District undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of the rating obtained may have an adverse effect on the market price of the Series A Notes.
UNDERWRITING
The Series A Notes are being purchased for public offering by UBS Financial Services Inc., as representative of itself and BofA Securities, Inc. (collectively, the “Underwriters”). The Underwriters have agreed to purchase the Series A Notes for an aggregate price of $______, representing the principal amount of the Series A Notes of $______, plus an original issue premium of $______, less an Underwriters’ discount of $______. The Note Purchase Agreement provides that the Underwriters will purchase all of the Series A Notes if any are purchased. The obligation to make such purchase is subject to certain terms and conditions set forth in the Note Purchase Agreement.
The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the District, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the District.
UBS Financial Services Inc. (“UBS FSI”) has entered into a distribution and service agreement with its affiliate UBS Securities LLC (“UBS Securities”) for the distribution of certain municipal securities offerings. Pursuant to such agreement, UBS FSI will share a portion of its underwriting compensation with UBS Securities. UBS FSI and UBS Securities are each subsidiaries of UBS Group AG.
BofA Securities, Inc., an underwriter of the Series A Notes, has entered into a distribution agreement with its affiliate Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”). As part of this arrangement, BofA Securities, Inc. may distribute securities to MLPF&S, which may in turn distribute such securities to investors through the financial advisor network of MLPF&S. As part of this arrangement, BofA Securities, Inc. may compensate MLPF&S as a dealer for their selling efforts with respect to the Series A Notes.
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ADDITIONAL INFORMATION
The purpose of this Official Statement is to supply information to prospective buyers of the Series A Notes. Quotations from and summaries and explanations of the Series A Notes, the Resolution and statutes and documents contained herein do not purport to be complete, and reference is made to said documents and statutes for a full and complete statement of their provisions.
The District regularly prepares a variety of reports, including audits, budgets and related documents, as well as certain monthly activity reports. Any owner or Beneficial Owner of a Series A Note may obtain a copy of any such report, as available, from the District. The District may require the payment of the costs of duplication of any such report requested.
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Any statement in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or owners of any of the Series A Notes.
All data and tables contained herein have been taken or constructed from District records and other sources, unless otherwise indicated. Appropriate District officials, acting in their official capacity, have reviewed this Official Statement and have determined that as of the date hereof the information contained herein with respect to the District is, to the best of their knowledge and belief, true and correct in all material respects and does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading. An appropriate District official will execute a certificate to this effect upon delivery of the Series A Notes. This Official Statement and its distribution have been duly authorized and approved by the Board of Education of the District.
SAN DIEGO UNIFIED SCHOOL DISTRICT
By: Superintendent of Public Education
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APPENDIX A
FINANCIAL AND ECONOMIC INFORMATION FOR THE DISTRICT
TABLE OF CONTENTS Page
FINANCIAL AND OPERATING INFORMATION ...... A-2 District Organization ...... A-2 Facilities, Staff and Enrollment ...... A-3 Employment ...... A-3 Charter Schools of the District ...... A-4 State Budget Process ...... A-5 LCFF and the District ...... A-16 District’s Response to the Final 2020-21 State Budget ...... A-19 Other District Revenues ...... A-20 Significant Accounting Policies and Audited Financial Statements...... A-21 Financial Statements ...... A-21 Fund Balances ...... A-23 School District Budgeting Process ...... A-23 AB 1200 Budget Requirements; County and State Oversight; Reports and Certifications ...... A-24 Assessed Valuation ...... A-25 Tax Rates and Levies and Collection Procedures...... A-28 Tax Rates ...... A-31 Secured Tax Charges and Delinquencies ...... A-31 The Teeter Plan ...... A-31 Direct and Overlapping Debt ...... A-33 Long Term Obligations ...... A-35 Tax Rate Reserves for Proposition MM, Proposition S, Proposition Z and Measure YY ...... A-38 Pension Plans ...... A-39 Post-Retirement Programs ...... A-43 Self-Insurance and Commercial Insurance ...... A-44 CONSTITUTIONAL AND STATUTORY INITIATIVES ...... A-44 FUTURE INITIATIVES ...... A-48 DISTRICT ECONOMY ...... A-48 City of San Diego ...... A-49 Population ...... A-50 Employment ...... A-51 City Economy ...... A-52 Major Employers ...... A-52 Industry ...... A-54 Building Permits ...... A-55 Median Home Sale Prices ...... A-56 Commerce ...... A-57 Transportation ...... A-57 Research and Development ...... A-58 Visitor and Convention Activity ...... A-58 Education ...... A-60 Utilities ...... A-60
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FINANCIAL AND OPERATING INFORMATION
The San Diego Unified School District (the “District”) provides elementary and secondary educational services to residents of a 211-square-mile area that includes most of the City of San Diego and a small adjoining unincorporated area. The District has operated as a unified school district under the laws of the State of California (the “State”) continuously since 1936. The District is the second largest school district in the State in terms of enrollment.
The economic and demographic data contained in this Appendix are the latest available, but may be as of dates and for periods before the economic impact of the COVID-19 pandemic and the measures instituted to slow it. Accordingly, the information may not necessarily be indicative of the current financial condition or future economic prospects of the District, the County or the region.
District Organization
The District is governed by an independent Board of Education (the “Board”) consisting of five members elected at large for overlapping four-year terms.
Cynthia Marten, Superintendent of Public Education. The District appointed Cynthia Marten Superintendent effective July 1, 2013. Ms. Marten has served as a teacher and administrator for more than 25 years, including her most recent position as Principal at Central Elementary School (“Central”) for six years prior to her appointment as Superintendent. She began her career as a teacher in the Poway Unified School District, moving to Central, a District school, in 2003. During her tenure at Central, the school’s Academic Performance Index score rose from 631 to 788. Ms. Marten is a product of the District, having attended Hardy Elementary School and Horace Mann Middle School before moving to La Jolla Country Day School for high school. She received her Bachelor’s Degree from the University of Wisconsin La Crosse and holds a Master’s Degree from the University of California San Diego in curriculum and instruction. Since beginning in her role as Superintendent, Ms. Marten has brought a District-wide singular focus on creating quality schools in every neighborhood. A clear direction for implementing the Board of Education’s Vision 2020 is now at the center of every decision. This alignment allows for greater coherence and efficiencies.
Gregory K. Ottinger, Ed.D., Chief Business Officer. Greg Ottinger was appointed Chief Business Officer effective July 25, 2017. Prior to that time, Dr. Ottinger served as the Executive Director of the District’s Integrated Technology Division and Information Technology Department. Dr. Ottinger has also served as Executive Director and Senior Information Technology Officer, Director of Online Blended Learning and Technology Integration Architect at the San Diego County Office of Education. He also is a K-12 Online Program Reviewer for the Colorado Department of Education and a Board Member of The Raptor Institute, a non-profit focused on conservation through education and inspiration. Dr. Ottinger received his Bachelor’s Degree from the University of California, San Diego, Teaching Credential and Administrative Credential and Ed.D. in Educational Leadership from San Diego State University and is currently earning a CORe Credential of Business from the Harvard Business School.
Debbie Foster, Executive Director, Financial Planning and Development. Debbie Foster has spent her career in the Finance Division of the District. With over 30 years of experience managing all facets of school district financing, budgeting, and fiscal operations, her experience and expertise are invaluable to the operations of the District. Ms. Foster oversees all Financial Audits and Reviews for the District including the District’s Annual External Audit, Federal Program Monitoring reviews and is well-versed in the laws and regulations. She represented the District and supervised District staff in the financial Districtwide application implementation. She oversees the District Advisory Council (DAC) support team as well as the State and federal compliance team. For many years, she held the position of Budget Director, responsible for budget development and budget operations. In her current role of Executive Director, Financial Planning & Development, Ms. Foster is responsible for delivering the District budget for Board adoption, as well as oversight of the management and operations of all departments within the Finance Division.
Jodie Macalos, Controller. Jodie Macalos has worked in the Finance Division at the District for over 25 years. She has held positions as a Senior Financial Accountant and Financial Accounting Manager, and in August
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2018 was appointed Controller. As Controller, Ms. Macalos is responsible for the management and oversight of Accounts Payable, Financial Accounting, and Fiscal Control. She is also responsible for preparing the District’s Tax and Revenue Anticipation Notes (“TRANs”) cash flows, the District’s General Fund cash flows, and has oversight of the District’s internal auditors as well as the annual external audit. Ms. Macalos recently has partnered with the Council of ASB Presidents to mentor the students on financial literacy. Ms. Macalos has a Bachelor of Science in Accounting from the University of San Diego and worked in public accounting for six years prior to working for the District.
Andra M. Greene, General Counsel. Andra M. Greene was appointed the District’s General Counsel effective July 1, 2013. Ms. Greene is an experienced school attorney specializing particularly in finance, land use, facilities and labor/personnel matters. With more than twenty-one years of experience in the practice of law, she has represented and advised school districts throughout in a wide array of legal matters; including tax-related litigation, bond measures, state funding audits, redevelopment claims and election-related litigation. Since October 2009, Ms. Greene has served as the District’s lead legal counsel in complex cases and is responsible for negotiating several high value interagency, multi-party facilities development agreements. Additionally, she serves as the San Diego County Office of Education’s representative on the San Diego Redevelopment Oversight Board. Ms. Greene has a juris doctor from the University of San Diego School of Law.
Facilities, Staff and Enrollment
As of September 13, 2019, the District operates 108 elementary schools, 9 K-8 schools, 25 middle/junior high schools, 23 senior high schools, 12 atypical/alternative schools, 47 State preschool sites, 4 child development centers, 4 special education centers and is the sponsoring agency for 45 charter schools. The District’s 2019-20 budget for all funds as of July 1, 2019 provides for the employment of approximately 6,472 full-time equivalent certificated staff positions, 5,452 full-time equivalent classified employees and over 5,000 active hourly certificated and classified employees. As of September 13, 2019, the District’s K-12 enrollment (excluding charter schools and preschool students) totaled 103,336, representing more than 15 different ethnic groups. For the charter schools that utilize the District’s enrollment reporting database, the charter school enrollment is 12,633. The District’s racial/ethnic distribution of students is as follows: 44.0% Latino, 24.1% White, 7.5% African-American, 5.2% Filipino, 9.6% Asian/Indo-Chinese, 0.4% Pacific Islander, 0.3% Native American and 8.4% Multiracial. For fiscal year 2018-19 it is currently estimated that 57.6% of District students are eligible for free or reduced price meals, approximately 875 foster youth and 8,016 homeless students are enrolled, approximately 8,015 students from military families are enrolled, and 20.9% of students are English learners, whose native languages constitute more than 56 different languages and dialects.
Employment
The District negotiates agreements with seven bargaining units under the Educational Employment Relations Act. These bargaining units and their approximate number of members budgeted for Fiscal Year 2019-20 are as set forth in the table below. The table and information summarizes the current state of affairs with respect to the District’s bargaining units and non-represented employees. Each bargaining unit may have additional proposed changes to compensation and other terms and conditions with cost factors that are unique to such units, the costs of which are included in these figures, but the details may not be included herein.
The District is in the process of negotiating longevity terms with the Paraeducator and Operations-Support Services bargaining units and, therefore, expects that any additional compensation agreed to with the employee bargaining units would be offset with adjustments to other items in its current budget. Once agreements are approved by the District Board and the respective union, they are submitted to the County Board of Education.
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BARGAINING UNITS San Diego Unified School District
Employees(1) Bargaining Unit(2) Expiration Date
6,115 San Diego Education Association (SDEA) June 30, 2020
1,332 Office-Technical and Business Services (CSEA OTBS) San Diego June 30, 2020 Chapter 788 1,774 Operations-Support Services (CSEA OSS) San Diego Chapter 724 June 30, 2020(3) 1,917 Paraeducators (CSEA PARA) San Diego Chapter 759 June 30, 2020(3) 240 Administrators’ Association of San Diego (AASD Classified) June 30, 2020 300 Administrators’ Association of San Diego (AASD Certificated) June 30, 2020 40 Police Officers’ Association (POA) June 30, 2020 Non-Represented Employees(2) 33 Confidential Employees N/A 70 Management Employees N/A ______(1) Approximate number of full-time equivalent employees budgeted for Fiscal Year 2019-20. (2) All contracts are set to expire on June 30, 2020 and successor negotiations are in process during the current fiscal year. (3) Currently negotiating terms for adjustments to the current longevity stipend language. Source: The District.
Salary Increases. On July 30, 2019, the Board of Education approved a tentative agreement between the District and SDEA that includes a 3.7% wage increase effective January 1, 2020, as well as a longevity stipend for educators effective June 30, 2020 at 11:59 P.M. The longevity stipends are limited to SDEA members that have more than 22 years of creditable service. The wage increases were provided to employees of all bargaining units pursuant to the equity clauses of all of the collective bargaining agreements and will be extended to the Non- represented Management and Confidential employees. This signed agreement, is an increase of approximately $4.2 million from what was submitted in the District’s 2019-20 proposed budget.
Supplementary Early Retirement Plan (SERP). The District and all bargaining units agreed to the implementation of a 2017-18 SERP, through Public Agency Retirement Services (“PARS”). A total of approximately 1,128 employees elected early retirement. As of June 30, 2019, the District’s long-term liability related to the SERP was $47,764,675. See “ – Long Term Obligations” herein.
Charter Schools of the District
Charter schools are public schools that are operated as or by nonprofit public benefit corporations, and provide instruction for grades K-12. In the Fall of 2019, the District authorized 45 independently operated charter schools. The San Diego Cooperative Charter School, Mountain View site, voluntarily closed as of December 31, 2019. The District worked with the families to enroll the students and to maintain the course of study as planned by the charter and to have the students remain at their current location, Emerson/Bandini Elementary School. The District continues to work closely with the families and the community to make the transition for the students as seamless as possible.
The District’s charter schools have a combined average daily attendance (“ADA”) of 20,597 as of the 2019-20 first principal apportionment reporting period certified in February 2020. Charter schools within the District may represent an encroachment upon the District’s own enrollment figures when District students transfer to charter schools, with a resulting decrease in ADA and concomitant operating revenues. In fiscal year 2019-20, approximately 14.8% of current charter school students came from, or would otherwise be attending, schools outside of the District, which results in no loss of ADA funding for the District. The District is also required to transfer “in
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lieu of property taxes” to its authorized charter schools, as well as the State Board of Education authorized charter school located on a District site. For the Fiscal Year 2019-20, the estimated total amount of in lieu transferred is $131.77 million. See table below for the District’s Charter School ADA.
San Diego Unified School District Charter School Average Daily Attendance
Charter School Fiscal Year Average Daily Attendance
2009-10 13,129 2010-11 14,873 2011-12 15,845 2012-13 16,923 2013-14 18,489 2014-15 20,002 2015-16 21,601 2016-17 21,752(1) 2017-18 21,628(2) 2018-19 21,457(2) 2019-20 21,464(3) ______(1) The Charter School ADA for Fiscal Year 2016-17 is based on the third and final revision to annual ADA counts, certified in June 2019. (2) The Charter School ADA for Fiscal Year 2017-18 is based on the second revision to annual ADA counts and for Fiscal Year 2018-19, the ADA is based on the annual count, certified in February 2020. (3) As of February 2020. Source: The District
State Budget Process
General. The District’s operating income consists primarily of two components: a State portion funded from the State’s general fund and a locally-generated portion derived from the District’s share of the 1% local ad valorem property tax authorized by the State Constitution. School districts may be eligible for other special categorical funding, including for State and federal programs. The District received approximately $492.5 million or 37.12% of its general fund revenues from the State (comprised of LCFF and other State Revenue), for Fiscal Year 2018-19. For Fiscal Year 2019-20, the District budgeted to receive approximately 44.8% or $537.8 million general fund revenues from the State, and for Fiscal Year 2020-21, the District budgeted to receive approximately 36.8% or $521.8 million general fund revenues from the State. Accordingly, decreases or deferrals in State revenues, or in State legislative appropriations made to fund education, may significantly affect District operations.
State funding is guaranteed to a minimum level for school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs under “Proposition 98,” a constitutional and statutory initiative amendment adopted by the State’s voters in 1988, and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution). See “CONSTITUTIONAL AND STATUTORY INITIATIVES – Proposition 98 and Proposition 111” herein.
The State’s Proposition 98 funding mandate normally commands about 45% of all State general fund revenues. Because education funding constitutes such a large part of the State’s general fund expenditures, it is at the heart of annual budget negotiations and adjustments.
Adoption of Annual State Budget. According to the State Constitution, the Governor of the State (the “Governor”) must propose a budget to the State Legislature no later than January 10 of each year. Under an initiative constitutional amendment approved by the State’s voters on November 2, 2010 as “Proposition 25,” a final budget must be adopted by a simple majority vote (rather than a two-third majority, as was the case prior to the
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passage of Proposition 25) of each house of the Legislature no later than June 15, although this deadline has been routinely breached in the past. (Tax increases continue to require a two-thirds majority vote.) The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget.
Prior to the passage of Proposition 25, there were instances where the State Legislature failed to pass a budget in a timely fashion, and the District cannot predict what circumstances may cause a similar failure in future years. In each year where the State budget lags adoption of the District’s budget, it will be necessary for the District’s staff to review the consequences of the changes, if any, at the State level from the proposals in the Governor’s May Revision for that year, and determine whether the District’s budget will have to be revised. The District cannot predict the final outcome of State budget negotiations, the impact future State Budgets will have on District finances and operations or what actions the State Legislature and the Governor may take to respond to changing State revenues and expenditures. Current and future State Budgets will be affected by national and State economic conditions and other factors which the District cannot control.
Court Decision on State Payments Pending Budget Adoption. When the State budget is not adopted on time, basic appropriations and the categorical funding portion of each district’s State funding are affected differently. Under the rule of White v. Davis (also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is no constitutional mandate for appropriations to school districts without an adopted budget or emergency appropriation, and funds for State programs cannot be disbursed by the State Controller until that time unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the State Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. The Controller has posted guidance as to what can and cannot be paid during a budget impasse at its website: www.sco.ca.gov (such website is not incorporated herein by reference). Should the Legislature fail to pass the budget or emergency appropriation before the start of any Fiscal Year, the District might experience delays in receiving certain expected revenues. The District is authorized to borrow temporary funds to cover its annual cash flow deficits, and as a result of the White decision, the District might find it necessary to increase the size or frequency of its cash flow borrowings, or to borrow earlier in the Fiscal Year. The District does not expect the White decision to have any long-term effect on its operating budgets.
Aggregate State Education Funding. The Proposition 98 guaranteed amount for education is based on prior-year funding, as adjusted through various formulas and tests that take into account State taxes, local property tax proceeds, school enrollment, per-capita personal income, and other factors. The State’s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given Fiscal Year’s budget, from the Governor’s initial budget proposal to actual expenditures to post-year-end revisions, as more accurate information regarding the various factors becomes available. The guaranteed amount will generally increase as enrollment and per capita personal income grow.
If, at year-end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as a “settle-up.” If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster than personal income (or sooner, as the State Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as a “maintenance factor.”
The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years’ Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds one Fiscal Year to the next; by permanently deferring the year-end apportionment from June
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30 to July 2; by suspending Proposition 98, and by proposing to amend the Constitution’s definition of the guaranteed amount and settle-up requirement under certain circumstances.
The District’s principal funding formulas and revenue sources are derived from the budget of the State of California. The following information concerning the State of California’s budgets has been obtained from publicly available information which the District believes to be reliable; however, the State has not entered into any contractual commitment with the District, the County, the Underwriters, Bond Counsel and Disclosure Counsel nor the Owners of the Notes to provide State budget information to the District or the owners of the Notes. Additional information regarding State budgets is available at various State-maintained websites including www.dof.ca.gov, which website is not incorporated herein by reference.
2019-20 State Budget. On June 27, 2019, Governor Newsom signed a final State budget for Fiscal Year 2019-20 (the “2019-20 State Budget”) in the total amount of $214.8 billion, including $147.8 billion from the State General Fund. The 2019-20 State Budget projects that the State will end Fiscal Year 2018-19 with total reserves of $19.2 billion, of which $16.5 billion is in the Rainy Day Fund, $1.4 billion in the Special Fund for Economic Uncertainties, $900 million in the Safety Net Reserve, and approximately $380 million in the Public School System Stabilization Account. Since the 2019-20 State Budget preceded the COVID-19 pandemic, it did not take into account the significant adverse impacts it will have on the State’s financial condition beginning in fiscal year 2019- 20. The May Revision (as defined herein) for Fiscal Year 2020-21 significantly revises the projections of revenues and expenditures in the 2019-20 State Budget. Further, the May Revision proposes to defer $1.9 billion of LCFF apportionments due in Fiscal Year 2019-20 to Fiscal Year 2020-21. For more information on the May Revision, see “ – Fiscal Year 2020-21 May Revision.” Certain limited information from the 2019-20 State Budget relating to the funding of education is provided herein as a historical baseline solely for context and reference.
See “CONSTITUTIONAL AND STATUTORY INITIATIVES – Proposition 2” and “– Rainy Day Fund” herein. The 2019-20 State Budget makes an additional payment of $9 billion over the four succeeding fiscal years to pay down unfunded pension liabilities, including $3 billion to CalPERS, $2.9 billion to CalSTRS on behalf of the State, and $3.15 billion to CalSTRS and CalPERS on behalf of schools. The 2019-20 State Budget also invests $4.5 billion to eliminate the so-called ‘Wall of Debt’ and reverses the debt deferral undertaken during the last recession.
With respect to K-12 education, the 2019-20 State Budget sets the minimum funding guarantee at $81.1 billion, including $55.9 billion from the State general fund, reflecting an increase of $2.7 billion from the prior-year level. For K-12 schools, the 2019-20 State Budget sets ongoing per-pupil spending at $11,993 and includes total funding of $103.4 billion ($58.8 billion General Fund and $44.6 billion other funds) for all K-12 education programs. For Fiscal Year 2019-20, the 2019-20 State Budget includes the constitutionally required deposit into the Public School System Stabilization Account of $376.5 million which does not initiate school district reserve caps (as the amount in the account is not equal to or greater than 3 percent of the total K-12 share of the Proposition 98 Guarantee). The 2019-20 State Budget also provides $1.9 billion in new Proposition 98 funding for the LCFF, reflecting a 3.26 percent COLA. Other significant features of the 2019-20 State Budget affecting K-12 schools include the following:
Homeless Youth Education. The 2019-20 State Budget includes an increase of $500,000 one- time Proposition 98 General Fund for the San Diego Unified School District to support the education of homeless youth.
