DALLAS COUNTY SCHOOLS (A Political Subdivision Located in Dallas County, Texas) LIMITED TAX REFUNDING BONDS, SERIES 2017

Please attach this Supplement to the copies of the Preliminary Limited Offering Memorandum in your possession and forward copies to the parties to whom you have previously delivered copies of such Preliminary Limited Offering Memorandum.

SUPPLEMENT TO PRELIMINARY LIMITED OFFERING MEMORANDUM Dated May 11, 2017

Regarding

$44,950,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) LIMITED TAX REFUNDING BONDS, SERIES 2017

and

$12,280,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) TAX ANTICIPATION NOTE, TAXABLE SERIES 2017

PLEASE BE ADVISED that the above-referenced Preliminary Limited Offering Memorandum has been supplemented to revise the following information:

(1) Initial Paying Agent:

- Each instance of the following text:

The initial Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas

hereby amended to read:

The initial Paying Agent/Registrar is Wilmington Trust, N.A., Dallas, Texas

(2) Paying Agent/Registrar:

- The second paragraph of the subcaption “THE BONDS AND THE NOTE – Paying Agent/Registrar” is hereby amended to read:

In the Order and the Note Resolution, the Paying Agent/Registrar has been designated as a Trustee over each, respective Debt Service Fund for the benefit of the holders of the Bonds and the Notes and also has been granted the authority to pursue any and all remedies permitted by law to ensure that sufficient funds are held in each Debt Service Fund.

The information contained in this Supplement is subject in all respects to the more complete information in the Preliminary Limited Offering Memorandum, to the extent that such information is not otherwise amended or supplemented hereby. Except as amended hereby and by the Supplement to the Preliminary Limited Offering Memorandum dated May 15, 2017, the Preliminary Limited Offering Memorandum shall remain in effect. This Supplement should be affixed to all copies of the Preliminary Limited Offering Memorandum.

The date of this Supplement is May 16, 2017

SUPPLEMENT TO PRELIMINARY LIMITED OFFERING MEMORANDUM Dated May 11, 2017

Regarding

$44,950,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) LIMITED TAX REFUNDING BONDS, SERIES 2017

and

$12,280,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) TAX ANTICIPATION NOTE, TAXABLE SERIES 2017

PLEASE BE ADVISED that the above-referenced Preliminary Limited Offering Memorandum has been supplemented to revise the following information:

(1) Maturity date of the Limited Tax Refunding Bonds, Series 2017:

- The maturity month and day for the Bonds was inadvertently listed as December 1. The maturity month and day for each instance of reference to a maturity date for the Bonds is hereby amended to read “June 1.”

(2) Use of Bonds Proceeds:

- Each instance of the following text:

is hereby amended to read:

Proceeds from the sale of the Bonds will be used to (i) refund certain of the Issuer’s outstanding obligations, as indicated in “APPENDIX A – Table 14”, attached hereto (the “Refunded Bonds”) and (ii) pay the costs associated with the issuance of the Bonds (see “THE BONDS AND NOTE-Purpose of the Bonds”). The purpose of the refunding is to restructure existing debt service on certain outstanding obligations and, upon implementation of the other financial measures described herein, including the issuance of the Note, the Board and management believe that sufficient resources will be available for operations of the Issuer (see “THE BONDS AND NOTE-Purpose of the Bonds,” “CURRENT FINANCIAL STATUS OF THE ISSUER – Investment Risk,” “- Outstanding Debt,” “Financial Position of the Issuer,” “RISK FACTORS,” and “Note 18 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”)

(3) Use of Note proceeds:

- Each instance of the following text:

is hereby amended to read:

Proceeds from the sale of the Note will be used to (i) pay maintenance expenses of the Issuer, and (ii) pay the costs associated with the issuance of the Note (see “THE BONDS AND THE NOTE-Purpose of the Note”). By providing funds to pay such maintenance expenses and, upon implementation of the other financial measures described herein, including the issuance of the Bonds, the Board and management believe that sufficient resources will be available for operations of the Issuer (see “THE BONDS AND NOTE-Purpose of the Note,” “CURRENT FINANCIAL STATUS OF THE ISSUER – Investment Risk,” “- Outstanding Debt,” “Financial Position of the Issuer,” “RISK FACTORS,” and “Note 18 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”)

(4) Figure 3 – Other Obligations:

- The chart on page four of the PLOM is hereby amended to read as follows:

Figure 3 – Other Obligations

Obligation Date Lessor / Assignee/ Nominal Value Rate Amount Lender Outstanding(1) Master Capital March 12, 2015 ELGA / Lakeside $3,000,000.00 5.95% $1,905,082 Lease 20150306- Bank 1(2) Master Capital March 12, 2015 ELGA / Lakeside $1,979,079.20 5.95% $1,321,622 Lease 20150306- Bank 2(2) Master Capital March 12, 2015 ELGA / Lakeside $1,434,570.60 5.95% $1,070,442 Lease 20150306- Bank 3(2) Master Capital June 25, 2015 Equipment Leasing $3,508,272.95 5.95% $2,254,036 Lease 20150625- Group of America 1(2) LLC (“ELGA”) / Leasing Innovations Incorporated (“LLI”) Master Capital June 25, 2015 ELGA / $2,093,843.20 6.86% $1,293,283 Lease 20150625- Community Trust 2(2) Bank Master Capital June 25, 2015 ELGA / $3,308,936.40 6.87% $2,043,497 Lease 20150625- Community Trust 3(2) Bank Master Capital June 25, 2015 ELGA / LLI $1,141,380.00 6.87% $704,877 Lease 20150625- 4(2) Master Capital June 25, 2015 ELGA / Grinnell $2,875,800.00 5.95% $1,799,289 Lease 20150625- State Bank & Trust 5(2)

Master Capital June 25, 2015 ELGA / LLI $1,162,320.00 5.95% $776,193 Lease 20150625- 6(2) Master Capital June 25, 2015 ELGA / LLI $3,141,400.00 5.95% $2,221,836 Lease 20150625- 7(2) Master Capital June 25, 2015 ELGA / Growth $1,424,099.20 5.95% $1,062,629 Lease 20150625- Funding Equipment 8(2) Finance Master Capital June 25, 2015 ELGA / Prime $1,120,440.00 5.95% $836,046 Lease 20150625- Alliance Bank 9(2) Master Capital June 25, 2015 ELGA / Growth $680,635.60 5.95% $507,874 Lease 20150625- Funding Equipment 10(2) Alliance Master Gov’t Lease November 7, 2016 Wells Fargo $9,277,580.80 3.27% $6,988,405 Purchase Equipment Agreement Finance, Inc. #498185 Master Gov’t Lease November 7, 2016 Wells Fargo $808,500.00 3.27% $732,081 Purchase Equipment Agreement Finance, Inc. #498185 Master Equipment October 21, 2016 Texas Capital $18,979.025.00 4.26% $15,442,438 Lease Purchase Bank, N.A. Agreement(3) Master Equipment October 21, 2016 Texas Capital $1,816,500 4.26% $1,620,292 Lease Purchase Bank, N.A. Agreement(3)

Vendor Note (4) August 1, 2014 Preston Hollow $12,090,000.00 3.00% $2,816,033 Capital, LLC ______(1) Outstanding Amount includes principal and interest. (2) Obligations are payable from “Legally Available Funds” which is defined, pursuant to Section 271.005(a)(4), Texas Local Government Code, to include “all or any part of any revenues, funds, or taxes available to the [Issuer].” Although the amounts payable as contract payments under these obligations (“Contract Payments”) are subject to annual appropriation by the Issuer’s Board, any failure to appropriate funds to pay the Contract Payments is an Event of Default. See “RISK FACTORS – Appropriation of Contract Payments.” (3) The Issuer’s default with respect to the payment of principal of or interest on any debt or any lease payment to any other party or the Issuer’s failure to observe any covenant or obligation in any agreement ancillary to such debt is a cross-default. (4) See “Note 19 to APPENDIX B – Excerpts from the Issuer’s Audited Financial Report for Year Ended June 30, 2016.”

The Issuer has also incurred certain lease-finance obligations in connection with a sale and leaseback transaction with respect to certain Issuer-owned land, buildings, and equipment. The nominal value of such lease-finance obligations is $25,000,000. Interest expense and future lease payments in connection with the lease-finance obligations is set forth below. See “THE ISSUER – Sale-Leaseback of Property” and “Note 10 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”

Year Ending, Amount June 30, 2017 $2,193,897 2018 $2,215,836 2019 $2,237,994 2020 $2,260,374 2021 $2,252,978 2022-2026 $11,761,935 2027-2031 $12,361,913 2032-2035 $8,342,028 Total minimum lease payments $43,626,955

(5) Stop Arm Camera Program:

- The subsection of the PLOM entitled “THE ISSUER - Stop Arm Camera Program” is hereby amended to read as follows:

The Issuer has previously installed Stop Arm Camera Equipment on school buses providing transportation for Dallas Independent School District (“Dallas ISD”) students within the City of Dallas, which for the 2016-17 school year covered approximately 670 daily routes. The Issuer has entered into Stop Arm Camera Program agreements with other school districts, both within the County and located outside the County for the implementation of a Stop Arm Camera Program for such school district. Under these agreements, the Issuer will pay to such school districts approximately twelve and one half percent (12.5%) of the net sums collected from violations of the Municipal Stop Arm Ordinance. In addition, the municipality enacting the Municipal Stop Arm Ordinance will retain approximately twelve and one half percent (12.5%) of the net sums collected for such violations.

Pursuant to a service agreement dated effective as of January 1, 2017 (the “Stop Arm Agreement”), by and between Force Multiplier Solutions, Inc. (“FMS”) and the Issuer, FMS assumed all managerial responsibility for the operation of the assembly, development, and distribution of technology and equipment used to provide the Stop Arm Camera Program. The compensation of the Stop Arm Agreement are as follows:

The Issuer will receive all revenues generated by the Stop Arm Camera Program collected in Dallas County. The Issuer will pay FMS $190,000 per month for operations within Dallas County and FMS will receive 50% of all revenues that exceed $350,000 per month in Dallas County. FMS will receive all revenues generated by the Stop Arm Camera Program collected outside of Dallas County. FMS will pay the Issuer $400,000 per month until March 1, 2023 and $15.00 per paid citation received by FMS from business outside of Dallas County commencing March 1, 2019.

Pursuant to an amendment to the Stop Arm Agreement effective as of January 1, 2017, the Issuer has agreed to pay a royalty fee of 5% of all monies received by the Issuer during the term of the Stop Arm Agreement for paid violations collected in Dallas County to Rob Leonard, Chairman and Chief Executive Officer of FMS.

(6) The Deposit Account and the Debt Service Fund:

The subsection of the PLOM entitled “THE BONDS AND THE NOTE – The Deposit Account and the Debt Service Fund” is hereby amended to read as follows:

The Order and the Note Resolution, establish a ACH Positive Pay Implementation (the “Control Agreement”) between the Issuer and Bank of America National Association (the “Depository”) for a separate account established and to be maintained exclusively for receipt of ad valorem tax revenues from the Dallas County Tax Collector/Assessor. Under the terms of the Control Agreement, the Issuer has instructed its Depository to annually allow the Trustee to withdraw amounts sufficient to pay the principal and interest due on the next two payment dates for the Bonds and the Notes to each respective Debt Service Fund held by U.S. Bank National Association as Trustee (the “Trustee”). Furthermore, the Issuer has agreed to not release any funds from this separate account until sufficient ad valorem tax revenue has been transferred to the Trustee for deposit into each Debt Service Fund each year.

Under the terms of the Order and the Note Resolution and each Trustee, Paying Agent and Registrar Agreement, i) the Trustee holds each Debt Service Fund for the benefit of the holders of the Bonds and the Notes; ii) terminating the Control Agreement shall be an event of default; and iii) the Trustee has been granted the authority to pursue any and all remedies permitted by law to ensure that sufficient funds are held in each Debt Service Fund.

The information contained in this Supplement is subject in all respects to the more complete information in the Preliminary Limited Offering Memorandum, to the extent that such information is not otherwise amended or supplemented hereby. Except as amended hereby, the Preliminary Limited Offering Memorandum shall remain in effect. This Supplement should be affixed to all copies of the Preliminary Limited Offering Memorandum.

The date of this Supplement is May 15, 2017 The Preliminary Limited Offering Memorandum and the information contained herein are subject to completion or amendment. These securities may not be sold, nor any offers to buy be accepted prior to the time the Limited Offering Memorandum is delivered in final form. Under no circumstances shall this Preliminary Limited Offering Memorandum constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. form toDTConoraboutMay 30, 2017(the“DeliveryDate”). for theUnderwriterbyBracewell, LLP,Houston,Texas.ItisexpectedthattheBondswill beavailablefordeliveryindefinitive Texas, BondCounsel(see“APPENDIX C–FORMOFBONDCOUNSEL’SOPINION”).Certain legalmatterswillbepassedupon and subjecttotheapprovingopinion oftheAttorneyGeneralTexasandopinion AndrewsKurthKenyonLLP,Houston, Note andotherfeatures. rights oftheholders,federal,stateorlocaltaxconsequences ofthepurchase,ownershipordispositionBondsand analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the while theBondsandNotesharecertaincommonattributes, eachissueisseparatefromtheotherandshouldbereviewed distinct securitiesofferingsbeingissuedandsoldindependently exceptforthecommonLimitedOfferingMemorandum,and, Taxable Series2017(the“Note”)underacommonLimited OfferingMemorandum.TheBondsandtheNoteareseparate to thedateofredemption.See“THEBONDSANDTHENOTE- Redemption–TheBonds”herein. or anydatethereafter,atapriceequaltotheparvaluethereof, plusaccruedinterestfromthemostrecentpaymentdate Association, Dallas,Texas(see“THEBONDSANDTHENOTE– PayingAgent/Registrar”). Bonds (see“THEBONDSANDTHENOTE–Book-Entry-OnlySystem”).TheinitialPayingAgent/RegistrarisU.S.Bank National distribution oftheamountssopaidtoparticipatingmembersDTCforsubsequentpaymentbeneficialowners ofthe thereof. TheprincipalofandinterestontheBondswillbepayablebyPayingAgent/RegistrartoCede&Co.,whichmake acquired in authorized denominationsthereof. Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be 30-day months.ThedefinitiveBondswillbeinitiallyregisteredanddeliveredonlytoCede&Co.,thenomineeof Depository each year commencing December 1, 2017, until maturity, and will be calculated on the basisof a 360-dayyear consisting of twelve Bonds,” “THEBONDSANDTHENOTE–SecurityandSourceofPaymentfortheBonds”“RISKFACTORS”). property locatedwithinDallasCounty(the“County”),asprovidedintheOrder(see“THEBONDS–AuthorityforIssuance ofthe maintenance andoperationspurposes,withinthelimitsof$0.01per$100taxablevaluationasprescribedbylaw,onall taxable AND THENOTE-PurposeoftheBonds”). “APPENDIX A–Table14”,attachedhereto,and(ii)paythecostsassociatedwithissuanceofBonds(see“THE BONDS ABOVE REQUIREMENTS. ANYONE WHOSELLSTHEBONDSARERESPONSIBLEFORDETERMININGPROPOSEDPURCHASERMEETS THE ONLY TOQUALIFIEDINVESTORSALSOMEETINGTHOSESUITABILITYSTANDARDS.See“PURCHASERREQUIREMENTS.” MEETING CERTAINSUITABILITYSTANDARDS.THEBONDSANDBENEFICIALINTERESTSTHEREINMAYBE RESOLD and anymultipleof$5,000principalinexcessthereof.THEBONDSAREOFFEREDONLYTOQUALIFIEDINVESTORS offered andsold(includinginsecondarymarkettransactions) in AuthorizedDenominationsoftheBonds$100,000principal order (the“Order”)adoptedbytheBoardofTrustees“Board”)DallasCountySchools“Issuer”).TheBonds aretobe to theConstitutionandgenerallawsofStateTexas(the“State”),particularlyChapter1207,GovernmentCode,an Interest accruesfromDeliveryDate * Preliminary, subjectto change. Dated Date:May1,2017 alternative minimumtaxconsequencesforcorporations. “TAX MATTERS”herein.SeehereinforadiscussionofBondCounsel’sopinionincludingthe regulations, publishedrulingsandcourtdecisionsexistingonthedatethereof,subjecttomattersdescribedunder purposes, andwillnotbeincludedinthefederalalternativeminimumtaxableincomeofindividualsunderstatutes, BOOK-ENTRY-ONLY NEW ISSUE The Bondsareofferedfordelivery when,asandifissuedreceivedbytheCrews&Associates, Inc.(the“Underwriter”) SEPARATE ISSUES…TheBondsarebeingofferedbytheIssuerconcurrentlywith theIssuer’sTaxAnticipationNote, The BondsmaturingonandafterDecember1,2019aresubject tooptionalredemptioninwholeorpartonDecember1,2018, Interest ontheBondswillaccruefromDeliveryDate(asdefinedbelow)andbepayableJune1December 1of The BondsaredirectobligationsoftheIssuer,payablefromaandcontinuingannualadvaloremtaxlevied, for Proceeds fromthesaleofBondswillbeusedto(i)refundcertainIssuer’soutstandingobligations,asindicated in The $44,950,000* Dallas County Schools Limited Tax Refunding Bonds, Series 2017 (the “Bonds”) are being issued pursuant In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax

PRELIMINARY LIMITED OFFERING MEMORANDUM DATED MAY 11, 2017

(A politicalsubdivisionlocatedinDallasCounty,Texas) LIMITED TAXREFUNDINGBONDS, DALLAS COUNTY SCHOOLS CREWS & ASSOCIATES No physicaldeliveryoftheBondswillbemadetobeneficialowners $44,950,000* SERIES 2017 Due: December1,asshownonpageii NON RATED The Preliminary Limited Offering Memorandum and the information contained herein are subject to completion or amendment. These securities may not be sold, nor any offers to buy be accepted prior to the time the Limited Offering Memorandum is delivered in final form. Under no circumstances shall this Preliminary Limited Offering Memorandum constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. form toDTConoraboutMay 30,2017(the“DeliveryDate”). for theUnderwriterbyBracewell, LLP,Houston,Texas.ItisexpectedthattheNotewill beavailablefordeliveryindefinitive Texas, BondCounsel(see“APPENDIX C–FORMOFBONDCOUNSEL’SOPINION”).Certain legalmatterswillbepassedupon and subjecttotheapprovingopinion oftheAttorneyGeneralTexasandopinion AndrewsKurthKenyonLLP,Houston, and theNoteotherfeatures. the rightsofholders,federal,stateorlocaltaxconsequences ofthepurchase,ownershipordispositionBonds and analyzedindependently,includingthetypeofobligation beingoffered,itstermsforpayment,thesecurity while the Bonds and the Note share certain common attributes,eachissueis separate from the other and shouldbe reviewed distinct securitiesofferingsbeingissuedandsoldindependently exceptforthecommonLimitedOfferingMemorandum,and, Bonds, Series2017(the“Bonds”)underacommonLimited OfferingMemorandum.TheBondsandtheNoteareseparate to theparvaluethereof,plusaccruedinterestdateof redemption.See“THEBONDSANDTHENOTE–Redemption.” “THE BONDSANDTHENOTE–PayingAgent/Registrar”). NOTE – Book-Entry-OnlySystem”).The initial PayingAgent/Registraris U.S. Bank National Association,Dallas, Texas (see to theparticipatingmembersofDTCforsubsequentpaymentbeneficialownersNote(see“THEBONDS ANDTHE on theNotewillbepayablebyPayingAgent/RegistrartoCede&Co.,whichmakedistributionofamounts sopaid thereof. the Book-Entry-OnlySystemdescribedherein.BeneficialownershipofNotemaybeacquiredinauthorizeddenominations be initiallyregisteredanddeliveredonlytoCede&Co.,thenomineeofTheDepositoryTrustCompany(“DTC”)pursuant to at maturity,andwillbecalculatedonthebasisofa360-dayyearconsistingtwelve30-daymonths.Thedefinitive Notewill Security andSourceofPaymentfortheNote”“RISKFACTORS”). Resolution (see “THE BONDS AND THE NOTE – Authority for Issuance for the Note,” “THE BONDS AND THE NOTE – taxable propertylocatedwithinDallasCounty(the“County”),andotheravailablefundsoftheIssuerasprovidedin theNote maintenance andoperationspurposes,withinthelimitsof$0.01per$100taxablevaluationasprescribedbylaw, onall associated withtheissuanceofNote(see“THEBONDSANDTHENOTE-PurposeNote”). MEETS THEABOVEREQUIREMENTS. REQUIREMENTS.” ANYONEWHOSELLSTHENOTEISRESPONSIBLEFORDETERMININGPROPOSEDPURCHASER BE RESOLD ONLY TO QUALIFIED INVESTORS ALSO MEETING THOSE SUITABILITY STANDARDS. See “PURCHASER INVESTORS MEETINGCERTAINSUITABILITYSTANDARDS.THENOTEANDBENEFICIALINTERESTSTHEREIN MAY $100,000 ofprincipalandanymultiple$5,000inexcessthereof.THENOTEISOFFEREDONLYTOQUALIFIED The Noteistobeofferedandsold(includinginsecondarymarkettransactions)AuthorizedDenominationsofthe Noteof a resolution(the“NoteResolution”)adoptedbytheBoardofTrustees“Board”)DallasCountySchools “Issuer”). to theConstitutionandgenerallawsofStateTexas(the“State”),particularlyChapter45,EducationCode, Interest accruesfromDeliveryDate * Preliminary, subjectto change. Dated Date:May1,2017 alternative minimumtaxconsequencesforcorporations. under “TAX MATTERS” herein. See “TAX MATTERS” herein for a discussion of BondCounsel’s opinion including the regulations, publishedrulingsand court decisions existingon the datethereof,subject to the matters described tax purposes,andwillbeincludedinthefederalalternativeminimumtaxableincomeofindividualsunderstatutes, BOOK-ENTRY-ONLY NEW ISSUE The Noteisofferedfordelivery when,asandifissuedreceivedbytheCrews&Associates, Inc.(the“Underwriter”) The Noteissubjecttooptionalredemptioninwholeor partonMarch1,2018,oranydatethereafter,atapriceequal Interest on the Note will accrue from the Delivery Date (as defined herein) and will be payable on March 1, 2018 and on The NoteisadirectobligationoftheIssuer,payablefromandcontinuingannualadvaloremtaxlevied, for Proceeds fromthesaleofNotewillbeusedto(i)paymaintenanceexpensesIssuer,and(ii)costs The $12,280,000*DallasCountySchoolsTaxAnticipationNote,TaxableSeries2017(the“Note”)isbeingissuedpursuant In the opinion of Bond Counsel, interest on the Notewill not be excludable from grossincomefor federal income S eparate No physicaldeliveryoftheNotewillbemadetobeneficialownersthereof.Theprincipalandinterest

PRELIMINARY LIMITED OFFERING MEMORANDUM DATED MAY 11, 2017 I ssues

… (A politicalsubdivisionlocatedinDallasCounty,Texas) The NoteisbeingofferedbytheIssuerconcurrentlywith theIssuer’sLimitedTaxRefunding DALLAS COUNTY SCHOOLS TAX ANTICIPATIONNOTE, CREWS & ASSOCIATES TAXABLE SERIES2017 $12,280,000* Due: Asshownonpageiii NON RATED $44,950,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) LIMITED TAX REFUNDING BONDS, SERIES 2017 MATURITY SCHEDULE*

Initial Maturity Principal Interest Reoffering (12/1)(a) Amount Rate Yield (b) CUSIP (a) 2021 $6,775,000 % % 2022 7,050,000 2023 7,330,000 2024 7,625,000 2025 7,925,000 2026 8,245,000

(Interest accrues from Delivery Date)

* Preliminary, subject to change.

(a) The Bonds maturing on or after December 1, 2019 are subject to optional redemption prior to maturity on December 1, 2018 or any date thereafter, at a price equal to the par value thereof, plus accrued interest from the most recent interest payment date to the date of redemption. See “THE BONDS AND THE NOTE-Redemption” herein. (b) The initial reoffering yield represents the initial offering yield to the public, which will be determined by the Underwriter and may subsequently be changed by the Underwriter without notice to the Issuer and is the sole responsibility of the Underwriter. (c) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence 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 Issuer, the Financial Advisor, nor the Underwriter take any responsibility for the accuracy of CUSIP numbers.

ii $12,280,000* DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) TAX ANTICIPATION NOTE TAXABLE SERIES 2017

MATURITY SCHEDULE*

Principal Interest Initial Reoffering Maturity(a) Amount* Rate Yield CUSIP(b) March 1, 2018 $10,000,000 % % June 15, 2018 1,280,000

(Interest accrues from Delivery Date)

______

* Preliminary, subject to change.

(a) The Note is subject to redemption in whole or in part on March 1, 2018, or any date thereafter at par plus accrued interest to the date of redemption. See “THE BONDS AND THE NOTE –Redemption” herein. (b) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence 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 Issuer nor the Financial Advisor takes any responsibility for the accuracy of CUSIP numbers.

iii USE OF INFORMATION IN LIMITED OFFERING MEMORANDUM

For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission, as amended (“Rule 15c2-12”), and in effect on the date of this Preliminary Limited Offering Memorandum, this document constitutes a Preliminary Limited Offering Memorandum of the Issuer with respect to the Bonds and the Note that has been deemed “final” by the Issuer as of its date except for the omission of no more than the information permitted by Rule 15c2-12.

This Limited Offering Memorandum is being provided in connection with the sale of the Bonds and the Note as referred to herein and may not be reproduced for use, in whole or in part, for any other purpose. The information set forth under “BOOK-ENTRY-ONLY SYSTEM” has been obtained from The Depository Trust Company. All other information set forth herein has been obtained from the Issuer and other noted sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness.

No dealer, salesman, or other person has been authorized to give any information or to make any representation, other than the information contained in Limited Offering Memorandum, in connection with the offering of the Bonds and the Note, and, if given or made, such information or representation must not be relied upon as having been authorized by the Issuer, the Borrower, the Underwriter. The information in this Limited Offering Memorandum is subject to change without notice, and neither the delivery of this Limited Offering Memorandum nor any sale hereunder will, under any circumstances, create any implication that there has been no change in the affairs of the Issuer the Underwriter since the date hereof. This Limited Offering Memorandum does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized, or in which any person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation.

The Bonds and the Note are not being registered with the United States Securities and Exchange Commission in reliance upon an exemption from the Securities Act of 1933, as amended, nor have the Order or Note Resolution been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions contained in such acts. The registration or qualification of the Bonds in accordance with applicable provisions of securities laws of the states in which the Bonds and the Note have been registered or qualified, if any, and the exemption from registration or qualification in other states cannot be regarded as a recommendation thereof. Neither these states nor any of their agencies have passed upon the merits of the Bonds or the Note or the accuracy or completeness of this Limited Offering Memorandum. Any representation to the contrary may be a criminal offense.

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY BODY, AND NO SUCH AUTHORITIES HAVE CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS LIMITED OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AND THE NOTE AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

This Limited Offering Memorandum contains statements relating to future results that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. When used in this Limited Offering Memorandum, the words “estimated,” “forecasted,” “intended,” “expected,” “anticipated,” “projected,” and similar expressions identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

The Underwriter has provided the following sentence for inclusion in this Limited Offering Memorandum. The Underwriter has reviewed the information in this Limited Offering Memorandum in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader’s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Preliminary Limited Offering Memorandum.

iv TABLE OF CONTENTS

MATURITY SCHEDULE FOR BONDS ...... ii The Current School Finance System as it Applies to the MATURITY SCHEDULE FOR NOTE ...... iii Issuer ...... 22 USE OF INFORMATION IN LIMITED OFFERING Overview ...... 23 MEMORANDUM ...... iv Local Funding for School Districts ...... 24 SELECTED INFORMATION FROM THE LIMITED State Funding for School Districts...... 24 OFFERING MEMORANDUM ...... v i 2006 Legislation ...... 26 SELECTED FINANCIAL INFORMATION ...... viii 2015 Legislation ...... 26 BOARD OF TRUSTEES, APPOINTED OFFICIALS 2017 Legislation ...... 26 AND CONSULTANTS ...... ix Wealth Transfer Provisions ...... 27 INTRODUCTION ...... 1 AD VALOREM TAX PROCEDURES ...... 27 Separate Issues ...... 1 Tax Code and County-Wide Appraisal District ...... 27 CURRENT FINANCIAL STATUS OF THE ISSUER ...... 1 Property Subject to Taxation by the Issuer ...... 27 Investment Risk ...... 1 Valuation of Property for Taxation ...... 28 Issuer Revenue Sources ...... 2 Residential Homestead Exemption ...... 29 Figure 1 – Issuer Revenues ...... 2 Issuer and Taxpayer Remedies ...... 29 Transportation Contracts...... 3 Public Hearing and Rollback Tax Rate ...... 29 Outstanding Debt ...... 3 Tax Ceiling ...... 30 Figure 2 – Obligations Secured by Ad Valorem Taxes ...... 4 Levy and Collection of Taxes ...... 30 Figure 3 – Other Obligations ...... 4 Issuer’s Rights in the Event of Tax Delinquencies ...... 30 Financial Position ...... 6 Penalties and Interest ...... 31 THE ISSUER ...... 6 Pending Legislation ...... 31 Recent Personnel Changes ...... 7 Issuer Application of Tax Code ...... 31 Stop Arm Camera Program ...... 7 INVESTMENTS ...... 31 Sale-Leaseback of Property ...... 7 Legal Investments ...... 31 PLAN OF FINANCE ...... 8 Investment Policies ...... 33 Refunded Obligations ...... 8 Additional Provisions ...... 33 Sources and Uses of Bond Proceeds ...... 9 Current Investments ...... 33 Sources and Uses of Note Proceeds ...... 9 TAX MATTERS FOR THE BONDS ...... 34 PURCHASER REQUIREMENTS ...... 9 Tax Exemption ...... 34 RISK FACTORS ...... 11 Proposed Tax Legislation ...... 34 Concentration of Operating Revenues ...... 11 Tax Accounting Treatment of Original Issue Discount Contract Termination ...... 12 Bonds ...... 35 Stop Arm Camera Program Revenues ...... 12 Tax Accounting Treatment of Original Issue Premium Financial Condition of Issuer ...... 13 Bonds ...... 35 Ability to General Sufficient Revenues ...... 13 TAX MATTERS FOR THE NOTE ...... 36 Current Legislation ...... 14 Stated Interest on the Note ...... 36 Bankruptcy Risk ...... 14 Disposition of the Note...... 36 Appropriation of Contract Payments ...... 14 Backup Withholding ...... 36 Key Leadership Retention ...... 15 Withholding on Payments to Nonresident Alien Marketability of Bonds ...... 15 Individuals and Foreign Corporations ...... 37 THE BONDS AND THE NOTE ...... 15 Reporting of Interest Payments ...... 37 Purpose of the Bonds ...... 15 CONTINUING DISCLOSURE OF INFORMATION ...... 37 Purpose of the Note ...... 15 Annual Reports ...... 37 Description of the Bonds ...... 15 Event Notices ...... 38 Description of the Note ...... 15 Limitations and Amendments ...... 38 Authority for Issuance of the Bonds ...... 16 Compliance with Prior Undertakings ...... 38 Authority for Issuance of the Note ...... 16 OTHER INFORMATION ...... 39 Security and Source of Payment for the Bonds and the Rating ...... 39 Note ...... 16 Litigation ...... 39 The Deposit Account and the Debt Service Fund ...... 16 Registration and Qualification of Bonds and the Note for Issuance of Additional Bonds ...... 17 Sale ...... 39 Redemption ...... 17 The Bonds and the Note as Legal Investments in Texas .... 39 Notice of Redemption for the Bonds ...... 17 Legal Matters ...... 40 Defeasance ...... 17 Verification of Accuracy of Mathematical Computations .. 40 Book-Entry-Only System ...... 18 Financial Advisor ...... 41 Paying Agent/Registrar ...... 20 Underwriting ...... 41 Transfer, Exchange and Registration ...... 20 Forward-Looking Statements Disclaimer ...... 41 Record Date for Interest Payment ...... 20 Miscellaneous ...... 42 BONDHOLDERS’ REMEDIES ...... 20 TAX RATE LIMITATIONS ...... 21 APPENDICES STATE AND LOCAL FUNDING OF SCHOOL INFORMATION REGARDING THE ISSUER ...... A DISTRICTS IN TEXAS ...... 21 EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL Litigation Relating to the Texas Public School Finance REPORT FOR YEAR ENDED JUNE 30, 2016 ...... B System ...... 21 FORM OF BOND COUNSEL’S OPINION ...... C Possible Effects of Changes in Law on Issuer Bonds ...... 22 BUDGET ...... D CURRENT PUBLIC SCHOOL FINANCE SYSTEM ...... 22 v

SELECTED INFORMATION FROM THE LIMITED OFFERING MEMORANDUM

This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Limited Offering Memorandum. The offering of the Bonds to potential investors is made only by means of this entire Limited Offering Memorandum. No person is authorized to detach this summary from this Limited Offering Memorandum or to otherwise use it without the entire Limited Offering Memorandum.

ISSUER ...... Dallas County Schools (the “Issuer”) is a political subdivision located in Dallas County, Texas (the “County”). The Issuer is a county-unit school district and the boundaries of the Issuer are coterminous with the County. The Issuer supports the operations of certain independent school districts in the County and other independent school districts located outside the County. Under this arrangement, the independent school districts are responsible for their classroom and administrative functions, while the Issuer provides various support services pursuant to contracts with the school districts (see “THE ISSUER” and “RISK FACTORS – Current Legislation”).

BONDS ...... The $44,950,000* Limited Tax Refunding Bonds, Series 2017 (the “Bonds”) shall mature on the dates and in the amounts set forth on page ii of this Limited Offering Memorandum (see “THE BONDS AND THE NOTE - Description of the Bonds”).

NOTE………...... The $12,280,000* Tax Anticipation Note, Taxable Series 2017 (the “Note”) shall mature on the dates and in the amounts set forth on page iii of this Limited Offering Memorandum (see “THE BONDS AND THE NOTE – Description of the Note”).

PAYMENT OF INTEREST ON THE BONDS ...... Interest on the Bonds will accrue from the Delivery Date and will be payable June 1 and December 1 of each year commencing December 1, 2017, until maturity (see “THE BONDS AND THE NOTE – Description of the Bonds”).

PAYMENT OF INTEREST ON THE NOTE………...... Interest on the Note will accrue from the Delivery Date and will be payable on March 1, 2018 and at maturity (see “THE BONDS AND THE NOTE – Description of the Note”).

AUTHORITY FOR ISSUANCE FOR THE BONDS ...... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas (the “State”), particularly Chapter 1207, Texas Government Code, and an order (the “Order”) adopted by the Board (see “THE BONDS AND NOTE – Authority for Issuance of the Bonds”).

AUTHORITY FOR ISSUANCE FOR THE NOTE……… ...... The Note is being issued pursuant to the Constitution and general laws of the State, particularly Chapter 45, Texas Education Code, and a resolution (the “Note Resolution”) adopted by the Board (see “THE BONDS AND THE NOTE – Authority for Issuance of the Note”).

SECURITY FOR THE BONDS ...... The Bonds are direct obligations of the Issuer payable as to principal and interest from and secured by the proceeds of a direct and continuing annual ad valorem tax levied for maintenance and operations purposes by the Issuer, within the limit of $0.01 per $100 of taxable valuation as prescribed by law, on all taxable property located within the County (see “THE BONDS AND THE NOTE – Security and Source of Payment for the Bonds and the Note” and “CURRENT FINANCIAL STATUS OF THE ISSUER-Issuer Revenue Sources”).

SECURITY FOR THE NOTE……...... The Note is a direct obligation of the Issuer payable as to principal and interest from and secured by the proceeds of a direct and continuing, annual ad valorem tax levied for maintenance and operations purposes by the Issuer, within the limit of $0.01 per $100 of taxable valuation as prescribed by law, on all taxable property located within the County, and other available funds of the Issuer (see “THE BONDS AND THE NOTE – Security and Source of Payment of the Bonds and the Note” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Issuer Revenue Sources”).

TAX MATTERS ...... In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under “TAX MATTERS FOR THE BONDS” herein, and is not includable in the alternative minimum taxable income of individuals. See “TAX MATTERS FOR THE BONDS” for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations. In the opinion of Bond Counsel, interest on the Note will not be excludable from gross income for federal income tax purposes, and will be included in the federal alternative minimum taxable income of individuals under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters

described under “TAX MATTERS FOR THE NOTE” herein. See “TAX MATTERS FOR THE NOTE” herein for a discussion of Bond Counsel’s opinion including the alternative minimum tax consequences for corporations.

REDEMPTION ...... The Bonds maturing on and after December 1, 2019 are subject to optional redemption in whole or in part on December 1, 2018, or any date thereafter, at a price equal to the par value thereof, plus accrued interest from the most recent interest payment date to the date of redemption. See “THE BONDS AND THE NOTE—Redemption” herein.

The Note is subject to redemption in whole or in part on March 1, 2018, or any date thereafter at par plus accrued interest to the date of redemption. See “THE BONDS AND THE NOTE –Redemption” herein.

USE OF PROCEEDS OF THE BONDS ...... Proceeds from the sale of the Bonds will be used to (i) refund certain of the Issuer’s outstanding obligations, as indicated in “APPENDIX A – Table 14”, attached hereto (the “Refunded Bonds”) and (ii) pay the costs associated with the issuance of the Bonds (see “THE BONDS AND NOTE-Purpose of the Bonds”).

USE OF PROCEEDS OF THE NOTE……...... Proceeds from the sale of the Note will be used to (i) pay maintenance expenses of the Issuer, and (ii) pay the costs associated with the issuance of the Note (see “THE BONDS AND THE NOTE—Purpose of the Note”).

INVESTOR RESTRICTIONS ...... The Bonds and the Note are offered only to qualified investors meeting certain suitability standards. The Bonds and Note and beneficial interest therein may be resold only to qualified investors also meeting those suitability standards. See “Purchaser Requirements”. Anyone who sells the Bonds or the Note is responsible for determining the proposed purchaser meets the above requirements.

BOOK-ENTRY-ONLY SYSTEM ...... The definitive Bonds and Note will be initially registered and delivered only to Cede & Co., the nominee of DTC, pursuant to the Book-Entry-Only System described herein. The Bonds and Note will be issued in principal denominations of $100,000 of principal and any multiple of $5,000 thereof. No physical delivery of the Bonds and Note will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds and Note will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds and Note. See “THE BONDS AND THE NOTE - Book-Entry-Only System” herein.

PAYING AGENT / REGISTRAR ...... The initial Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas (see “THE BONDS AND NOTE – Paying Agent/Registrar”). Initially, the Issuer intends to use the Book-Entry-Only System of The Depository Trust Company, New York, New York (see “THE BONDS AND THE NOTE – Book-Entry-Only System”).

CONTINUING DISCLOSURE OF INFORMATION ...... Pursuant to the Order, the Issuer is obligated to provide certain updated financial information and operating data annually, and timely notice of certain specific events to the Municipal Securities Rulemaking Board (the “MSRB”). Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org (See “CONTINUING DISCLOSURE OF INFORMATION”).

Pursuant to Section 240.15c2-12(d)(3) of the Securities Exchange Act of 1934, the offering of the Note qualifies for an exemption from the Securities and Exchange Commission Rule 15c2-12(b)(5) because the Note has a stated maturity of 18 months or less. The Issuer will be required to submit event notices with respect to the Note as required by Section 240.15c2-12(b)(5)(i)(C). (See “CONTINUING DISCLOSURE OF INFORMATION”)

LEGAL OPINION ...... Andrews Kurth Kenyon LLP, Houston, Texas, Bond Counsel.

PAYMENT RECORD ...... The Issuer has not defaulted in the prompt payment of its bonded indebtedness.

vii

SELECTED FINANCIAL INFORMATION

Ratio Taxable Per Capita Ad Valorem Per Capita Tax Debt Fiscal Estimated Assessed Assessed Tax Supported Tax Supported to Assessed Tax Year End Population (a) Valuation (b) Valuation Debt (c) Debt Valuation Year 2013 2,453,843 $ 157,695,312,615 $ 64,265 $ 49,490,000 20 0.031% 2012 2014 2,379,214 164,158,531,709 68,997 67,265,000 28 0.041% 2013 2015 2,518,638 175,072,563,521 69,511 60,215,000 24 0.034% 2014 2016 2,518,638 188,190,199,007 74,719 50,405,000 20 0.027% 2015 2017 2,518,638 207,228,323,960 82,278 76,800,000 (c) 30 0.037% (c) 2016

(a) Source: Municipal Advisory Council of Texas. (b) Net of exemptions. Assessed valuations do not include adjustments in supplemental rolls made after the end of the fiscal year. (c) Includes the Bonds, the Note and excludes the Refunded Obligations. Preliminary, subject to change.

General Fund Consolidated Statement Summary

2016 2015 2014 2013 2012 Beginning Balance $ 27,969,836 $ 13,487,944 $ 6,300,499 $ 9,366,692 $ 12,596,857 Adjustments to Fund Balance - - - - - Total Revenue 116,411,099 109,066,830 112,607,031 94,571,417 91,088,514 Total Expenses 121,478,538 114,166,531 109,628,241 97,637,610 86,333,779 Net Other Resources (Uses) (16,391,645) 19,581,593 4,208,655 - (7,984,900) Ending Balance $ 6,510,752 $ 27,969,836 $ 13,487,944 $ 6,300,499 $ 9,366,692

For Additional Information Regarding the District Contact:

Leatha Mullins Interim Superintendent 5151 Samuell Blvd Dallas, Texas 75228 Phone: 214-944-4559

Martin Clarke Director of Finance 5151 Samuell Blvd Dallas, Texas 75228 Phone: 214-915-6426

Lewis A. Wilks USCA Municipal Advisors 4444 Westheimer, Suite G500 Houston, Texas 77027 Phone: 713-366-0592

viii

DALLAS COUNTY SCHOOLS

BOARD OF TRUSTEES, APPOINTED OFFICIALS AND CONSULTANTS

BOARD OF TRUSTEES

Term Years of Expires Name Title Service May Occupation Larry Duncan President 14 2021 Computer Consultant

Dr. Paul A. Freeman* Vice President 6 2017 Preacher

James Hubener* Member 6 2017 College Administrator Healthcare Administrator Gloria Tercero Levario Member 4 2019 Professional Omar Narveaz Member 3 2021 Community Educator

Kyle Renard, M.D. Member 4 2019 Physician C.W. Whitaker Member 4 2017 Retired

Diego Alberto Ayela** Member

Renato de los Santos, Jr. ** Member * Term Expires May 16, 2017 ** Term Commences May 16, 2017

APPOINTED OFFICIALS Length of Service with Name Position the Issuer Leatha Mullins Interim Superintendent* 17

Martin Clarke Executive Director Of Business 7

Amanda Davis In House General Counsel 17

*Ms. Mullins was appointed Interim Superintendent in February, 2017 and the Issuer has started the search for a permanent Superintendent. Previously, Ms. Mullins served as Assistant Superintendent/CTO for the Issuer. See “THE ISSUER – Recent Personnel Changes” herein.