Special Education. The 2019-20 State Budget includes $152.6 million to provide all Special Education Local Plan Areas with at least the Statewide target rate for base special education funding, approximately $557 per unit of average daily attendance, under the existing special education funding formula. The 2019-20 State Budget also includes $492.7 million for special education allocated based on the number of children ages 3 to 5 years with exception needs that the school district is serving.
CalSTRS and CalPERS. The 2019-20 State Budget includes a $3.15 billion non-Proposition 98 General Fund payment on their behalf to CalSTRS and the CalPERS Schools Pool. Of this amount, an estimated $850 million will buy down the employer contribution rates in 2019-20 and
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2020-21. This payment is expected to save employers $6.1 billion over the next three decades, with an estimated reduction in the out-year contribution rate to CalSTRS of 0.3 percentage points, and to the CalPERS Schools Pool of 0.1 to 0.3 percentage points.
After School Programs. The 2019-20 State Budget includes $50 million ongoing Proposition 98 General Fund to provide an increase of approximately 8.3 percent to the per-pupil daily rate for After School Education and Safety Program (increasing this rate from $8.19 to $8.87 per day).
Teacher Training and Resources. The 2019-20 State Budget includes $43.8 million one-time non-Proposition 98 General Fund to provide training and resources for classroom educators, including teachers and paraprofessionals, comprised of $37.1 million for the Educator Workforce Investment Grants for teachers and paraprofessionals, and $6.7 million for the California Subject Matter Projects. The 2019-20 State Budget also includes $13.8 million ongoing Federal funds to establish the “21st Century California Leadership Academy,” to provide professional learning opportunities for public K-12 administrators and school leaders.
Teacher Recruitment. To recruit and retain qualified teachers in school districts with high rates of under-prepared teachers, the 2019-20 State Budget includes $89.8 million one-time non- Proposition 98 General Fund to provide up to 4,487 grants of $20,000 for students enrolled in a professional teacher preparation program who commit to working in a high-need field at a priority school for at least four years.
Kindergarten Programs. The 2019-20 State Budget includes $300 million one-time non- Proposition 98 General Fund to construct new or retrofit existing facilities to support full-day kindergarten programs, which will increase participation in kindergarten by addressing barriers to access.
Proposition 98 Settle-Up. The 2019-20 State Budget includes an increase of $686.6 million for K-12 schools and community colleges to pay the balance of past year Proposition 98 funding owed through 2017-18.
Classified School Employees Summer Assistance Program. The 2019-20 State Budget includes an increase of $36 million one-time Proposition 98 General Fund to provide an additional year of funding for this program, which provides a State match for classified employee savings used to provide income during summer months.
Proposed 2020-21 State Budget. On January 10, 2019, Governor Newsom released California’s Proposed Fiscal Year 2020-21 State Budget (the “Proposed 2020-21 State Budget”) which reflects $153 billion in new spending from the State’s general fund and tackles issues including climate change, particularly wildfires, clean energy, and homelessness in California. Since the Proposed 2020-21 State Budget preceded the COVID-19 pandemic, it did not take into account the significant adverse impacts it will have on the State’s financial condition in Fiscal Year 2020-21 and future fiscal years. The May Revision significantly revises the projections of revenues and expenditures and cuts substantial educational funding and programs from the Proposed 2020-21 State Budget. For more information on the May Revision, see “ – Fiscal Year 2020-21 May Revision.” Certain limited information from the Proposed 2020-21 State Budget relating to the funding of education is provided herein solely for context and reference.
The Proposed 2020-21 State Budget totals approximately $222 billion and includes more than $1 billion in funding for homeless families to access shelter and approximately $1 billion over four years to prevent, track and fight wildfires. The Proposed 2020-21 State Budget also adds approximately $2 billion to the “Rainy Day Fund” which is projected to grow to $18 billion by the end of Fiscal Year 2020-21 and calls for $12 billion over five years to respond to climate change, both through a resilience initiative that would protect vulnerable areas and a cap-and- trade program.
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For K-12 schools and California Community Colleges (“CCCs”), the Proposition 98 funding for Fiscal Year 2020-21 is approximately $84 billion, which combines with more than $819 million in “settle-up” payments for prior fiscal years. The Proposed 2020-21 State Budget also proposes an increased investment of $3.8 billion in K-12 schools and CCCs, including an augmentation of approximately $1.2 billion in LCFF funding, approximately $900 million for educator recruitment and training, an increase of nearly $900 million for special education, and $300 million for expanded supports and services for the State's neediest schools, as further described below.
Significant features of the Proposed 2020-21 State Budget pertaining to K-12 education include:
Recruitment. $900 million to expand and increase the preparedness of the State's public K-12 teacher and administrator workforce, including $350 million one-time Proposition 98 General Fund to augment the funding provided in the 2019 Budget Act for the Educator Workforce Investment Grants; $18 million one-time Proposition 98 General Fund for the California Collaborative for Educational Excellence to bolster awareness of available services and supports for local educational agencies; $175 million one-time Proposition 98 General Fund to expand the Teacher Residency Program; $100 million one-time Proposition 98 General Fund for the California Teacher Credential Award Program; and $64.1 million one-time Proposition 98 General Fund to expand the California Classified School Employees Credentialing Program.
Special Education. $900 million for special education, including a three-phase, multi-year process to improve special education finance, services, and student outcomes including a new special education base formula that uses a three-year rolling average of local educational agency ADA and a 15 percent increase in the Proposition 98 General Fund contribution to the base formula funding over the amount provided in the 2019 Budget.
Community Schools. $300 million one-time Proposition 98 General Fund to establish Community School grants for local educational agencies supporting innovative community school models to provide resources to local educational agencies to implement programs aligned with the community school model.
Opportunity Grants. $300 million one-time Proposition 98 General Fund to establish Opportunity Grants for the state's lowest-performing schools and school interest, and expand the capacity of the “California Collaborative for Educational Excellence” in its role within the statewide system of education support.
Computer Science. $15 million one-time Proposition 98 General Fund for grants to local educational agencies to support the preparation of approximately 10,000 K-12 teachers to earn a supplementary authorization on their credential to teach computer science.
School Nutrition. $60 million 98 General Fund to increase funding for school nutrition, plus $10 million Proposition 98 General Fund to provide training for school food service and $10 million non-Proposition 98 General Fund for Fiscal Year 2020-21 and $1.5 million annually thereafter for the California Department of Food and Agriculture to establish a Farm to School Grant Program to support California farmers and expand healthy food access by providing grants to schools.
Kindergarten. $75 million Proposition 98 General Fund to expand the Inclusive Early Education Expansion Program to fund to local educational agencies to construct or modify preschool facilities to serve students with exceptional needs or severe disabilities.
Local Property Tax Adjustments. An increase of $7.3 million Proposition 98 General Fund for K-12 school districts and county offices of education in Fiscal Year 2019-20 as a result of decreased offsetting property tax revenues, and a decrease of $1.1 billion in Fiscal Year 2020- 21 as a result of increased offsetting property taxes.
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School District ADA. A decrease of $268.5 million Proposition 98 General Fund in Fiscal Year 2019-20 for school districts resulting from a decrease in projected ADA from the 2019 Budget Act, and a decrease of $175.1 million Proposition 98 General Fund in Fiscal Year 2020-21 for school districts resulting from a further projected decline in average daily attendance for Fiscal Year 2020-21.
Cost-of-Living Adjustments. An increase of $122.4 million Proposition 98 General Fund to reflect a 2.29 percent COLA for categorical programs that remain outside of the LCFF, including Special Education, Child Nutrition, State Preschool, Youth in Foster Care, Mandates Block Grant, Adults in Correctional Facilities Program, American Indian Education Centers, and the American Indian Early Childhood Education Program.
County Offices of Education. An increase of $5.7 million Proposition 98 General Fund to reflect a 2.29 percent COLA and average daily attendance changes applicable to the LCFF.
Supplemental Pension Payments. Local educational agencies will also continue to benefit from the $3.15 billion non-Proposition 98 General Fund payment made on their behalf by the State to the CalSTRS and CalPERS Schools Pool. An estimated $850 million is buying down the employer contribution rates in 2019-20 and 2020-21 and the remaining $2.3 billion is being paid toward long-term unfunded liabilities. Overall, these payments are expected to save schools $6.9 billion over the next three decades.
The Proposed 2020-21 State Budget was prepared prior to the COVID-19 outbreak, and the projections included therein did not account for any of the negative economic impacts to date associated with the outbreak, nor any potential impacts yet to be realized. See “INTRODUCTION – Risks Related to COVID-19” herein. The May Revision reflects, and the final budget approved by the State Legislature could reflect, significantly lower projections of State revenues and higher projections of State expenditures.
Department of Finance Budget Letter. On March 24, 2020, the State Department of Finance (the “Department”) released Budget Letter 20-08 which states that the Department anticipates a severe drop in economic activity in California as a result of the COVID-19 pandemic, which could negatively impact anticipated revenue levels in fiscal year 2019-20, and will certainly produce impacts in fiscal year 2020-21 and beyond. The Governor released the May Revision to the Proposed 2020-21 State Budget (the “May Revision”) on May 14, 2020, and the final 2020-21 State Budget is projected to be adopted by the State Legislature by June 15, 2020, with Governor approval estimated to occur by June 30, 2020. While recent State budgets have been timely adopted, State budgets have not always been timely adopted and signed. The District cannot predict the adoption date of the final State budget nor the impact any delay may have on basic appropriations, District funding nor the effect on District budgets or operations.
Fiscal Update from Department of Finance. The State Department of Finance (the “DOF”) released a fiscal update memorandum (the “Fiscal Update”) on May 7, 2020 reflecting the economic forecast for the May Revision to the Proposed 2020-21 State Budget. The Fiscal Update makes it clear that the onset of COVID-19 has had a severe and immediate impact on the State’s economy, including in excess of 4.4 million claims for State and federal unemployment benefits since mid-March 2020 and disproportionate job losses in lower-wage sectors of the economy. The DOF also projects that the 2020 unemployment rate will be as high as 18% and states that the May Revision economic forecast projects that COVID-19 will continue to cause economic losses in 2020, including a projected drop in State personal income by nearly 9% on an annual basis and a projected drop of 21% in permits for new housing construction, a key economic indicator. Consequently, compared to the projections included in the Proposed 2020-21 State Budget, the State’s three main revenues sources are projected to drop as follows: (i) personal income taxes by 25.5%, (ii) sales and use taxes by 27.2%, and (iii) corporation taxes by 22.7%. As a result, the DOF projects that State general fund revenues will decline by $41.2 billion from the projected level included in the Proposed 2020-21 State Budget, including $9.7 billion allocable to Fiscal Year 2019-20 and $32.2 billion allocable to Fiscal Year 2020-21. This revenue decline would result in a reduction of the Proposition 98 minimum funding guarantee by approximately $19 billion.
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These revenue declines, together with $7.1 billion in caseload increases supporting health and human services programs and other expenditures of approximately $6.1 billion largely attributable to the COVID-19 outbreak, are projected to result in an overall State budget deficit of approximately $54.3 billion. Of this amount, $13.4 billion occurs in Fiscal Year 2019-20 and $40.9 billion would occur in Fiscal Year 2020-21. For additional information regarding the Fiscal Update, see the DOF website at www.dof.ca.gov. However, the information presented on such website is not incorporated herein by reference.
Fiscal Year 2020-21 May Revision. The May Revision incorporates the significant impact of the effects of the COVID-19 pandemic on the budgets and operations of the State and local agencies and proposes to strategically use the federal CARES Act funds to support schools, public health and local governments. In an effort to respond to dramatic economic and revenue changes since the Proposed 2020-21 State Budget, the May Revision proposes to cancel or reduce spending included in the 2019 Budget Act, cancel new initiatives proposed in the Proposed 2020- 21 Budget, draw down reserves, borrow from special funds, temporarily increase revenues and make government more efficient.
Consistent with the State’s constitutional obligation to enact a balanced budget and the prohibition against issuing long-term bonds to finance deficits, the May Revision proposes the following actions to achieve a balanced budget for fiscal year 2020-21:
• Cancel $6.1 billion in program expansions and spending increases, including by canceling or reducing a number of one-time expenditures included in the 2019-20 State Budget. It also includes redirecting $2.4 billion in extraordinary payments to CalPERS to temporarily offset the State’s obligations to CalPERS in fiscal years 2020-21 and 2021-22.
• Draw down $16.2 billion in the Rainy Day Fund over three years, and allocate the Safety Net Reserve to offset increased costs in health and human services programs over the next two years. The 2020-21 May Revision reflects the withdrawal of $8.3 billion, including $7.8 billion from the Rainy Day Fund and $450 million from the Safety Net Reserve in 2020-21.
• Borrow and transfer $4.1 billion from special funds.
• Temporarily suspend net operating losses and temporarily limit to $5 million the amount of credits a taxpayer can use in any given tax year. These short-term limitations will generate new revenue of $4.4 billion in fiscal year 2020-21, $3.3 billion in fiscal year 2021-22, and $1.5 billion in fiscal year 2022-23 to increase funding for schools and community colleges and maintain other core services.
• Reflect the nationwide request of $1 trillion in flexible federal funds to support all 50 states and local governments, and identify reductions to base programs and employee compensation that will be necessary if sufficient federal funding does not materialize.
Although the May Revision proposes a balanced budget for fiscal year 2020-21, a significant out-year deficit would remain, increasing to over $16 billion by fiscal year 2023-24. Without the actions described above to achieve a balanced budget for fiscal year 2020-21, the out-year structural deficit would be approximately $45 billion annually. The May Revision estimates that total resources available in fiscal year 2019-20 will be approximately $148.1 billion (including revenues and transfers of approximately $136.8 billion and a prior year balance of $11.3 billion) and total expenditures in fiscal year 2019-20 will be approximately $146.5 billion. The May Revision projects total resources available for fiscal year 2020-21 of approximately $139.0 billion, inclusive of revenues and transfers of approximately $137.4 billion and a prior year balance of approximately $1.6 billion. The May Revision projects total expenditures of approximately $133.9 billion, inclusive of non-Proposition 98 expenditures of $89.0 billion and Proposition 98 expenditures of $44.9 billion. The May Revision proposes to allocate approximately $3.2 billion of the State general fund’s projected fund balance to the State’s reserve for liquidation of encumbrances and approximately $2.0 billion of such fund balance to the Special Fund for Economic Uncertainties (“SFEU”). In addition, the May Revision estimates that the Rainy Day Fund will have a fund balance of approximately $8.4 billion.
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The CARES Act allocated the Coronavirus Relief Funds to state and local governments for expenditures incurred between March 1 and December 30, 2020 in response to COVID-19, not previously accounted for in the most recent state and local budgets. Based on the State’s population, California received a total of $15.3 billion with $9.5 billion paid to the State. Cities and counties with populations over 500,000 received $5.8 billion directly from the U.S. Treasury. As a result five California cities received a direct CARES Act allocation as a result of their size— for a total of $1.5 billion direct from the federal government. The funding allocated to those large cities was deducted from the county share.
The May Revision allocates a portion of the State’s CARES Act funding to local governments, contingent on adherence to federal guidance and the State's stay-at-home orders and will be released upon such jurisdictions’ certification of both. The May Revision also includes $1.1 billion in available federal funds through the Community Development Block Grant Program for critical infrastructure and disaster relief related to the 2017 and 2018 wildfires and maintains $50 million in one-time General Fund to support preparedness measures that bolster community resiliency to support critical services still vulnerable to power outage events, including schools, county election offices, and food storage reserves. The CARES Act includes $13.2 billion in direct funding for K-12 districts. California will receive $1.65 billion, with 10 percent set aside for emergencies designated by the California Department of Education. School district distribution is based on a district’s share of federal Title I funding which uses a formula based primarily on the number of students whose family income is below the federal poverty threshold of $26,200 for a family of four and who receive Temporary Assistance for Needy Families. The District is estimated to receive $30,512,782 of CARES Act funding.
The May Revision includes total funding of $99.7 billion ($47.7 billion General Fund and $52 billion other funds) for all K-12 education programs. Due to COVID-19 and its impact on the State’s economy, the May Revision estimates that the Proposition 98 minimum funding guarantee will decline by $19 billion from the Proposed 2020-21 State Budget.
The May Revision includes the following features affecting K-12 school districts:
Reductions in K-12 Categorical Program. The May Revision makes a total of $352.9 million in reductions to all of the following categorical programs: $100 million: After School Education and Safety; $79.4 million: K-12 Strong Workforce Program; $77.4 million: Career Technical Education Incentive Grant Program; $66.7 million: Adult Education Block Grant; $9.4 million: California Partnership Academies; $7.7 million: Career Technical Education Initiative; $3.5 million: Exploratorium; $3 million: Online Resource Subscriptions for Schools; $2.4 million: Specialized Secondary Program; $2.1 million: Agricultural Career Technical Education Incentive Grant; $1.3 million: Clean Technology Partnership.
Proposals Withdrawn by May Revision. The May Revision withdraws the following programs and funding allocations that were included in the Proposed 2020-21 State Budget: Educator Workforce Investment Grants ($350 million); Opportunity Grants ($300.3 million); Community Schools Grants ($300 million); Special Education Preschool Grant ($250 million); Workforce Development Grants ($193 million); Teacher Residency Program ($175 million); Credential Award Program ($100 million); Child Nutrition Programs ($70 million); Classified Teacher Credential Program ($64.1 million); Local Services Coordination ($18 million); and Computer Science Supplementary Authorization Incentive: $15 million.
Proposition 98 Changes. As a result of the decline of Proposition 98 Minimum Guarantee from the Proposed 2020-21 State Budget, compounded by the impact of declining average daily attendance and declining per capita income, the May Revision proposes to suspend for three-years net operating losses and limitations on business incentive tax credits to offset no more than $5 million of tax liability per year, which could generate $1.8 billion in benefits to the Proposition 98 Guarantee. Commencing in Fiscal Year 2021-22, the State proposes to provide supplemental appropriations of 1.5 percent of General Fund revenues per year, in order to avoid a permanent drop in the Proposition 98 Minimum Guarantee and maintain the Guarantee at 40 percent of total State General Fund support. The May Revision also reflects the withdrawal of all of the funding in the Public School System Stabilization Account. The May Revision projects that no additional deposits will be required and the entire amount is available to offset the decline in the Proposition 98 minimum guarantee. The May Revision also proposes (i) an increase of $84.5 million
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Proposition 98 General Fund in fiscal year 2019-20 and $727 million Proposition 98 General Fund in fiscal year 2020-21 as a result of lower offsetting property tax revenues in each such fiscal years; (ii) a decrease of $300 million one-time non-Proposition 98 General Fund for construction of new, or retrofit of existing facilities for full-day kindergarten programs; (iii) a decrease of $10.9 million Proposition 98 General Fund for selected categorical programs, based on updated estimates of ADA.
Local Control Funding Formula and Deferrals. The May Revision proposes a reduction to the LCFF by $6.5 billion, or 10 percent, which includes the elimination of a 2.31 percent cost of living adjustment, however, in the event the federal government provides sufficient resources, these reductions could be backfilled in the future. The May Revision also suspends the statutory cost of living adjustment for all eligible programs and proposes to defer $1.9 billion of LCFF apportionment to fiscal year 2020-21. For fiscal year 2021-22, $5.3 billion in funding as follows: $528 million in April 2021, $2.4 billion in May 2021 and $2.4 billion in June 2021 to an unspecified date.
Learning Loss Mitigation. The May Revision proposes a one-time investment of $4.4 billion in federal funds ($4 billion federal Coronavirus Relief Fund and $355 million federal Governor’s Emergency Education Relief Fund) for mitigation of students’ learning loss during school closures. These funds will be allocated to local educational agencies (“LEAs”) that offer instruction based on a formula which prioritizes students most heavily impacted by school closures, and may be used as follows: summer programs, extending the instructional school year, providing additional academic services for students (such as providing instructional materials and devices), health, counseling or mental health services, professional development opportunities for teachers and parents to support pupils in distance-learning contexts, and access to school breakfast and lunch programs.
Access to Nutrition Programs. The State received $1.6 billion in federal Elementary and Secondary School Emergency Relief (“ESSER”) funds, 90 percent of which will be distributed to LEAs through Title I-A funding for COVID-19 related costs. The May Revision proposes to use the remaining $164.7 million (10%) in the following manner: $100 million for Grants to county offices of education to support developing networks of community schools, mental health services, and ways to address barriers for high- need students, $63.2 million for training and professional development, $1.5 million for the Department of Education for operational costs due to COVID-19.
Pension Relief. The May Revision reallocates $2.3 billion paid to CalSTRS and CalPERS towards long- term unfunded liabilities to further reduce employer contribution rates in fiscal years 2020-21 and 2021-22. This reallocation will reduced the CalSTRS employer rate from 18.41 percent to approximately 16.15 percent in 2020-21 and from 18.2 percent to 16.02 percent in 2021-22. The CalPERS Schools Pool employer contribution rate will be reduced from 22.67 percent to 20.7 percent in 2020-21 and from 25 percent to 22.84 percent in 2021-22.
Special Education. The May Revision retains the Proposed 2020-21 commitment to improve and support special education with the suspension of the 2.31 percent COLA bringing the special education base rates to $645 per pupil, an increase of 15 percent from fiscal year 2019-20, apportioned on a three-year rolling ADA of the LEA’s ADA, and distributed to Special Education Local Planning Agencies (“SELPA’s”). The May Revision also includes $15 million in federal Individuals with Disabilities Education Act (“IDEA”) funds for the Golden State Teacher Scholarship Program to support increasing the teacher pipeline and $7 million to assist LEAs with developing different dispute resolution services and mediation services for cases arising from COVID-19 distance learning service delivery models.
Flexibility Proposals. The May Revision includes the following programmatic and fiscal flexibilities: exemptions for LEAs if apportionment deferrals create a documented hardship; authority for LEAs to exclude state pension payments on behalf of LEAs from the calculation of required contributions to routine restricted maintenance; subject to public hearing, increases on LEA internal inter-fund borrowing limits to help mitigate the impacts of apportionment deferrals; authority to use proceeds from the sale of surplus property for one-time general fund purposes; and options for specified special education staff to utilize technology-based options to serve students.