CONSULTANTS

Certified Public Accountant ...... Weaver and Tidwell L.L.P.

Bond Counsel ...... Andrews Kurth Kenyon LLP

General Counsel ...... Strasburger & Price, LLP

Financial Advisor ...... USCA Municipal Advisors, LLC

ix LIMITED OFFERING MEMORANDUM RELATING TO

$44,950,000* $12,280,000* DALLAS COUNTY SCHOOLS DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) (A political subdivision located in Dallas County, Texas) LIMITED TAX REFUNDING BONDS, SERIES 2017 TAX ANTICIPATION NOTE TAXABLE SERIES 2017

INTRODUCTION

This Limited Offering Memorandum, which includes the Appendices hereto, provides certain information regarding the issuance of $44,950,000* Dallas County Schools Limited Tax Refunding Bonds, Series 2017 (the “Bonds”) and $12,280,000* Dallas County Schools Tax Anticipation Note, Taxable Series 2017 (the “Note”). Capitalized terms used in this Limited Offering Memorandum have the same meanings assigned to such terms in the Order (hereinafter defined) and the Note Resolution (hereinafter defined) authorizing the issuance and sale of the Bonds and Note respectively, except as otherwise indicated herein.

All financial and other information presented in this Limited Offering Memorandum has been provided by Dallas County Schools (the “Issuer”) from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information and is not intended to indicate future or continuing trends in the financial position or other affairs of the Issuer. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future (see “OTHER INFORMATION – Forward-Looking Statements Disclaimer”).

There follows in this Limited Offering Memorandum descriptions of the Bonds and the Note and certain information regarding the Issuer and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. THIS LIMITED OFFERING MEMORANDUM IS BEING FURNISHED SOLELY FOR CONSIDERATION BY QUALIFIED INSTITUTIONAL BUYERS AND ACCREDITED INVESTORS WITH SUBSTANTIAL FINANCIAL RESOURCES AND THE EXPERIENCE AND FINANCIAL EXPERTISE TO UNDERSTAND AND EVALUATE THE RISK INHERENT IN THIS INVESTMENT, INCLUDING THE RISK OF NON-PAYMENT OF PRINCIPAL AND INTEREST.

PROSPECTIVE PURCHASERS OF THE BONDS AND THE NOTE ARE EXPECTED TO CONDUCT THEIR OWN INDEPENDENT DUE DILIGENCE INVESTIGATIONS WITH RESPECT TO THE BONDS AND THE NOTE. DOCUMENTS AND OTHER INFORMATION MAY BE AVAILABLE FROM THE DISTRICT UPON REQUEST. ANY SUCH REQUESTS SHOULD BE DIRECTED TO THE UNDERWRITER.

Separate Issues

The Bonds and the Note are being offered concurrently by the Issuer under a common Limited Offering Memorandum. The Bonds and the Note are separate and distinct securities offerings being issued and sold independently except for the common Limited Offering Memorandum, and, while the Bonds and the Note share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of holders, the federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds and the Note and other features.

CURRENT FINANCIAL STATUS OF THE ISSUER

Investment Risk

As set forth in APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016, the Issuer experienced recurring losses from operations and has an unrestricted deficit that raises substantial doubt about its ability to continue as a going concern. Although the Issuer’s Board of Trustees (the “Board”) and executive management believe that implementation of certain measures (including the issuance of the Bonds to restructure outstanding debt and the Note as well as other measures further described herein) will generate certain capital to operate beyond the next twelve months, the success of such measures cannot be guaranteed. See “Note 18 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.” THIS LIMITED OFFERING MEMORANDUM IS BEING FURNISHED SOLELY FOR CONSIDERATION BY QUALIFIED INSTITUTIONAL BUYERS AND ACCREDITED INVESTORS WITH SUBSTANTIAL FINANCIAL RESOURCES AND THE EXPERIENCE AND FINANCIAL EXPERTISE TO UNDERSTAND AND EVALUATE THE HIGH DEGREE OF RISK INHERENT IN THIS INVESTMENT, INCLUDING THE RISK OF NON-PAYMENT OF PRINCIPAL AND INTEREST. See “RISK FACTORS”, also see “THE ISSUER – Stop Arm Camera Program” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Figure 3 – Other Obligations.” * Preliminary, subject to change.

Issuer Revenue Sources

The Issuer’s revenues are derived from three primary sources: (i) contractual revenues, which are derived from (a) charges for services rendered to the Issuer’s client school districts and (b) Stop Arm Camera Program payments, (ii) a local property tax, the rate of which may not exceed the legal limit of $0.01 per $100 of taxable valuation, and (iii) State aid for funding (see “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT PUBLIC SCHOOL FINANCE SYSTEM.”

For fiscal year 2017, the Issuer’s tax rate was $0.009271 per $100 valuation. The Issuer is prohibited from levying a tax above $0.01 per $100 of assessed valuation. The Office of the Attorney General of Texas has issued an opinion that the statutes governing county-unit school districts, including the Issuer, do not allow citizens to petition the district to increase the tax rate. Under this interpretation, the county-unit school districts would not be authorized to submit a proposition to the voters to increase the maximum tax rate. See “RISK FACTORS” and “TAX RATE LIMITATIONS” herein for a discussion of the limitations on the Issuer’s ability to raise its property tax rate.

The Issuer receives the transportation allotment directly from TEA. During the school year, the Issuer tracks mileage for each district during the operational year but submits the total miles driven directly to TEA, who determines the dollar amount of the allotment. The Issuer receives a total transportation allotment and distributes back to the districts based on the mileage data collected during the operating year. At year’s end, the Issuer settles-up on costs and payments with each district.

In the event that a district terminates its interlocal transportation agreement or other contracts with the Issuer, the Issuer’s financial condition may be adversely affected, as the Issuer is not able to increase its property tax rate beyond its statutory limit of $0.01 per $100 of assessed valuation to offset reduced revenues. See “RISK FACTORS – Concentration of Operating Revenues” and “- Contract Termination.”

Figure 1 – Issuer Revenues

The following figure shows the current contracts and the breakdown of revenues from the participating districts for fiscal year 2017 and projections for fiscal year 2018:

REVENUE FROM CONTRACTS Contract Term Projected Percent District Beginning Date End Date 2016-17 Revenue 2017-18 Revenue Total Carrollton-Farmers Branch ISD 8/1/2014 7/31/2017 $ 5,637,469 $ 5,638,000 8.10% Cedar Hill ISD 7/31/2015 7/31/2018 2,300,076 2,300,100 3.31% Dallas ISD 3/1/2017 7/31/2018 43,585,784 43,586,000 62.64% Desoto ISD 8/1/2015 7/31/2018 2,152,169 2,153,000 3.09% Highland Park ISD 8/1/2015 7/31/2018 377,303 378,000 0.54% Irving ISD 8/1/2015 7/31/2018 7,294,627 7,295,000 10.48% Lancaster ISD 8/1/2015 7/31/2018 1,508,874 1,509,000 2.17% Aledo ISD 8/2/2011 Perpetual 2,117,594 2,120,000 3.05% Richardson ISD 1/25/2001 Perpetual 4,549,371 4,600,000 6.61% $ 69,523,267 $ 69,579,100 100.00%

REVENUE FROM TEA REVENUE FROM TAXES Projected Percent Projected Percent District 2016-17 Revenue 2017-18 Revenue Total 2016-17 Revenue 2017-18 Revenue Total Carrollton-Farmers Branch ISD $ 1,458,785 $ 1,458,785 7.67% $ 1,364,238 $ 1,469,940 9.20% Cedar Hill ISD 400,631 400,631 2.11% 303,477 326,991 2.05% Dallas ISD 12,793,647 12,793,647 67.24% 8,588,099 9,253,510 57.92% Desoto ISD 778,547 778,547 4.09% 246,540 265,642 1.66% Highland Park ISD 55,141 55,141 0.29% 1,130,310 1,217,887 7.62% Irving ISD 1,262,266 1,262,266 6.63% 1,112,220 1,198,396 7.50% Lancaster ISD 417,439 417,439 2.19% 210,778 227,109 1.42% Aledo ISD 606,920 606,920 3.19% - - 0.00% Richardson ISD 1,252,393 1,252,393 6.58% 1,871,082 2,016,054 12.62% $ 19,025,769 $ 19,025,769 100.00% $ 14,826,744 $ 15,975,529 100.00%

The Issuer is not provided with a right of action against a district in the event the district is unable to fulfill its obligations under the transportation contract as a result of lack of sufficient funding or failure to budget or authorize funding for the contractual costs, but each district may provide funds from a separate source of funding or may terminate the contract and pay for services already received. See “RISK FACTORS” herein.

The Issuer also expects to receive certain revenues from a service agreement between the Issuer and Force Multiplier Solutions, Inc. dated as of January 1, 2017 (the “Stop Arm Camera Program Management Agreement”). See “THE ISSUER – Stop Arm Camera Program.”

Transportation Contracts

The Issuer’s transportation contracts require that the Issuer provide school transportation to the contracting school districts in accordance with the rules set forth by the Texas Education Agency. The Issuer assumes all responsibility for employing, assigning, managing and disciplining all drivers and transportation employees. The transportation contracts are typically for an initial term of three years with a renewal option, but the total term may not exceed six years. Currently, none of the Issuer’s contracts with school districts extends beyond fiscal year 2018. The Issuer’s contracts with Aledo ISD and Richardson ISD renew automatically each year until 60 days written notice is provided to the Issuer. Upon the expiration of the contracts, the Issuer and the individual districts may enter into a new contract. The contracts are terminable by either party with or without cause by giving ninety day notice.

In the twelve-month period ending April 30, 2017, three school districts have terminated or given notice to terminate their transportation contracts with the Issuer. Currently Dallas ISD has issued a request for proposal to provide transportation services in connection with its Gifted and Talented Program but has not requested proposals for any other transportation services. Revenues from the Issuer’s contract with Dallas ISD comprises 67.24% of its school district contractual revenues. If the Issuer’s contract with Dallas ISD were to terminate or be significantly reduced in scope and compensation, the Issuer could face significant pressure on its abilities to pay its outstanding obligations. Additionally, there is no guarantee that all districts will continue their Agreement for a term equal to the final maturity date of the Bonds. The default of the Issuer with respect to this debt could materially negatively affect the Issuer’s overall financial condition. See “RISK FACTORS – Contract Termination;” also see “Table 9 – OTHER OBLIGATIONS” herein for a detailed description of the Issuer’s debt secured by the Available Revenues as defined herein) and significant pressures on the Issuer’s cash flows and financial condition; “ – Concentration of Operating Revenues” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt.”

The proposed budget for each district includes revenue from the State Transportation Allotment attributable to providing transportation for the particular district and a subsidy from the Issuer to the particular district in the form of a “property tax allocation” from the Issuer’s $0.01 tax. (See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM - The Current School Finance System as it Applies to the Issuer” for a discussion of the State Transportation Allotment). The property tax allocation is provided only to those districts located in the County, and is provided only at the discretion of the Board. The districts located outside the County that contract with the Issuer for transportation are allocated their pro-rata share of the State Transportation Allotment but the Issuer does not provide a property tax allocation subsidy to those districts as the property tax allocation is raised from the Issuer’s $0.01 tax levied on taxable property located in the County and must therefore be limited to services within the County. The property tax allocation is essentially a subsidy provided to the County districts and is allocated to the districts on a per-mile basis. The districts are invoiced on the first of each month, September through June, for the total budgeted operating expenses evenly spread over a ten-month period. The districts must pay the Issuer such amounts within thirty days after receipt of the invoice. At the end of each year, the Issuer adjusts the operational cost from estimates to actual, which results in credits to or from the districts for the final adjusted actual operations costs for the year and credits the districts for their allocation of a portion of the State Transportation Allotment received and the property tax allocation, if any. The estimated expenses for each district include the estimated actual costs of operations, estimated overhead and estimated general and administrative expenses. The obligations of each district under its respective contract are contingent upon the availability of funding and are subject to annual appropriation by the districts.

Outstanding Debt

Upon issuance of the Bonds and the Note, the Issuer will have the following outstanding debt payable from a direct and continuing, annual ad valorem tax levied, for maintenance and operations purposes, within the limits of $0.01 per $100 taxable valuation as prescribed by law, on all taxable property located within the County (see “TAX RATE LIMITATION”):

Figure 2 – Obligations Secured by Ad Valorem Taxes (1) Amount Dated Outstanding (2) Caption Date After Issuance Public Property Finance Contractual Obligations, Series 2012A 6/15/2012 $ 2,950,000 Public Property Finance Contractual Obligations, Series 2014 4/15/2014 10,525,000 Public Property Finance Contractual Obligations, Taxable Series 2014 4/15/2014 6,095,000 The Bonds 5/1/2017 44,950,000 * The Note (3) 5/1/2017 12,280,000 *

* Preliminary, subject to change. (1) The Master Capital Leases 20150625 (1-10) and 20150306 (1-3), listed below, are also payable from any part of the Issuer’s revenues, funds or taxes available for any lawful purpose.

(2) Does not include certain Issuer long-term liabilities related to compensated absences. See “Note 11 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”

(3) SEE “THE BONDS AND THE NOTE – SECURITY AND SOURCE OF PAYMENT FOR THE BONDS AND THE NOTE.”

Figure 3 – Other Obligations

Obligation Date Lessor / Assignee/ Nominal Value Rate Amount Lender Outstanding(1) Master Capital March 12, 2015 ELGA / Lakeside $3,000,000.00 5.95% $1,919,742 Lease 20150306-1(2) Bank Master Capital March 12, 2015 ELGA / Lakeside $1,979,079.20 5.95% $1,385,355 Lease 20150306-2(2) Bank Master Capital March 12, 2015 ELGA / Lakeside $1,434,570.60 5.95% $1,147,656 Lease 20150306-3(2) Bank Master Capital June 25, 2015 Equipment $3,508,272.95 5.95% $2,495,664 Lease 20150625-1(2) Leasing Group of America LLC (“ELGA”) / Leasing Innovations Incorporated (“LLI”) Master Capital June 25, 2015 ELGA / $2,093,843.20 6.86% $1,360,998 Lease 20150625-2(2) Community Trust Bank Master Capital June 25, 2015 ELGA / $3,308,936.40 6.87% $2,150,809 Lease 20150625-3(2) Community Trust Bank Master Capital June 25, 2015 ELGA / LLI $1,141,380.00 6.87% $741,897 Lease 20150625-4(2) Master Capital June 25, 2015 ELGA / Grinnell $2,875,800.00 5.95% $1,677,550 Lease 20150625-5(2) State Bank & Trust Master Capital June 25, 2015 ELGA / LLI $1,162,320.00 5.95% $813,624 Lease 20150625-6(2)

Master Capital June 25, 2015 ELGA / LLI $3,141,400.00 5.95% $2,356,050 Lease 20150625-7(2) Master Capital June 25, 2015 ELGA / Growth $1,424,099.20 5.95% $1,139,279 Lease 20150625-8(2) Funding Equipment Finance

Master Capital June 25, 2015 ELGA / Prime $1,120,440.00 5.95% $896,352 Lease 20150625-9(2) Alliance Bank Master Capital June 25, 2015 ELGA / Growth $680,635.60 5.95% $544,508 Lease 20150625- Funding 10(2) Equipment Alliance Master Gov’t Lease November 7, Wells Fargo $9,277,580.80 3.27% $773,042 Purchase Agreement 2016 Equipment #498185 Finance, Inc. Master Equipment October 21, Texas Capital $18,979.025.00 4.26% $1,708,173 Lease Purchase 2016 Bank, N.A. Agreement(3) Vendor Note (4) August 1, 2014 Preston Hollow $12,090,000.00 3.00% $2,491,830 Capital, LLC ______(1) Outstanding Amount includes principal and interest. (2) Obligations are payable from “Legally Available Funds” which is defined, pursuant to Section 271.005(a)(4), Texas Local Government Code, to include “all or any part of any revenues, funds, or taxes available to the [Issuer].” Although the amounts payable as contract payments under these obligations (“Contract Payments”) are subject to annual appropriation by the Issuer’s Board, any failure to appropriate funds to pay the Contract Payments is an Event of Default. See “RISK FACTORS – Appropriation of Contract Payments.” (3) The Issuer’s default with respect to the payment of principal of or interest on any debt or any lease payment to any other party or the Issuer’s failure to observe any covenant or obligation in any agreement ancillary to such debt is a cross-default. (4) See “Note 19 to APPENDIX B – Excerpts from the Issuer’s Audited Financial Report for Year Ended June 30, 2016.”

The Issuer has also incurred certain lease-finance obligations in connection with a sale and leaseback transaction with respect to certain Issuer-owned land, buildings, and equipment. The nominal value of such lease-finance obligations is $25,000,000. Interest expense and future lease payments in connection with the lease-finance obligations is set forth below. See “THE ISSUER – Sale- Leaseback of Property” and “Note 10 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”

Financial Position of the Issuer

The audited financial report for the fiscal year ending June 30, 2016 (the “2016 Audit”) indicated that the Issuer’s total net position decreased by $12,164,746 and the unrestricted net position of governmental activities reported a cumulative deficit of $17,250,817 at year’s end. In fiscal year 2017, three local independent public school districts for whom the Issuer provides services terminated their interlocal transportation agreements with the Issuer effective from the end of the 2016/2017 school year, which had no impact on the results of operations for the year ended June 30, 2016. The availability to continue as a going concern can, however, be affected by the loss of additional transportation contracts with local independent school districts. During fiscal years 2013, 2014, and 2015, the Student Safety/Stop Arm Camera Program experienced collectability challenges and declining revenues. As a result of the above conditions, the program operated at a deficit by incurring operating losses and negative changes in net position and cash flows. Consequently, Weaver and Tidwell L.L.P. issued a report as part of the Fiscal Year 2016 Audit that questioned the Issuer’s ability to continue as a going concern. Although the Issuer’s Board and executive management believe the implementation of certain remedial actions and the debt restructuring as part of the issuance of the Bonds (including executing a service agreement with respect to the Stop Arm Camera Program and executing certain equipment leases with Wells Fargo Equipment Finance, Inc. and Texas Capital Bank, N.A.) will be sufficient to help the Issuer satisfy its obligations going forward, such outcome cannot be guaranteed. See “Note 18 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016;” also see “THE ISSUER – Stop Arm Camera Program” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt – Figure 3-Obligations Secured by non-Ad Valorem Tax Revenues.”

Management of the Issuer has taken certain steps to improve the operations of Dallas County Schools. These steps include the implementation of a finance plan and zero-based budgeting as well as the following:

• In March 2017, management engaged the services of municipal advisors who proposed a plan of finance that, when implemented, would 1) restructure a portion of the Issuer’s outstanding debt obligations to provide immediate debt service relief for the remainder of fiscal year 2017 and the fiscal years immediately following and 2) issue a Tax Anticipation Note to provide working capital and. Also in March 2017, the Issuer’s Board voted unanimously to approve and implement the plan of finance.

• In addition, the Issuer will arrange its financial affairs in accordance with the plan of finance and manage future budgets to help restore positive cash flows in the Stop Arm Funds and provide for future balanced financial operations. That arrangement includes implementing further workforce reductions; regaining overall operating efficiencies through the enforcement of tighter budgetary controls; and entering into a service agreement to outsource all responsibilities for the operation, development, distribution, and general management of the School Bus Student Safety Program.

• To help carry out its plans, the Issuer’s Finance Department will 1) use an activity-based budgeting approach to determine true costs and enable the Issuer to be financially transparent to all customers; 2) conduct monthly budget meetings to enforce the planned budgetary controls; 3) strengthen purchasing procedures through proper bidding and requisitioning processes; and 4) utilize Key Performance Indicators to measure and monitor financial health. THE ISSUER The Issuer is a county-unit school district and political subdivision located in Dallas County, Texas (the “County”). The Issuer supports the operations of certain independent school districts in the County and other independent school districts located outside the County. The most significant service provided to school districts by the Issuer is transportation. The Issuer provides transportation services to the following area school districts: Carrollton/Farmers Branch ISD, Cedar Hill ISD, DeSoto ISD, Dallas ISD, Highland Park ISD, Irving ISD, Lancaster ISD, Aledo ISD and Richardson ISD. The Issuer provides technology services to twenty-three school districts; media services to twelve schools districts; and psychological services to five districts. Under this arrangement, the independent school districts are responsible for their classroom and administrative functions, while the Issuer provides various support services pursuant to contracts with the school districts. Texas Education Code Chapters 17 and 18 originally authorized county school systems. County-unit agencies are now authorized by Education Code 11.301(a) to “continue to operate under the applicable chapter [17 and 18] as that chapter existed on May 1, 1995.” Two countywide school districts currently exist in Texas: Dallas County Schools and The Harris County Department of Education (Houston).