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Early Education Programs. The May Revision proposes to utilize $350.3 million of CARES Act funding for COVID-19 related child care expenses as follows: $144.3 million for State costs associated with SB 89 expenses, family fee waivers, and provider payment protection; $125 million for one-time stipends for State-subsidized child care providers offering care during the pandemic; $73 million for increased access to child care services for at-risk children and children of essential workers; $8 million to extend family fee waivers until June 30, 2020. The May Revision continues to propose to consolidate the State’s early learning and child care programs under the Department of Social Services, which maintains $2 million General Fund in 2020-21 to support this proposal.
State Preschool Reductions. Absent additional federal funds to mitigate these fiscal decisions, the May Revision proposes reductions in the following programs: $159.4 million General Fund to eliminate 10,000 slots scheduled to begin April 1, 2020 and 10,000 additional slots scheduled to begin April 1, 2021; $130 million Proposition 98 General Fund, $94.6 million Proposition 98 General Fund and $67.3 million General Fund to reflect a 10 percent decrease in State Preschool daily reimbursement rate; $20.5 million Proposition 98 General Fund and $11.6 million General Fund to reflect suspension of a 2.31 percent cost of living adjustment; $3.3 million Proposition 98 General Fund and $3 million General Fund to eliminate a 1 percent add-on to the full-day State Preschool reimbursement rate.
Child Care Reductions. The May Revision proposes to reduce the following programs, which would be mitigated if the federal government provides sufficient funds to restore them: $363 million one-time General Fund and $45 million one-time federal Child Care and Development Block Grant funds from the 2019 Budget Act for child care workforce and infrastructure; $223.8 million General Fund to reflect a 10 percent decrease in the Standard Reimbursement Rate and the Regional Market Rate; $35.9 million General Fund to reflect lower caseload estimates in CalWORKs Stage 2 and 3 child care; $25.3 million General Fund to reflect suspension of a 2.31 percent cost of living adjustment; $10 million one-time General Fund from the 2019 Budget Act for child care data systems, $4.4 million one-time General Fund to reduce resources available for the Early Childhood Policy Council, and $13.4 million in federal funds is appropriated through the Health and Human Services Agency to reflect the State’s 2020 Preschool Development Grant award.
Future Budgets. The District cannot predict how State income or State education funding will vary over the term of the Series A Notes, and the District takes no responsibility for informing owners of the Series A Notes as to actions the State Legislature or Governor may take affecting the current year’s budget after its adoption. Future State budgets will be affected by national and State economic conditions, over which the District has no control, and other factors over which the District will have no control. Additionally, due to COVID-19, the filing deadline for federal and California tax returns was extended from April 15, 2020 to July 15, 2020. Accordingly, the State’s adopted budget may not reflect the receipt of personal income tax and corporation tax payments received after the State’s budget adoption date. To the extent that the State budget process results in reduced revenues deferred revenues or increased expenses for the District, the District will be required to make adjustments to its budget and cash management practices. In the event current or future State Budgets decrease the District’s revenues or increase required expenditures by the District from the levels assumed by the District, the District will be required to generate additional revenues, curtail programs or services, or use its reserve funds to ensure a balanced budget.
State and School District Reserves. On April 5, 2020, the Office of the Legislative Analyst (“LAO”) published an Update on State and School District Reserves, addressing the current levels of State and local reserves in light of the COVID-19 outbreak. The LAO indicates that State revenues will be lower than estimated in the Proposed 2020-21 State Budget, and that economic and budget conditions continue to rapidly evolve. The LAO indicates that the State currently has $17.5 billion in reserves, including $16.5 billion in the Budget Stabilization Account (“BSA”) and $900 million in the Safety Net Reserve. The LAO explains that the balance of the SFEU is nearly zero because the State recently transferred $1.3 billion from the SFEU to its disaster fund to address the effects of COVID-19. The LAO also notes, however, that the State will likely be reimbursed by the federal government for most of the funds transferred from the SFEU.
The LAO also addressed the accessibility of funds in the BSA, recounting that the State can make a withdrawal from the BSA in the case of a budget emergency that is declared by the Governor and approved by both
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houses of the State Legislature. A budget emergency may be declared if either (i) the estimated resources in the current or upcoming fiscal year are insufficient to maintain spending at the highest level of the last three enacted budgets; or (ii) it is made in response to a natural or man-made emergency. The LAO notes that if the State faces a budget deficit in either fiscal year 2019-20 or 2020-21, the conditions for the declaration of a budget emergency will likely exist. If a budget emergency exists and the State elects to make a withdrawal from the BSA, the State may withdraw the lesser of (i) the amount needed to maintain general fund spending at the highest level of the past three enacted budget acts; and (ii) fifty percent of the balance of the BSA.
The LAO also analyzed two sources of reserves that school districts in the State may use to mitigate some of the reduction in State revenue that is likely to occur as a result of the COVID-19 outbreak: the State-level reserve for schools and local school district reserves. The LAO notes that the State made its first deposit into the State-level reserve for schools in connection with the 2019-20 State Budget. That deposit was only approximately $377 million, representing less than 1% of State spending on schools in fiscal year 2019-20. School districts, however, may also hold reserves in their local operating accounts, and although there is significant variation in the level of reserves held by the various school districts, the LAO indicates that school district reserves average 17% of school spending Statewide. According to the LAO, the median school district holds reserves equal to approximately 22% of its expenditures, although about 25% of school districts hold reserves that account for less than 14% of their expenditures. As of June 8, 2020, the District held approximately $39.5 million in unrestricted reserves.
Information about the State budget and State spending for education is regularly available at various State- maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance, www.dof.ca.gov, under the heading “California Budget” or www.ebudget.ca.gov. An impartial analysis of the budget is posted by the LAO at www.lao.ca.gov. The information referred to is prepared by the respective State agency maintaining each website and not by the District, and the District can take no responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references.
The State Constitution requires that from all State revenues there will first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education. As discussed below, school districts in the State receive a significant portion of their funding from State appropriations. Accordingly, the State’s economic condition can affect the economic condition of California school districts.
Local Control Funding Formula (LCFF). As part of the 2013-14 State Budget, State Assembly Bill 97 (Stats. 2013, Chapter 47) (“AB 97”) was enacted to establish a new system for funding school districts, charter schools and county offices of education by the implementation of the Local Control Funding Formula or LCFF, to replace the revenue limit funding system for determining State apportionments and the majority of categorical program funding. Subsequently, AB 97 was amended and clarified by Senate Bill 91 (Stats. 2013, Chapter 49). The LCFF consists primarily of base, supplemental and concentration funding that focuses resources based on a school district’s student demographics. Each school district and charter school will receive a per pupil base grant used to support the basic costs of instruction and operations. The implementation of the LCFF is to occur over a period of several years (and by 2021 or earlier), beginning in Fiscal Year 2013-14 when an annual transition adjustment was calculated for each school district, equal to such district’s proportionate share of appropriations included in the 2013-14 State Budget to close the gap between the prior-year funding level and the target allocation following full implementation of the LCFF. School districts will have the same proportion of their respective funding gaps closed in each year, with funding amounts that vary in accordance with the size of each district’s funding gap.
The LCFF includes the following components:
An average base grant for each local education agency equivalent to $7,643 per unit of average daily attendance (“ADA”) (by the end of the implementation period). This amount includes an adjustment to the base grant to support lowering class sizes in grades K-3, and an adjustment to reflect the cost of operating career technical education programs in high schools. The authorizing LCFF statute, AB 97, provides for differentiated base grant amounts according to four different grade spans: K-3, 4-6, 7-8, and 9-12. Unless otherwise collectively bargained for, following full implementation of the LCFF, school districts must maintain an average class enrollment of 24 or fewer students in grades K-3 at
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each school site so as to continue receiving its adjustment to the K-3 base grant. Such K-3 school districts must also make progress towards this class size reduction goal in proportion to the growth in their funding over the implementation period. (The May Revision proposes to suspend the statutory cost-of-living adjustment in fiscal year 2020-21. For more information, see “ – Fiscal Year 2020-21 May Revision.”)
A 20% supplemental grant for students classified as English learners (“EL”), those eligible to receive a free or reduced price meal (“FRPM”) and foster youth, to reflect increased costs associated with educating those students. These supplemental grants are only attributed to each eligible student once, and the total student population eligible for the additional funding is known as an “unduplicated count.”
An additional concentration grant equal to 50% of a local education agency’s base grant, based on the number of unduplicated EL, FRPM and foster youth served by the local agency that comprise more than 55% of the school district’s or charter school’s total enrollment. Because the District’s unduplicated count is above the 55% threshold, the District will be eligible for the concentration grant for eligible students above 55%.
An “Economic Recovery Target” to ensure that almost every local education agency receives at least their pre-recession funding level, adjusted for inflation, at full implementation of the LCFF.
LCFF and the District
The District has received increased revenues as a result of the LCFF due to the District’s high proportion of students who are EL, FRPM eligible or foster youth. The LCFF funds the District receives may be spent on a District-wide basis, provided the District identify the District-wide services and describe how these services meet the District’s goals for the targeted students. There are certain risks associated with the LCFF, including future State budget challenges in the event of an economic recession difficulty collecting all income eligibility survey forms to determine student demographics and student free and reduced priced meal status, as well as shifts in student demographic and enrollment counts, transition year expenses, and intervention by the California Department of Education in connection with school districts that are unable to demonstrate increased and improved services for students targeted by the LCFF.
The following table sets forth the District’s actual LCFF for Fiscal Years 2014-15 to 2018-19, projected ADA of unduplicated EL, FRPM, and foster youth for Fiscal Years 2019-20 through 2024-25, the District’s projected target LCFF funding amounts at full implementation (which represents a combined total of base grant, K-3 class size reduction and grades 9-12 adjustments, supplemental and concentration grant funding, each calculated by grade span), and projected annual LCFF allocation and gap funding for Fiscal Years 2014-15 through 2024-25. The ADA figures are dependent upon the District’s collection of “Income Eligibility” and other survey forms from District students. Note that such data assumes an unduplicated count of EL, FRPM and foster youth as a percentage of enrollment for each of the Fiscal Years, based on current survey form collections.
Actual funding is based on the difference between the District’s funding floor and its LCFF target (the LCFF gap). For the 2019-20 Fiscal Year, the District received $1,010,433,010 in its funding floor amount plus 100% of its LCFF gap, which was equivalent to $25.2 million, for a total 2019-20 Annual LCFF Allocation of $1,035,686,136.
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SAN DIEGO UNIFIED SCHOOL DISTRICT LCFF Implementation (Assumes Unduplicated % Indicated of Free Reduced Price Meal (FRPM), English Learner (EL) and Foster Youth Students ADA) Fiscal Years 2014-15 Through 2024-2025(1)(2) As of June 24, 2020
Gap Funding Included & LCFF Target Deducted in Gap COLA & at Full Annual LCFF Annual LCFF Remaining Funding Augmentation Unduplicated Fiscal Year(3) ADA(4) Implementation(5) LCFF Floor Allocation Allocation Gap(5)(6) % % %
2014-15 104,663 $1,028,825,984 $763,933,733 $79,891,931 $(843,825,664) 185,000,320 30.16% 0.85% 63.26% 2015-16 102,324 1,017,219,978 828,874,826 98,989,722 (927,864,548) 89,355,430 52.56 1.02 63.37 2016-17 101,080 1,003,346,160 918,710,631 47,460,896 (966,171,527) 37,174,633 56.08 0.00 62.93 2017-18 100,573 1,009,092,580 962,204,116 20,146,305 (982,350,421) 26,742,159 42.97 1.56 62.20 2018-19 98,756 1,021,384,034 967,763,259 53,620,775 (1,021,384,034) - 100.00 3.70 61.25 2019-20 97,479 1,035,686,136 1,010,433,010 25,253,126 (1,035,686,136) - 100.00 3.26 60.43 2020-21 97,189 1,029,806,183 1,007,950,612 21,855,571 (1,029,806,183) - 100.00 0.00 59.89 2021-22 96,446 1,020,247,944 1,001,579,510 18,668,434 (1,020,247,944) - 100.00 0.00 59.45 2022-23 94,988 1,005,950,293 989,082,994 16,867,299 (1,005,950,293) - 100.00 0.00 59.45 2023-24 93,552 991,867,054 976,773,871 15,093,183 (991,867,054) - 100.00 0.00 59.45 2024-25 92,138 977,995,091 964,649,396 13,345,695 (977,995,091) - 100.00 - 59.45
______(1) Preliminary and projected figures for Fiscal Years 2019-20 through 2024-25. (2) This table assumes 59.45% of District enrollment is comprised of unduplicated EL, FRPM, and foster youth students for Fiscal Years 2020-21 through 2024-25. Beginning in Fiscal Year 2015-16, a school district’s percentage of unduplicated EL, FRPM and foster youth students is based on a rolling average of such district’s EL, FRPM, and foster youth enrollment for the then-current Fiscal Year and the two immediately preceding Fiscal Years. If the unduplicated count in Fiscal Year 2013-14 is less than the unduplicated count for Fiscal Year 2014-15, for purposes of the three-year rolling average, the count for Fiscal Year 2014-15 will be used twice and the count for Fiscal Year 2015-16 will only be used once. (3) Excludes grade-span adjustment penalty. (4) ADA as of the second principal reporting period (P-2 ADA). Excludes charter schools. (5) The LCFF Target at Full Implementation and Remaining Gap are subject to COLA, Augmentation & Base Grant Proration Factor adjustments. (6) Remaining Gap is calculated by subtracting Annual LCFF Allocation from LCFF Target at Full Implementation (“LCFF Target”). As each year’s LCFF Target is compiled and incorporates changes in ADA and COLA, the Remaining Gap figure will be subject to increases or decreases in the LCFF Target. Source: The District.
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Local Control and Accountability Plan. As part of the LCFF, school districts, county offices of education, and charter schools are required to develop, adopt and annually update a three-year Local Control and Accountability Plan or “LCAP,” beginning on July 1, 2014, using a template adopted by the California State Board of Education (“SBE”). The SBE is required to adopt evaluation rubrics to assist school districts and oversight entities in evaluating strengths, weaknesses, areas that require improvement, technical assistance needs, and where interventions are warranted. Subsequent revisions to the template or evaluation rubrics are required to be approved by the SBE by January 31 before the Fiscal Year when the template or rubric would be used. The LCAP is required to identify goals and measure progress for student subgroups across multiple performance indicators. On March 6, 2019, the State’s Joint Legislative Audit Committee approved a Local Control Funding Formula audit of three large, geographically disbursed school districts that have significant numbers of unduplicated pupils who are considered low income, English learners, or foster youth to review each district’s LCAPs. The audit’s scope will include, but not be limited to, the following:
LCAP goals aimed at raising student achievement and whether additional goals would have been helpful; Student success measurement tools and whether additional measurements would have been helpful; Funding spent on unduplicated pupils on a districtwide and school-by-school basis, identifying expenditures and whether they are being spent appropriately; Multiple school years to understand how funding and expenditures have changed under the LCFF; Methodology for distributing and spending funds on students or at various schools; Whether the most recent LCAP complies with the spirit and legal requirements of the LCAP – especially requirements associated with achievement measurements and helping chronically low- achieving students – and make recommendations regarding the LCAP to improve their achievement levels.
The State auditor has selected the District as one of the three large districts that will be reviewed in the near future. The District is unable to predict when such review will be completed, or whether the final report related to any audit would have a material adverse fiscal impact if it discloses material unauthorized expenditures of funds that need to be rebated to the State, or might otherwise result in a material penalty or other consequence.
Prohibitions on Diverting Local Revenues for State Purposes; Proposition 1A and Proposition 22. Beginning in Fiscal Year 1992-93, the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund (“ERAF”) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the Legislature proposed an amendment to the State Constitution, which the State’s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as “Proposition 22.”
The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government, including school districts, or from temporarily shifting property taxes from cities, counties and special districts to schools, as in the ERAF program. This is intended to, among other things, stabilize local government revenue sources by restricting the State’s control over local property taxes. One effect of this amendment will be to deprive the State of fuel tax revenues to pay debt service on most State bonds for transportation projects, reducing the amount of State general fund resources available for other purposes, including education. Because Proposition 22 reduces the State’s authority to use or reallocate certain 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.
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Redevelopment Agency Dissolution. On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos, finding ABX1 26, a trailer bill to the 2011-12 State budget, to be constitutional. As a result, all redevelopment agencies in California were dissolved as of February 1, 2012, and all net tax increment revenues, after payment of redevelopment bonds debt service and administrative costs, will be distributed to cities, counties, special districts and K-14 school districts. The Court also found that ABX1 27, a companion bill to ABX1 26, violated the California Constitution, as amended by Proposition 22. ABX1 27 would have permitted redevelopment agencies to continue operations provided their establishing cities or counties agreed to make specified payments to K-14 school districts and county offices of education, totaling $1.7 billion statewide. The District is unable to predict what affect the implementation of ABX1 26 will have on the District’s future receipt of tax increment revenues.
As a result of the dissolution of California redevelopment agencies and ABX1 26, the tax increment previously paid to redevelopment agencies shall first be used to pay pass-through payments to other taxing entities and second to pay the redevelopment agencies enforceable obligations; with the remaining revenue (if any) paid to the taxing entities by the County Auditor-Controller in the same proportion as other tax revenue. The California Department of Finance estimates the amount the District is expected to receive once the pass-through payments are made and enforceable obligations paid, then reduces its funding allocation to the District by such amount. See the table below for the District’s receipts from redevelopment agency tax increment distributions for Fiscal Years 2013- 14 through 2019-20.
San Diego Unified School District Receipts from Redevelopment Agency Tax Increment Distributions As of April 15, 2020
Fiscal Year Amount Received
2013-14 $98,172,497 2014-15 33,813,407 2015-16 20,110,396 2016-17 39,645,085 2017-18 34,428,911 2018-19 48,702,693 2019-20(1) 73,555,328 ______(1) Projected. Source: The District
District’s Response to the Final 2020-21 State Budget
On March 10, 2020, the District Board approved the 2019-20 2nd Interim Financial Report. The District’s 2019-20 estimated Total General Fund Budget exceeds $1.3 billion and its current projected unrestricted general fund ending fund balance is $71.8 million, with a decrease in fund balance of $17.8 million. For Fiscal Year 2020- 21, the projected unrestricted general fund ending balance is $34.5 million which includes an estimated $84.2 million in budget solutions. In addition to the continued advocacy efforts, District administration has identified and the Board is expected to consider various funding opportunities and operational efficiency solutions to address the projected deficit. On May 12, 2020, the Board of Education approved the Third Interim Financial Report (the “3rd Interim Report”) self-certifying the District’s budget plan with a “qualified” certification. The 3rd Interim Report reflected no financial reporting changes from the 2nd Interim Financial Report. Additional costs related to school closures, as well as savings and potential new revenue streams will be reflected in the Estimated Actual projections shared with the Board in June, 2020. Multi-year projections and budget solutions will be identified by the District no later than the 2020-21 First Interim Reporting Period on or before December 15, 2020. The information below is preliminary and subject to change as details of the final State Budget are released, and numerous other factors. See “FINANCIAL AND OPERATING INFORMATION - State Budget Process – 2020-21 State Budget” herein. The chart below sets forth the District’s Fiscal Year 2020-21 proposed response to solving the estimated $84.2 million operating budget deficit.
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2020-21 General Fund Unrestricted Budget Solutions As of June 30, 2020
Amount Description (in millions) Final State Budget $47.5 Funding Opportunities 34.3 Reductions in Centralized Costs 2.4 Total $84.2 ______(1) Budget Solutions for the 2020-21 projected deficit of $84.2 million were presented to the Board on March 10, 2020. Such budget solutions are subject to change based on the State’s Adopted Budget in June 2020, along with any adjustments made to the State Budget after taxes are received on or about July 2020.
Other District Revenues
Federal Revenues. The federal government provides funding for several District programs, including special education programs. Federal revenues, most of which are restricted, comprise approximately 7.43% (or approximately $104.96 million) of the District’s General Fund revenues for fiscal year 2019-20.
Impact Aid Funds. Many local school districts, including the District, include within their boundaries parcels of land that are owned by the Federal Government or that have been removed from the local tax rolls by the Federal Government. These school districts face special challenges – they must provide a quality education to the children living on Native American and other Federal lands, while sometimes operating with less local revenue than is available to other school districts, because the Federal property is exempt from local property taxes. Since 1950, Congress has provided financial assistance to these local school districts through the Impact Aid Program. Impact Aid was designed to assist local school districts that have lost property tax revenue due to the presence of tax- exempt federal property, or that have experienced increased expenditures due to the enrollment of federally connected children, including children living on Native American lands, military bases, low-rent housing properties, and other Federal properties, or have parents in the uniformed services or employed on eligible Federal properties. Most Impact Aid funds, except for the additional payments for children with disabilities and construction payments, are considered general aid to the recipient school districts; these districts may use the funds in whatever manner they choose in accordance with their local and State requirements.
In Fiscal Year 2018-19, as of June 30, 2019, the District received $17,683,402 in Impact Aid funds which includes close-out amounts for Sections 7002 and 7003 of the federal Impact Aid act, for Fiscal Year 2015-16, interim and close-out payments for Section 7003 for Fiscal Year 2016-17, initial payment for Section 7002 for Fiscal Year 2017-18, and an initial and interim payment for Section 7003 for Fiscal Year 2017-18. The initial application for Fiscal Year 2018-19 was submitted in January 2019 and the final application was submitted in June 2019. In Fiscal Year 2019-20, as of June 1, 2020, the District has received $15,073,113 in Impact Aid funds. This includes close-out amounts for Sections 7002 and 7003 for Fiscal years 2016-17 and 2017-18, and initial payments for both Section 7002 and 7003 for Fiscal Year 2018-19. The initial application for Fiscal Year 2019-20 was submitted in January 2020 and the final amended application will be submitted in August 2020. Typically, the amended application is due by June 30 of each year, however, due to the COVID-19 pandemic, an extension was granted to August 2020. The U.S. Department of Education (the “Department”) periodically audits school districts receiving federal funds and such Department audited the District’s Impact Aid questionnaire for Fiscal Year 2016- 17. The outcome of the audit resulted in minor adjustments reducing the number of students claimed but also provided constructive feedback on ways to help the District improve the data collection process. The District cannot predict when future audits will occur nor the final outcome of such audits and what the effect future audits may have on the District’s receipt of Impact Aid funds.
Other State Revenues. In addition to State apportionments for Proposition 98 funding through the Local Control Funding Formula, the District receives other State revenues which comprise approximately 10.08% (or
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approximately $133.62 million) of the District’s General Fund revenues for fiscal year 2019-20 estimated as of June 30, 2020. A significant portion of such other State revenues are amounts the District expects to receive from State lottery funds, which may not be used for non-instructional purposes, such as the acquisition of real property, the construction of facilities, or the financing of research. School districts receive lottery funds proportional to their total ADA. The District is estimated to receive $20.92 million State lottery funds for fiscal year 2019-20.
Other Local Revenues. In addition to ad valorem property taxes, the District receives additional local revenues from items such as interest earnings and other local sources. Other local revenues comprise approximately 3.21% (or approximately $42.45 million) of the District’s General Fund projected revenues for fiscal year 2019-20 as of June 30, 2020.
Significant Accounting Policies and Audited Financial Statements
The California State Department of Education imposes uniform financial reporting and budgeting requirements for K-12 school districts. Financial transactions are accounted for in accordance with the contemporary California School Accounting Manual. Independent auditing services are being conducted by Crowe LLP, Sacramento, California (the “Auditor”). The District’s audit for the Fiscal Year ended June 30, 2019 is attached hereto as APPENDIX C. The financial statements for prior years are available on the EMMA website (such website is not incorporated herein by reference) and by contacting the District. A fee may be imposed for copying, shipping and handling. The District has not requested the consent of the Auditor regarding the inclusion of their report in this Official Statement. The Auditor has not undertaken to update its report or to review this Official Statement and expresses no opinion with respect to any events subsequent to the date of its report.
Financial Statements
The following tables contain accounting data abstracted from financial statements prepared by the District’s independent auditors for the Fiscal Years 2016-17 through 2018-19, and budget information for 2019-20. The projected totals for Fiscal Year 2019-20 do not factor the impact of COVID-19 on the District’s general fund for such Fiscal Year. The District cannot make any assurance that the District’s 2019-20 and 2020-21 general fund actual results will be commensurate with what is presented on the following pages.
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SAN DIEGO UNIFIED SCHOOL DISTRICT General Fund Budgets Comparison Revenues, Expenditures and Changes in Fund Balances(1) For Fiscal Years Ending June 30
Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2016-17 2017-18 2018-19 2019-20
Adopted Budget(2) Audit Adopted Budget(3) Audit Adopted Budget(4) Audit Adopted Budget(5)
BEGINNING BALANCE $ 161,912,644 $ 164,076,120 $ 77,713,156 $ 85,024,755 $ 62,892,945 $ 92,706,338 $ 107,168,545
Revenues and Other Sources Local Control Funding Formula (LCFF) $ 974,630,585 $ 970,604,541 $ 991,476,899 $ 986,647,296 $ 1,023,138,081 $ 1,026,808,516 $ 1,041,226,850 Federal Sources 102,143,599 111,814,283 93,859,716 103,294,042 88,674,989 107,195,075 101,440,924 Other State Sources 168,190,441 171,930,471 162,323,189 194,485,172 193,093,304 244,556,062 194,543,729 Other Local Sources 24,671,383 34,701,531 32,119,378 39,513,016 26,205,408 47,916,725 31,690,641 TOTAL REVENUES 1,269,636,008 1,289,050,826 1,279,779,182 1,323,939,526 1,331,111,782 1,426,476,378 1,368,902,144 TOTAL BEGINNING BALANCE AND REVENUES $ 1,431,548,652 $ 1,453,126,946 $ 1,357,492,338 $ 1,408,964,281 $ 1,394,004,727 $ 1,519,182,716 $ 1,476,070,689
Expenditures and Other Uses Certificated Salaries $ 576,775,524 $ 602,466,912 $ 562,557,942 $ 571,177,516 $ 570,854,611 $578,460,333 $ 596,018,330 Classified Salaries 220,818,456 226,818,356 200,775,561 197,038,529 202,087,222 201,031,630 217,578,401 Employee Benefits 401,208,047 395,140,080 418,384,727 401,635,052 428,623,105 474,018,392 462,994,218 Books and Supplies 46,089,178 40,255,623 34,893,125 33,747,227 44,707,200 35,535,950 42,714,981 Services and Other Operating Expenses 89,123,622 92,063,310 87,580,681 90,515,089 84,379,181 91,854,204 87,630,008 Capital Outlay 2,948,000 13,886,035 878,986 18,356,597 482,070 1,345,077 687,266 Other Outgo (66,969) 775,278 (638,233) 1,358,189 191,294 12,766,530 (911,900) TOTAL EXPENDITURES $ 1,336,895,858 $ 1,371,405,594 $ 1,304,432,789 $ 1,313,828,199 $ 1,331,324,683 $ 1,395,012,116 $ 1,406,711,304
EXCESS (DEFICIENCY) OF TOTAL BEGINNING BALANCE AND REVENUES OVER TOTAL EXPENDITURES $ 94,652,794 $ 81,721,352 $ 53,059,549 $ 10,111,327 $ 62,680,044 $ 124,170,600 $ 69,359,385
TOTAL OTHER FINANCING SOURCES(USES) 876,476 3,303,403 9,214,369 (2,429,744) 3,308,826 6,281,505 6,958,814
NET ENDING FUND BALANCE $ 95,529,270 $ 85,024,755 $ 62,273,918 $ 92,706,338 $ 65,988,870 $ 130,452,105 $ 76,318,199 ______(1) Totals may not add due to rounding. (2) Data from the District’s Adopted Budget for Fiscal Year 2016-17 as of September 13, 2016. (3) Data from the District’s Adopted Budget for Fiscal Year 2017-18 as of June 27, 2017. (4) Data from the District’s Adopted Budget for Fiscal Year 2018-19 as of June 26, 2018 (5) Data from the District’s Adopted Budget for Fiscal Year 2019-20 as of June 25, 2019.
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SAN DIEGO UNIFIED SCHOOL DISTRICT General Fund Balance Sheets for Fiscal Years Ending June 30
2015 2016 2017 2018 2019 ASSETS Cash(1) $141,606,394 $154,283,444 $116,790,216 $146,842,904 $164,553,386(1) Accounts and Property Taxes Receivable 115,130,742 81,404,894 45,694,339 30,976,143 53,728,631 Due from Other Funds 33,109,607 43,541,722 42,854,778 33,542,501 35,683,887 Prepaid Expenses 617,812 630,560 533,805 468,753 356,131 Inventory 2,066,997 2,175,228 2,506,219 2,747,871 3,204,914 Total Assets $292,531,552 $282,035,848 $208,379,357 $214,578,172 $257,526,949
LIABILITIES AND FUND EQUITY Accounts Payable and Other Liabilities $ 83,435,434 $ 89,286,095 $ 97,310,752 $ 90,543,793 $95,779,947 Deferred Income 15,288,044 19,030,597 13,549,906 13,723,143 15,941,442 Due to Other Funds 29,613,970 9,643,036 12,493,944 17,604,898 15,353,455 Total Liabilities $128,337,448 $117,959,728 $123,354,602 $121,871,834 $127,074,844 Fund Balance(2) 164,194,104 164,076,120 85,024,755 92,706,338 130,452,105
Total Liabilities and Fund Equity $292,531,552 $282,035,848 $208,379,356 $214,578,172 $257,526,949 ______(1) Includes cash in County Treasury and cash in revolving fund. (2) Includes set-aside for a self-insurance fund. Source: District Audited Financial Statements for years ended June 30, 2015, 2016, 2017, 2018 and 2019.
Fund Balances
The following table summarizes the fund balances for each of the District’s governmental funds from Fiscal Year 2014-15 through Fiscal Year 2018-19.
SAN DIEGO UNIFIED SCHOOL DISTRICT Fund Balance for Fiscal Years Ending June 30
2015 2016 2017 2018 2019
General Fund $164,194,104 $ 164,076,120 $ 85,024,755 $ 92,706,338 $ 130,452,105 Special Revenue Funds 2,835,525 2,379,754 4,942,715 10,531,125 180,740,028 Debt Service Funds 183,449,737 334,175,211 330,118,073 324,870,919 367,869,899 Capital Projects Funds 336,390,548 893,648,690 627,273,819 1,143,563,571 766,619,901 Total Governmental Fund Balances $686,869,914 $1,394,279,775 $1,047,359,362 $1,571,671,953 $1,445,681,933 ______Source: The District.
School District Budgeting Process
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 file with the county superintendent of schools a tentative budget by July 1 in each Fiscal Year and an adopted budget by September 8 of each Fiscal Year. After approval of the adopted budget, the school district’s administration may submit budget revisions for governing board approval.
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School districts in California must also conduct a review of their budgets according to certain standards and criteria established by the State Department of Education. A written explanation must be provided for any element in the budget that does not meet the established standards and criteria. The district superintendent or designee must certify that such a review has been conducted and the certification, together with the budget review checklist and a written narrative, must accompany the budget when it is submitted to the governing board for approval. The balanced budget requirement makes appropriations reductions necessary to offset any revenue shortfalls.
Furthermore, county superintendent of schools offices (each, a “COE”) are required to review district budgets, complete the budget review checklist and conduct an analysis of any budget item that does not meet the established standards. A copy of the completed checklist, together with any comments or recommendations, must be provided to the district and its governing board by November 1. By November 30, every district must have an adopted and approved budget, or the county superintendent of schools will impose one.
AB 1200 Budget Requirements; County and State Oversight; Reports and Certifications
The Education Code of the State (Section 42130 et seq.) requires each school district to certify to the COE at two points during the Fiscal Year whether it is able to meet its financial obligations for the remainder of such Fiscal Year, and, based on current forecasts, for the subsequent Fiscal Year. The first report covers the period ending October 31 and the second report covers the period ending January 31. Such certifications are based on the governing board’s assessment based on standards and criteria for fiscal stability adopted by the State Board of Trustee and the State Superintendent of Public Instruction (the “Superintendent”). Each certification is required to be classified as positive, qualified, or negative on the basis of a review of the respective report against such criteria, but may include additional financial information known by the governing board to exist at the time of each certification. Such certifications are to be filed with the COE within forty-five days after the close of the period being reported and, in the event of a negative or qualified certification, to the State Controller and the Superintendent. A positive certification is assigned to any school district that, based on then-current projections, 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, based on then-current projections, will be unable to meet its financial obligations for the remainder of the Fiscal Year or the subsequent Fiscal Year, or for which existing expenditure practices jeopardize the ability of the school district to meet its multi-year financial commitments. A qualified certification is assigned to any school district, based on then-current projections, which may not meet its financial obligations for the current Fiscal Year or two subsequent Fiscal Years. The COE reviews the interim reports and certifications made by school districts and may change certification to qualified or negative, if necessary.
The governing board of a school district that files a qualified or negative certification for the second report is required to provide to the county superintendent of schools, the State Controller and the Superintendent by June 1 a third report for the period ending April 30.
Any school district 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 and revenue anticipation notes, revenue bonds or any other debt instruments that do not require the approval of the voters of the school district, unless the county superintendent of schools determines that the school district’s repayment of indebtedness is probable. On December 10, 2019, the Board of Education approved the First Interim Financial Report (the “1st Interim Report”) self-certifying its financial status with a “positive” certification. On March 10, 2020, the Board of Education approved the Second Interim Financial Report (the “2nd Interim Report”) self-certifying its financial status with a “qualified” certification. On May 12, 2020, the Board of Education approved the District’s 3rd Interim Report self-certifying its budget plan with a “qualified” certification. On June 5, 2020, the San Diego County Office of Education (“SDCOE”) issued a letter to the District stating that in accordance with California Education Code Sections 42131 and 42133(a), and the California Department of Education’s Management Advisory No. 92-04 dated June 17, 1992, the SDCOE has reviewed the District’s financial condition, cash flow projections and projected budget for Fiscal Year 2020-21 as they relate to the Notes, and has determined that the repayment of principal and interest on the Notes is probable.
For school districts under fiscal distress, the county superintendent of schools is authorized to take a number of actions to ensure that the school district meets its financial obligations, including budget revisions. However, the county superintendent is not authorized to approve any diversion of revenue from ad valorem taxes levied to pay debt service on district general obligation bonds. A school district that becomes insolvent may, upon the approval of a fiscal plan by the county superintendent of schools, receive an emergency appropriation from the State, the acceptance
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of which constitutes an agreement to submit to management of the school district by a Superintendent appointed administrator.
In the event the State elects to provide an emergency appropriation to a school district, such appropriation may be accomplished through the issuance of “State School Fund Apportionment Lease Revenue Bonds” to be issued by the California Infrastructure and Economic Development Bank, on behalf of the school district. State law provides that so long as such bonds are outstanding, the recipient school district (via its State-appointed administrator) cannot file for bankruptcy.
Copies of the District’s reports and certifications, as well as audited financial statements, may be obtained upon request from the District’s Business Office located at 4100 Normal Street, San Diego, California 92103-2682. A fee may be imposed for copying, mailing and handling.
Assessed Valuation
As required by State Law, the County of San Diego assesses and collects taxes for District purposes. District taxes are collected at the same time and on the same tax rolls as are County, city and other special district taxes.
California law exempts $7,000 of the full cash value of an owner-occupied dwelling, but this exemption does not result in any loss of revenue to local entities, since an amount equivalent to the taxes which would have been payable on such exempt values is paid by the State.
The law provides, among other things, for accelerated recognition and taxation of increases in real property assessed valuation upon change in ownership of property or completion of new construction. The value of property assessed by the State Board of Equalization is allocated by a formula to local jurisdictions in the county, including K- 12 school districts, each community college district, each city and each special district within the county.
Factors Affecting Assessed Valuation. The annual tax rate will be based on the assessed value of taxable property in the District. Changes in the annual debt service on the District’s outstanding general obligation bonds and the assessed value of taxable property in the District may cause the annual tax rate to fluctuate. Economic and other factors beyond the District’s control, such as economic recession, global pandemics such as COVID-19, deflation of land values, relocation of businesses out of the District or financial difficulty or bankruptcy by one or more major property taxpayers, or the complete or partial destruction of taxable property caused by, among other eventualities, earthquake, flood, drought, fire, debris flow or other natural disaster, could cause a reduction in the assessed value of taxable property in the District and, all other factors being equal, necessitate a corresponding increase in the annual tax rate. Conversely, factors such as increased assessed value of taxable property and/or an increase in the numbers of property taxpayers within the District could, all other factors being equal, cause a corresponding decrease in the annual tax rate.
An economic recession or depression could be caused by many factors outside the control of the District, including high interest rates, reduced consumer confidence, reduced real wages or reduced economic activity as a result of the spread of COVID-19 or other outbreak of disease or natural or manmade disaster. See “INTRODUCTION – Risks Related to COVID-19” herein.
Wildfire. In recent years, portions of California, including adjacent counties, have experienced wildfires that have burned thousands of acres and destroyed thousands of homes and structures. Property damage due to wildfire could result in a significant decrease in the assessed value of the District. It is not possible for the District to make any representation regarding the extent to which wildfires could cause reduced economic activity within the boundaries of the District or the extent to which wildfires may impact the value of taxable property within the District.
Sea Level Rise. The District may be particularly vulnerable to impacts associated with sea level rise due to development on its coastline. A wide range of critical infrastructure, such as roads, airports, hospitals, schools, emergency facilities, wastewater treatment plants, power plants, and ports is also vulnerable. Continued development in vulnerable areas will put additional assets at risk and raise protection costs. The District is unable to predict whether sea level rise or other impacts of climate change or flooding from a major storm will occur, when they may occur, and if any such events occur, whether they will have a material adverse effect on the financial condition of the District and the local economy.
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Shown in the following two tables are the District assessed valuations and their tax roll components in the last five years, and a history of assessed valuations.
SAN DIEGO UNIFIED SCHOOL DISTRICT Assessed Valuations 2015-16 through 2019-20
State- Net Assessed Reimbursed Gross Assessed Valuation Exemption Valuation
2015-16 Local Secured $149,918,524,921 $1,028,557,966 $150,947,082,887 Utility 20,998,958 -0- 20,998,958 Unsecured 6,894,647,859 1,541,094 6,896,188,953 Total $156,834,171,738 $1,030,099,060 $157,864,270,798
2016-17 Local Secured $158,963,078,144 $1,022,595,878 $159,985,674,022 Utility 11,401,517 -0- 11,401,517 Unsecured 6,961,367,414 1,492,194 6,962,859,607 Total $165,935,847,075 $1,024,088,072 $166,959,935,147
2017-18 Local Secured $169,100,385,710 $1,014,446,858 $170,114,832,568 Utility 14,878,958 -0- 14,878,958 Unsecured 7,507,503,893 1,458,871 7,508,962,764 Total $176,622,768,561 $1,015,905,729 $177,638,674,290
2018-19 Local Secured $179,689,784,721 $1,009,740,446 $180,699,525,167 Utility 7,509,903 -0- 7,509,903 Unsecured 7,840,429,488 1,397,748 7,841,827,236 Total $187,537,724,112 $1,011,138,194 $188,548,862,306
2019-20 Local Secured $190,835,828,732 $1,022,965,194 $191,858,793,926 Utility 7,512,876 -0- 7,512,876 Unsecured 8,403,040,729 1,329,420 8,404,370,149 Total $199,246,382,337 $1,024,294,614 $200,270,676,951 ______Source: San Diego County Auditor and Controller.
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SAN DIEGO UNIFIED SCHOOL DISTRICT History of Assessed Valuations 2010-11 through 2020-21(1)(2) % Growth from Fiscal Year Assessed Valuation(1) Previous Year
2010-11 $134,714,145,620 (1.94) 2011-12 134,993,695,091 0.21 2012-13 134,786,052,020 (0.15) 2013-14 140,132,550,406 3.97 2014-15 148,840,299,336 6.21 2015-16 157,864,270,798 6.06 2016-17 166,959,935,147 5.76 2017-18 177,638,674,290 6.40 2018-19 188,548,862,306 6.14 2019-20 200,270,676,951 6.22 2020-21(2) [208,242,372,000] [3.98] ______(1) Valuations include secured and unsecured property at full market value and reimbursable exemptions. (2) [Estimate. In a letter dated May 15, 2020, the County Assessor provided the District with an estimate of the total local secured and unsecured assessed values for the District for the 2020-21 assessment year of $208,242,372,000. The letter also stated that final values will be mailed to the District by June 30, 2020.][TO BE UPDATED] Source: San Diego County Auditor and Controller.
Shown in the following table is a summary of the 2019-20 local secured assessed valuation of the District by land use, displaying the number of parcels and the percentages of the total parcels in the District in each category.
SAN DIEGO UNIFIED SCHOOL DISTRICT Local Secured Assessed Valuation and Parcels by Land Use(1)
2019-20 No. of % of Assessed Valuation(1) % of Total Parcels Total Non-Residential: Commercial/Office $33,539,028,118 17.48% 10,589 3.88% Vacant Commercial 548,696,320 0.29 3,397 1.24 Industrial 9,978,621,465 5.20 3,669 1.34 Vacant Industrial 392,516,560 0.20 3,998 1.46 Recreational 792,614,863 0.41 1,818 0.67 Government/Social/Institutional 677,825,995 0.35 2,031 0.74 Subtotal Non-Residential $45,929,303,321 23.94% 25,502 9.34%
Residential: Single Family Residence $ 80,954,689,811 42.19% 169,986 62.27% Condominium/Townhouse 21,186,301,847 11.04 33,852 12.40 Mobile Home Park 139,030,486 0.07 29 0.01 Timeshare 32,187,035 0.02 4,585 1.68 2+ Residential Units/Apartments 41,863,016,477 21.82 26,987 9.89 Vacant Residential 1,393,368,730 0.73 11,854 4.34 Subtotal Residential $145,568,594,386 75.87% 247,293 90.59%
Unknown Use $360,896,219 0.19% 198 0.07%
Total $191,858,793,926 100.00% 272,993 100.00% ______(1) Local Secured Assessed Valuation; excluding tax-exempt property. Source: California Municipal Statistics, Inc.
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Shown in the following table is a summary of the 2019-20 per parcel assessed valuation of single-family homes within the District.
SAN DIEGO UNIFIED SCHOOL DISTRICT Per Parcel 2019-20 Assessed Valuation of Single-Family Homes
2019-20 Average Median No. of Parcels Assessed Valuation Assessed Valuation Assessed Valuation
Single-Family Residential 169,986 $80,954,689,811 $476,243 $355,452
2019-20 No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels(1) Total % of Total Valuation Total % of Total
$0 - $49,999 3,214 1.891% 1.891% $ 121,765,245 0.150% 0.150% $50,000 - $99,999 17,007 10.005 11.896 1,243,635,276 1.536 1.687 $100,000 - $149,999 11,885 6.992 18.887 1,484,804,935 1.834 3.521 $150,000 - $199,999 13,148 7.735 26.622 2,306,219,487 2.849 6.370 $200,000 - $249,999 13,746 8.087 34.709 3,097,611,411 3.826 10.196 $250,000 - $299,999 13,126 7.722 42.431 3,597,874,992 4.444 14.640 $300,000 - $349,999 11,519 6.776 49.207 3,736,215,039 4.615 19.255 $350,000 - $399,999 11,158 6.564 55.771 4,175,425,662 5.158 24.413 $400,000 - $449,999 10,483 6.167 61.938 4,445,560,737 5.491 29.905 $450,000 - $499,999 9,427 5.546 67.484 4,464,958,126 5.515 35.420 $500,000 - $599,999 14,736 8.669 76.153 8,075,739,404 9.976 45.396 $600,000 - $699,999 11,180 6.577 82.730 7,221,943,569 8.921 54.316 $700,000 - $799,999 7,723 4.543 87.273 5,761,123,962 7.116 61.433 $800,000 - $899,999 5,402 3.178 90.451 4,570,976,692 5.646 67.079 $900,000 - $999,999 3,664 2.155 92.606 3,466,328,708 4.282 71.361 $1,000,000 - $1,099,999 2,296 1.351 93.957 2,399,988,467 2.965 74.326 $1,100,000 - $1,199,999 1,630 0.959 94.916 1,868,389,227 2.308 76.634 $1,200,000 - $1,299,999 1,353 0.796 95.712 1,685,438,359 2.082 78.716 $1,300,000 - $1,399,999 1,067 0.628 96.340 1,436,449,490 1.774 80.490 $1,400,000 - $1,499,999 845 0.497 96.837 1,221,099,834 1.508 81.998 $1,500,000 - $1,599,999 644 0.379 97.216 993,760,828 1.228 83.226 $1,600,000 - $1,699,999 570 0.335 97.551 939,403,492 1.160 84.386 $1,700,000 - $1,799,999 447 0.263 97.814 779,612,776 0.963 85.349 $1,800,000 - $1,899,999 391 0.230 98.044 720,750,502 0.890 86.240 $1,900,000 - $1,999,999 327 0.192 98.236 636,659579 0.786 87.026 $2,000,000 and greater 2,998 1.764 100.000 10,502,954,012 12.974 100.000 Total 169,986 100.000% $76,313,904,409 100.000% ______(1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc.