The Issuer is one of the top pupil transportation fleets in the United States. Consisting of a fleet of approximately 2,000 buses, the Issuer transports approximately 76,000 students each day. The Issuer operates its Instructional Media Services, which partners with many publishers of online resources to provide school districts in Dallas County and throughout the state of Texas with online instructional programs at consortium prices. The Issuer also provides customized staff development and on-site support to school

6 districts through our Technology Education and Mentoring Services staff. The Technology Department integrates modern technology to the serviced school districts and provides managed technology services such as infrastructure, software, and internet services.

The Issuer is governed by a seven-member Board of Trustees (the “Board”), three of whom are elected from Dallas County at-large and one elected from each of the four Dallas County Commissioners Precincts. Each Board member serves for a six-year term, with either two or three members elected every two years, the number depending upon that needed to bring the Board to seven members. The Board delegates administrative responsibilities to the Superintendent who is the chief administrative officer of the Issuer. Support services are supplied by the Issuer’s staff, and any outside consultants and advisors. The boundaries of the Issuer are coterminous with those of the County and encompass approximately 909.37 square miles.

Recent Personnel Changes

The Issuer’s prior superintendent, Dr. Rick Sorrels, recently resigned in February 2017, and the Assistant Superintendent/CTO is serving as the Interim Superintendent. Dr. Sorrels has been retained as a consultant for the Issuer through December 31, 2017, at which time Dr. Sorrels plans to retire. The Board is in the hiring process to permanently fill the open Superintendent’s position. The posting for selection of a consultant has been posted and the Issuer expects to begin the formal search for the new superintendent during June, 2017.

Internal Investigation

The former Superintendent engaged the Denshaw Group to conduct an internal investigation as to whether a forensic financial audit was required. The interim report was presented to the District Board of Trustees on March 8, 2017. In this interim report, the Denshaw Group indicated a number of management challenges. In addition, while their investigation would continue, they had yet to find or develop any evidence of criminal conduct or violations of bond covenants that could cause significant financial problems. The interim report details a number of interviews with administrative staff but no hard data to substantiate these conclusions. DCS requested that the Denshaw Group substantiate their findings with reference to supporting facts and/or records. To date, a final report has not been issued.

Stop Arm Camera Program

Pursuant to a second amendment to the Stop Arm Agreement, the Issuer has agreed to pay a royalty fee of 5% of all monies received by the Issuer during the term of the Stop Arm Agreement for paid violations collected in Dallas County to Rob Leonard.

Sale-Leaseback of Property

In June 2015, the Issuer sold property consisting of land, buildings, and equipment (the “Property”) to a buyer-lessor and immediately entered into lease agreements (the “Agreements’) with the buyer-lessor to lease 100% of the Property back over a primary lease term of 20 years. The fair market value of the Property, as determined by an independent third-party appraisal prior to the sale, was $17,122,000, and the undepreciated cost of the Property was $7,410,765 on the date of the transaction. The total

7 consideration received for the Property was $25,000,000, and the Issuer made a rental prepayment of $2,000,000, which, after financing costs and commissions, resulted in net proceeds of $22,641,157 at closing.

The Agreements provide the Issuer with the option to repurchase the Property at fair value and include options to renew and extend the terms of the leases for additional periods, with fixed rents as specified in the Agreements. The Issuer’s option to repurchase the Property in the future is considered continued involvement under the provisions of GASB 62, “Codification of Accounting and Financial Reporting Guidance in Pre-November 30, 1989 FASB and AICPA Pronouncements,” and, therefore, the Issuer has applied the financing method in accounting for the transaction. Under the financing method, the undepreciated cost and related accumulated depreciation of the Property remain on the Issuer’s statement of net position and no sale is recognized. Instead, the sale price of the Property is recorded as a lease finance obligation and each lease payment is recorded as interest expense. The initial term of the leases, which became effective in June 5, 2015, is 20 years, with monthly rental payments that began July 1, 2015.

For the year ended June 30, 2016, the Issuer recorded interest expense of $2,151,819 related to the leases. At June 30, 2016, the Issuer expected interest expense over the term of the leases related to the Property to total $43,626,955.

PLAN OF FINANCE

Refunded Obligations

The Refunded Obligations (as indicated in “APPENDIX A – Table 14” attached hereto) and the interest due thereon are to be paid on their scheduled interest payment dates (until redeemed) and dates of redemption from funds to be deposited with U.S. Bank National Association, Dallas, Texas (the “Escrow Agent”), pursuant to an Escrow Agreement (the “Escrow Agreement”) between the Issuer and the Escrow Agent.

The Order provides that from the proceeds of the sale of the Bonds to the Underwriter, the Issuer will deposit with the Escrow Agent an amount, together with other available funds which, when added to the investment earnings thereon, will be sufficient to accomplish the discharge and final payment of the Refunded Obligations. Such funds will be held by the Escrow Agent in a special escrow account (the “Escrow Fund”) and used to purchase a portfolio of securities authorized under 1207.067 Texas Government Code (the “Escrowed Securities”). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of principal of and interest on the Refunded Obligations. In the Order, the Issuer will give irrevocable instructions to provide the required notice to the owners of the Refunded Obligations that the Refunded Obligations will be redeemed on the redemption date described herein, on which date money will be made available to redeem the Refunded Obligations from money held under the Escrow Agreement.

Grant Thornton LLP, Minneapolis, Minnesota, will verify from the information provided to them the mathematical accuracy as of the date of the closing of the Bonds of the computations contained in the provided schedules to determine that the anticipated receipts from the Escrowed Securities in the schedules provided by USCA Municipal Advisors, LLC will mature and pay interest in such amounts which, together with uninvested funds, if any, in the Escrow Fund will be sufficient to pay, when due, the principal of and interest on the Refunded Obligations. Such maturing principal of and interest on the Escrowed Securities will not be available to pay the debt service on the Bonds. See “OTHER INFORMATION-Verification of Accuracy of Mathematical Computations” herein.

By the deposit of the Escrowed Securities and cash, if needed, with the Escrow Agent pursuant to the Escrow Agreement, the Issuer will have effected the final payment and discharge of the Refunded Obligations pursuant to Chapter 1207, Texas Government Code, and the orders authorizing the issuance of the Refunded Obligations. It is the opinion of Bond Counsel that as a result of such deposit and in reliance upon the report of Grant Thornton LLP, firm banking and financial arrangements will have been made for the discharge and final payment of the Refunded Obligations, and such Refunded Obligations will be deemed to be fully paid and no longer outstanding except for the purpose of being paid from funds provided therefor, in the Escrow Agreement.

The Issuer has covenanted in the Escrow Agreement to make timely deposits with the Escrow Agent from lawfully available funds of any additional amounts required to pay the principal of and interest on the Refunded Obligations, if for any reason the cash balances on deposit or scheduled to be on deposit in the Escrow Fund are insufficient to make such payments.

Sources and Uses of Bond Proceeds

The proceeds from the sale of the Bonds will be applied approximately as follows:

Sources of Funds

Par Amount of Bonds Original Issue Premium / Discount Total

Uses of Funds

Deposit to Escrow Fund Costs of Issuance and Underwriter’s Discount Total

Sources and Uses of Note Proceeds

The proceeds from the sale of the Note will be applied approximately as follows:

Sources of Funds

Par Amount of the Note 1 Original Issue Premium / Discount Total

Uses of Funds

Deposit to Note Payment Account Costs of Issuance and Underwriter’s Discount Total

PURCHASER REQUIREMENTS

The Bonds and the Note or any beneficial interest therein will be offered and sold only to:

1) "Qualified Institutional Buyers," as defined in subsection (a) of Rule 144A of the Securities Act ("Rule 144A") as any of the following entities, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity:

• Any insurance company as defined in Section 2(a)(13) of the Securities Act;

• Any investment company registered under the Investment Company Act or any business development company as defined in Section 2(a)(48) of that Act;

• Any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;

• Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees;

______1 See “THE BONDS AND THE NOTE – Purpose of the Note”.

• Any employee benefit plan within the meaning of title I of the Employee Retirement Income Security Act of 1974;

• Any trust fund whose trustee is a bank or trust company and whose participants are exclusively plans of the types identified in paragraph (a)(1)(i)(D) or (E) of [Section 144 A], except trust funds that include as participants individual retirement accounts or H.R. 10 plans;

• Any business development company as defined in Section 202 (a)(22) of the Investment Advisers Act of 1940;

• Any organization described in Section 501(c) (3) of the Internal Revenue Code, corporation (other than a bank as defined in Section 3(a)(2) of the Securities Act or a savings and loan association or other institution referenced in section 3(a)(5)(A) of the Securities Act or a foreign bank or savings and loan association or equivalent institution), partnership, or Massachusetts or similar business trust;

• Any investment adviser registered under the Investment Advisers Act;

• Any dealer registered pursuant to Section 15 of the Securities Exchange Act, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $10 million of securities of issuers that are not affiliated with the dealer, provided that securities constituting the whole or a part of an unsold allotment to or subscription by a dealer as a participant in a public offering shall not be deemed to be owned by such dealer;

• Any dealer registered pursuant to section 15 of the Securities Exchange Act acting in a riskless principal transaction on behalf of a qualified institutional buyer;

• Any investment company registered under the Investment Company Act, acting for its own account or, for the accounts of other qualified institutional buyers, that is part of a family of investment companies which own in the aggregate at least $100 million in securities of issuers, other than issuers that are affiliated with the investment company or are part of such family of investment companies. Family of investment companies means any two or more investment companies registered under the Investment Company Act, except for a unit investment trust whose assets consist solely of shares of one or more registered investment companies, that have the same investment adviser (or, in the case of unit investment trusts, the same depositor), provided that, for purposes of this section:

° Each series of a series company (as defined in Rule 18f-2 under the Investment Company Act) shall be deemed to be a separate investment company; and

° Investment companies shall be deemed to have the same adviser (or depositor) if their advisers (or depositors) are majority-owned subsidiaries of the same parent, or if one investment company's adviser (or depositor) is a majority-owned subsidiary of the other investment company's adviser (or depositor);

• Any entity, all of the equity owners of which are qualified institutional buyers, acting for its own account or the accounts of other qualified institutional buyers; and • Any bank as defined in section 3(a)(2) of the Securities Act, any savings and loan association or other institution as referenced in section 3(a)(5)(A) of the Securities Act, or any foreign bank or savings and loan association or equivalent institution, acting for its own account or, the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with it and that has an audited net worth of at least $25 million as demonstrated in its latest annual financial statements, as of a date not more than 16 months preceding the date of sale under the Rule in the case of a U.S. bank or savings and loan association, and not more than 18 months preceding such date of sale for a foreign bank or savings and loan association or equivalent institution;

2) Any entity for which all of the equity owners are "Accredited Investors." Accredited Investors are defined in Rule 501(a) of Regulation D under the Securities Act as any of the following:

• any bank, as defined in Section 3(a) (2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act, any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, any insurance company as defined in Section 2(13) of the 1933 Act, any investment company registered under the 1940 Act or a business development company as defined in Section 2(a) (48) of the 1940 Act, any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, any plan established and maintained by a state, its political subdivisions, or

any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000, any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000, or if a self directed plan, with investment decisions made solely by persons that are Accredited Investors;

• any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940;

• any organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the Bonds, with total assets in excess of $5,000,000;

• any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase exceeds $1,000,000

• any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; or

• any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Note, whose purchase is directed by a "sophisticated person" as described in 17 C.F.R. Section 230.506(b) (2) (ii).

RISK FACTORS

The purchase of the Bonds or the Note is subject to certain risks. Each prospective investor in the Bonds or the Note should read this Limited Offering Memorandum in its entirety including its appendices. Particular attention should be given to the factors described herein which, among others, could affect the payment of debt service on the Bonds and the Note, and which could also affect the marketability of the Bonds and the Note to an extent that cannot be determined.

Each beneficial owner of the Bonds or the Note will be deemed to have acknowledged and agreed to certain provisions as described herein under “PURCHASER REQUIREMENTS.”

Concentration of Operating Revenues

The majority of the Issuer’s operating revenues are derived from charges for services rendered to its client school districts. On average for the past five fiscal years, charges for services have provided approximately 57.2% of the Issuer’s operating revenues. For the fiscal year ended June 30, 2016, such charges for services provided approximately 62.36% of the Issuer’s operating revenues. See “APPENDIX A – Table 10 – SCHEDULE OF CHANGES IN NET ASSETS”. A disruption in the Issuer’s operations which reduces the Issuer’s revenues from services could adversely affect the financial condition of the Issuer, as the Issuer is not able to increase its property tax rate to offset reduced revenues, as discussed below. Although the Bonds and Note are secured by and payable from the Issuer’s property tax revenues, the revenues generated from services are a critical component of the Issuer’s financial condition, and such operations are dependent upon certain factors which are beyond the control of the Issuer, including State laws affecting funding for public schools, economic and demographic conditions within the service area of the Issuer and the continuing need by the client school districts for the Issuer’s services. Additionally, funds paid by the client school districts to the Issuer for services rendered may be subject to annual appropriation by the related school district. The ability of such districts to appropriate funds could be impacted by the extent of legislative appropriations to the districts. Further, the districts may enter into other contractual obligations which may be prior in right and constitute additional charges against the funds from which the payments due to the Issuer may be appropriated. Any disruption of the Issuer’s contractual relationships with its client school districts or the ability to generate revenues from the Issuer’s services could have a material adverse impact on the Issuer’s overall financial condition and its ability to operate and pay its outstanding obligations. For the 2017-18 fiscal year, the Issuer projects deriving 67.24% of its school district contractual revenues from its service contracts Dallas ISD. Therefore, a disruption in the Issuer’s contract with Dallas ISD would have a significant effect on its overall contractual revenues with school districts.

The Issuer has also issued debt, payable from all available revenues (the “Available Revenues”) (which means all available funds of the Issuer (but excluding receipts from the Issuer’s Maintenance Tax, State funding and federal funding) that the Issuer may lawfully use to pay amounts coming due on certain of the Issuer’s outstanding debt obligations) for the acquisition of technology equipment for school buses. The default of the Issuer with respect to this debt and/or the payment of revenues from contracting districts could materially negatively impact the Issuer’s overall financial condition. See “Table 9 – OTHER OBLIGATIONS” herein for a detailed description of the Issuer’s debt secured by the Available Revenues and significant pressures on the Issuer’s

11 cash flows and financial condition as a result of the Stop Arm Camera Program. Also see “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt.”

On average for the past five fiscal years, the Issuer has received 22.2% of its operating revenues from the State in accordance with the State’s public school finance system. For the fiscal year ended June 30, 2016, the Issuer received approximately 20.0% of its operating revenues from the State. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM” herein. Because the Issuer does not provide classroom education for students, all of the Issuer’s state funding is derived from the “Transportation Allotment” of the Foundation School Program. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM – The Current School Finance System as it Applies to the Issuer” for a discussion of the Transportation Allotment. The Issuer uses these funds to offset its charges to the customer school districts for transportation effectively reducing the amount each customer district pays for transportation services provided by the Issuer. In the past, State funding of public education has been challenged on constitutional grounds requiring the State Legislature to enact several funding programs, each of which has differed in the manner in which State and local funds have been allocated to school districts. Recently, several lawsuits against the State have been filed challenging the constitutionality of the Texas school finance system. There is no assurance that the State Legislature will not change the current system of funding for school districts in Texas which could adversely affect, not only the Issuer’s anticipated funding from the Transportation Allotment, but the manner in which the Issuer’s client districts are funded. See “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS – Current Litigation Related to the Texas Public School Finance System.”

On average for the past five fiscal years, the Issuer’s local tax revenues have provided approximately 15.9% of the Issuer’s operating revenues. For the 2016 fiscal year, local property tax revenues provided approximately 16.1% of the Issuer’s operating revenues. The Issuer does not have the authority to raise its local tax rate above $0.010 per $100 taxable valuation in the future to offset a decrease in taxable assessed valuation or decrease in operating revenues, if they occur. The Office of the Attorney General of Texas recently issued an opinion stating that the statutes governing county-unit school districts, including the Issuer, do not allow citizens to petition the district to increase the tax rate. Accordingly, it does not appear that the county-unit school districts would be authorized to submit a proposition to the voters to increase the maximum tax rate in the future.

Contract Termination

The districts served by the Issuer and the Issuer may terminate the interlocal transportation agreement (the “Agreement”) on any renewal date thereof, with or without cause, by giving ninety (90) calendar days’ prior written notice to the Issuer. Additionally, either party has the right to cancel any portion of the transportation services provided under the Agreement with ninety (90) calendar days’ written notice. A reduction in the Issuer’s revenues from contractual services could adversely affect the financial condition of the Issuer, as the Issuer is not able to increase its property tax rate to offset reduced revenues. See “TAX RATE LIMITATIONS.”

The Issuer currently maintains contracts to: (i) provide transportation services to the following area school districts: Aledo ISD, Carrollton/Farmers Branch ISD, Cedar Hill ISD, DeSoto ISD, Dallas ISD, Highland Park ISD, Irving ISD, Lancaster ISD and Richardson ISD; (ii) provide technology services to twenty-three school districts; (iii) provide media services to twelve schools districts; and (iv) provide psychological services to five districts. Under this arrangement, the independent school districts are responsible for their classroom and administrative functions, while the Issuer provides various support services pursuant to contracts with the school districts. See “THE ISSUER.”

In the twelve-month period ending April 30, 2017, three school districts have terminated or given notice to terminate their transportation contracts with the Issuer, and six school districts (including Dallas ISD) in the Issuer’s service area have issued a request for proposal for transportation services to occur within the next six months. Currently Dallas ISD has issued a request for proposal to provide transportation services in connection with its Gifted and Talented Program only. Revenues from the Issuer’s contract with Dallas ISD comprises 67.24% of its school district contractual revenues. If the Issuer’s contract with Dallas ISD were to terminate or be significantly reduced in scope and compensation, the Issuer could face significant pressure on its abilities to pay its outstanding obligations. Additionally, there is no guarantee that all districts will continue their Agreement for a term equal to the final maturity date of the Bonds. The default of the Issuer with respect to this debt could materially negatively affect the Issuer’s overall financial condition. See “Table 9 – OTHER OBLIGATIONS” herein for a detailed description of the Issuer’s debt secured by the Available Revenues and significant pressures on the Issuer’s cash flows and financial condition. Also see “ – Concentration of Operating Revenues” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt.”

Stop Arm Camera Program Revenues

The Issuer has previously entered into Stop Arm Camera Program agreements with school districts located both within the County and outside the County. Pursuant to a service agreement entered into between the Issuer and Force Multiplier Solutions (“FMS”) on January 1, 2017 (the “Agreement”), the Issuer will pay a monthly service fee and a percentage of collections to FMS in exchange for FMS assuming managerial responsibilities for the Stop Arm Camera Program inside and outside Dallas County. See “THE

ISSUER – Stop Arm Equipment” for a discussion of the payment terms of the Agreement and “Note 19 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.” The Issuer can provide no guarantees as to the number of collections generated in the course of the Stop Arm Camera Program. If there are fewer collections than anticipated or other events affect the amount of revenues the Issuer is able to collect, it could materially negatively impact the financial condition of the Issuer and the Issuer’s ability to pay the principal of and interest on its outstanding obligations.

Financial Condition of Issuer

The Issuer’s ability to continue as a going concern was questioned in a report provided by Weaver and Tidwell L.L.P. as part of the Issuer’s audited financial report for the fiscal year ending June 30, 2016 (the “2016 Audit”). Although the Issuer’s Board and executive management believe the implementation of certain measures (including the issuance of the Bonds and the Note, executing a service agreement with respect to the Stop Arm Camera Program, and executing certain equipment leases with Wells Fargo Equipment Finance, Inc. and Texas Capital Bank, N.A.) will generate sufficient capital to operate beyond the next twelve months, the success of such measures cannot be guaranteed. Financial conditions threatening the Issuer’s ability to continue as a going concern include (i) a reported decline in total net position of $12,164,746 and cumulative decrease in unrestricted net position of governmental activities of $17,250,817 at year’s end; (ii) the termination of three local independent public school districts for whom the Issuer provides services in fiscal year 2017; and (iii) collectability challenges and declining revenues for the Student Safety/Stop Arm Camera Program in fiscal years 2013, 2014, and 2015. See “CURRENT FINANCIAL STATUS OF THE ISSUER – Financial Condition of the Issuer” and “Note 18 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.”

Ability to Generate Sufficient Revenues

The Issuer’s revenues (a portion of which is allocated to pay debt service or other contractual payments on its outstanding obligations) are derived from three primary sources: (i) contractual revenues, which are derived from (a) charges for services rendered to the Issuer’s client school districts and (b) Stop Arm Camera Program payments, (ii) a local property tax, the rate of which may not exceed the legal limit of $0.01 per $100 of taxable valuation, and (iii) State aid for funding (see “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT PUBLIC SCHOOL FINANCE SYSTEM.” The Issuer is prohibited from levying a tax above $0.01 per $100 of assessed valuation unless voters of the County approve a higher tax rate. The Office of the Attorney General of Texas has issued an opinion that the statutes governing county-unit school districts, including the Issuer, do not allow citizens to petition the district to increase the tax rate. Under this interpretation, the county-unit school districts, including the Issuer, would be prohibited from submitting a proposition to the voters to increase the maximum tax rate. For the 2016 fiscal year, local property tax revenues provided approximately 16.1% of the Issuer’s operating revenues. See “RISK FACTORS” and “TAX RATE LIMITATIONS.”