Tax Rates, Levies and Collection Procedures
Taxes are levied for each fiscal year on taxable real and personal property as of the preceding January 1. Real property which changes ownership or is newly constructed is revalued at the time the change occurs or the construction is completed. The current year property tax rate is applied to the reassessed value, and the taxes are then adjusted by a proration factor that reflects the portion of the remaining tax year for which taxes are due.
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 real property the taxes on which have a lien 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, and become delinquent on December 10 and April 10, respectively. A penalty of ten percent attaches immediately to all delinquent payments. Properties on the secured roll with respect to which taxes are delinquent become tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of
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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 County notifies the State Controller, and the property may be sold at public auction by the County Treasurer.
Property taxes on the unsecured roll are due as of the January 1 lien dates and become delinquent on August 31. A ten percent penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The County has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a judgment 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 Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee.
Property tax delinquencies may be impacted by economic and other factors beyond the District’s control, including the ability or willingness of property owners to pay property taxes during an economic recession or depression. An economic recession or depression could be caused by many factors outside the control of the District, including high interest rates, reduced consumer confidence, reduced real wages or reduced economic activity as a result of the COVID-19 or other pandemic or natural or manmade disaster, such as earthquake, drought, flood, fire, toxic dumping. It is not possible for the District to make any representation regarding the extent to which an economic recession or depression, stemming from the effects of COVID-19 or otherwise, could impact the ability or willingness of property owners within the District to pay property taxes in the future. For more information on the impact of the COVID-19 pandemic, see “INTRODUCTION – Risks Related to COVID-19” herein. If delinquencies increase substantially as a result of the unprecedented events of the COVID-19 pandemic or other events outside the control of the District, the County does have the authority to increase allowances for annual reserves in the tax levy to avoid fluctuating tax levies.
On May 6, 2020, the Governor signed Executive Order N-61-20, suspending provisions of the State Revenue and Taxation Code requiring collection of interest, penalties, and costs through May 6, 2021, for certain property taxes that are not subject to impounds and were not delinquent prior to March 4, 2020, upon satisfaction of certain conditions set forth in such order. The District cannot predict the extent of delinquencies and delayed tax collections, or the resulting impact on the District’s financial condition or operations. The County has adopted the Teeter Plan (defined herein), according to which the County distributes to the District the amount levied on the secured and supplemental tax rolls, instead of the amount actually collected. See “– The Teeter Plan” below. There can be no assurances that the County will always maintain the Teeter Plan or will have sufficient funds available to distribute the full amount of the District’s share of property tax collections to the District. However, State law requires the County to levy ad valorem property taxes sufficient to pay general obligation bonds of the District when due.
A portion of the property tax in the District is derived from utility property subject to assessment by the State Board of Equalization (the “SBE”). State-assessed property, or “unitary property,” is property of a utility system with components located in many taxing jurisdictions assessed as part of a “going concern” rather than as individual parcels of real or personal property. Unitary and certain other state-assessed property is allocated to the counties by the SBE, taxed at special county-wide rates, and the tax revenues are distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year.
San Diego County has adopted, subject to future discontinuance, the “Teeter Plan,” as discussed herein, allocating 100% of the District’s total secured tax and general obligation bond taxes. See “FINANCIAL AND OPERATING INFORMATION – The Teeter Plan” herein.
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Shown in the following table are the District’s past ten years’ secured roll tax levies, combining the District’s shares of the 1% County tax levies and the District’s own debt service levies.
SAN DIEGO UNIFIED SCHOOL DISTRICT Secured Tax Levies
Secured Tax Levy(1) Fiscal Year 1%(2) Debt Service Total
2009-10 $522,748,235 $ 92,029,537 $614,777,772 2010-11 515,874,655 92,119,990 607,994,645 2011-12 520,587,528 93,080,498 613,668,026 2012-13 520,305,576 91,886,581 612,192,157 2013-14 539,208,858 177,999,518 717,208,376 2014-15 570,685,396 190,196,626 760,882,022 2015-16 604,990,676 202,083,596 807,074,272 2016-17 636,569,283 214,615,264 851,184,547 2017-18 676,898,539 229,521,648 906,420,187 2018-19 714,881,835 241,916,515 956,798,350 ______(1) Excludes State Reimbursed Exemptions, (2) District’s share of 1% County Levy. Includes secured property and unitary property. Source: San Diego County Auditor and Controller, Property Tax Services Division.
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Tax Rates
The following table sets forth typical tax rates for property within the District for Fiscal Years 2015-16 through 2019-20:
SAN DIEGO UNIFIED SCHOOL DISTRICT HISTORICAL TAX RATES(1) TYPICAL TAX RATE PER $100 OF ASSESSED VALUATION 2015-16 2016-17 2017-18 2018-19 2019-20
General Tax Rate 1.00000 1.00000 1.00000 1.00000 1.00000 Metropolitan Water District .00350 .00350 .00350 .00350 .00350 City of San Diego .00500 .00500 .00500 .00500 .00500 San Diego Community College District .03939 .03912 .03447 .03941 .03801 San Diego Unified School District .12670 .12670 .12670 .12670 .18548 Total 1.17459 1.17432 1.16967 1.17461 1.23199 ______(1) Tax Rate Area 8-001; 2019-20 Assessed Valuation: $103,504,091,816. Source: California Municipal Statistics, Inc.
Secured Tax Charges and Delinquencies
The County levies and collects all property taxes for property located within the County’s taxing boundaries. The following table shows secured tax charges and delinquencies for the portion of the District within the County. Note that the District receives 100% of its ad valorem property taxes levied irrespective of actual delinquencies in the collection of property taxes by the County while the Teeter Plan is in place. See “FINANCIAL AND OPERATING INFORMATION – The Teeter Plan” herein.
SAN DIEGO UNIFIED SCHOOL DISTRICT SECURED TAX CHARGES AND DELINQUENCY RATES FISCAL YEARS 2013-14 THROUGH 2018-19 Total Secured Fiscal Year Tax Charges(1) Amount Delinquent Delinquency Rate
2013-14 $551,495,689.89 $1,007,952.02 0.18% 2014-15 583,505,415.19 818,828.55 0.14 2015-16 617,668,023.45 581,160.92 0.09 2016-17 653,039,956.85 1,046,677.79 0.16 2017-18 690,993,545.12 717,412.56 0.10 2018-19 730,171,274.36 917,026.66 0.13 ______(1) Includes Current Secured, Unsecured, Secured Homeowners’ Exemption, Unsecured Homeowners’ Exemption. Source: County of San Diego Auditor and Controller Department – Property Tax Services.
The Teeter Plan
The County, since the 1993-94 Fiscal Year, has operated under provisions of Revenue and Taxation Code Sections 4701-4716 (commonly referred to as the “Teeter Plan”) pursuant to which public agencies in the County will receive their total secured tax levies and special assessments irrespective of actual collections and delinquencies. Pursuant to such provisions, the County establishes a delinquency reserve and assumes responsibility for all secured delinquencies.
Because of this method of tax collection, the District is allocated 100% collection of its total secured tax levies. Under County policy, taxes for general obligations bonds are covered by the Teeter Plan. This method of tax collection and distribution is, however, subject to future discontinuance if demanded by the participating entities or
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upon action by the County Board of Supervisors. Further, the County may take action to discontinue the Teeter Plan with respect to any tax levying agency in the County if the rate of secured tax delinquency in any year exceeds 3% of the total of all taxes and assessments of that agency. The County has reported that the delinquency rate for taxes collected in the District are currently under 3%. See “FINANCIAL AND OPERATING INFORMATION – Secured Tax Charges and Delinquencies” herein.
The Teeter Plan of the County is to remain in effect unless the Board of Supervisors of the County orders its discontinuance or unless, prior to the commencement of any Fiscal Year of the County (which commences on July 1), the Board of Supervisors of the County receives a petition for its discontinuance joined in by a resolution adopted by at least two-thirds of the participating revenue districts in the County. In the event the Board of Supervisors of the County orders discontinuance of its Teeter Plan, only those secured property taxes and special assessments actually collected would be allocated to political subdivisions (including the District) for which the County acts as the tax- levying or tax-collecting agency.
The District is not aware of any plans for the discontinuance of the Teeter Plan now pending in the County.
The twenty largest local secured taxpayers in the District and their assessed valuations for 2019-20 are shown in the following table.
SAN DIEGO UNIFIED SCHOOL DISTRICT Largest Local Secured Taxpayers Fiscal Year 2019-20
2019-20 Percentage of Property Owner Primary Land Use Assessed Valuation Total(1)
1. Qualcomm Inc. Office Building $ 2,087,000,719 1.09% 2. Irvine Company LLC Office Building 1,187,304,614 0.62 3. Host Hotels and Resorts LP Hotel 1,101,509,159 0.57 4. UTC Venture LLC Commercial 863,560,212 0.45 5. H.G. Fenton Co. Apartments 779,974,074 0.41 6. Fashion Valley Mall LLC Shopping Center 527,864,992 0.28 7. One Park Boulevard LLC Hotel 505,922,463 0.26 8. La Jolla Crossroads 1 LLC Apartments 488,173,042 0.25 9. Bosa Development California II Inc. Office Building 466,983,126 0.24 10. Solar Turbines Inc. Industrial 419,357,181 0.22 11. Village Mission Valley LLC Apartments 418,283,763 0.22 12. Illumina Inc. ARE-SD Region No. 32 Industrial 389,427,916 0.20 LLC 13. Pacific Gateway Ltd. Hotel 383,893,261 0.20 14. LHO Mission Bay Hotel LP Hotel 382,369,272 0.20 15. HSPF La Jolla Commons II Investors Office Building 350,945,788 0.18 16. Seaworld Parks and Entertainment Theme Park 333,317,421 0.17 17. GDCV II BP Village Podium REIT LLC Office Building 312,608,415 0.16 18. Pfizer Inc. Industrial 307,771,562 0.16 19. National Steel & Shipbuilding Co. Industrial 293,877,003 0.15 20. Scripps Mesa Developers II LLC Apartments 280,677,207 0.15 $11,880,821,190 6.19% ______(1) 2019-20 Local Secured Assessed Valuation: $191,858,793,926 Source: California Municipal Statistics, Inc.
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Direct and Overlapping Debt
Set forth below is a direct and overlapping debt report (the “Debt Report”) for the District prepared by California Municipal Statistics, Inc. on May 14, 2020 for debt outstanding as of June 1, 2020. 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 representations in connection therewith. 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 from the general fund or other revenues of such public agency. The top portion of the table reflects direct and overlapping tax and assessment debt, while the bottom portion of the table reflects overlapping general fund debt.
The first column in the table names each public agency which has outstanding debt as of the date of the report and whose territory overlaps the District in whole or in part. Column 2 shows the percentage of each overlapping agency’s assessed value located within the boundaries of the District. This percentage, multiplied by the total outstanding debt of each overlapping agency (which is not shown in the table) produces the amount shown in column 3, which is the apportionment of each overlapping agency’s outstanding debt to taxable property in the District.
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SAN DIEGO UNIFIED SCHOOL DISTRICT Direct and Overlapping Debt Statement (as of June 1, 2020)
2019-20 Assessed Valuation: $200,270,676,951
DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 6/1/20 Metropolitan Water District 6.475% $ 2,415,175 Mira Costa Community College District 0.798 568,735 Palomar Community College District 0.697 4,256,285 San Diego Community College District 99.502 1,315,071,476 San Diego Unified School District 100.000 3,827,676,890(1) City of La Mesa 0.056 10,802 Grossmont Healthcare District 7.229 18,408,528 Palomar Pomerado Health Systems 1.805 7,617,534 City of San Diego Community Facilities District No. 1 100.000 3,515,000 City of San Diego Community Facilities District No. 3 100.000 12,850,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $5,192,390,425
OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 36.007% $ 83,302,195 San Diego County Pension Obligation Bonds 36.007 164,206,323 San Diego County Superintendent of Schools Obligations 36.007 3,366,655 Palomar Community College District Certificates of Participation 0.697 11,675 City of La Mesa General Fund Obligations 0.056 1,512 City of San Diego General Fund Obligations 75.672 375,580,877 TOTAL OVERLAPPING GENERAL FUND DEBT $ 626,469,237
OVERLAPPING TAX INCREMENT DEBT: San Diego Redevelopment Agency (Successor Agency) 97.032-100.000% $324,545,268 TOTAL OVERLAPPING TAX INCREMENT DEBT $324,545,268
COMBINED TOTAL DEBT $6,143,404,930(2)
(1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations.
Ratios to 2019-20 Assessed Valuation: Direct Debt ($3,827,676,890) ...... 1.91% Total Direct and Overlapping Tax and Assessment Debt ...... 2.59% Combined Total Debt ...... 3.07%
Ratios to Successor Agency Redevelopment Incremental Valuation ($27,888,121,808): Total Overlapping Tax Increment Debt ...... 1.16%
______Source: California Municipal Statistics, Inc.
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Long Term Obligations
The debt service payments on the District’s General Obligation Bonds listed below are secured by voter- approved ad valorem taxes from taxable property within the District. All general obligation bonds of the District are issued on a parity with one another.
General Obligation Bonds – Proposition MM. The District received authorization at an election held on November 3, 1998 by more than 2/3 of the votes cast by eligible voters within the District on the proposition known as “Proposition MM” to issue general obligation bonds in an amount not to exceed $1,510,000,000. With the issuance of the 2005 General Obligation Bonds (Election of 1998, Series G) on September 8, 2005, all of the Proposition MM authorization have been issued, and the District has also effected the refunding of a number of its Proposition MM bond issues. Proposition MM proceeds were applied to fund the modernization of 161 existing schools and construction of 12 new and three rebuilt schools. In addition to the repair of aging schools, Proposition MM projects included ensuring the health and safety of school playground equipment, access to the physically disabled, fire alarm/security systems and climate controls, upgrading electrical systems for technology, building libraries, science classrooms and outdoor lunch court shelters, maintaining school buildings and grounds and improving the teaching and learning environment. As of June 1, 2020, the District had $943,277,987.30 aggregate principal or issue amount of Proposition MM bonds outstanding. See the table below for a summary of the District’s bond issuances under Proposition MM.
November 3, 1998 Election Proposition MM $1,510,000,000 Series Aggregate Principal Amount Issued Issue Date A $139,995,085 May 27, 1999 B 149,999,084 December 14, 2000 C 199,995,712 November 21, 2001 D 274,995,346 September 12, 2002 E 349,993,599 August 19, 2003 F 199,996,373 September 2, 2004 G 195,024,802 September 8, 2005
Remaining Authorization: $0
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General Obligation Bonds – Proposition S. The District received authorization at a Proposition 39 election held on November 4, 2008, by more than 68% of the votes cast by eligible voters within the District on the measure to issue general obligation bonds in an amount not to exceed $2,100,000,000 for the purposes summarized as follows: repairing outdated student restrooms, deteriorated plumbing and roofs; upgrading career/vocational classrooms and labs; providing up-to-date classroom technology; improving school safety/security; replacing dilapidated portable classrooms; upgrading fire alarms; and removing hazardous substances (“Proposition S”). As of June 1, 2020, the District had $891,703,902 aggregate principal or issue amount of Proposition S bonds outstanding. The District anticipates issuing not to exceed $100,000,000 of Proposition S Bonds [in the fiscal year ending June 30, 2021]. See the table below for a summary of the District’s bond issuances under Proposition S.
November 4, 2008 Election Proposition S $2,100,000,000 Series Aggregate Principal Amount Issued Issue Date A $131,157,581 May 7, 2009 B (QSCB Tax Credit Bonds) 38,840,000 May 7, 2009 C 163,869,783 August 18, 2010 D-1 (QSCB Taxable Direct Subsidy Bonds) 16,130,000 August 18, 2010 D-2 (QSCB Taxable Direct Subsidy Bonds) 20,000,000 August 18, 2010 E 149,998,824 May 24, 2012 F 15,095,000 April 16, 2014 G 50,000,726 April 16, 2014 H-1 (Federally Taxable) 2,150,000 June 29, 2015 H-2 29,620,000 June 29, 2015 I 99,999,241 January 5, 2016 J-1 (Federally Taxable) 5,605,000 May 19, 2016 J-2 39,395,000 May 19, 2016 K-1 23,460,000 December 12, 2017 K-2 76,538,885 December 12, 2017
Total Aggregate Principal or Issue Amount: $861,860,041
Remaining Authorization: $1,238,139,959
______(1) Totals may not add due to rounding. (2) Excludes refunding transactions under Proposition S.
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General Obligation Bonds – Proposition Z. The District received authorization at a Proposition 39 election held on November 6, 2012, by more than 62% of the votes cast by eligible voters within the District on the proposition to issue general obligation bonds in an amount not to exceed $2,800,000,000 for the purposes summarized as follows: repairing deteriorating 60-year-old classrooms, libraries, wiring, plumbing, bathrooms and leaky roofs; removing hazardous mold, asbestos, and lead; upgrading fire safety systems/doors; upgrading classroom instructional technology, labs and vocational education classrooms (“Proposition Z”). As of June 1, 2020, the District had $1,650,525,000 aggregate principal amount of Proposition Z bonds outstanding. The District anticipates issuing not to exceed $300,000,000 of Proposition Z Bonds on or about August 27, 2020. See the table below for a summary of the District’s bond issuances under Proposition Z.
November 6, 2012 Election Proposition Z $2,800,000,000 Series Aggregate Principal Amount Issued Issue Date A (Taxable) $52,500,000 April 30, 2013 A-1 (Taxable) 3,000,000 April 30, 2013 B 60,500,000 April 30, 2013 C 414,000,000 April 30, 2013 D (Federally Taxable) 75,400,000 October 14, 2015 E 78,955,000 October 14, 2015 F 370,645,000 January 5, 2016 G (Green Bonds) 100,000,000 January 5, 2016 H-1 (Federally Taxable) 43,735,000 November 1, 2017 H-2 176,265,000 November 1, 2017 I 441,000,000 November 1, 2017 J (Green Bonds) 59,000,000 November 1, 2017 Series K-1 (Federally Taxable) 19,465,000 October 30, 2019 Series K-2 103,900,000 October 30, 2019 Series L 126,635,000 October 30, 2019
Total Aggregate Principal Amount Issued: $2,125,000,000
Remaining Authorization: $675,000,000
General Obligation Bonds - Measure YY. The District received authorization at an election held on November 6, 2018 by more than 55% of the votes cast by eligible voters within the District on the proposition known as “Measure YY” to issue general obligation bonds in an amount not to exceed $3,500,000,000 for the purposes summarized as follows: Improving school security, emergency communications, controlled-entry points, door locks; upgrading classrooms/labs for vocational/career, science, technology, math education; repairing foundations, bathrooms/plumbing; and removing lead in drinking water and hazardous asbestos (“Measure YY”). As of June 1, 2020, the District had $342,170,000 aggregate principal amount of Measure YY bonds outstanding. The District anticipates issuing not to exceed $545,000,000 of Measure YY Bonds on or about August 27, 2020. See the table below for a summary of the District’s bond issuances under Measure YY.
November 6, 2018 Election Measure YY $3,500,000,000 Series Aggregate Principal Amount Issued Issue Date A $ 201,260,000 May 6, 2019 B 48,740,000 May 6, 2019 C-1 (Federally Taxable) 7,830,000 October 30, 2019 C-2 92,170,000 October 30, 2019
Total Aggregate Principal Amount Issued $ 350,000,000
Remaining Authorization $3,150,000,000
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General Obligation Refunding Bonds and Defeasances. The District has issued general obligation refunding bonds over the years to restructure the District’s outstanding bonds, take advantage of interest rate savings, and reduce debt service. The District has also established tax rate reserves to maintain certain tax rates, and utilized such reserve funds at times to defease debt service. See “FINANCIAL AND OPERATING INFORMATION – Tax Rate Reserves for Proposition MM, Proposition S, Proposition Z and Measure YY” herein. The District continues to pursue refundings and defeasances in order to manage its tax rate levels.
Bonding Capacity. As a unified school district, the District may issue bonds in an amount up to 2.50% of the assessed valuation of taxable property within its boundaries. The District’s fiscal year 2019-20 gross bonding capacity (also commonly referred to as the “bonding limit” or “debt limit”), not including apportioned unitary utility assessed value as determined by the County Auditor-Controller, is approximately $5,006,766,924 and its net bonding capacity is approximately $5,006,766,924 and its net bonding capacity is approximately $1,179,090,034 as of June 1, 2020.
Tax Rate Reserves for Proposition MM, Proposition S, Proposition Z and Measure YY
In order to avoid fluctuating tax rates in connection with District’s Proposition MM, Proposition S, Proposition Z and Measure YY general obligation bonds, the County, at the request of the District has established certain reserve accounts where excess ad valorem property taxes collected by the County are deposited and held by the County (each a “Tax Rate Reserve”). The amounts in the respective Tax Rate Reserves may only be applied to pay, redeem and defease outstanding bonds associated with Proposition MM and Proposition S, Proposition Z, or Measure YY, respectively. The County may discontinue the accumulation of excess ad valorem property taxes held in its Tax Rate Reserves at any time, at its discretion.
Memoranda of Understanding. The District executed Memoranda of Understanding, each dated as of June 1, 2019 (collectively, the “2019 MOU”) with the County with respect to the tax rate reserves for bonds issued under Measure YY, Proposition Z and bonds issued under Proposition MM and Proposition S, respectively, which 2019 MOU supersedes prior Memoranda of Understanding, each for the purpose of avoiding a fluctuating tax levy in accordance with Section 15250 of the Education Code. Pursuant to the 2019 MOU, the District and the County agreed to limit the amounts held in the tax rate reserves. Commencing Fiscal Year 2019-20, the Proposition MM and Proposition S Tax Rate Reserve has an upper limit of $35,000,000. The Proposition Z Tax Rate Reserve has an upper limit of $12,500,000, and the Measure YY Tax Rate Reserve has an upper limit of $20,000,000. Once those tax rate reserve thresholds are met, the District is obligated under the 2019 MOU to apply any excess over and above such limits to execute a defeasance plan or provide for payment of specific bonds or interest payments, as well as certain short term scheduled debt service payments, all as contemplated by the 2019 MOU.
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Long-Term Obligations. A schedule of changes in long-term debt for the fiscal year ended June 30, 2019 is as follows:
Long-Term Debt As of June 30, 2019
2019 2018 Net Change LONG-TERM LIABILITIES Total General Obligation Bonds $4,184,726,261 $4,011,220,333(1) $173,505,928.00 Net Pension Liability 1,438,498,000 1,539,630,000 (101,132,000.00) Compensated Absences 34,507,093 29,644,037 4,863,056.00 SERP Liability 47,764,675 71,583,001 (23,818,326.00) Claims Liability 69,533,000 72,450,000 (2,917,000.00) Net OPEB Obligation 128,102,556 127,328,463 774,093.00
Total Long-Term Liabilities $5,903,131,585 $5,851,855,834 $51,275,751.00 ______(1) Amount in addition to bond principal includes unamortized bond premium of $250,415,579 and accreted interest on capital appreciation bonds of $274,022,862. Source: The District’s Audited Financial Statements June 30, 2019.
Tax and Revenue Anticipation Notes. On July 23, 2019, the District issued $220,000,000 of its 2019-20 Tax and Revenue Anticipation Notes, Series A (the “2019 Notes”), maturing June 30, 2020. The District is required to fund the repayment fund with respect to the 2019 Notes in full from General Fund revenues as provided in the authorizing resolution for the 2019 Notes. The District made the first set-aside payment on December 13, 2019 in the amount of $132,000,000 and the second set-aside payment on April 21, 2020 in the amount of $98,297,222.22.
Pension Plans
The following information on CalPERS and CalSTRS (as defined below) has been obtained from publicly available sources and has not been independently verified by the District, is not guaranteed as to the accuracy or completeness of the information and is not to be construed as a representation by the District, the Underwriters or the Municipal Advisor. Furthermore, the summary data below should not be read as current or definitive, as recent losses on investments made by the retirement systems generally may have increased the unfunded actuarial accrued liabilities stated below.
The assets and liabilities of the funds administered by CalPERS and CalSTRS, as well as certain other retirement funds administered by the State, are included in the financial statements of the State for the year ended June 30, 2019, as fiduciary funds. Both CalPERS and CalSTRS have unfunded actuarial accrued liabilities in the tens of billions of dollars. The amount of unfunded actuarially accrued liability will vary from time to time depending upon actuarial assumptions, rates of return on investments, salary scales, and levels of contribution.
CalSTRS and CalPERS each issue separate comprehensive annual financial reports that include financial statements and required supplementary information. Copies of the CalSTRS annual financial report may be obtained from CalSTRS, P.O. Box 15275, Sacramento, California 95851-0275 and copies of the CalPERS annual financial report and actuarial valuations may be obtained from the CalPERS Financial Services Division, P.O. Box 942703, Sacramento, California 94229-2703. The information presented in these reports is not incorporated by reference in this Official Statement.
CalSTRS. The District participates in the California State Teachers’ Retirement System (“CalSTRS”). CalSTRS is a defined benefit plan that covers all full-time certificated employees and some classified employees, which are employees employed in a position that does not require a teaching credential from the State. CalSTRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program (the “CalSTRS Defined Benefit Program”). The CalSTRS Defined Benefit Program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers, and the State. Benefit provisions are established by State legislation in accordance with the State Teachers’ Retirement Law. CalSTRS is operated on a Statewide basis and, based on publicly available information, has substantial
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unfunded liabilities. Additional funding of CalSTRS by the State and the inclusion of adjustments to such State contributions based on consumer price changes were provided for in 1979 Statutes, Chapter 282.
As part of the 2014-15 State Budget, the Legislature enacted AB 1469 (Chapter 47, Statutes of 2014) (“AB 1469”), a comprehensive funding solution intended to eliminate the projected CalSTRS unfunded liability on the CalSTRS Defined Benefit Program by 2046. Under AB 1469, the funding plan began in Fiscal Year 2014-15 and will be phased in over several years. The employer contribution rate increased by 1.85% of covered payroll annually beginning July 1, 2015 and will continue to increase until the employer contribution rate is 19.10% of covered payroll. Beginning in Fiscal Year 2021-22 through Fiscal Year 2045-46, AB 1469 authorizes the CalSTRS Board to adjust the employer contribution up or down 1 percentage point each year, but no higher than 20.25% total and no lower than 8.25%, to eliminate the remaining unfunded obligation that existed on July 1, 2014.
In addition, the CalSTRS Board is authorized to modify the percentages paid by employers and employees for Fiscal Year 2021-22 and each fiscal year thereafter in order to eliminate CalSTRS’ unfunded liability by June 30, 2046 based upon actuarial recommendations. The CalSTRS Board would also have the authority to reduce employer and State contributions if they are no longer necessary.
The actuarial assumptions and methods adopted by the CalSTRS Board for funding the CalSTRS Defined Benefit Program include: the “Entry Age Normal Cost Method”, with the actuarial gains/losses and the unfunded actuarial obligation amortized over a closed period ending June 30, 2046, an assumed 7.25% investment rate of return (net of investment and administrative expenses) for Fiscal Year 2015-16 and a 7.00% investment rate of return (net of investment and administrative expenses) for Fiscal Year 2016-17, an assumed 3.00% interest on member accounts (based on the CalSTRS Board’s short-term interest crediting policy), projected 3.50% general wage growth, of which 2.75% is due to inflation and 0.75% is due to expected gains in productivity, and demographic assumptions relating to mortality rates, length of service, rates of disability, rates of withdrawal, probability of refund, and merit salary increases.
In May 2019, CalSTRS released an update on the financial position of the pension system, including estimates of the unfunded liability and contribution rates required for districts, employees and the State. The May funding update reflected an estimated unfunded liability of $107.2 billion for the valuation period ending June 30, 2018.
Pursuant to Assembly Bill 1469, school districts’ contribution rates will increase in accordance with the following schedule:
K-14 SCHOOL DISTRICT CONTRIBUTION RATES CalSTRS (Defined Benefit Program)
District Projected Cumulative General Fund and Special Education Contribution Increase Effective Date(1) K-14 school districts (in millions) July 1, 2017 14.43% $33.7 July 1, 2018 16.28 43.8 July 1, 2019 17.10 48.4 July 1, 2020 16.15 42.7 ______(1) [The May Revision proposes redirecting funds paid to STRS towards long-term unfunded liabilities to further reduce employer contribution rates in fiscal years 2020-21 and 2021-22. This reallocation will reduce the STRS employer contribution rate to approximately 16.15% in fiscal year 2020-21 and to 16.02% in fiscal year 2021-22. See “– State Budget Process – Fiscal Year 2020-21 May Revision.”] Source: AB 1469; the District.
The District estimates that its Fiscal Year 2019-20 CalSTRS contribution will increase by approximately $8.0 million over its Fiscal Year 2018-19 CalSTRS contribution. The District, nonetheless, is unable to predict all factors or any changes in law that could affect its require contributions to CalSTRS in future fiscal years.
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The following sets forth the District’s regular annual contributions to CalSTRS for Fiscal Years 2014-15 through 2018-19 and its estimated contributions for Fiscal Years 2019-20 and 2020-21. Historically, the District has paid all required CalSTRS annual contributions.
SAN DIEGO UNIFIED SCHOOL DISTRICT Annual Regular CalSTRS Contributions Fiscal Years 2014-15 through 2020-21
District Fiscal Year Contributions 2014-15 $47,882,107 2015-16 61,306,467 2016-17 75,318,729 2017-18 80,930,177 2018-19 93,059,038 2019-20(1) 101,039,530 2020-21(1) 104,386,339 ______(1) Estimated. Source: The District.
CalPERS. The District also participates in the State Public Employees’ Retirement System (“CalPERS”). CalPERS is a defined benefit plan that covers classified personnel who work four or more hours per day. Benefit provisions are established by State legislation in accordance with the Public Employees’ Retirement Law. The contribution requirements of the plan members are established by State statute. The actuarial methods and assumptions used for determining the rates are based on those adopted by Board of Administration of CalPERS (the “CalPERS Board”).
Active plan miscellaneous members hired on or before December 31, 2012 are required to contribute 7.0% of their monthly salary and those hired on or after January 1, 2013 are required to contribute 6.5% of their monthly salary. The required contribution rate is the difference between the actuarially determined rate and the contribution rate of employees. The actuarial methods and assumptions used for determining the rates are based on those adopted by CalPERS Board. School districts are currently required to contribute to CalPERS at an actuarially determined rate, which was 11.847%, 13.888% and 15.531% of eligible salary expenditures for fiscal years 2015-16, 2016-17 and 2017-18 respectively, and 18.062% of eligible salary expenditures for fiscal year 2018-19 and 19.721% of eligible salary for fiscal year 2019-20.
On April 17, 2019, the CalPERS Board established the employer contribution rates and released certain information from the CalPERS Schools Pool Actuarial Valuation as of June 30, 2018 (the “2018 CalPERS Schools Pool Actuarial Valuation”). The actuarial funding method used in the 2018 CalPERS Schools Pool Actuarial Valuation is the “Entry Age Normal Cost Method.” The 2018 CalPERS Schools Pool Actuarial Valuation assumes, among other things, 2.625% inflation and payroll growth of 2.875% compounded annually. The 2018 CalPERS Schools Pool Actuarial Valuation reflects a discount rate of 7.25% compounded annually (net of administrative expenses) as of June 30, 2018 and 7.00% compounded annually (net of administrative expenses) as of June 30, 2019. The CalPERS Board adopted new demographic assumptions on December 19, 2017, including a reduction in the inflation assumption from 2.625% as of June 30, 2018 to 2.50% as of June 30, 2019. The reduction in the inflation assumption results in decreases in both the normal cost and the accrued liabilities in the future. Based on the changes in the discount rate, inflation rate, payroll growth rate and demographic assumptions, the addition of $904 million contributed by the State in July 2019, along with expected reductions in normal cost due to the continuing transition of active members from those employees hired prior to January 1, 2013, to those hired after such date, the projected employer contribution (as a percentage of payroll) is 22.8% and 24.9% for fiscal year 2020-21 and fiscal year 2021-22, respectively. According to the CalPERS Schools Actuarial Valuation as of June 30, 2018, the funded ratio as of June 30, 2018 is approximately 70.4% on a market value of assets basis, as compared to the funded ratio of 72.1% reported in the Actuarial Valuation as of June 30, 2017. The funded ratio, on a market value basis, as of June 30, 2016, June 30, 2015, June 30, 2014, June 30, 2013 and June 30, 2012 was 71.9%, 77.5%, 86.6%, 80.5%, and 75.5%. On December 21, 2016, the CalPERS Board voted to lower the CalPERS discount rate to 7.0% over the next three years in accordance with the following schedule: 7.375% in Fiscal Year 2017-18, 7.25% in Fiscal Year 2018-19 and 7.00% in Fiscal Year 2019-20. The discount rates went into effect July 1, 2017 for the State and went into effect July 1, 2018
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for K-14 school districts and other public agencies. The change in the assumed rate of return is expected to result in increases in the District’s normal costs and unfunded actuarial liabilities.
On June 27, 2019, CalPERS informed school employers that the employer and employee pension contribution rates approved by the CalPERS Board of Administration on April 17, 2019 were modified by Senate Bill 90 and codified at California Government Code Section 20825.2. The employer contribution rate for Fiscal Year 2019-20 would be 19.721%, representing a reduction of 1.012% in the employer contribution rate from the 20.733% adopted by the CalPERS Board on April 17, 2019. The employer contribution rate of 19.721% for fiscal year 2019-20 was the first fiscal year that employer contributions were impacted by demographic assumptions adopted by the CalPERS Board in December 2017. The 19.721% contribution rate became effective with the first payroll period beginning July 2019. The employer contribution rate for fiscal year 2020-21 will be 22.68%, which reflects an initial actuarially determined rate of 23.35% that has been reduced by 0.67% pursuant to Senate Bill 90. Participants enrolled in CalPERS prior to January 1, 2013 contribute at a rate established by statute, which is 7% of their respective salaries in fiscal year 2019-20 and will be 7% of such salaries in fiscal year 2020-21, while participants enrolled after January 1, 2013 contribute at an actuarially determined rate, which is 7% in fiscal year 2019-20 and will be 7% in fiscal year 2020-21. [The May Revision proposes redirecting State funding paid to CalPERS in fiscal year 2019-20 towards long-term unfunded liabilities to further reduce employer contribution rates in fiscal years 2020-21 and 2021- 22. As a result, the May Revision projects that the CalPERS employer contribution rate will be reduced to 20.7% in fiscal year 2020-21 and to 22.84% in fiscal year 2021-22. The proposals, contribution requirements and projections sent forth in the May Revision and otherwise relating to CalPERS may change or be updated in the adopted 2020-21 State Budget.]
The following table sets forth the District’s annual contributions to CalPERS for Fiscal Years 2014-15 through 2018-19 and the estimated contributions for Fiscal Years 2019-20 and 2020-21. Historically, the District has paid all required CalPERS annual contributions.
SAN DIEGO UNIFIED SCHOOL DISTRICT Annual CalPERS Regular Contributions Fiscal Years 2014-15 through 2020-21 District Fiscal Year Contributions(1) 2014-15 $28,198,294 2015-16 28,817,068 2016-17 35,561,219 2017-18 34,529,493 2018-19 41,302,579 2019-20(2) 50,849,337 2020-21(2) 61,742,892 ______(1) Includes CalPERS contributions for the District’s Police Officers Association members. (2) Estimated. Sources: The District
California Public Employees’ Pension Reform Act of 2013. The Governor signed the California Public Employee’s Pension Reform Act of 2013 (the “Reform Act” or “PEPRA”) into law on September 12, 2012. The Reform Act affects both CalSTRS and CalPERS, most substantially as they relate to new employees hired after January 1, 2013 (the “Implementation Date”). As it pertains to CalSTRS participants hired after the Implementation Date, the Reform Act changes the normal retirement age, increasing the eligibility for the 2% “age factor” (the percent of final compensation to which an employee is entitled to for each year of service) from age 60 to 62 and increasing the eligibility of the maximum age factor of 2.4% from age 63 to 65. For non-safety CalPERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and also increases the eligibility requirement for the maximum age factor of 2.5% to age 67.
The Reform Act also implements certain other changes to CalPERS and CalSTRS including the following: (a) all new participants enrolled in CalPERS and CalSTRS after the Implementation Date are required to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (b) CalSTRS
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and CalPERS are both required to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date (currently 12 months for CalSTRS members who retire with 25 years of service), and (c) “pensionable compensation” is capped for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for CalSTRS and CalPERS members not participating in social security.
Governmental Accounting Standards Board. In June 2012, the Governmental Accounting Standards Board (“GASB”) approved two related statements that change how State and local governments report and account for the pension benefits provided to their employees. Statement No. 67, “Financial Reporting for Pension Plans,” addresses financial reporting for state and local government pension plans and Statement No. 68, “Accounting and Financial Reporting for Pensions,” establishes new accounting and financial reporting requirements for governments that provide their employees with pensions. The guidance contained in these Statements will change how governments calculate and report the costs and obligations associated with pensions and are designed to improve the reporting of pension information while increasing the transparency, consistency, and comparability of pension information across governments. The Statements relate only to accounting and financial reporting and do not extend to how governments approach pension plan funding. Governments will now report a pension liability on the face of their financial statements. At present, the difference between a government’s total pension obligation and assets available for benefits — often called the unfunded liability — is disclosed in notes, but does not appear on the face of the financial statements. Statement No. 67 will take effect for pension plans in Fiscal Years ended June 30, 2014 or later. Statement No. 68 will take effect for employers and governmental non-employer contributing entities in Fiscal Years ended June 30, 2015 or later. The District began reporting its CalSTRS obligations in its audited financial statements for Fiscal Year ended June 30, 2015. See “APPENDIX C – FINANCIAL STATEMENTS FOR THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2019.”
Post-Retirement Programs
In June 2004, the Governmental Accounting Standards Board (“GASB”) pronounced Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions. The pronouncement required public agency employers providing other postemployment benefits (“OPEB”) to retirees to recognize and account for the costs for providing these benefits on an accrual basis and provide footnote disclosure on the progress toward funding the benefits (“GASB 45”). In June 2015, GASB pronounced Statement No. 75, Accounting and Financial Reporting for Post-Employment Benefits Other Than Pensions (“GASB 75”). The primary objective of GASB 75, which replaced the requirements of GASB 45, is to improve accounting and financial reporting by state and local governments for OPEB obligations. GASB 75 became effective for the District in fiscal year ending June 30, 2018. GASB 75 requires the liability of employers and non-employer contributing entities to employees for defined benefit OPEB (“Net OPEB Liability”) to be measured as the portion of the present value of projected benefit payments to be provided to current active and inactive employees that is attributed to those employees’ past periods of service (“Total OPEB Liability”), less the amount of the OPEB plan’s fiduciary net position. The Total OPEB Liability generally is required to be determined through an actuarial valuation. The District conducted an actuarial valuation of its post-retirement health care benefits as of July 1, 2019 and received a report dated February 18, 2020.
The District provides a partial contribution toward the monthly premiums for postretirement health care benefits to employees who retire from the District and meet certain age and service requirements. Employees must have a minimum of 17 years of service to the District prior to retirement, must be receiving a monthly benefit from CalPERS or CalSTRS and must elect to participate in the program. (The program ceases once the retired employee reaches the age of 67.) As of June 30, 2019, there were 12,024 eligible plan members, of which 11,300 were actively receiving benefits. The provisions and obligations to contribute are established through collective bargaining agreements between the District and various unions. The District’s contributions are advance funded each year based on a specific amount agreed upon through union negotiations. The amount deposited is calculated using a base amount, plus salary increases, less any advance deposits made in the prior year. The contributions are deposited into a fund designated to account for District monies used to reduce medical contributions paid by retirees participating in a District-sponsored group medical plan for medical insurance. Contributions of approximately $586,600 were reimbursed to the General Fund from the Postemployment Benefits Fund in the Fiscal Year ended June 30, 2011, $513,900 in the year ended June 30, 2012, $435,315 in the year ended June 30, 2013, $393,435 in the year ended June 30, 2014, $354,936 in the year ended June 30, 2015, $359,880 in the year ended June 30, 2016, $515,228 in the year ended June 30, 2017, $457,332 in the year ended June 30, 2018, $397,715 in the year ended June 30, 2019, and
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$466,880 projected for the year ended June 30, 2020 for postretirement health care costs. The total amount expended from all resources for this purpose was $2,864,677 in 2012-13 (the same amount as in 2011-12), $2,931,168 in 2013- 14, $3,089,783 in 2014-15, $3,270,641 for 2015-16, $3,350,721 for 2016-17, $3,352,476 for 2017-18, $3,417,773 for 2018-19, and $3,408,053 for 2019-20 (Budget).
Based on an actuarial valuation of the District’s post-retirement health care benefits dated June 30, 2020 (which valuation assumed that the District has not pre-funded any portion of the obligation), the District had an estimated Net OPEB Liability of $135.8 million and an annual OPEB expense of $10,266,576. As of June 30, 2020, the District’s Net OPEB Liability as a percentage of total covered employee payroll is 17.92%. The District made no contribution toward the annual OPEB expense in 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 or 2019-20 as the annual OPEB expense is associated entirely with the implicit subsidy associated with retirees paying a discounted rate for their medical premiums. The implicit subsidy does not represent a true liability that requires funding.
Changes Since Prior Valuation. The discount rate as of the measurement date for GASB 75 purposes is 2.79%. The prior valuation used was 3.87%. The GASB 75 discount rate is based on the 20-year municipal bond rate as of June 28, 2019. The impact of the change in discount rate resulted in an increase to the Total OPEB Liability of approximately 9%, or $10.7 million. The salary scale rate is assumed to be the same as the inflation rate of 2.5%. This change was mandated by new GASB 75 standards requiring the use of the Entry Age Normal (Level % of Pay) cost method. The impact of this change was a decrease of the Total OPEB Liability by approximately $15,255,000. The SERP offering during 2017 did not provide any special health-related subsidy. As such, no OPEB liability was explicitly measured for the SERP in the OPEB actuarial valuation dated July 1, 2017. See “FINANCIAL AND OPERATING INFORMATION – Employment – Supplementary Early Retirement Plan (SERP)” herein for additional information on the SERP.
Self-Insurance and Commercial Insurance
The District self-funds vision benefits for all eligible employees (those categorized as 0.5 full-time equivalent). The Vision Self-Insurance Fund balance was $963,997 as of June 30, 2017, $528,357 as of June 30, 2018, $632,966 as of June 30, 2019, and is estimated to be $868,583 as of June 30, 2020. The District also self-funds dental benefits for those eligible employees that participate in the Dental PPO plan. The Dental Self-Insurance Fund balance was $2,987,391 as of June 30, 2017, $2,955,760 as of June 30, 2018, $2,806,699 as of June 30, 2019, and is estimated to be $4,753,870 as of June 30, 2020.
The District is fully self-insured for workers’ compensation claims and appropriates moneys in each Fiscal Year to a fund for the payment of such claims, based on a rate set by an independent insurance consultant. The ending fund balance to be used for the payment of workers’ compensation claims was $70,115,626 as of June 30, 2014, $78,426,169 as of June 30, 2015, $81,609,327 as of June 30, 2016, $28,394,038 as of June 30, 2017, $33,939,067 as of June 30, 2018, $42,810,432 as of June 30, 2019, and is estimated to be $45,002,230 as of June 30, 2020. The ending balance was significantly lower on June 30, 2017 due to the recording of the unfunded liability of $69,720,000, as required by GASB Statement No. 10. The current unfunded liability is estimated to be $67,905,000 as of June 30, 2020.
In addition, the District appropriates each Fiscal Year moneys sufficient to fund the premiums for its comprehensive property and public liability insurance policies and to fund a reasonable reserve for the payment of the deductible amounts under such policies. The decision concerning the amount of such reserves is made by a risk manager, who is an employee of the District.