The remaining Issuer primary revenue sources could be subject to many factors beyond the Issuer’s control. For the fiscal year ended June 30, 2016, the Issuer received approximately 20.0% of its operating revenues from State aid. State aid is provided as a Transportation Allotment through the Tier 1 Category of the Foundation School Program and is calculated based on the number of miles driven per service category. If the school districts elect to terminate their transportation service agreements with the Issuer, the amount of the Transportation Allotment could decrease. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM – The Current School Finance System as it Applies to the Issuer.”

For the fiscal year ended June 30, 2016, charges for contractually-provided transportation services to school districts provided approximately 62.36% of the Issuer’s operating revenues. In the twelve-month period ending April 30, 2017, three school districts have terminated or given notice to terminate their transportation contracts with the Issuer. Currently Dallas ISD has issued a request for proposal to provide transportation services in connection with its Gifted and Talented Program. Revenues from the Issuer’s contract with Dallas ISD comprises 67.24% of its school district contractually-provided transportation services revenues. If the Issuer’s contract with Dallas ISD were to terminate or be significantly reduced in scope and compensation, the Issuer could face significant pressure on its abilities to pay its outstanding obligations. Additionally, there is no guarantee that all school districts will continue their transportation contracts with the Issuer for a term equal to the final maturity date of the Bonds. See “RISK FACTORS – Contract Termination;” also see “Table 9 – OTHER OBLIGATIONS;” “– Concentration of Operating Revenues” and “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt.”

The Stop Arm Camera Program revenues are dependent on several factors including (1) a certain minimum number of “failure-to- stop” violations with respect to school busses occurring each year, (2) adequate identification of violators and delivery of citations, and (3) payment of citations by violators in a timely manner. In addition, the Issuer has agreed to pay a monthly service fee and a percentage of citation collections to FMS in exchange for FMS assuming managerial responsibilities for the Stop Arm Camera Program inside and outside Dallas County. See “THE ISSUER – Stop Arm Equipment” and “Note 19 to APPENDIX B – EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016.” If motorist habits change significantly or if violators fail to timely pay fines associated with their citations, the Issuer could lose revenues. The Issuer

13 cannot guarantee there will be sufficient violators who pay their citation fines to generate sufficient revenues to pay the debt service or contractual payments associated with its outstanding obligations in connection with the Stop Arm Camera Program.

The loss of Issuer revenues as discussed above could have a material, negative effect on the Issuer’s ability to pay debt service or contractual payments associated with its outstanding obligations.

Current Legislation

On February 28, 2017, SB1122 was filed with the Texas Legislature and referred to the Education Committee on March 7, 2017. The intent of SB1122 is to abolish Dallas County Schools effective September 1, 2018. Two bills have been filed in the Texas Legislature, SB 1122 and HB 2329, with the intent of abolishing Dallas County Schools and limiting the authority of Dallas County Schools to levy and collect ad valorem taxes.

On February 23, 2017, HB 2329 was filed in the Texas Legislature and referred to the House Education Committee on March 20, 2017. If passed, HB 2329 would provide for the abolishment of the Issuer unless the school districts in Dallas County with 75 percent or more of the student population for all school districts in the County elect each school year to participate in services offered by the Issuer. The bill provides that beginning at the end of the 2017-2018 school year, the Texas Commissioner of Education shall determine at the end of each school year whether the Issuer achieved the required 75 percent participation level during that year. If the Issuer failed to achieve the required level, a dissolution committee will be formed to abolish the Issuer effective September 1 of the year following the year in which the dissolution committee is formed. In addition, HB 2329 would eliminate the Issuer’s authority to levy, assess, or collect its annual ad valorem maintenance tax beginning January 1, 2018. The ad valorem tax formerly assessed by the Issuer would continue to be assessed by Dallas County on behalf of the Issuer solely for the purpose of paying the principal of and interest on any bonds issued before September 1, 2017 until all bonds are paid in full. While Dallas County would levy and asses the $.01 ad valorem tax, the bonds will not become obligations of Dallas County. The Issuer can make no representations regarding the outcome of this legislation or any other action the Texas Legislature may take with respect to the Issuer.

On February 28, 2017, SB 1122 was filed in the Texas Legislature and referred to the Senate Education Committee on March 7, 2017. If passed, SB 1122 would abolish the Issuer effective September 1, 2017. The ad valorem tax assessed by the Issuer would continue to be assessed by Dallas County on behalf of the Issuer for the purpose of paying the principal of and interest on any bonds issued before September 1, 2017 until all bonds are paid in full. After payment of all outstanding bonds, the ad valorem tax would no longer be assessed. While Dallas County would levy and asses the $.01 ad valorem tax, the bonds will not become obligations of Dallas County. SB 1122 was voted out of the Senate with certain amendments allowing for an election in Dallas County in November 2017. If a majority of voters approve the continuation of the Issuer, the dissolution provisions of SB 1122 will not take effect. The Issuer can make no representations regarding the outcome of this legislation, the results of an election, if held, or any other action the Texas Legislature may take with respect to the Issuer.

Bankruptcy Risk

After approval by the Texas Attorney General and registration by the Texas Comptroller of Public Accounts, the Bonds and the Note will have a secured interest in the ad valorem taxes pledged to the payment of principal of and interest on the Bonds and the Note. If the Issuer was to become the debtor in a proceeding under Chapter 9 of the Bankruptcy Code, then the application of ad valorem taxes to pay the Bonds and the Note could be stayed during the proceeding (unless the proceeds of such ad valorem taxes were determined to be “special revenues” within the meaning of the Bankruptcy Code), and it is possible that the terms of the Bonds and the Note and the respective Order and Note Resolution (including amount, rate, security, and tax-related covenants) could be altered by a plan of adjustment, if the bankruptcy court determines that the alterations are fair and equitable and otherwise comply with the requirements of the Bankruptcy Code. Bankruptcy courts are courts of equity with broad discretionary powers, and their decisions can be heavily influenced by the facts in a case, including whether commingled ad valorem tax revenues can be identified, and the overall goal of the Bankruptcy Code to facilitate adjustment of debts. A bankruptcy proceeding, if initiated on behalf of the District, could have an adverse effect on the liquidity and value of the Bonds and the Notes. See “CURRENT FINANCIAL STATUS OF THE ISSUER – Financial Position of the Issuer” for a discussion of the report by the Issuer’s auditor questioning the Issuer’s ability to continue as a going concern and “RISK FACTORS – Concentration of Operating Revenues” for a discussion of the Issuer’s revenue sources and their potential impact on the Issuer’s financial condition.

Appropriation of Contract Payments

Notwithstanding that the Issuer’s capital leases are generally structured to provide that contract payments required in connection with the capital leases (the “Contract Payments”) are subject to annual appropriation of funds by the Issuer’s Board of Trustee, several of the Issuer’s capital leases provide that any failure to annual appropriate the Contract Payments constitutes an event of

14 default. An event of default under such capital leases could trigger additional defaults under separate Issuer lease agreements with cross default provisions. See “CURRENT FINANCIAL STATUS OF THE ISSUER – Outstanding Debt.”

Key Leadership Retention

The Issuer’s future operations will depended on the vision and commitment of a few, key personnel. The inability to hire a permanent Superintendent and/or the loss of any key personnel could adversely affect the Issuer’s plans, operations, ability to retain contracts with area school districts and ultimately its financial results.

Marketability of the Bonds

The Issuer does not intend to apply for a credit rating by any rating agency of the Bonds or Note. The absence of a rating could adversely affect the ability to sell the Bonds or Note or the price at which the Bonds or Note can be sold. No assurance can be given that a secondary market for the Bonds or Note will develop following the completion of the offering of the Bonds or Note.

THE BONDS AND THE NOTE

Purpose of the Bonds

Purpose of the Note

Proceeds from the sale of the Note will be used to (i) pay maintenance expenses of the Issuer, and (ii) pay the costs associated with the issuance of the Note.

Description of the Bonds

The Bonds will be dated May 1, 2017 and will accrue interest from the Delivery Date, which is the date of their delivery to the Underwriter, and such interest is payable on December 1, 2017 and each June 1 and December 1 thereafter, until maturity. The Bonds will mature on the dates, in the principal amounts, and will bear interest at the rates set forth on page ii of this Limited Offering Memorandum, and such interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months.

Interest on the Bonds is payable to the registered owner appearing on the registration books of the Paying Agent/Registrar on the Record Date (as defined below) and such interest shall be paid by the Paying Agent/Registrar (i) by check sent by United States Mail, first class postage prepaid, to the address of the registered owner recorded in the register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. The principal of the Bonds is payable only at maturity, upon their presentation and surrender to the Paying Agent/Registrar; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Bonds, all payments will be made as described under “THE BONDS - Book-Entry-Only System” herein. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, a legal holiday, or a day when banking institutions in the city where the designated corporate office of the Paying Agent/Registrar is located is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day when banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due.

The Bonds will be issued only in fully registered form and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. The Bonds will be issued in minimum denominations of $100,000 of principal amount and increments of $5,000 thereafter within a maturity. No physical delivery of the Bonds will be made to the beneficial owners thereof. The principal of and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See “THE BONDS - Book- Entry-Only System” herein.

Description of the Note

The Note will be dated May 1, 2017 and will accrue interest from the Delivery Date with and such interest is payable on March 1, 2018 and at maturity on June 15, 2018. The Note will mature on the date, in the principal amount, and will bear interest at the rate

15 set forth on page iii of this Limited Offering Memorandum, and such interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The Note will be issued in minimum denominations of $100,000 of principal amount and increments of $5,000 thereafter.

Interest on the Note is payable to the registered owner appearing on the registration books of the Paying Agent/Registrar on the Record Date (as defined below) and such interest shall be paid by the Paying Agent/Registrar (i) by check sent by United States Mail, first class postage prepaid, to the address of the registered owner recorded in the register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. The principal of the Note is payable only at maturity, upon its presentation and surrender to the Paying Agent/Registrar; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Note, all payments will be made as described under “THE BONDS AND THE NOTE - Book-Entry-Only System” herein. If the date for the payment of the principal of or interest on the Note shall be a Saturday, Sunday, a legal holiday, or a day when banking institutions in the city where the designated corporate office of the Paying Agent/Registrar is located is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day when banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due.

The Note will be issued only in fully registered form and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. No physical delivery of the Note will be made to the beneficial owners thereof. The principal of and interest on the Note will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See “THE BONDS AND THE NOTE - Book- Entry-Only System” herein.

Authority for Issuance of the Bonds

The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas (the “State”), particularly Chapter 1207, Texas Government Code, and an order (the “Order”) adopted by the Board.

Authority for Issuance of the Note

The Note is being issued pursuant to the Constitution and general laws of the State, particularly Chapter 45, Texas Education Code and a resolution (the “Note Resolution”) adopted by the Board.

Security and Source of Payment for the Bonds and the Note

During each year while any Bond or Note is outstanding and unpaid, the Bonds and the Note will be payable from and secured by the proceeds of a direct and continuing annual ad valorem tax levied for maintenance and operations purposes by the Issuer, within the limits of $0.01 per $100 of taxable valuation as prescribed by law, on all taxable property located within the County. (See “TAX RATE LIMITATIONS” herein.

The Bonds and the Note will be issued on parity with the Issuer’s: (i) Public Property Finance Contractual Obligations, Series 2012-A maturing December 1, 2019 and June 1, 2020, (ii) Public Property Finance Contractual Obligations, Series 2014 maturing in years 2020-2022, and (iii) Public Property Finance Contractual Obligations, Taxable Series 2014 maturing in years 2021-2022.

The Deposit Account and the Debt Service Fund

The Order and the Note Resolution, establish a Control Agreement (the “Control Agreement”) between the Issuer and Bank of America National Association (the “Depository”). Under the terms of the Control Agreement, the Issuer has instructed its Depository to annually transfer amounts sufficient to pay the principal and interest due on the next two payment dates for the Bonds and the Notes to each respective Debt Service Fund held by U.S. Bank National Association as Trustee (the “Trustee”). Furthermore, the Depository shall not release any funds to the Issuer during the calendar year until sufficient ad valorem tax revenue has been transferred to the Trustee for deposit into each Debt Service Fund.

Under the terms of the Order and the Note Resolution and each Trustee, Paying Agent and Registrar Agreement, the Trustee holds each Debt Service Fund for the benefit of the holders of the Bonds and the Notes and has been granted the authority to pursue any and all remedies permitted by law to ensure that sufficient funds are held in each Debt Service Fund.

Issuance of Additional Bonds

Subject to certain conditions described below, the Issuer has reserved the right to issue additional Debt which is secured by the ad valorem taxes and issued on parity with the Bonds, the Note and other obligations set forth in Figure 2 (collectively, the “Parity Obligations”). Assuming that no Event of Default has occurred or will result from the issuance of any additional obligations, such additional obligations may be issued if the following condition is met:

A Certificate by the Issuer’s Director of Finance setting forth the estimated ad valorem tax revenue based on certified tax roll of the Issuer for the Fiscal Year in which the proposed debt will be issued will be not less than 115% of the maximum annual debt service for all Parity Obligations including the proposed additional obligations; provided that such restriction shall not apply to refunding or refinancing of any Parity Obligations as long as the annual debt service is not increased. With respect to all Parity Obligations except the Bonds, the District further covenants to annually reserve the necessary funds in the respective debt service funds and from the sources set forth in the Orders and Resolutions authorizing their issuance

Redemption

The Bonds …The Bonds maturing on and after December 1, 2019, are subject to optional redemption in whole or in part on December 1, 2018, or any date thereafter, at a price equal to the par value thereof, plus accrued interest from the most recent interest payment date to the date of redemption. If a Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date.

The Note… The Note is subject to optional redemption in whole or in part on March 1, 2018, or any date thereafter, at a price equal to the par value thereof, plus accrued interest to the date of redemption.

Notice of Redemption for the Bonds

Not less than 30 days prior to a redemption date for the Bonds, the Paying Agent/Registrar shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Bonds to be redeemed, in whole or in part at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE.

The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the District will reduce the outstanding principal amount of such Bonds held by DTC. In such an event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the District or the Paying Agent/Registrar. Neither the District nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. See “THE BONDS AND THE NOTE–Book-Entry-Only System” herein.

Defeasance

The Order and the Note Resolution provide for the defeasance of the Bonds or the Note in any manner permitted by law. Under current Texas law, defeasance would include when payment of the principal amount of and interest on the Bonds or the Note to their due date (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with the Paying Agent/Registrar, or a trust company or commercial bank authorized to serve as Escrow Agent, (a) cash in an amount sufficient to make such payment or (b) pursuant to an escrow or trust agreement, cash and/or (1) direct, non-callable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) non-callable obligations of an agency or instrumentality of the United States of America, including obligations that are

17 unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent, and (3) non-callable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent, the principal and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other money, if any, held in such escrow, will be sufficient to provide for the timely payment of the principal of and interest on such Bonds to their due date. Upon such deposit as described above, such Bonds and the Note shall no longer be regarded to be outstanding obligations for purposes of applying any limitation on indebtedness or for purposes of taxation.

Upon such deposit as described above, such Bonds and the Note shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds and the Note have been made, as described above, all rights of the Issuer to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds and the Note for redemption is not extinguished, if the Issuer (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (ii) gives notice of the reservation of that right to the owners of the Bonds and the Note immediately following the making of the firm banking and financial arrangements, and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes.

There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds and the Note. Because the Order and Note Resolution do not contractually limit such investments, registered owners are deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law.

Book-Entry-Only System

This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by DTC while the Bonds and the Note are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Limited Offering Memorandum. The Issuer, the Financial Advisor, the Underwriter believes the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof.

The Issuer cannot and does not give any assurance that (1) DTC will distribute payment of debt service on the Bonds and the Note, or notices to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds and the Note), or notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Limited Offering Memorandum. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC.

DTC will act as securities depository for the Bonds and the Note. The Bonds and the Note will be issued as fully-registered securities 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 certificate will be issued for the Bonds and the Note, in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 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, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is a holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of: “AA+.” The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of Bonds and Note under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds and Note on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmation providing details of the transaction, as well as periodic statements of their holdings from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds and Note 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 physical certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds and Note is discontinued.

To facilitate subsequent transfers, all Bonds and the Note 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 with DTC and their registration in the name of Cede & Co. or such other DTC nominee, do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds and the Note are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds and the Note may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as tenders, defaults and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds and the Note may wish to ascertain that the nominee holding the Bonds and the Note for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds and the Note unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Bonds and the Note are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Bonds and the Note 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 Issuer or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest payments on the Bonds and the Note to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Paying Agent/Registrar. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and reimbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds and the Note at any time by giving reasonable notice to the Issuer or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. Discontinuance by the Issuer of use of the system of book- entry transfers through DTC may require compliance with DTC operational arrangements.

The Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). Discontinuance of the system of book-entry transfers by the Issuer may require the consent of Participants under DTC’s Operational Arrangements. In that event, Bond certificates will be printed and delivered.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Issuer believes to be reliable, but none of the Issuer, the Financial Advisor or the Underwriters take responsibility for the accuracy thereof.

Use of Certain Terms in Other Sections of this Limited Offering Memorandum.

In reading this Limited Offering Memorandum it should be understood that while the Bonds and the Note are in the Book-Entry- Only System, references in other sections of this Limited Offering Memorandum to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC

19 and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC.

Paying Agent/Registrar

The initial Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas. In the Order and the Note Resolution, the Issuer retains the right to replace the Paying Agent/Registrar. The Issuer covenants to maintain and provide a Paying Agent/Registrar at all times while any Bonds or the Note are outstanding and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds and the Note. Upon any change in the Paying Agent/Registrar for the Bonds and the Note, the Issuer agrees promptly to cause a written notice thereof to be sent to each registered owner of the Bonds and the Note by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar.

In the Order, the Paying Agent/Registrar has been designated as a Trustee over the Debt Service Fund and also has been designated the Bondholder Trustee with respect to the remedies following nay Event of Default.

Transfer, Exchange and Registration

In the event the Book-Entry-Only System should be discontinued, the Bonds or the Note may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender thereof to the Paying Agent/Registrar at its designated payment office and such transfer or exchange shall be without expenses or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds or the Note may be assigned by the execution of an assignment form on the Bonds or Note or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds or Note will be delivered by the Paying Agent/Registrar, in lieu of the Bond or Bonds or the Note being transferred or exchanged, at the designated payment office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds or Note issued in an exchange or transfer of Bonds or the Note will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds or the Note to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds or Note registered and delivered in an exchange or transfer shall be in minimum of $100,000 and any integral multiple of $5,000 of principal or Maturity Amount for any one maturity and for a like aggregate principal amount as the Bond or Bonds or Note surrendered for exchange or transfer. See “THE BONDS-Book-Entry-Only System” herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds.

Record Date for Interest Payment

The record date (“Record Date”) for the interest payable on the Bonds or Note on any interest payment date means the close of business on the fifteenth business day of the month next preceding such interest payment date. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a “Special Record Date”) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest (“Special Payment Date,” which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each holder of a Bond or Note appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice.

BONDHOLDERS’ REMEDIES

The Order provides for the appointment of a trustee to represent the interests of the registered owners upon any failure of the Issuer to perform in accordance with the terms of the Order or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Order. Furthermore, the Order establishes specific events of default with respect to the Bonds however, under State law, there is no right to the acceleration of maturity of the Bonds upon the failure of the Issuer to observe any covenant under the Order. The Trustee or any registered owner of Bonds could seek a judgment against the Issuer if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the Issuer and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the Issuer to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes due or perform other material terms and covenants contained in the Order. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to

20 perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis.

The Issuer is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity, which has sought protection under Chapter 9. Therefore, should the Issuer avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of another federal or state court); and, the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors including rights afforded to creditors under the Bankruptcy.

TAX RATE LIMITATIONS

Pursuant to Article VII, Section 3 of the Texas Constitution, the Issuer may levy an ad valorem tax only if such tax has been approved by the voters within the County. The Issuer’s ad valorem tax was authorized pursuant to Chapter 182, Acts of the 44th Legislature, (1935) and Article 2790e, Vernon’s Texas Civil Statutes (as codified as Chapter 18, Texas Education Code), and an election held within Dallas County on August 24, 1940. Such tax is limited to $0.01 per $100 of assessed valuation and limited to operations and maintenance purposes. The Issuer is prohibited from levying a tax above $0.01 per $100 of assessed valuation. The Office of the Attorney General of Texas has taken the position that the repealed statutes governing county-unit school districts, including the Issuer, do not allow citizens to petition the district to increase the tax rate. Under this interpretation, the county-unit school districts are not authorized to submit a proposition to the voters to increase the maximum tax rate.

The Issuer is not authorized to issue bonds and levy taxes for payment of bonds subject to voter approval under Section 45.003(b)(1), Texas Education Code, as amended, which provides a tax unlimited as to rate or amount for the support of school district bonded indebtedness.

STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS

The Issuer receives a portion of its revenues through state and local funding of school districts. However, the majority of the Issuer’s revenues are derived from charges for services rendered to the Issuer’s client school districts. The remainder of the Issuer’s revenues are derived from a local property tax, the rate of which may not exceed the legal limit of $0.01 per $100 of taxable valuation. See “RISK FACTORS-Concentration of Operating Revenues” and “CURRENT FINANCIAL STATUS OF THE ISSUER” herein.