CONSTITUTIONAL AND STATUTORY INITIATIVES
Limitations on Revenues. On June 6, 1978, State voters approved Proposition 13 (“Proposition 13”), which added Article XIIIA to the State Constitution (“Article XIIIA”). Article XIIIA limits the amount of any ad valorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii) bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-thirds of the voters on such indebtedness, and (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures
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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 1975-76 tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership have occurred after the 1975 assessment.” This full cash value may be increased at a rate not to exceed 2% per year to account for inflation.
Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster and in other minor or technical ways.
County of Orange v. Orange County Assessment Appeals Board No. 3. Section 51 of the State Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently “recapture” such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending on the assessor’s measure of the restoration of value of the damaged property. The constitutionality of this procedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court, and in similar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new “base year value” for purposes of Proposition 13 and that subsequent increases in the assessed value of a property by more than 2% in a single year violate Article XIIIA. On appeal, the California Court of Appeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling, leaving the recapture law in place.
Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The 1% property tax is automatically levied by the county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989.
Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the 2% annual adjustment are allocated among the various jurisdictions in the “taxing area” based upon their respective “situs.” Any such allocation made to a local agency continues as part of its allocation in future years.
Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values on tax rolls at the assessed value of 25% of market value which was expressed at $4 per $100 assessed value. All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate is expressed as $1 per $100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of market value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value.
Article XIIIB of the State Constitution. An initiative to amend the State Constitution entitled “Limitation of Government Appropriations” was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution (“Article XIIIB”). Under Article XIIIB state and local governmental entities have an annual “appropriations limit” and are not permitted to spend certain moneys which are called “appropriations subject to limitation” (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the “appropriations limit.” Article XIIIB does not affect the appropriation of moneys which are excluded from the definition of “appropriations subject to limitation,” including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the “appropriations limit” is to be based on certain 1978-79 expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities’ revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.
The District’s 2018-19 “appropriations limit” is $813,312,311 and the “appropriations limit” for 2019-20 is estimated to be $830,435,138. Any proceeds of taxes received by the District in excess of the allowable limit are absorbed into the State’s allowable limit.
Articles XIIIC and 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
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the State Constitution Articles XIIIC and XIIID (“Article XIIIC” and “Article XIIID,” respectively), which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges.
According to the “Title and Summary” of Proposition 218 prepared by the State 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 State Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIID deals with assessments and property-related fees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development.
The District does not impose any taxes, assessments, or property-related fees or charges which are subject to the provisions of Proposition 218. It does, however, receive a portion of the basic 1% ad valorem property tax levied and collected by the County pursuant to Article XIIIA of the State Constitution. The provisions of Proposition 218 may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District thereby causing such local governments to reduce service levels and possibly adversely affecting the value of property within the District.
Statutory Limitations. On November 4, 1986, State voters approved Proposition 62, an initiative statute limiting the imposition of new or higher taxes by local agencies. The statute: (a) requires new or higher general taxes to be approved by two-thirds of the local agency’s governing body and a majority of its voters; (b) requires the inclusion of specific information in all local ordinances or resolutions proposing new or higher general or special taxes; (c) penalizes local agencies that fail to comply with the foregoing; and (d) required local agencies to stop collecting any new or higher general tax adopted after July 31, 1985, unless a majority of the voters approved the tax by November 1, 1988.
Appellate court decisions following the approval of Proposition 62 determined that certain provisions of Proposition 62 were unconstitutional. However, the California Supreme Court upheld Proposition 62 in its decision on September 28, 1995 in Santa Clara County Transportation Authority v. Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regarding Proposition 62 were not addressed in the Supreme Court’s decision, such as whether the decision applies retroactively, what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62, and whether the decision applies to charter cities.
Proposition 98 and Proposition 111. On November 8, 1988, voters approved Proposition 98, a combined initiative constitutional amendment and statute called the “Classroom Instructional Improvement and Accountability Act” (the “Accountability Act”). The Accountability Act changed State funding of public education below the university level, and the operation of the State’s Appropriations Limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (collectively, “K-14 districts”) at a level equal to the greater of (a) the same percentage of general fund revenues as the percentage appropriated to such districts in 1986-87, which percentage is equal to 40.9%, or (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for growth in enrollment and inflation.
Since the Accountability Act is unclear in some details, there can be no assurance that the Legislature or a court might not interpret the Accountability Act to require a different percentage of general fund revenues to be allocated to K-14 districts than the 40.9%, or to apply the relevant percentage to the State’s budgets in a different way than is proposed in the Governor’s Budget. In any event, the Governor and other fiscal observers expect the Accountability Act to place increasing pressure on the State’s budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State’s ability to fund such other programs by raising taxes.
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The Accountability Act also changes how tax revenues in excess of the State Appropriations Limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 districts. Such transfer would be excluded from the Appropriations Limit for K-14 school districts and the K-14 school Appropriations Limits for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to schools is 4% of the minimum State spending for education mandated by the Accountability Act, as described above.
On June 5, 1990, State voters approved Proposition 111 (Senate Constitutional Amendment 1), which further modified the State Constitution to alter the spending limit and education funding provisions of Proposition 98. Most significantly, Proposition 111 (1) liberalized the annual adjustments to the spending limit by measuring the “change in the cost of living” by the change in State per capita personal income rather than the Consumer Price Index, and specified that a portion of the State’s spending limit would be adjusted to reflect changes in school attendance; (2) provided that 50% of the “excess” tax revenues, determined based on a two-year cycle, would be transferred to K-14 school districts with the balance returned to taxpayers (rather than the previous 100% but only up to a cap of 4% of the districts’ minimum funding level), and that any such transfer to K-14 school districts would not be built into the school districts’ base expenditures for calculating their entitlement for State aid in the following year and would not increase the State’s appropriations limit; (3) excluded from the calculation of appropriations that are subject to the limit appropriations for certain “qualified capital outlay projects” and certain increases in gasoline taxes, sales and use taxes, and receipts from vehicle weight fees; (4) provided that the Appropriations Limit for each unit of government, including the State, would be recalculated beginning in the 1990-91 fiscal year, based on the actual limit for fiscal year 1986-87, adjusted forward to 1990-91 as if Senate Constitutional Amendment 1 had been in effect; and (5) adjusted the Proposition 98 formula that guarantees K-14 school districts a certain amount of general fund revenues, as described below.
Under prior law, K-14 school districts were guaranteed the greater of (a) 40.9% of general fund revenues (the “first test”) or (b) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the “second test”). Under Proposition 111, school districts would receive the greater of (a) the first test, (b) the second test or (c) a third test, which would replace the second test in any year when growth in per capita general fund revenues from the prior year was less than the annual growth in State per capita personal income. Under the third test, school districts would receive the amount appropriated in the prior year adjusted for change in enrollment and per capita general fund revenues, plus an additional small adjustment factor. If the third test were used in any year, the difference between the third test and the second test would become a “credit” to be paid in future years when general fund revenue growth exceeds personal income growth.
Proposition 30 and Proposition 55. On November 6, 2012, voters approved Proposition 30, also referred to as the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment. Proposition 30 temporarily (a) increased the personal income tax on certain of the State’s income taxpayers by one to three percent for a period of seven years from January 1, 2012 through the end of 2018, and (b) increased the sales and use tax by one-quarter percent for a period of four years from January 1, 2013 through the end of 2016. The revenues generated from such tax increases are included in the calculation of the Proposition 98 minimum funding guarantee (see “CONSTITUTIONAL AND STATUTORY INITIATIVES – Proposition 98 and Proposition 111” herein). The revenues generated from such temporary tax increases are deposited into a State account created pursuant to Proposition 30 (the “Education Protection Account”), and 89% of the amounts therein are allocated to school districts and 11% of the amounts therein are allocated to community college districts.
The Proposition 30 sales and use tax increases expired at the end of the 2016 tax year. Under Proposition 30, the personal income tax increases were set to expire at the end of the 2018 tax year. However, the California Tax Extension to Fund Education and Healthcare Initiative (“Proposition 55”), approved by voters on November 8, 2016, extends by twelve years the temporary personal income tax increases on incomes over $250,000 that was first enacted by Proposition 30; Proposition 55 did not extend the sales tax increases imposed by Proposition 30. Revenues from the tax increase will be allocated to school districts and community colleges in the State.
Applications of Constitutional and Statutory Provisions. The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. For a discussion of how
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the provisions of Proposition 98 have been applied to school funding, see “FINANCIAL AND OPERATING INFORMATION – State Budget Process” herein.
Proposition 2. Proposition 2, which included certain constitutional amendments to the Rainy Day Fund and, upon its approval, triggered the implementation of certain provisions which could limit the amount of reserves that may be maintained by a school district, was approved by the voters in the November 2014 election.
Rainy Day Fund. The Proposition 2 constitutional amendments related to the Rainy Day Fund (i) require deposits into the Rainy Day Fund whenever capital gains revenues rise to more than 8% of general fund tax revenues; (ii) set the maximum size of the Rainy Day Fund at 10% of general fund revenues; (iii) for the next 15 years, require half of each year’s deposit to be used for supplemental payments to pay down the budgetary debts or other long-term liabilities and, thereafter, require at least half of each year’s deposit to be saved and the remainder used for supplemental debt payments or savings; (iv) allow the withdrawal of funds only for a disaster or if spending remains at or below the highest level of spending from the past three years; (v) require the State to provide a multiyear budget forecast; and (vi) create a Proposition 98 reserve (the “Public School System Stabilization Account”) to set aside funds in good years to minimize future cuts and smooth school spending. The State may deposit amounts into such account only after it has paid all amounts owing to school districts relating to the Proposition 98 maintenance factor for fiscal years prior to fiscal year 2014-15. The State, in addition, may not transfer funds to the Public School System Stabilization Account unless the State is in a Test 1 year under Proposition 98 or in any year in which a maintenance factor is created.
SB 858. Senate Bill 858 (“SB 858”) became effective upon the passage of Proposition 2. SB 858 includes provisions which could limit the amount of reserves that may be maintained by a school district in certain circumstances. Under SB 858, in any fiscal year immediately following a fiscal year in which the State has made a transfer into the Public School System Stabilization Account, any adopted or revised budget by a school district would need to contain a combined unassigned and assigned ending fund balance that (a) for school districts with an ADA of less than 400,000, is not more than two times the amount of the reserve for economic uncertainties mandated by the Education Code, or (b) for school districts with an ADA that is more than 400,000, is not more than three times the amount of the reserve for economic uncertainties mandated by the Education Code. In certain cases, the county superintendent of schools may grant a school district a waiver from this limitation on reserves for up to two consecutive years within a three-year period if there are certain extraordinary fiscal circumstances.
The District, which has an ADA of less than 400,000, is required to maintain a reserve for economic uncertainty in an amount equal to 2% of its General Fund expenditures and other financing uses.
SB 751. Senate Bill 751 (“SB 751”), enacted on October 11, 2017, alters the reserve requirements imposed by SB 858. Under SB 751, in a fiscal year immediately after a fiscal year in which the amount of moneys in the Public School System Stabilization Account is equal to or exceeds 3% of the combined total general fund revenues appropriated for school districts and allocated local proceeds of taxes for that fiscal year, a school district budget that is adopted or revised cannot have an assigned or unassigned ending fund balance that exceeds 10% of those funds. SB 751 excludes from the requirements of those provisions basic aid school districts (also known as community funded districts) and small school districts having fewer than 2,501 units of average daily attendance.
FUTURE INITIATIVES
Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID and Propositions 1A, 2, 22, 30, 55, 98 and 111, were each adopted as measures that qualified for the ballot pursuant to California’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.
DISTRICT ECONOMY
The following information has been obtained from sources which are believed to be reliable but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District, the Underwriters or the Municipal Advisor.
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Prospective purchasers of the Notes should be aware that a number of the tables below, which demonstrate historical income, employment, sales and other figures, are not an accurate predictor of future trends, nor are they an entirely current report of economic circumstances, as of the date of printing of this Official Statement, particularly given the impact of COVID-19. The historical data displayed in this section is derived from a number of third-party sources from data accumulated over time, and thus cannot be presented on a real-time basis.
The District serves an area of approximately 211 square miles, embracing most of the populated portion of the City of San Diego (the “City”).
City of San Diego
The City is located 125 miles south of Los Angeles, 525 miles south of San Francisco, and 17 miles north of the Mexican border. It grew out of the first California mission – Mission San Diego de Alcala – founded in 1769. The City was incorporated in 1850, the year California became the 31st State of the United States. The City is the county seat for the County of San Diego (the “County”) and is the County’s business and financial center.
The City covers approximately 330 square miles in the southwestern coastal area of the County of San Diego, including 72 square miles of water. The City limits extend to the Mexican border, contiguous in places to the boundaries of the cities of Chula Vista, National City, and Imperial Beach.
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Population
The City is the second most populous city in California. It contains 42% of the total population of the County.
CITY OF SAN DIEGO COUNTY OF SAN DIEGO STATE OF CALIFORNIA Population*
Growth Growth Growth Year City Rate County Rate State Rate
1990 1,110,623 - -% 2,498,016 - -% 29,760,021 - -% 2000 1,223,415 10.6 2,813,833 12.64 33,873,086 13.82 2001 1,228,432 0.4 2,849,238 1.3 34,256,789 1.1 2002 1,236,616 0.7 2,890,256 1.4 35,725,516 1.4 2003 1,251,700 1.2 2,927,216 1.3 35,163,609 (1.6) 2004 1,257,358 0.5 2,953,703 0.9 35,570,847 1.2 2005 1,261,035 0.3 2,966,783 0.4 35,869,173 0.8 2006 1,261,633 0.1 2,976,492 0.3 36,116,202 0.7 2007 1,266,978 0.4 2,998,477 0.7 35,399,676 (2.0) 2008 1,279,505 1.0 3,032,689 1.1 36,704,375 0.8 2009 1,294,031 1.1 3,064,436 1.0 36,966,713 0.7 2010 1,301,617 0.6 3,095,313 1.0 37,253,956 0.8 2011 1,313,779 0.9 3,125,264 1.0 37,594,781 0.9 2012 1,329,294 1.2 3,161,750 1.2 37,971,427 1.0 2013 1,348,843 1.5 3,201,417 1.3 38,321,459 0.9 2014 1,363,549 1.1 3,235,142 1.1 38,662,301 0.9 2015 1,380,886 1.3 3,267,992 1.0 38,952,462 0.8 2016 1,388,101 0.5 3,287,279 0.6 39,214,803 0.7 2017 1,396,510 0.6 3,309,626 0.7 39,504,609 0.7 2018 1,414,373 1.3 3,333,128 0.7 39,740,508 0.6 2019 1,420,572 0.4 3,351,786 0.6 39,927,315 0.5 ______* For 2001-09 and 2011-19, population statistics are as of January 1. For 1990, 2000 and 2010, population statistics are as of April 1. Source: California State Department of Finance for 2001-09 and 2011-19; U.S. Department of Commerce, Bureau of Census, for 1990, 2000 and 2010.
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Employment
CITY AND COUNTY OF SAN DIEGO, CALIFORNIA, AND UNITED STATES Labor Force, Employment, and Unemployment(1)(2)(3)
Unemployment Year and Area Labor Force Employment Unemployment Rate(3)
2015 City of San Diego 695,600 661,200 34,400 4.9% San Diego County 1,550,100 1,469,500 80,600 5.2 California 18,851,100 17,681,800 1,169,200 6.2 United States 157,130,000 148,834,000 8,296,000 5.3 2016 City of San Diego 704,800 672,600 32,200 4.6% San Diego County 1,564,300 1,490,500 73,900 4.7 California 19,044,500 18,002,800 1,041,700 5.5 United States 159,187,000 151,436,000 7,751,000 4.9 2017 City of San Diego(4) 711,800 684,200 27,700 3.9% San Diego County 1,574,600 1,511,400 63,200 4.0 California 19,205,300 18,285,500 919,800 4.8 United States 160,320,000 153,337,000 6,982,000 4.4 2018 City of San Diego 717,100 693,700 23,400 3.3% San Diego County 1,581,500 1,528,100 53,500 3.4 California 19,280,000 18,460,700 820,100 4.3 United States 162,075,000 155,761,000 6,314,000 3.9 2019 City of San Diego 721,000 699,100 21,900 3.0% San Diego County 1,590,600 1,539,900 50,700 3.2 California 19,411,600 18,627,400 784,200 4.0 United States 163,539,000 157,538,000 6,001,000 3.7 2020(4) City of San Diego 202,300 599,000 103,300 14.7% San Diego County 1,552,400 1,319,500 232,900 15.0 California 18,405,000 15,484,000 2,921,200 15.9 United States 157,975,000 137,461,000 20,514,000 13.0 ______(1) Data reflects employment status of individuals by place of residence. (2) Data not seasonally adjusted. (3) Unemployment rate is based on unrounded data. (4) 2020 figures as of May, 2020. Source: California State Employment Development Department. U.S. Department of Labor, Bureau of Labor Statistics.
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City Economy
A factor in the City’s growth is a diversified economy. Expansion has been concentrated in four major areas: high tech manufacturing and research (including electronics, communications equipment, scientific instruments, drugs, and biomedical equipment); professional services; tourism; and international trade. In addition to these industries, the City benefits from an economic foundation composed of basic manufacturing (ship building, industrial machinery, television and video equipment, and printing and publishing), public and private higher education, health services, military, and local government.
The Manchester Pacific Gateway is a $1.5 billion mixed-use waterfront project featuring more than 1 million square feet of office space and encompasses seven buildings, plus a 1.9-acre public park, replacing what is known as the Navy Broadway Complex, which the Navy occupied since the early 1920’s. Taking over eight city blocks, the 13.5-acre project calls for multiple office towers, including a 17-story, 372,000 square foot Navy headquarters, an 1,100-room convention hotel, a retail-lined paseo, and a museum of more than 12 acres south of Broadway between Pacific Highway and Harbor Drive. It is slated for completion in 2021.
The United States armed forces represent a substantial economic presence within the District, including several United States Navy and Marine Corps facilities. Civilian employees of military establishments and service members are among the largest groups of employees within the District and their children attend many District schools under the subsidy known as “Impact Aid Funds.” See “FINANCIAL AND OPERATING INFORMATION – Other District Revenues – Impact Aid Funds” herein.
Expansion in the high tech manufacturing and research component of the City’s economic base has been led by the emergence of telecommunications. Major participants in the City’s telecommunications industry include manufacturers of personal communications equipment, radio/TV communications equipment, network communications equipment/systems, satellite communications equipment, and military surveillance/guidance systems. The City is a major location for telecommunications firms in the County, with the Sorrento Valley area emerging as a center in the development and manufacturing of products using wireless and digital technology.
Another component of the City’s high tech industry is the biotechnology sector, which includes companies involved in developing chemical and biological products for use in the treatment and diagnosis of diseases and various medical conditions. As with telecommunications, the biotechnology industry is concentrated in the City, with the highest concentration in the area around the University of California at San Diego. Growth in both biotechnology and other high tech industries has been facilitated by the City’s various research organizations. Among the more important research facilities located in the City are the Scripps Research Institute, the Salk Institute for Biological Studies, and the San Diego Super Computer Center.
The City is also home to a software industry. Components within this industry include basic computer programming services, prepackaged software, systems integration services, and development of multimedia products.
Major Employers
The County is host to a diverse mix of major employers representing industries ranging from education and health services, to diversified manufacturing, financial services, retail trade and amusement and recreation. The following table lists the County’s major employers.
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COUNTY OF SAN DIEGO MAJOR EMPLOYERS (2019)
Number of Employer Employees Organization Description
Qualcomm Inc. 37,000 Computers and related technology Naval Base San Diego 30,713 Principal homeport of the Pacific Fleet Sharp HealthCare 18,770 Health care, hospitals, medical groups, health services, health plan Nonprofit health maintenance hospital, outpatient medical, urgent care, Kaiser Permanente San Diego Medical Center 9,630 medical offices Higher education institution which includes City, Mesa & Miramar college San Diego Community College District 6,805 & continuing education Remotely piloted aircraft systems, radars & electro-optic & related missions General Atomics Aeronautical Systems, Inc. 6,777 systems solutions San Diego State University 6,635 Higher education Not for profit health care facility for newborns to young adults; regional Rady Children's Hospital-San Diego 5,541 pediatric trauma center Programs & services focused on youth development, healthy living & YMCA of San Diego County 5,517 social responsibility Sweetwater Union High 5,199 Secondary school district Chula Vista Elementary School District 5,019 Primary school district Autonomous systems, cyber solutions, C4ISR, strike, missile defense, space Northrop Grumman Corp. 5,000 systems, logistics Sempra Energy 4,741 Electric and natural gas infrastructure company Medical technology company helping to advance discovery, diagnostics & BD (Becton, Dickinson and Co.) 4,500 delivery of care Palomar Health 4,200 Inpatient hospital services, outpatient services, home care, health education University of San Diego 3,884 Private university Veterans Affairs San Diego Healthcare System 3,735 Comprehensive health care for veterans in inpatient & outpatient settings Barona Resort & Casino 3,332 Gaming, hospitality, golf & dining General Dynamics NASSCO 3,000 Design, construction, repair of oceangoing vessels for the U.S. Navy and commercial customers Viasat Inc. 2,773 Satellite & wireless systems & services, digital communications, cybersecurity ______(1) San Diego Business Journal. (2) California Labor Market Information. Percentage is calculated by dividing employees by total employment of 1,525,500 as of June 2018. (3 )County of San Diego 2018 Operational Plan. Source: San Diego County Comprehensive Annual Financial Report Fiscal Year ended June 30, 2018.
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Industry
Annual wage and salary workers by industry for 2015 through 2019 are shown below.
COUNTY OF SAN DIEGO NON-AGRICULTURAL LABOR FORCE AND INDUSTRY EMPLOYMENT ANNUAL AVERAGES(1) 2015 through 2019 by Class of Work
2015 2016 2017 2018 2019 Mining and Logging 300 300 300 400 400 Construction 69,900 76,300 79,500 83,700 84,000 Manufacturing 106,600 108,400 109,400 112,300 115,100 Trade, Transportation and Public Utilities 219,300 220,900 224,700 225,100 224,000 Information 23,400 23,200 23,400 23,600 23,500 Financial Activities 71,400 73,000 74,600 76,000 76,400 Professional and Business Services 229,500 234,700 239,000 248,900 256,600 Educational & Health Services 192,700 198,700 204,300 208,900 216,000 Leisure & Hospitality 182,400 190,400 195,600 199,600 202,400 Other Services 53,200 54,400 55,000 55,500 55,800 Government 236,200 242,200 246,300 248,100 249,600 Non-Farm Total 1,384,800 1,422,600 1,452,200 1,482,200 1,503,900 ______(1) March 2019 Benchmark as of March 27, 2020. Source: California Employment Development Department.