Litigation Relating to the Texas Public School Finance System

On seven occasions in the last thirty years, the Texas Supreme Court (the “Court”) has issued decisions assessing the constitutionality of the Texas public school finance system (the “Finance System”). The litigation has primarily focused on whether the Finance System, as amended by the Texas Legislature (the “Legislature”) from time to time (i) met the requirements of article VII, section 1 of the Texas Constitution, which requires the Legislature to “establish and make suitable provision for the support and maintenance of an efficient system of public free schools,” or (ii) imposed a statewide ad valorem tax in violation of article VIII, section 1-e of the Texas Constitution because the statutory limit on property taxes levied by school districts for maintenance and operation purposes had allegedly denied school districts meaningful discretion in setting their tax rates. In response to the Court’s previous decisions, the Legislature enacted multiple laws that made substantive changes in the way the Finance System is funded in efforts to address the prior decisions declaring the Finance System unconstitutional.

On May 13, 2016, the Court issued its opinion in the most recent school finance litigation, Morath, et.al v. The Texas Taxpayer and Student Fairness Coalition, et al., No. 14-0776 (Tex. May 13, 2016) (“Morath”). The plaintiffs and intervenors in the case had alleged that the Finance System, as modified by the Legislature in part in response to prior decisions of the Court, violated article VII, section 1 and article VIII, section 1-e of the Texas Constitution. In its opinion, the Court held that “[d]espite the imperfections of the current school funding regime, it meets minimum constitutional requirements.” The Court also noted that:

Lawmakers decide if laws pass, and judges decide if those laws pass muster. But our lenient standard of review in this policy-laden area counsels modesty. The judicial role is not to second-guess whether our

system is optimal, but whether it is constitutional. Our Byzantine school funding "system" is undeniably imperfect, with immense room for improvement. But it satisfies minimum constitutional requirements.

Possible Effects of Changes in Law on Issuer Bonds

The Court’s decision in Morath upheld the constitutionality of the Finance System but noted that the Financing System was “undeniably imperfect.” While not compelled by the Morath decision to reform the Finance System, the Legislature could enact future changes to the Finance System. Any such changes could benefit or be a detriment to the Issuer. If the Legislature enacts future changes to, or fails adequately to fund the Finance System, or if changes in circumstances otherwise provide grounds for a challenge, the Finance System could be challenged again in the future. In its 1995 opinion in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995), the Court stated that any future determination of unconstitutionality “would not, however, affect the district’s authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system’s unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions” (collectively, the “Contract Clauses”), which prohibit the enactment of laws that impair prior obligations of contracts.

Although, as a matter of law, the Bonds and the Note, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the Issuer can make no representations or predictions concerning the effect of future legislation, or any litigation that may be associated with such legislation, on the Issuer’s financial condition, revenues or operations. While the enactment of future legislation to address school funding in Texas could adversely affect the financial condition, revenues or operations of the Issuer, the Issuer does not anticipate that the security for payment of the Bonds and the Note, specifically, the Issuer’s obligation to levy a direct and continuing annual ad valorem tax for maintenance and operations at a rate of $0.01 per $100 of taxable valuation. See “CURRENT PUBLIC SCHOOL FINANCE SYSTEM.”

CURRENT PUBLIC SCHOOL FINANCE SYSTEM

The Current School Finance System as it Applies to the Issuer

As described above, State funding for school districts is provided through the Foundation School Program, which provides each school district with a minimum level of funding (a “Basic Allotment”) for each student in average daily attendance. Because the Issuer does not provide classroom education for any students, the Issuer derives no State funding from the funding formulas that take into account student attendance. Consequently, all of the Issuer’s State funding is derived from the Transportation Allotment (as defined below).

The Texas Education Code authorizes the board of trustees of each school district, county-unit system (such as the Issuer), charter school, or other local education agency to establish and operate (or alternatively contract with a mass transit authority, commercial transportation company, or county juvenile board) to provide an economical public school transportation system and provides for the allotment of State Foundation School Program funds (the “Transportation Allotment”) for eligible student transportation. The Transportation Allotment is one of seven programs funded through the Tier 1 category of the Foundation School Program. The Transportation Allotment is reimbursed to school districts based on the number of miles driven on different categories of routes. The reimbursable routes are (1) Regular Education Program, (2) Special Education, (3) career and technology education (CTE) and (4) Private Transportation.

The Transportation Allotment for the Regular Education Program is derived from the daily cost of operating and maintaining the regular transportation system per regular eligible student, and the “linear density” of that system. Linear density is the average number of regular eligible students transported daily, divided by the approved daily route miles traveled in the district. A “regular eligible student” means a student who resides two or more miles from the student’s campus of regular attendance, measured along the shortest route that may be traveled on public roads, and who is not classified as a student eligible for Special Education services. Eligible route miles do not include extracurricular miles (which are school activity trips and other non-instructional purposes such as field trips, athletics practice, sporting events, school club meetings, band/cheer competitions, animal shows or competitions, or between-campus transportation for meals). The allotments per mile of approved Regular Education Program routes is set by appropriation by the Legislature in the General Appropriations Act and have not changed since 1984. If the allotments remain unchanged, the only method to increase State funding revenues is to drive more eligible miles, which may not be practical or possible.

For the Issuer’s 2016 and 2017 fiscal years, the appropriation for funding Regular Education Program route miles is calculated on the following basis:

Linear Density Allocation per mile of Grouping Approved Route 2.40 and above $1.43 1.65 to 2.399 $1.25 1.15 to 1.649 $1.11 0.90 to 1.149 $0.97 0.65 to 0.899 $0.88 0.40 to 0.649 $0.79 Up to 0.399 $0.68

The Issuer is in the fourth-highest linear density group, qualifying for a reimbursement of $0.97 per mile for Regular Education Program route miles. The linear density is calculated each year using the Issuer’s preceding school year’s effective linear density and costs per mile. The effective linear density is applied to the legislative linear density groupings shown in the table above to determine a rate per mile.

Each school district that is provided student transportation by the Issuer is reimbursed based on miles of service provided. The Issuer receives the Transportation Allotment from the State and credits the funds to the cost of transportation for each district; the total funds received by the Issuer from the State are credited to each school district based upon the route miles allocable to each district divided by the total eligible route miles driven by the Issuer. These funds are used to offset the amount owed to the Issuer by each district for transportation services.

Transportation for Special Education students is not based on the linear density allocation but rather is based on the cost per mile for the Issuer’s preceding school year, not to exceed the legislated maximum, which is $1.08 per mile. The cost per mile of transporting Special Education students exceeds $3.00 per mile, therefore the Issuer is reimbursed the maximum $1.08 per mile. Transportation for CTE students is based on the actual number of miles traveled and the travel rate per mile for extracurricular activities as determined by the school district board of trustees and approved by TEA.

Under TEA guidelines, a district may provide a Private Transportation program, which reimburses eligible students for transportation provided by a parent or public transit. To be eligible, students must live in geographically isolated areas two or more miles from their home school and from the nearest available school bus route. By law, determining eligibility for reimbursement for Private Transportation must be made on a case-by-case basis, and only approved in extreme hardship cases. Private Transportation is funded at the rate of $0.25 per mile, with a maximum annual amount of $816 per student. State funding received from the Transportation Allotment must be used to provide transportation services. The Issuer does not administer Private Transportation for its client school districts; each district administers its own Private Transportation program.

Additionally, as discussed above under the subcaption “Wealth Transfer Provisions” some districts have sufficient property wealth per student in WADA to generate their statutory level of funding through collections of local property taxes alone, and those districts are subject to the wealth equalization provisions contained in Chapter 41 of the Texas Education Code, as amended. Because the Issuer does not have provide classroom education for students, it does not have a WADA calculation and, under current law, cannot be a Chapter 41 district.

This Issuer also makes available private transportation rentals to public and non-profit private entities. These rentals are established by the Issuer and governed by the Issuer’s policies regarding the extent to which the Issuer will provide private rental transportation. Costs of private rentals are paid by the renter, and the TEA provides no State aid for such activities.

See “APPENDIX A – Table 10 – SCHEDULE OF CHANGES IN NET ASSETS” for a listing of the Issuer’s revenue sources which shows a line-item for State funding revenues.

Overview

The following language constitutes only a summary of the Finance System as it is currently structured. For a more complete description of school finance and fiscal management in the State, reference is made to Vernon’s Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended.

Funding for school districts in the State is provided primarily from State and local sources. State funding for all school districts is provided through a set of funding formulas comprising the “Foundation School Program,” as well as two facilities funding

23 programs. Generally, the Finance System is designed to promote wealth equalization among school districts by balancing State and local sources of funds available to school districts. In particular, because districts with relatively high levels of property wealth per student can raise more local funding, such districts receive less State aid, and in some cases, are required to disburse local funds to equalize their overall funding relative to other school districts. Conversely, because districts with relatively low levels of property wealth per student have limited access to local funding, the Finance System is designed to provide more State funding to such districts. Thus, as a school district’s property wealth per student increases, State funding to the school district is reduced. As a school district’s property wealth per student declines, the Finance System is designed to increase that district’s State funding. The Finance System provides a similar equalization system for facilities funding wherein districts with the same tax rate for debt service raise the same amount of combined State and local funding. Facilities funding for debt incurred in prior years is expected to continue in future years; however, State funding for new school facilities has not been consistently appropriated by the Texas Legislature, as further described below.

Local funding is derived from collections of ad valorem taxes levied on property located within each district’s boundaries. School districts are authorized to levy two types of property taxes: a limited maintenance and operations (“M&O”) tax to pay current expenses and an unlimited interest and sinking fund (“I&S”) tax to pay debt service on bonds. Generally, under current law, M&O tax rates are subject to a statutory maximum rate of $1.17 per $100 of taxable value for most school districts. (Although a few districts can exceed the $1.17 limit as a result of authorization approved in the 1960s.) Current law also requires school districts to demonstrate their ability to pay debt service on outstanding indebtedness through the levy of an ad valorem tax at a rate of not to exceed $0.50 per $100 of taxable property at the time bonds are issued. Once bonds are issued, however, districts may levy a tax to pay debt service on such bonds unlimited as to rate or amount (see “TAX RATE LIMITATIONS”). As noted above, because property values vary widely among school districts, the amount of local funding generated by the same tax rate is also subject to wide variation among school districts.

Local Funding for School Districts

The primary source of local funding for school districts is collections from ad valorem taxes levied against taxable property located in each school district. Prior to reform legislation that became effective during the 2006-07 fiscal year (the “Reform Legislation”), the maximum M&O tax rate for most school districts was generally limited to $1.50 per $100 of taxable value at the time the Reform Legislation was enacted and the majority of school districts were levying an M&O tax rate of $1.50 per $100 of taxable value. The Reform Legislation required each school district to “compress” its tax rate by an amount equal to the “State Compression Percentage.” For fiscal years 2007–08 through 2016-17, the State Compression Percentage has been set at 66.67%, effectively setting the maximum compressed M&O tax rate for most school districts at $1.00 per $100 of taxable value. The State Compression Percentage is set by legislative appropriation for each State fiscal biennium or, in the absence of legislative appropriation, by the Commissioner. School districts are permitted, however, to generate additional local funds by raising their M&O tax rate by up to $0.04 above the compressed tax rate without voter approval (for most districts, up to $1.04 per $100 of taxable value). In addition, if the voters approve a tax rate increase through a local referendum, districts may, in general, increase their M&O tax rate up to a maximum M&O tax rate of $1.17 per $100 of taxable value and receive State equalization funds for such taxing effort (see “AD VALOREM TAX PROCEDURES – Public Hearing and Rollback Tax Rate” herein). Elections authorizing the levy of M&O taxes held in certain school districts under older laws, however, may subject M&O tax rates in such districts to other limitations (See “TAX RATE LIMITATIONS” herein).

State Funding for School Districts

State funding for school districts is provided through the Foundation School Program, which provides each school district with a minimum level of funding (a “Basic Allotment”) for each student in average daily attendance (“ADA”). The Basic Allotment is calculated for each school district using various weights and adjustments based on the number of students in average daily attendance and also varies depending on each district’s compressed tax rate. This Basic Allotment formula determines most of the allotments making up a district’s basic level of funding, referred to as “Tier One” of the Foundation School Program. The basic level of funding is then “enriched” with additional funds known as “Tier Two” of the Foundation School Program. Tier Two provides a guaranteed level of funding for each cent of local tax effort that exceeds the compressed tax rate (for most districts, M&O tax rates above $1.00 per $100 of taxable value). The Finance System also provides an Existing Debt Allotment (“EDA”) to subsidize debt service on eligible outstanding school district bonds and an Instructional Facilities Allotment (“IFA”) to subsidize debt service on newly issued bonds. IFA primarily addresses the debt service needs of property-poor school districts. A New Instructional Facilities Allotment (“NIFA”) also is available to help pay operational expenses associated with the opening of a new instructional facility; however, NIFA awards were not funded by the Legislature for either the 2012–13 or the 2014-15 State fiscal biennium. In 2015, the 84th Texas Legislature did appropriate funds in the amount of $1,445,100,000 for the 2016-17 State fiscal biennium for an increase in the Basic Allotment, EDA, IFA, and NIFA support, as further described below.

Tier One and Tier Two allotments represent the State’s share of the cost of M&O expenses of school districts, with local M&O taxes representing the district’s local share. EDA and IFA allotments supplement a school district’s local I&S taxes levied for debt

24 service on eligible bonds issued to construct, acquire and improve facilities. Tier One and Tier Two allotments and existing EDA and IFA allotments are generally required to be funded each year by the Texas Legislature. Since future-year IFA awards were not funded by the Texas Legislature for the 2014–15 fiscal biennium or the 2015-16 school year and debt service assistance on school district bonds that are not yet eligible for EDA is not available, debt service on new bonds issued by districts to construct, acquire and improve facilities must be funded solely from local I&S taxes. For the 2016-17 school year, the Texas Legislature has appropriated $55.5 million for IFA allotments.

Tier One allotments are intended to provide all districts a basic level of education necessary to meet applicable legal standards. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that basic program at a level of its own choice; however, Tier Two allotments may not be used for the payment of debt service or capital outlay.

As described above, the cost of the basic program is based on an allotment per student known as the “Basic Allotment”. For fiscal year 2016-17, the Basic Allotment is $5,140 for each student in average daily attendance. The Basic Allotment is then adjusted for all districts by several different weights to account for inherent differences between school districts. These weights consist of (i) a cost adjustment factor intended to address varying economic conditions that affect teacher hiring known as the “cost of education index”, (ii) district-size adjustments for small and mid-size districts and (iii) an adjustment for the sparsity of the district’s student population. The cost of education index and district-size adjustments applied to the Basic Allotment, create what is referred to as the “Adjusted Allotment”. The Adjusted Allotment is used to compute a “regular program allotment,” as well as various other allotments associated with educating students with other specified educational needs.

Tier Two supplements the basic funding of Tier One and provides two levels of enrichment with different guaranteed yields (i.e., guaranteed levels of funding by the State) depending on the district’s local tax effort. The first six cents of tax effort that exceeds the compressed tax rate (for most districts, M&O tax rates ranging from $1.01 to $1.06 per $100 of taxable value) will, for most districts, generate a guaranteed yield of $74.28 and $77.53 per cent per weighted student in average daily attendance (“WADA”) for the fiscal year 2015-16 and fiscal year 2016-17, respectively. The second level of Tier Two is generated by tax effort that exceeds the district’s compressed tax rate plus six cents (for most districts eligible for this level of funding, M&O tax rates ranging from $1.06 to $1.17 per $100 of taxable value) and has a guaranteed yield per cent per WADA of $31.95 for fiscal years 2015-16 and 2016-17. Property-wealthy school districts that have an M&O tax rate that exceeds the district’s compressed tax rate plus six cents are subject to recapture above this tax rate level at the equivalent wealth per student of $319,500 (see “Wealth Transfer Provisions” below).

Because districts with compressed rates of less than $1.00 have not been receiving the full Basic Allotment, the 84th Texas Legislature amended the Foundation School Program to enable some districts (known as “fractionally funded districts”) to increase their Tier One participation by moving the district’s local tax effort that would be equalized under Tier Two at $31.95 per penny to the Tier One Basic Allotment. The compressed tax rate of a school district that adopted a 2005 M&O Tax Rate below the maximum $1.50 tax rate for the 2005 tax year can now include the portion of a district’s current M&O tax rate in excess of the first six cents above the district’s compressed tax rate until the district’s compressed tax rate is equal to the state maximum compressed tax rate of $1.00, thereby eliminating the penalty against the Basic Allotment. For these districts, each one cent of M&O tax levy above the district’s compressed tax rate plus six cents, will have a guaranteed yield based on Tier One funding instead of the $31.95 Tier Two yield for the fiscal year 2015-16 and fiscal year 2016-17. These conversions are optional for each applicable district in the 2015-16 and 2016-17 fiscal years and are automatic beginning in the 2017-18 fiscal year.

In addition to the operations funding components of the Foundation School Program discussed above, the Foundation School Program provides a facilities funding component consisting of the Instructional Facilities Allotment (IFA) program and the Existing Debt Allotment (EDA) program. These programs assist school districts in funding facilities by, generally, equalizing a district’s I&S tax effort. The IFA guarantees each awarded school district a specified amount per student (the “IFA Guaranteed Yield”) in State and local funds for each cent of tax effort to pay the principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. The guaranteed yield per cent of local tax effort per student in ADA has been $35 since this program first began in 1997. To receive an IFA award, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with IFA state assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in ADA. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance for such bonds without reapplying to the Commissioner. The guaranteed level of State and local funds per student per cent of local tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. For the fiscal years 2011-12 through 2015-16, no funds were appropriated for new IFA awards by the Texas Legislature, although all prior awards were funded throughout such periods. The 84th Texas Legislature appropriated funds in the amount of $55,500,000 for new IFA awards to be made during the 2016-17 fiscal year only.

State financial assistance is provided for certain existing eligible debt issued by school districts through the EDA program. The EDA guaranteed yield (the “EDA Yield”) is the same as the IFA Guaranteed Yield ($35 per cent of local tax effort per student in ADA), subject to adjustment as described below. For bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance was less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations granted to the Commissioner under State law. The portion of a district’s local debt service rate that qualifies for EDA assistance is limited to the first 29 cents of debt service tax (or a greater amount for any year provided by appropriation by the Texas Legislature). In general, a district’s bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final fiscal year of the preceding State fiscal biennium or (ii) the district levied taxes to pay the principal of and interest on the bonds for that fiscal year. Each biennium, access to EDA funding is determined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives IFA funding.

A district may also qualify for a NIFA allotment, which provides assistance to districts for operational expenses associated with opening new instructional facilities. For the 2012-13 and 2014-15 State fiscal biennia, no funds were appropriated by the Texas Legislature for new NIFA allotments. The 84th Texas Legislature did appropriate funds in the amount of $23,750,000 for each of the 2015-16 and 2016-17 fiscal years for NIFA allotments.

2006 Legislation

Since the enactment of the Reform Legislation in 2006, most school districts in the State have operated with a “target” funding level per student (“Target Revenue”) that is based upon the “hold harmless” principles embodied in the Reform Legislation. This system of Target Revenue was superimposed on the Foundation School Program and made existing funding formulas substantially less important for most school districts. As noted above, the Reform Legislation was intended to lower M&O tax rates in order to give school districts “meaningful discretion” in setting their M&O tax rates, while holding school districts harmless by providing them with the same level of overall funding they received prior to the enactment of the Reform Legislation. Under the Target Revenue system, each school district is generally entitled to receive the same amount of revenue per student as it did in either the 2005–2006 or 2006–07 fiscal year (under existing laws prior to the enactment of the Reform Legislation), as long as the district adopted an M&O tax rate that was at least equal to its compressed rate. The reduction in local M&O taxes resulting from the mandatory compression of M&O tax rates under the Reform Legislation, by itself, would have significantly reduced the amount of local revenue available to fund the Finance System. To make up for this shortfall, the Reform Legislation authorized Additional State Aid for Tax Reduction (“ASATR”) for each school district in an amount equal to the difference between the amount that each district would receive under the Foundation School Program and the amount of each district’s Target Revenue funding level. However, in subsequent legislative sessions, the Texas Legislature has gradually reduced the reliance on ASATR by increasing the funding formulas. This phase-out of ASATR began with actions adopted by the 83rd Texas Legislature. Beginning with the 2017- 18 school year, the statutes authorizing ASATR are repealed.

2015 Legislation

On January 13, 2015, the 84th Texas Legislature convened in regular session, which ended on June 1, 2015. As a general matter, the 84th Texas Legislature did not enact substantive changes to the Finance System. However, of note, Senate Joint Resolution 1, passed during the 84th Texas Legislature, proposed a constitutional amendment increasing the mandatory homestead exemption for school districts from $15,000 to $25,000 and requiring that the tax limitation for taxpayers who are age 65 and older or disabled be reduced to reflect the additional exemption. On November 3, 2015, voters approved this constitutional amendment.

Senate Bill 1, which was also passed during the 84th Texas Legislature and was signed by the Governor on June 15, 2015, provides for additional state aid to hold school districts harmless for tax revenue losses resulting from the increased homestead exemption. Any hold harmless funding for future biennia must be approved in future legislative sessions, and the Issuer can make no representations that such funding will occur. Senate Bill 1 also prohibits a school district from reducing the amount of or repealing an optional homestead exemption that was in place for the 2014 tax year (fiscal year 2015) for a period running through December 31, 2019. An optional homestead exemption reduces both the tax revenue and State aid received by a school district.