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Building Permits
The table below provides a summary of the building permit valuations, and the number of new dwelling units authorized in the City of San Diego, for the years 2015 through 2019. The valuation of non-residential permits includes both private commercial construction and publicly funded, non-tax generating projects. CITY OF SAN DIEGO Building Permit Valuations and Number of Dwelling Units 2015 through 2019 2015 2016 2017 2018 2019 Valuation (in 000s) Residential $1,415,107 $1,354,480 $1,164,181 $1,062,683 $ 932,823 Nonresidential 1,353,053 1,224,465 1,496,960 1,247,164 1,344,409
Total $2,768,160 $2,578,945 $2,661,141 $2,309,847 $2,277,232
Number of New Dwelling Units Single Family 1,306 882 1,096 724 798 Multiple Family 5,097 5,154 4,134 3,561 2,791
Total 6,403 6,036 5,230 4,285 3,589 ______Source: Construction Industry Research Board, California Homebuilding Foundation CHF|CIRB.
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Median Home Sale Prices
The table below provides a summary of the median home sale prices in the City of San Diego from 2007 through 2018.
CITY OF SAN DIEGO Annual Home Sale Median Prices
All Home Sales Year Median Prices
2007 $465,000 2008 373,000 2009 320,000 2010 345,000 2011 322,000 2012 350,000 2013 419,000 2014 450,000 2015 479,000 2016 509,000 2017 542,000 2018 582,000 ______Source: CoreLogic; provided by DQNews.
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Commerce
Taxable transactions from 2015 through 2019 are summarized below.
CITY OF SAN DIEGO Taxable Transactions (in thousands)(1)
2015 2016 2017 2018 2019
Retail and Food Services Motor Vehicle and Parts Dealers $2,580,830 $2,734,187 $2,747,732 $2,873,480 $2,875,587 Home Furnishings and Appliance Stores 1,226,012 1,227,499 1,140,892 1,163,314 1,131,199 Bldg. Mat’l. and Garden Equip. and Supplies 957,041 1,008,705 1,041,763 1,081,396 1,090,320 Food and Beverage Stores 1,054,380 1,045,178 1,078,711 1,125,759 1,140,264 Gasoline Stations 1,662,826 1,437,892 1,571,570 1,782,322 1,735,124 Clothing and Clothing Accessories 1,932,777 1,926,762 Stores 1,876,406 1,849,752 1,884,703 General Merchandise Stores 1,685,705 1,629,375 1,633,756 1,710,621 1,721,868 Food Services and Drinking Places 3,871,361 4,133,095 4,307,507 4,466,904 4,702,899 Other Retail Group 1,714,791 1,749,474 1,782,546 1,836,103 1,901,442
Total Retail and Food Services $16,629,356 $16,815,163 $17,189,186 $17,972,680 $18,225,468
All Other Outlets $6,056,004 $6,407,062 $6,566,238 $6,999,132 $7,302,083
Total All Outlets $22,685,360 $23,222,225 $23,755,424 $24,971,813 $25,527,551 ______(1) Detail may not compute to total due to rounding. Source: “Taxable Sales in California,” California State Board of Equalization.
Transportation
Excellent surface, sea and air transportation facilities serve county residents and businesses. Interstate 5 parallels the coast from Mexico to the Los Angeles area and points north. Interstate 15 runs inland, leading to Riverside-San Bernardino, Las Vegas and Salt Lake City. Interstate 8 runs eastward to Phoenix, Arizona.
San Diego’s International Airport (Lindbergh Field) is located approximately one mile west of the downtown area at the edge of the San Diego Bay. The airport is one of the most active commercial airports in California, served by 16 airline carriers. A west terminal of the airport was expanded in 1998, approximately doubling terminal capacity. In addition to San Diego International Airport, there are two military air stations and seven general aviation airports located in the county.
San Diego is the terminus of the Santa Fe Railway’s main line from Los Angeles. Amtrak passenger service is available at San Diego with stops at Solana Beach and Oceanside in the north county. San Diego’s harbor is one of the world’s largest natural harbors. The harbor, a busy commercial port, has also become an extremely popular destination for cruise ships. The Port of San Diego is administered by the San Diego Unified Port District, which includes the cities of San Diego, National City, Chula Vista, Imperial Beach and Coronado.
Public transportation through the City and surrounding communities is provided by the San Diego Metropolitan Transit Development Board (“MTDB”). The San Diego Trolley, Inc. operates a fleet of electric trolleys that provides transportation for commuters and tourists from downtown San Diego to San Ysidro (adjacent to Tijuana), and from downtown San Diego to the southern part of the County and East County. The East Line extension to Santee was completed in 1996. This 3.6-mile extension connects the cities of El Cajon and Santee. The trolley also provides service from downtown San Diego to the waterfront area, including the Convention Center. An extension providing additional service from downtown to the historical Old Town section of the City was completed in 1996. In addition,
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the Mission Valley extension, which connects Old Town with Qualcomm Stadium, ending at the Mission San Diego, opened in 1997. In May 1998, the U.S. Congress approved a transportation bill that earmarked $325 million for a 6- mile trolley extension connecting the Mission Valley Line with the East Line in La Mesa. This extension, completed in 2004, extends east from Qualcomm Stadium connecting Mission Valley with San Diego State University, La Mesa, and East County.
A 43-mile Coaster Commuter rail line from Oceanside to downtown San Diego came into service in 1995. This line links communities along the coast from Oceanside to Del Mar with downtown San Diego and is operated by North County Transit District.
Research and Development
Research and development activity plays an important role in the area’s economy. Construction of a major campus of the University of California at San Diego (“UCSD”) in 1964 gave significant impetus to this development.
The County is a leading health sciences and biomedical center. Approximately 35,000 persons are engaged in life sciences-related activities in the metropolitan area, with over 28,000 employed directly in health services. In addition to UCSD, other established research institutions in the La Jolla area of the City include the Salk Institute for Biological Studies, the Scripps Clinic and Research Foundation, and the Scripps Institution of Oceanography.
Visitor and Convention Activity
An excellent climate, proximity to Mexico, extensive maritime facilities, and such attractions as the San Diego Zoo and Wild Animal Park, Sea World, Cabrillo National Monument on Point Loma, and Palomar Observatory allow San Diego to attract visitor and convention business each year. The development of the 4,600-acre Mission Bay Park at San Diego and the construction of meeting and convention facilities at the San Diego community concourse have contributed to the growth in tourism.
The visitor industry is the City’s third largest in terms of income generation, behind manufacturing and the military. The following table depicts total visitor spending in San Diego County for the past ten years.
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SAN DIEGO COUNTY Total Visitor Spending 2010 – 2019 ($ billions)
Year Amount
2010 7.08 2011 7.49 2012 7.98 2013 8.39 2014 9.21 2015 9.92 2016 10.40 2017 10.82 2018 11.49 2019 11.60 ______Source: San Diego Tourism Authority.
Contributing to the historical growth in total visitor spending has been an increase in convention activity, as displayed in the table below. The convention center has hosted the annual Comic-Con International Convention, the 1996 Republican National Convention and the 2007 California Democratic Party Convention. The 2020 Comic-Con International event, along with other conferences, concerts and sporting events, was cancelled due to COVID-19.
SAN DIEGO CONVENTION CENTER 2009 – 2019
Number of Total Delegate Calendar Year Estimated Spending Conventions Attendance
2009 541,904,169 71 519,418 2010 567,413,270 64 543,931 2011 578,931,514 74 566,658 2012 621,304,790 67 561,523 2013 559,947,727 75 524,448 2014 593,105,421 76 527,621 2015 620,092,228 71 553,283 2016 721,047,316 67 697,518 2017 650,818,239 61 545,366 2018 733,357,461 68 610,848 2019 697,000,000 71 621,820 ______Note: Table includes only primary events held at the San Diego Convention Center, it does not include other sources of convention activity in the San Diego region. Source: San Diego Tourism Authority.
The City is the focal point for tourism in the County and includes downtown’s historic Gaslamp Quarter and the Old Town State Park. The San Diego Padres play home games at PETCO Park, a $449.4 million project, located on 18 acres, with a capacity of 46,000. The City’s cruise ship industry is another important sector of the local visitor industry.
The City has constructed the Downtown Community Concourse, with its Convention and Performing Arts Center, the downtown Sports Arena, and the San Diego Stadium, located at the intersection of two interstate freeways. The City’s Park and Recreation Department offers a comprehensive program of activities for all ages.
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Balboa Park covers 1,400 acres in the city and includes museums, art galleries, theaters and recreation areas, in addition to miles of garden walks. Covering 128 acres within the park is the San Diego Zoo, famous for its innovative methods of displaying animals. The San Diego Planetarium Authority has constructed a Planetarium and Hall of Science on a three-acre site in Balboa Park. Mission Bay Park is a 4,600-acre public and private development including hotels and motels, marinas, restaurants and Sea World.
There are over 90 golf courses in the County, including the La Costa Golf Course, scene of the Tournament of Champions in 2006 and the championship Torrey Pines Golf Course, where the U.S. Open was held in 2008 and is scheduled to return in 2021.
The San Diego region benefits greatly from its natural geography and from its proximity to Mexico, with its sporting attractions such as Jai Alai, thoroughbred racing and ocean fishing, as well as the shopping and entertainment venues of Tijuana. Tijuana may be reached from downtown San Diego by the Red Trolley, and within a short drive from the center of the City, visitors may take in the many beaches, mountains and desert areas within the County.
Education
As noted previously, the District serves most of the City. Additionally, certain portions of the City lie within two other unified school districts, four high school districts, and 14 elementary school districts.
There are 38 colleges and universities offering four-year and graduate degrees and five community college districts offering two-year programs in the County. Among the four-year institutions of higher education in the County are the University of California at San Diego, San Diego State University, the University of San Diego, California State University at San Marcos, Point Loma Nazarene University and National University.
Utilities
The San Diego Gas and Electric Company provides electric power and natural gas in the City and most communities in the western half of the County. Water service is supplied by the City. An adequate supplemental water supply is available from the Metropolitan Water District of Southern California via the San Diego County Water Authority. The Metropolitan Sewer System of the City of San Diego furnishes sewer service in the City and surrounding developed areas.
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APPENDIX B
PROPOSED FORM OF OPINION OF BOND COUNSEL
[Closing Date]
San Diego Unified School District San Diego, California
San Diego Unified School District (San Diego County, California) 2020-21 Tax and Revenue Anticipation Notes, Series A (Final Opinion)
Ladies and Gentlemen:
We have acted as bond counsel to the San Diego Unified School District, County of San Diego, California (the “District”) in connection with the issuance of $______aggregate principal amount of temporary notes, issued under and by authority of a resolution of the Board of Education of the District duly passed and adopted on [June 30, 2020] (the “Resolution”), and designated the “San Diego Unified School District (San Diego County, California) 2020-21 Tax and Revenue Anticipation Notes, Series A” (the “Notes”).
In such connection, we have reviewed the Resolution, the Tax Certificate of the District, dated the date hereof (the “Tax Certificate”), an opinion of counsel to the District, certificates of the District, the Treasurer- Tax Collector of the County of San Diego, as paying agent, and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.
The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions, and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Notes has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Resolution and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Notes to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Notes, the Resolution and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against school districts and counties in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy,
89113854.11 B-1 San Diego Unified School District [Date] Page 2 completeness or fairness of the Official Statement, dated July __, 2020, or other offering material relating to the Notes, and express no opinion with respect thereto.
Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:
1. The Notes constitute the valid and binding obligations of the District. The principal of and interest on the Notes are payable from Pledged Revenues (as that term is defined in the Resolution), and to the extent not so paid, are payable from any other moneys of the District lawfully available therefor.
2. Interest on the Notes is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. The amount treated as interest on the Notes and excluded from gross income will depend upon the taxpayer’s election under Internal Revenue Service Notice 94-84. Interest on the Notes is not a specific preference item for purposes of the federal alternative minimum tax. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Notes.
Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP per
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APPENDIX C
FINANCIAL STATEMENTS FOR THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2019
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APPENDIX D
PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE
This Continuing Disclosure Certificate (the “Disclosure Certificate”) is executed and delivered by the San Diego Unified School District (the “District”) in connection with the issuance of $______aggregate principal amount of San Diego Unified School District 2020-21 Tax and Revenue Anticipation Notes, Series A (the “Series A Notes”). The Series A Notes are being issued pursuant to a resolution (the “Resolution”) adopted by the Board of Education of the District on [June 30, 2020]. The District covenants and agrees as follows:
SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Holders and Beneficial Owners of the Series A Notes and in order to assist the Participating Underwriter in complying with Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time (the “Rule”).
SECTION 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:
“Beneficial Owner” shall mean any person who has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Series A Notes (including persons holding Notes through nominees, depositories or other intermediaries).
“Business Day” means any day (other than a Saturday or Sunday) on which banks and trust companies generally in New York, New York, or Los Angeles, California are not authorized or required to remain closed and on which the New York Stock Exchange is not closed.
“Disclosure Dissemination Agent” means Digital Assurance Certification, L.L.C, acting in its capacity as Disclosure Dissemination Agent hereunder, or any successor Disclosure Dissemination Agent designated in writing by the District.
“Financial Obligation” as used in this Disclosure Certificate is defined in the Rule as (i) a debt obligation; (ii) derivative instrument entered into in connection with, or pledged as a security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term “Financial Obligation” shall not include municipal securities as to which a final official statement has been provided to the MSRB consistent with the Rule.
“Holder” shall mean the person in whose name any Series A Notes shall be registered.
“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.
“MSRB” shall mean the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access (“EMMA”) website located at http://emma.msrb.org, or any other entity designated or authorized by the Securities and Exchange Commission.
“Participating Underwriter” shall mean any of the original underwriters of the Series A Notes required to comply with the Rule in connection with offering of the Series A Notes.
“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.
“State” shall mean the State of California.
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SECTION 3. Reporting of Significant Events.
(a) Pursuant to the provisions of this Section 3, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series A Notes not later than ten (10) Business Days after the occurrence of the event:
(i) Principal and interest payment delinquencies.
(ii) Unscheduled draws on any debt service reserves reflecting financial difficulties.
(iii) Unscheduled draws on any credit enhancements reflecting financial difficulties.
(iv) Substitution of credit or liquidity providers, or their failure to perform.
(v) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determination of taxability, Notice of Proposed Issue (IRS Form 5701-TEB);
(vi) Tender offers;
(vii) Defeasances;
(viii) Rating changes;
(ix) Bankruptcy, insolvency, receivership or similar event of the District; or
(x) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a Financial Obligation of the District, any of which reflect financial difficulties.
For purposes of item (ix) above, the described event shall be deemed to occur when any of the following shall occur: the appointment of a receiver, fiscal agent or similar officer for the District in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or other governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority have supervision or jurisdiction over substantially all of the assets or business of the District.
(b) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series A Notes, if material, not later than ten (10) Business Days after the occurrence of the event:
(i) Unless described in paragraph 3(a)(v) hereof, other material notices or determinations with respect to the tax status of the Series A Notes, or other material events affecting the tax status of the Series A Notes;
(ii) Modifications to rights of Holders;
(iii) Optional, unscheduled or contingent Series A Note calls;
(iv) Release, substitution or sale of property securing repayment of the Series A Notes;
(v) Non-payment related defaults;
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(vi) The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms;
(vii) Appointment of a successor or additional Paying Agent or the change of name of a Paying Agent; and
(viii) Incurrence of a Financial Obligation of the District, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation, any of which affect security holders, if material.
(c) Whenever the District obtains knowledge of the occurrence of a Listed Event described in Section 3(a) hereof, or determines that knowledge of a Listed Event described in Section 3(b) hereof would be material under applicable federal securities laws, the District shall within ten (10) Business Days of occurrence file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections (a)(vii) or (b)(iii) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Series A Notes pursuant to the Resolution.
SECTION 4. Termination of Reporting Obligation. The District’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series A Notes. If such termination occurs prior to the maturity of the Series A Notes, the District shall give notice of such termination in the same manner as for a Listed Event under Section 3(c).
SECTION 5. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Certificate to update such information or include it in any future notice of occurrence of a Listed Event.
SECTION 6. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner of the Series A Notes may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate; provided, that any such action may be instituted only in Superior Court of the State of California in and for the County of San Diego or in U.S. District Court in or nearest to the County; provided, that the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.
SECTION 7. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Participating Underwriters and Holders, from time to time of the Series A Notes, and shall create no rights in any other person or entity.
SECTION 8. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
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The Disclosure Dissemination Agent and the District have caused this Disclosure Certificate to be executed, on the date first written below, by their respective officers duly authorized.
Date: August __, 2020
SAN DIEGO UNIFIED SCHOOL DISTRICT
By: ______Superintendent of Public Education
DIGITAL ASSURANCE CERTIFICATION, L.L.C., as Disclosure Dissemination Agent
By: ______Name: Title:
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APPENDIX E
SAN DIEGO COUNTY INVESTMENT POOL
The following information concerning the Treasury Pool of San Diego County (the “Treasury Pool”) has been provided by the Treasurer and has not been confirmed or verified by the District or the Underwriters. No representation is made herein as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof, or that the information contained or incorporated hereby by reference is correct as of any time subsequent to its date.
County of San Diego County Investment Pool general information and portfolio statistics can be found at http://www.sdttc.com/content/ttc/en/treasury/financial-reports.html. The foregoing internet address is included for reference only, and the information on such internet site is not incorporated by reference herein.
In accordance with Government Code Section 53600 et seq., the Treasurer manages funds deposited with it by the District. The County is required to invest such funds in accordance with California Government Code Sections 53635 et seq. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code.
All investments in the Treasurer’s investment portfolio conform to the statutory requirements of Government Code Section 53635 et seq., authorities delegated by the County Board of Supervisors and the Treasurer’s investment policy.
General
Pursuant to a resolution adopted July 8, 1958, the Board of Supervisors delegated to the County Treasurer the authority to invest and reinvest funds of the County. Applicable law limits this delegation of authority to a one-year period and must be renewed annually by action of the Board of Supervisors. In addition to funds of the County funds of certain local agencies within the County, including school districts in the County, are required under state law to be deposited into County Treasury ("Involuntary Depositors"). In addition, certain agencies, such as cities and special districts, invest certain of their funds in the County Treasury on a voluntary basis ("Voluntary Depositors" and together with the Involuntary Depositors, the "Depositors"). Deposits made by the County and the various local agencies are commingled in a pooled investment fund (the "Treasury Pool" or the "Pool"). No particular deposits are segregated for separate investment.
Under State law, Depositors in the Pool are permitted to withdraw funds which they have deposited on 30 days’ notice. The County does not expect that the Pool will encounter liquidity shortfalls based on its current portfolio and investment guidelines or realize any losses that may be required to be allocated among all Depositors in the Pool.
The County has established an Oversight Committee pursuant to State law. The members of the Oversight Committee include the County Treasurer, the County Auditor–Controller, the County Superintendent of Schools or designee, a representative from the special districts, a representative from the school districts and community college districts in the County, and members of the public. The role of the Oversight Committee is to review and approve the Investment Policy that is prepared by the County Treasurer.
The Treasury Pool's Portfolio
[TO BE UPDATED] As of May 31, 2020, the securities in the Treasury Pool had a market value of $11,310,979,395 and a book value of $11,168,259,850, for a net unrealized gain of $142,719,545 of the book value of the Treasury Pool.
The effective duration for the Treasury Pool was 0.91 years as of May 31, 2020. "Duration" is a measure of the price volatility of the portfolio and reflects an estimate of the projected increase or decrease in the value of the portfolio based upon a decrease or increase in interest rates. A duration of 0.91 means that for every one percent increase in interest rates the market value of the portfolio would decrease by 0.91%.
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As of May 31, 2020, approximately 7.53% of the total funds in the Pool were deposited by Voluntary Depositors, such as cities and fire districts, 7.27% by community colleges, 39.95% by the County, 1.04% by Non- County and 44.21% by K-12 school districts.
Fitch Ratings maintains ratings of “AAAf” (highest underlying credit quality) and “S1” (very low sensitivity to market risk) on the Pool. The ratings reflect only the view of the rating agency and any explanation of the significance of such ratings may be obtained from such rating agency as follows: Fitch Ratings, Inc., 33 Whitehall Street, New York, New York 10004.
Investments of the Treasury Pool
Authorized Investments: Investments of the Pool are placed in those securities authorized by various sections of the California Government Code, which include obligations of the United States Treasury, Agencies of the United States Government, local and State bond issues, bankers acceptances, commercial paper of prime quality, certificates of deposit (both collateralized and negotiable), repurchase and reverse repurchase agreements, medium term corporate notes, shares of beneficial interest in diversified management companies (mutual funds), asset backed (including mortgage related), pass-through securities, and specific Supranational debt securities
Legislation which would modify the currently authorized investments and place restrictions on the ability of municipalities to invest in various securities is considered from time to time by the California State Legislature. At all times, the Pool’s investments will comply with California Government Code and the County’s Investment Policy (the "Investment Policy").
The Investment Policy currently states the primary goals of the County Treasurer when investing public funds to be as follows: the primary objective is to safeguard the principal of the funds under the County Treasurer's control, the secondary objective is to meet the liquidity needs of the Pool Participants, and the third objective is to achieve an investment return on the funds under the control of the County Treasurer within the parameters of prudent risk management. The Investment Policy contains a requirement that at least 35% of the Pool should be invested in securities maturing in one year or less, with the remainder of the portfolio being invested in debt securities with maturities spread over more than one year to five years. Furthermore, at least 15% of the securities must mature within 90 days. The maximum effective duration for the Pool shall be 2.0 years.
Certain Information Relating to Pool
The following reflects information with respect to the Pool as of May 31, 2020. As described above, a wide range of investments is authorized by state law. Therefore, there can be no assurances that the investments in the Pool will not vary significantly from the investments described below. In addition, the value of the various investments in the Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions. Therefore, there can be no assurance that the values of the various investments in the Pool will not vary significantly from the values described below. In addition, the values specified in the following table were based upon estimates of market values provided to the County by a third party. Accordingly, there can be no assurance that if these securities had been sold on May 31, 2020, the Pool necessarily would have received the values specified.
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