2017 Legislation

On January 10, 2017 the 85th Texas Legislature convened in general session, which is scheduled to end on May 29, 2017. Thereafter, the Governor may call one or more additional special sessions. During this time the Texas Legislature may enact laws that materially change school district finance, appropriations, or statutory authority related thereto. The Issuer can make no representations regarding the actions the Texas Legislature may take.

Wealth Transfer Provisions

Some districts have sufficient property wealth per student in WADA (“wealth per student”) to generate their statutory level of funding through collections of local property taxes alone. Districts whose wealth per student generates local property tax collections in excess of their statutory level of funding are referred to as “Chapter 41” districts because they are subject to the wealth equalization provisions contained in Chapter 41 of the Texas Education Code. Chapter 41 districts may receive State funds for certain competitive grants and a few programs that remain outside the Foundation School Program, as well as receiving ASATR until their overall funding meets or exceeds their Target Revenue level of funding. Otherwise, Chapter 41 districts are not eligible to receive State funding. Furthermore, Chapter 41 districts must exercise certain options in order to reduce their wealth level to equalized wealth levels of funding, as determined by formulas set forth in the Reform Legislation. For most Chapter 41 districts, this equalization process entails paying the portion of the district’s local taxes collected in excess of the equalized wealth levels of funding to the State (for redistribution to other school districts) or directly to other school districts with a wealth per student that does not generate local funds sufficient to meet the statutory level of funding, a process known as “recapture”.

The equalized wealth levels that subject Chapter 41 districts to wealth equalization measures for fiscal year 2016-17 are set at (i) $514,000 per student in WADA with respect to that portion of a district’s M&O tax effort that does not exceed its compressed tax rate (for most districts, the first $1.00 per $100 of taxable value) and (ii) $319,500 per WADA with respect to that portion of a district’s M&O tax effort that is beyond its compressed rate plus $.06 (for most districts, M&O taxes levied above $1.06 per $100 in taxable value). M&O taxes levied above $1.00 but below $1.07 per $100 of taxable value are not subject to the wealth equalization provisions of Chapter 41. Chapter 41 districts with a wealth per student above the lower equalized wealth level but below the higher equalized wealth level must equalize their wealth only with respect to the portion of their M&O tax rate, if any, in excess of $1.06 per $100 of taxable value. Chapter 41 districts may be entitled to receive ASATR from the State in excess of their recapture liability of $514,000 for the 2016-17 school year, and certain of such districts may use their ASATR funds to offset their recapture liability.

Under Chapter 41, a district has five options to reduce its wealth per student so that it does not exceed the equalized wealth levels: (1) a district may consolidate by agreement with one or more districts to form a consolidated district; all property and debt of the consolidating districts vest in the consolidated district; (2) a district may detach property from its territory for annexation by a property-poor district; (3) a district may purchase attendance credits from the State; (4) a district may contract to educate nonresident students from a property-poor district by sending money directly to one or more property-poor districts; or (5) a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O taxes or both M&O taxes and I&S taxes. A Chapter 41 district may also exercise any combination of these remedies. Options (3), (4) and (5) require prior approval by the Chapter 41 district’s voters; certain Chapter 41 districts may apply ASATR funds to offset recapture and to achieve the statutory wealth equalization requirements, as described above, without approval from voters.

A district may not adopt a tax rate until its effective wealth per student is at or below the equalized wealth level. If a district fails to exercise a permitted option, the Commissioner must reduce the district’s property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district’s existing debt. The Commissioner has not been required to detach property in the absence of a district failing to select another wealth-equalization option.

AD VALOREM TAX PROCEDURES

Tax Code and County-Wide Appraisal District

The Texas Tax Code, as amended (the “Tax Code”), provides for county-wide appraisal and equalization of taxable property values and establishes in each county of the State an appraisal district and an appraisal review board responsible for appraising property for all taxable units within the county. The Dallas County Appraisal District (the “Appraisal District”) is responsible for appraising property within the geographical boundaries of the Issuer, generally, as of January 1 of each year. The appraisal values set by the Appraisal are subject to review and change by an Appraisal Review Board (the “Appraisal Review Board”), the members of which are appointed by the Appraisal District. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the Issuer in establishing its tax roll and tax rate.

Property Subject to Taxation by the Issuer

Except for certain exemptions provided by Texas law, all real and certain tangible personal property with a tax situs in the geographical boundaries of the Issuer is subject to taxation by the Issuer. Principal categories of exempt property (including certain exemptions which are subject to local option by the Board) include property owned by the State or its political subdivisions if the

27 property is used for public purposes; property exempt from ad valorem taxation by federal law; certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which the Issuer has agreed to abate ad valorem taxes; so-called “freeport property” including property detained in the Issuer for up to 175 days for purpose of assembly or other processing; certain household goods, family supplies and personal effects; farm products owned by the producers; certain real property and tangible personal property owned by a non- profit community business organization or a charitable organization. Other principal categories of exempt property include tangible personal property not held or used for production of income; solar and windpowered energy devices; most individually owned automobiles; $10,000 exemption to residential homesteads of disabled persons or persons ages 65 or over; an exemption from $5,000 to a maximum of $12,000 for real or personal property of disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; $25,000 in market value for all residential homesteads; and certain classes of intangible property. In addition State law mandates a complete exemption for the residential homestead of disabled veterans determined to be 100% disabled by the U.S. Department of Veterans Affairs.

Furthermore, the surviving spouse of a deceased veteran who had received a disability rating of 100% is entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until the surviving spouse remarries. In addition, a partially disabled veteran or certain surviving spouses of partially disabled veterans are entitled to an exemption from taxation of a percentage of the appraised value of their residence homestead in an amount equal to the partially disabled veteran’s disability rating if the residence homestead was donated by a charitable organization. Finally, the surviving spouse of a member of the armed forces who was killed in action is entitled to an exemption of the total appraised value of the surviving spouse’s residence homestead if the surviving spouse has not remarried since the service member’s death and the property was the service member’s residence homestead at the time of death. An exemption up to the same amount may be transferred to a subsequent residence homestead of the surviving spouse if the surviving spouse has not remarried.

A city or a county may create a tax increment financing district (“TIF”) within the city or county, as applicable, with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with the city or county to contribute all or part of future ad valorem taxes levied and collected against the “incremental value” (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing taxing units. Effective September 1, 2001, school districts may not enter into tax abatement agreements under the general statute that permits cities and counties to initiate tax abatement agreements. Under current law, the Comptroller of Public Accounts is to determine taxable value of property within each school district in the State (which taxable value figure is used in calculating a district’s wealth per student) and in making such determination the taxable value is to exclude (i) the total dollar amount of any captured appraised value of property located in a reinvestment zone on August 31, 1999, that generates taxes paid into a tax increment fund and is eligible for tax increment financing under a reinvestment zone financing plan approved before September 1, 1999, and (ii) the total dollar value of taxable property covered by a tax abatement agreement entered into prior to July 1, 1993. Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for certain school districts to grant tax abatements on certain eligible property to encourage economic development in their tax base and provides additional State funding for each year of such tax abatement in the amount of the tax credit provided to the taxpayer by the district.

Article VIII, Section 1-j of the Texas Constitution provides for an exemption from ad valorem taxation for “freeport property,” which is defined as goods detained in the State for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Taxing units that took action prior to April 1, 1990, may continue to tax freeport property and decisions to continue to tax freeport property may be reversed in the future. However, decisions to exempt freeport property are not subject to reversal.

Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in- transit” is defined by a provision of the Tax Code, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out- board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in-transit beginning the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in- transit exemptions for items of personal property. See “Appendix A - Table 1 – Valuations, Exemptions and Tax Supported Debt” attached hereto and “AD VALOREM TAX PROCEDURES-Issuer Application of Tax Code” herein for a schedule of exemptions allowed by the Issuer.

Valuation of Property for Taxation

Generally, property in the Issuer must be appraised by the Appraisal District at market value as of January 1 of each year. In determining the market value of property, different methods of appraisal may be used, including the cost method of appraisal, the

28 income method of appraisal and market data comparison method of appraisal. The Appraisal District’s chief appraiser determines the method to be used. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the Issuer in establishing its tax rolls and tax rate. Assessments under the Tax Code are based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied.

State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property or (2) 110% of the appraised value of the resident homestead for the preceding tax year plus the market value of all new improvements to the property.

The Tax Code permits land designated for agricultural use, open space or timberland to be appraised at its value based on the land’s capacity to produce agricultural or timber products rather than at its fair market value. Landowners wishing to avail themselves of the agricultural use designation must apply for the designation, and the appraiser is required by the Tax Code to act on each claimant’s right to the designation individually. If a claimant receives the designation and later loses it by changing the use of the property or selling it to an unqualified owner, the Issuer can collect taxes for previous years based on the new value, including three years for agricultural use and five years for agricultural open-space land and timberland prior to the loss of the designation.

The Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three years. The Issuer, at its expense, has the right to obtain from the Appraisal District a current estimate of appraised values within the Issuer or an estimate of any new property or improvements within the Issuer. While such current estimate of appraisal values may serve to indicate the rate and extent of growth of taxable values within the Issuer, it cannot be used for establishing a tax rate within the Issuer until such time as the Appraisal District chooses to formally include such values on its appraisal rolls.

Residential Homestead Exemption

The Texas Constitution permits the exemption of certain percentages of the market value of residential homesteads from ad valorem taxation. The Constitution authorizes the governing body of each political subdivision in the State to exempt up to twenty percent (20%) of the market value of all residential homesteads from ad valorem taxation, and permits an additional optional homestead exemption for taxpayers 65 years of age or older and disabled persons.

Issuer and Taxpayer Remedies

Under certain circumstances, taxpayers and taxing units, including the Issuer, may appeal an order of the Appraisal Review Board by filing a petition for review in district court within 45 days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury, if requested by any party, or through binding arbitration, if requested by the taxpayer. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Tax Code.

Public Hearing and Rollback Tax Rate

In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district’s “rollback tax rate” without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. The rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district’s “State Compression Percentage” for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district’s current debt rate, or the sum of (1) the district’s effective maintenance and operations tax rate, (2) the product of the district’s State Compression Percentage for that year multiplied by $0.06, and (3) the district’s current debt rate (see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM-Local Funding for School Districts” for a description of the “State Compression Percentage”). If for the preceding tax year a district adopted an M&O tax rate that was less than its effective M&O tax rate for that preceding tax year, the district’s rollback tax for the current year is calculated as if the district had adopted an M&O tax rate for the preceding tax year equal to its effective M&O tax rate for that preceding tax year.

The “effective maintenance and operations tax rate” for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year.

Section 26.05 of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section 44.004 of the Texas Education Code. Section 44.004(e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section 44.004(b), (c) and (d) and if such failure to comply was not in good faith. Section 44.004(e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. A district may adopt its budget after adopting a tax rate for the tax year in which the fiscal year covered by the budget begins if the district elects to adopt its tax rate before receiving the certified appraisal roll. A district that adopts a tax rate before adopting its budget must hold a public hearing on the proposed tax rate followed by another public hearing on the proposed budget rather than holding a single hearing on the two items.

Tax Ceiling

Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons 65 years of age or over or of disabled persons to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year (see “CURRENT PUBLIC SCHOOL FINANCE SYSTEM-Overview” herein). The school property tax limitation provided by the constitutional amendment and enabling legislation apply to the 2007 and subsequent tax years.

Levy and Collection of Taxes

The Issuer is responsible for the collection of its taxes, unless it elects to transfer such function to another governmental entity. By September 30 or the 60th day after the Issuer receives the appraisal roll, whichever is later, the rate of taxation must be set by the Board of the Issuer based upon the valuation of property within the Issuer as of the preceding January 1. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs a penalty from six percent (6%) to twelve percent (12%) of the amount of the tax, depending on the time of payment, and accrued interest at the rate of one percent (1%) per month. If the tax is not paid by the following July 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the Issuer. The Tax Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances.

Issuer’s Rights in the Event of Tax Delinquencies

Taxes levied by the Issuer are a personal obligation of the owner of the property. The Issuer has no lien for unpaid taxes on personal property but does have a lien for unpaid taxes upon real property, which lien is discharged upon payment. On January 1 of each year, such tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The Issuer’s tax lien is on a parity with the tax liens of other such taxing units. A tax lien on real property taxes takes priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property, under certain circumstances, is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest.

Except with respect to taxpayers who are 65 years of age or older, at any time after taxes on property become delinquent, the Issuer may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the Issuer must join other taxing units that have claims for delinquent taxes against all or part of the same property.

Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights, or by bankruptcy proceedings which restrict the collection of taxpayer debts.

Federal bankruptcy law provides that an automatic stay of actions by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court.

Penalties and Interest

Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows:

Cumulative Cumulative Month Penalty Interest Total February 6% 1%7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18

After July, the cumulative penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 20% attorney’s collection fee may be added to the total tax, penalty and interest charge.

Pending Legislation

The Texas Legislature is currently in session for its 85th Regular Session (the "Regular Session''), which ends on May 29, 2017. While in session, the Texas Legislature may consider bills which could have a direct impact on the Issuer and its operations, including sunset review provisions, limitations or other caps on property appraisal values, and the levying and collection of ad valorem taxes by the Issuer. The Issuer makes no representations or predictions concerning the substance or effect of any legislation that may be proposed and ultimately passed in the Regular Session or any special session that may convene after the end of the Regular Session, or how any such legislation would affect the financial condition of the Issuer, its operations, or its continued existence.

Issuer Application of Tax Code

The Issuer grants the optional homestead exemption of $69,000 for persons over 65 and disabled persons. The Issuer grants an additional exemption of 20% of the market value of residence homesteads; the minimum exemption that could be received being $25,000. Ad valorem taxes are not levied by the Issuer against the exempt value of residence homesteads for the payment of debt. The Issuer does not tax non-business personal property; and the Dallas County Tax Assessor/Collector collects taxes for the Issuer. The Issuer does permit split payments of taxes, and discounts for early payment of taxes are allowed for taxpayers over age 65 or disabled. The Issuer does not grant the freeport exemption. The Issuer has taken action to continue taxing goods in transit.

INVESTMENTS

The Issuer invests its funds in investments authorized by Texas law in accordance with investment policies approved by the Board. Both state law and the Issuer’s investment policies are subject to change.

Legal Investments

Available Issuer funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board. Both state law and the Issuer’s investment policies are subject to change. Under Texas law, the Issuer is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than “A” or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates (i) issued by a depository institution that has its main office or a branch office in the State of Texas, that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for Issuer deposits, or (ii) where (a) the funds are invested by the Issuer through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted, at least annually, by the Issuer as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the Issuer; (b) the broker or the depository institution selected by the Issuer arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the Issuer; (c) the full amount of the principal and accrued

31 interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the Issuer appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the Issuer with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the Issuer, held in the Issuer’s name, and deposited at the time the investment is made with the Issuer or with a third party selected and approved by the Issuer and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State of Texas; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than “A” or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the Issuer, held in the Issuer’s name and deposited at the time the investment is made with the Issuer or a third party designated by the Issuer; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers’ acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least “A-1” or “P-1” or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least “A-1” or “P-1” or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than “AAA” or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph.

In addition to authorized investments described above, the Texas law provides that the Issuer may invest in corporate bonds that, at the time of purchase, are rated by a nationally recognized investment rating firm “AA-” or the equivalent and have a stated final maturity that is not later than the third anniversary of the date the corporate bonds were purchased. As used herein, corporate bond means a senior secured debt obligation issued by a domestic business entity and rated not lower than “AA-” or the equivalent by a nationally recognized investment rating firm, and does not include unsecured debt obligations or debt obligations that, on conversion, would result in the holder becoming a stockholder or shareholder in the entity that issued the debt obligation. The Issuer may not (1) invest in the aggregate more than 15% of its monthly average fund balance, excluding funds held for the payment of debt service, in corporate bonds or (2) invest more than 25% of the funds invested in corporate bonds in any one domestic business entity, including subsidiaries and affiliates of the entity. The investment officer of the Issuer must sell any corporate bonds not later than seven days after a nationally recognized investment rating firm (1) issues a release that places the corporate bonds or the entity that issued the corporate bonds on negative credit watch or the equivalent, if the corporate bonds are rated “AA-” or the equivalent at the time the release is issued; or (2) changes the rating on the corporate bonds to a rating lower than “AA-” or the equivalent. The Issuer may invest its funds in corporate bonds only if the Board of the Issuer (1) amends its investment policy to authorize corporate bonds as an eligible investment, (2) adopts procedures to provide for the monitoring of rating changes in corporate bonds and liquidating the investment in corporate bonds and (3) identifies the funds eligible to be invested in corporate bonds.

The Issuer may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than “AAA” or “Aaa” or an equivalent by at least one nationally recognized rating service. The Issuer may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the Issuer retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the Issuer must do so by order, ordinance, or resolution. The Issuer is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

Investment Policies

Under Texas law, the Issuer is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for Issuer funds, maximum allowable stated maturity of any individual investment owned by the Issuer, the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All Issuer funds must be invested consistent with a formally adopted “Investment Strategy Statement” that specifically addresses each fund’s investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield.

Under Texas law, Issuer investments must be made “with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person’s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived”. At least quarterly the investment officers of the Issuer shall submit an investment report detailing: (1) the investment position of the Issuer, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) state law. No person may invest Issuer funds without express written authority from the Board.

Additional Provisions

Under Texas law, the Issuer is additionally required to: (1) annually review its adopted policies and strategies, (2) adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution, (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board; (4) require the qualified representative of firms offering to engage in an investment transaction with the Issuer to: (a) receive and review the Issuer’s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the Issuer and the business organization that are not authorized by the Issuer’s investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the Issuer’s entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the Issuer and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the Issuer’s investment policy; (6) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the Issuer’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the Issuer.

Current Investments

As of June 30, 2016, the Issuer’s investable funds were invested in the following categories:

Investment Instrument Amount Percentage Demand deposits with financial institutions $10,813,807 100%

All investments were covered entirely by FDIC insurance and pledged collateral held by the Issuer’s agent banks in the Issuer’s name.

TAX MATTERS FOR THE BONDS

Tax Exemption

Delivery of the Bonds is subject to the opinion of Andrews Kurth Kenyon LLP, Houston, Texas, Bond Counsel, that interest on the Bonds will be (1) excludable from gross income of the owners thereof for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), and (2) not includable in the alternative minimum taxable income of individuals or, except as described below, corporations. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Bonds. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Bonds in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income.

Interest on the Bonds owned by a corporation, other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT), will be included in such corporation’s adjusted current earnings for purposes of calculating such corporation’s alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed.

In rendering its opinions, Bond Counsel has assumed continuing compliance by the Issuer with certain covenants contained in the Order and has relied on representations by the Issuer with respect to matters solely within the knowledge of the Issuer, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Bond proceeds and any facilities financed therewith, the source of repayment of the Bonds, the investment of Bond proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Bond proceeds and certain other amounts be paid periodically to the United States and that the Issuer file an information report with the Internal Revenue Service. If the Issuer should fail to comply with the covenants in the Order or if its representations relating to the Bonds that are contained in the Order should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds, regardless of the date on which the event causing such taxability occurs.

Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt or accrual of interest on or acquisition or disposition of the Bonds.

Bond Counsel’s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Issuer described above. No ruling has been sought from the Internal Revenue Service (the “Service”) with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel’s opinion is not binding on the Service. The Service has an ongoing program of auditing the tax- exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the Issuer as the “taxpayer,” and the owners of the Bonds may have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the Issuer may have different or conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome.

Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax-exempt interest, such as interest on the Bonds, received or accrued during the year.

Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds.

Proposed Tax Legislation

Tax legislation, administrative actions taken by tax authorities, and court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or state income taxation, or otherwise prevent the beneficial owners of the Bonds from realizing the full current benefit of the tax status of such interest. For example, future legislation to resolve certain federal budgetary issues may significantly reduce the benefit of, or otherwise affect, the exclusion from gross income for federal income tax purposes of interest on all state and local obligations, including the Bonds. In addition, such legislation or actions (whether currently proposed, proposed in the future or enacted) could affect the market price or marketability of the Bonds. Prospective

34 purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and its impact on their individual situations, as to which Bond Counsel expresses no opinion.

Tax Accounting Treatment of Original Issue Discount Bonds

Some of the Bonds may be offered at an initial offering price which is less than the stated redemption price payable at maturity of such Bonds. If a substantial amount of any maturity of the Bonds is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Bonds of that maturity (the “Discount Bond”) will be considered to have “original issue discount” for federal income tax purposes equal to the difference between (a) the stated redemption price payable at the maturity of such Discount Bond and (b) the initial offering price to the public of such Discount Bond. Under existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Bond and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Bond continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Bond under the caption “-Tax Exemption” generally applies to original issue discount deemed to be earned on a Discount Bond while held by an owner who has purchased such Bond at the initial offering price in the initial public offering of the Bonds and that discussion should be considered in connection with this portion of the Limited Offering Memorandum.

In the event of a redemption, sale, or other taxable disposition of a Discount Bond prior to its stated maturity, however, any amount realized by such initial owner in excess of the basis of such Discount Bond in the hands of such owner (increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Bond continues to be held by such initial owner) will be includable in gross income for federal income tax purposes.

Because original issue discount on a Discount Bond will be treated for federal income tax purposes as interest on a Bond, such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Corporations that purchase a Discount Bond must take into account original issue discount as it is deemed to be earned for purposes of determining alternative minimum tax. Other owners of a Discount Bond may be required to take into account such original issue discount as it is deemed to be earned for purposes of determining certain collateral federal tax consequences of owning a Bond. See “-Tax Exemption” herein for a discussion regarding the alternative minimum taxable income consequences for corporations and for a reference to collateral federal tax consequences for certain other owners.

The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Bond or of the Issuer. The portion of the principal of a Discount Bond representing original issue discount is payable upon the maturity or earlier redemption of such Bond to the registered owner of the Discount Bond at that time.

Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Bond is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determined under an actuarial method of accrual, using the yield to maturity as the constant interest rate and semi-annual compounding.

The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Discount Bonds by an owner that did not purchase such Bonds in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Bonds should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Discount Bonds.

Tax Accounting Treatment of Original Issue Premium Bonds

Some of the Bonds may be offered at an initial offering price which exceeds the stated redemption price payable at the maturity of such Bonds. If a substantial amount of any maturity of the Bonds is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Bonds of such maturity (the “Premium Bond”) will be considered for federal income tax purposes to have “bond premium” equal to such excess. The basis for federal income tax purposes of a Premium Bond in the hands of an initial purchaser who purchases such Bond in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Bond by the amount of amortizable bond premium. This reduction in basis will increase the amount of any gain (or decrease the amount of any loss) recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Bond by the initial purchaser. Generally, no corresponding deduction is allowed for federal income tax purposes, for the reduction in basis

35 resulting from amortizable bond premium with respect to a Premium Bond. The amount of bond premium on a Premium Bond which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Bond based on the initial purchaser’s original basis in such Bond.

The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Bonds that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering price for the Bonds of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Bonds should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Bonds.

TAX MATTERS FOR THE NOTE

The following is a general summary of United States federal income tax consequences of the purchase and ownership of the Note. The discussion is based upon laws, Treasury Regulations, rulings and decisions now in effect, all of which are subject to change (possibly with retroactive effect) or possibly differing interpretations. No assurances can be given that future changes in the law will not alter the conclusions reached herein. The discussion below does not purport to deal with United States federal income tax consequences applicable to all categories of investors. Further, this summary does not discuss all aspects of United States federal income taxation that may be relevant to a particular investor in the Note in light of the investor’s particular personal investment circumstances or to certain types of investors subject to special treatment under United States federal income tax laws (including insurance companies, tax exempt organizations, financial institutions, broker-dealers, and persons who have hedged the risk of owning the Note). The summary is therefore limited to certain issues relating to initial investors who will hold the Note as “capital assets” within the meaning of section 1221 of the Code, and acquire such Note for investment and not as a dealer or for resale. This summary addresses certain federal income tax consequences applicable to beneficial owners of the Note who are United States persons within the meaning of section 7701(a)(30) of the Code (“United States persons”) and, except as discussed below, does not address any consequences to persons other than United States persons. Prospective investors should note that no rulings have been or will be sought from the IRS with respect to any of the U.S. federal income tax consequences discussed below, and the discussion below is not binding on the IRS.

INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTE.

Stated Interest on the Note

The stated interest on the Note will be included in the gross income, as defined in section 61 of the Code, and in the net investment income, for purposes of the 3.8% Medicare tax imposed by Section 1411 of the Code, of the beneficial owners thereof and be subject to U.S. federal income taxation when paid or accrued, depending on the tax accounting method applicable to the beneficial owners thereof.

Disposition of the Note

A beneficial owner of the Note will generally recognize gain or loss on the redemption, sale or exchange of a Note equal to the difference between the redemption or sales price (exclusive of the amount paid for accrued interest) and the beneficial owner’s adjusted tax basis in the Note. Generally, the beneficial owner’s adjusted tax basis in a Note will be the beneficial owner’s initial cost, increased by any original issue discount previously included in the beneficial owner’s income to the date of disposition and reduced by any amortized bond premium. Any gain or loss generally will be capital gain or loss and will be long-term or short- term, depending on the beneficial owner’s holding period for the Note.

Backup Withholding

Under section 3406 of the Code, a beneficial owner of the Note who is a United States person, as defined in section 7701(a)(30) of the Code, may, under certain circumstances, be subject to “backup withholding” with respect to current or accrued interest on the Note or with respect to proceeds received from a disposition of the Note. This withholding applies if such beneficial owner of the Note: (i) fails to furnish to the payor such beneficial owner’s social security number or other taxpayer identification number (“TIN”); (ii) furnishes the payor an incorrect TIN; (iii) fails to report properly interest, dividends, or other “reportable payments” as defined in the Code; or (iv) under certain circumstances, fails to provide the payor with a certified statement, signed under penalty of perjury, that the TIN provided to the payor is correct and that such beneficial owner is not subject to backup withholding.

Backup withholding will not apply, however, with respect to payments made to certain beneficial owners of the Note. Beneficial owners of the Note should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedures for obtaining such exemption.

Withholding on Payments to Nonresident Alien Individuals and Foreign Corporations

Under sections 1441 and 1442 of the Code, nonresident alien individuals and foreign corporations are generally subject to withholding at the current rate of 30% (subject to change) on periodic income items arising from sources within the United States, provided such income is not effectively connected with the conduct of a United States trade or business. Assuming the interest income of such beneficial owners of the Note is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will be subject to 30% withholding, or any lower rate specified in an income tax treaty, unless such income is treated as portfolio interest. Interest will be treated as portfolio interest if: (i) the beneficial owner provides a statement to the payor certifying, under penalties of perjury, that such beneficial owner is not a United States person and providing the name and address of such beneficial owner; (ii) such interest is treated as not effectively connected with the beneficial owner’s United States trade or business; (iii) interest payments are not made to a person within a foreign country which the IRS has included on a list of countries having provisions inadequate to prevent United States tax evasion; (iv) interest payable with respect to the Note is not deemed contingent interest within the meaning of the portfolio debt provision; (v) such beneficial owner is not a controlled foreign corporation, within the meaning of section 957 of the Code; and (vi) such beneficial owner is not a bank receiving interest on the Note pursuant to a loan agreement entered into in the ordinary course of the bank’s trade or business.

Assuming payments on the Note are treated as portfolio interest within the meaning of sections 871 and 881 of the Code, then no withholding under section 1441 and 1442 of the Code and no backup withholding under section 3406 of the Code is required with respect to beneficial owners or intermediaries who have furnished Form W-8 BEN, Form W-8 EXP or Form W-8 IMY, as applicable, provided the payor does not have actual knowledge or reason to know that such person is a United States person.

Reporting of Interest Payments

Subject to certain exceptions, interest payments made to beneficial owners with respect to the Note will be reported to the IRS. Such information will be filed each year with the IRS on Form 1099 which will reflect the name, address, and TIN of the beneficial owner. A copy of Form 1099 will be sent to each beneficial owner of a Note for U.S. federal income tax purposes.

CONTINUING DISCLOSURE OF INFORMATION

In the Order, the Issuer will have made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (the “MSRB”). Information will be available free of charge via the Electronic Municipal Market Access (“EMMA”) system at www.emma.msrb.org.

Annual Reports

The Issuer will provide certain updated financial information and operating data to the MSRB annually in an electronic format as prescribed by the MSRB and available via the Electronic Municipal Market Access (“EMMA”) system at www.emma.msrb.org. The information to be updated includes the quantitative financial information and operating data with respect to the Issuer of the general type included in the Limited Offering Memorandum in Figures 1 through 3, Tables 1 through 5 and 7 through 13, and in APPENDIX B. The Issuer will update and provide this information within six months after the end of each fiscal year. The updated information will include audited financial statements, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Issuer will provide unaudited financial statements by the required time and will provide audited financial statements when and if the audit report becomes available. Any financial statements will be prepared in accordance with the accounting principles described in APPENDIX B or such other accounting principles as the Issuer may be required to employ from time to time pursuant to state law or regulation.

The Issuer’s current fiscal year-end is the last day of June. Accordingly, the Issuer must provide updated information by the last day of December in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify the MSRB of the change.

Event Notices

The Issuer shall notify the MSRB, in a timely manner not in excess of ten business days after the occurrence of the event, of any of the following events with respect to the Bonds and the Note: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the Issuer; (13) the consummation of a merger, consolidation, or acquisition involving the Issuer or the System or the sale of all or substantially all of the assets of the Issuer, 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, if material; and (14) appointment of a successor or additional trustee or the change of name of trustee, if material. The Issuer shall notify the MSRB in an electronic format prescribed by the MSRB, in a timely manner, of any failure by the Issuer to provide financial information or operating data in accordance with the Rule.

For these purposes, any event described in (12) in the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Issuer 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 Issuer, 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 governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Issuer. Limitations and Amendments

The Issuer has agreed to update information and to provide notices of material events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that has been provided except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. Nothing in this paragraph is intended or shall act to disclaim, waive or limit the Issuer’s duties under federal or state securities laws.

The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if, but only if, (1) the agreement, as so amended, would have permitted underwriters to purchase or sell Bonds in the initial primary offering in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent or (b) any qualified person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. If the Issuer amends its agreement, it has agreed to include with the financial information and operating data next provided, in accordance with its agreement described above under “Annual Reports,” an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and operating data so provided.

Compliance with Prior Undertakings

The Issuer failed to timely file audited or unaudited financial statements for fiscal years 2013, 2015 and 2016. The Issuer also failed to timely file operating data for the fiscal year 2016. The Issuer filed audited financial statements for fiscal year 2013 on January 31, 2014 and audited financial statements with updated operating data for fiscal year 2015 on April 13, 2016. Additionally, the Issuer filed audited financial statements and operating data for fiscal year 2016 on April 28, 2017 along with a failure to file timely financial information and operating data event notice for fiscal years 2013, 2015 and 2016 on April 28, 2017. The Issuer has taken steps to ensure that all annual financial information will be filed timely in the future.

OTHER INFORMATION

Rating

No rating was requested for the Bonds or the Note.

Litigation

The Issuer is represented by the law firm of Strasburger Attorneys at Law in a suit styled David Sewell v. Dallas County Schools, No. DC-16-13227 in the 134th District Court, Dallas County, Texas. The suit is a class action challenging the statutory and constitutional validity of certain city ordinances under which, in a program administered by the School District, motorists that violate state law prohibiting passing a school bus with an extended stop arm are subjected to civil fines. The plaintiffs allege class- wide damages exceeding $30 million against Dallas County Schools and its co-defendants -- the City of Dallas, Texas and the City of Carrollton, Texas.

The Issuer was served on October 28, 2016. Since filing this lawsuit the plaintiffs have not requested any discovery or taken any other action in the case beyond filing their initial complaint. Counsel to the Issuer is coordinating its defense with the City of Dallas and the City of Carrollton.

The Issuer denies any liability and intends to vigorously resist the suit on numerous grounds. The City of Dallas has raised the defenses of limitations, voluntary payment, failure to exhaust administrative remedies, and governmental immunity, among others. Further, the Texas Transportation Code allows cities to impose civil or administrative penalties for violation of the “Rules of the Road” when these fall under one or more of a “laundry list” of exceptions; among these are the regulation of traffic by traffic control devices, and the regulation of the stopping, standing, or parking of vehicles.

Neither the Issuer nor its counsel can express any opinion regarding the likely outcome of such claim nor, should the outcome be unfavorable, the range of any possible loss.

The Issuer is a defendant in a number of lawsuits arising principally in the normal course of operations. In the opinion of the Issuer’s management and general counsel, the outcome of these lawsuits will not have a materially adverse effect on the financial condition of the Issuer. At the time of the initial delivery of the Bonds and the Note, the Issuer will provide the Underwriter with a certificate to the effect that no litigation of any nature has been filed or is then pending challenging the issuance of the Bonds and the Note or that affects the payment and security of the Bonds or the Note or in any other manner questioning the issuance, sale or delivery of the Bonds and the Note.

Registration and Qualification of Bonds and the Note for Sale

The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The Issuer assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions.

The Bonds and the Note as Legal Investments in Texas

Under the Texas Public Security Procedures Act (Texas Government Code, Chapter 1201, as amended), the Bonds and the Note (1) are negotiable instruments, (2) are investment securities to which Chapter 8 of the Texas Business and Commerce Code applies, and (3) are legal and authorized investments for (A) an insurance company, (B) a fiduciary or trustee, or (C) a sinking fund of a municipality or other political subdivision or public agency of the State of Texas. The Bonds and the Note are eligible to secure deposits of any public funds of the State, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. With respect to investment in the Bonds and the Note by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, requires the Bonds and the Note to be assigned a rating of “A” or its equivalent as to investment quality by a national rating agency. (See “OTHER INFORMATION-Rating” above). In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds and the Note are legal investments for State banks, savings banks, trust companies with at least $1 million of capital and savings and loan associations.

The Issuer has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds and the Note for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds and the Note for such purposes. The Issuer has made no review of laws in other states to determine whether the Bonds and the Note are legal investments for various institutions in those states.

Legal Matters

The delivery of the Bonds and the Note is subject to the approving opinion of the Attorney General of Texas to the effect that the Bonds and the Note are valid and legally binding obligations of the Issuer payable from the proceeds of a continuing, direct, annual ad valorem tax levied, within the limits of $0.01 per $100 of taxable valuations as permitted by law, upon all taxable property located within Dallas County, and the approving legal opinion of Andrews Kurth Kenyon LLP, Bond Counsel to the Issuer (“Bond Counsel”), in substantially the form attached as APPENDIX C. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds and the Note is contingent upon the sale and delivery of the Bonds.

Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds and the Note, Bond Counsel has been engaged by and only represents the Issuer in connection with the issuance of the Bonds and the Note. Except as noted below, Bond Counsel did not take part in the preparation of the Limited Offering Memorandum, and such firm has not assumed any responsibility with respect hereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions or subcaptions “PLAN OF FINANCE (except for the information under the subcaptions “- Sources and Uses of Bond Proceeds” and “- Sources and Uses of Note Proceeds,” “THE BONDS AND THE NOTE,” (except for the information under the subcaptions “Book-Entry- Only System” and “Bondholders’ Remedies,” as to which no opinion is expressed), and “CONTINUING DISCLOSURE OF INFORMATION” (except for the information under the sub-caption “Compliance with Prior Undertakings,” as to which no opinion is expressed), “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS,” “CURRENT PUBLIC SCHOOL FINANCE SYSTEM,” “TAX RATE LIMITATIONS,” “TAX MATTERS FOR THE BONDS – Tax Exemption,” “- Tax Accounting Treatment of Original Issue Discount Bonds,” “- Tax Accounting Treatment of Original Issue Premium Bonds,” “TAX MATTERS FOR THE NOTE” and “OTHER INFORMATION – Registration and Qualification of Bonds and the Note for Sale,” “- The Bonds and the Note as Legal Investments in Texas” and “- Legal Matters (except for the last two sentences of the third paragraph thereof),” in the Limited Offering Memorandum, and Bond Counsel is of the opinion that the information relating to the Obligations and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Obligations, such information conforms to the provisions of the Order and the Note Resolution.

The various legal opinions to be delivered concurrently with the delivery of the Bonds and the Note express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Certain legal matters will be passed upon for the Underwriter by Bracewell, LLP, Houston, Texas. The legal fees to be paid to Underwriter’s Counsel for services in connection with the issuance of the Bonds and the Note are contingent on the sale and delivery thereof.

Verification of Accuracy of Mathematical Computations

Grant Thornton LLP, a firm of independent certified public accountants, will deliver to the Issuer, on or before the settlement date of the Bonds, its verification report indicating that it has verified, in accordance with the Statement on Standards for Consulting Services established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the Government Obligations, to pay, when due, the maturing principal of, interest on and related call premium requirements, if any, of the Refunded Bonds and (b) the mathematical computations of yield used by Bond Counsel to support its opinion that interest on the Bonds will be excluded from gross income for federal income tax purposes.

Grant Thornton LLP relied on the accuracy, completeness and reliability of all information provided to it by, and on all decisions and approvals of, the Issuer. In addition, Grant Thornton LLP has relied on any information provided to it by the Issuer’s retained advisors, consultants or legal counsel. Grant Thornton LLP was not engaged to perform audit or attest services under AICPA auditing or attestation standards or to provide any form of attest report or opinion under such standards in conjunction with this engagement.

Financial Advisor

USCA Municipal Advisors, LLC (“USCA” or the “Financial Advisor”), a subsidiary of U.S. Capital Advisors, LLC, is employed as Financial Advisor to the Issuer in connection with the issuance of the Bonds. The Financial Advisor’s fee for services rendered with respect to the sale of the Bonds and the Note is contingent upon the issuance and delivery of the Bonds. USCA, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the obligations, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

USCA has reviewed the information in this Limited Offering Memorandum in accordance with its responsibilities to the Issuer and, as applicable, to investors under federal securities laws as applied to the facts and circumstances of this transaction, but USCA does not guarantee the accuracy or completeness of such information.

Underwriting

The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the Issuer, at an underwriting discount of $______. The Underwriter will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Underwriter.

The Underwriter has agreed, subject to certain conditions, to purchase the Note from the Issuer, at a discount of $______. The Underwriter will be obligated to purchase all of the Note, if any is purchased. The Note to be offered to the public may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Note into investment trusts) at prices lower than the public offering prices of such Note, and such public offering prices may be changed, from time to time, by the Underwriter.

The Underwriter has provided the following sentence for inclusion in this Limited Offering Memorandum. The Underwriter has reviewed the information in this Limited Offering Memorandum in accordance with, and as part of, its responsibility to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

The Issuer intends to use a portion of the proceeds from the offering of the Bonds to redeem the Refunded Obligations. To the extent that the Underwriter or First Security Bancorp, the parent company of the Underwriter, or any affiliate thereof, is an owner of Refunded Obligations, such entity would receive a portion of the proceeds from the issuance of the Bonds contemplated herein in connection with such Refunded Obligations being redeemed by the Issuer. Such amounts, if any, received by the Underwriter, First Security Bancorp, or any affiliate thereof could be a significant. First Security Bancorp owns $8,030,000 in principal amount of the Public Property Finance Contractual Obligations, Series 2012B.

Forward-Looking Statements Disclaimer

The statements contained in this Limited Offering Memorandum, and in any other information provided by the Issuer, that are not purely historical, are forward-looking statements, including statements regarding the Issuer’s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on such forward-looking statements. All forward-looking statements included in this Limited Offering Memorandum are based on information available to the Issuer on the date hereof, and the Issuer assumes no obligation to update any such forward-looking statements. It is important to note that the Issuer’s actual results could differ materially from those in such forward-looking statements.

The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Issuer. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Limited Offering Memorandum would prove to be accurate.

Miscellaneous

The financial data and other information contained herein have been obtained from the Issuer’s records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and orders contained in this Limited Offering Memorandum are made subject to all of the provisions of such statutes, documents and orders. These summaries do not purport to be complete statements of such provisions and reference is made to such statutes, documents and orders for further information. Reference is made to original documents in all respects.

The Order and the Note Resolution will approve the form and content of this Limited Offering Memorandum, and any addenda, supplement or amendment thereto, and authorized its use in the reoffering of the Bonds and the Note by the Underwriter.

/s/ President, Board of Trustees ATTEST:

/s/ Secretary, Board of Trustees

APPENDIX A

INFORMATION REGARDING THE ISSUER

[THIS PAGE INTENTIONALLY LEFT BLANK]

Table 1 - TAXABLE ASSESSED VALUATION HISTORY

Fis cal Real Property (a) Business Personal Property (a) Total Year End Market Value Taxable Value Market Value Taxable Value Taxable Value (a) 2013 $ 176,457,356,450 $ 132,953,276,724 $ 30,175,252,120 $ 24,742,035,891 $ 157,695,312,615 2014 183,515,398,860 138,252,957,439 31,732,599,080 25,905,574,270 164,158,531,709 2015 196,608,390,240 148,419,112,864 32,644,515,330 26,653,450,657 175,072,563,521 2016 211,984,012,400 160,576,441,909 34,815,378,850 27,613,757,098 188,190,199,007 2017 234,862,689,120 177,817,540,614 36,749,520,890 29,410,783,346 207,228,323,960

Total Principal of Debt Payable from Ad Valorem Taxes (as of March 1, 2017): 60,140,000 Ratio Tax Supported Debt to Taxable Assessed Valuation: 0.029% 2015 Estimated Population: 2,518,638 Per Capita Taxable Assessed Valuation: 82,278 Per Capita Total Tax Supported Debt: 24

(a) As reported by Dallas Central Appraisal District; subject to change during the ensuing year as property protests are decided. (1) Includes t he Bonds and t he Note but does not include t he Refunded Obligations. Preliminary, subject to change.

Table 2 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY

Taxable Tax Debt Ratio of Tax Debt Fiscal Estimated Taxable Assessed Assessed Valuation Outstanding to Taxable Tax Debt Year End Population Valuation Per Capita at Year End Assessed Valuation Per Capita 2014 2,379,214 $ 164,158,531,709 $ 68,997 $ 67,265,000 0.041% 28 2015 2,518,638 (a) 175,072,563,521 69,511 60,215,000 0.034% 24 2016 2,518,638 (b) 188,190,199,007 74,719 50,405,000 0.027% 20 2017 2,518,638 (b) 207,228,323,960 82,278 76,800,000 (c) 0.037% 30 2018 2,518,638 (b) 231,170,110,112 (d) 91,784 64,520,000 0.028% 26

(a) Estimated as of July 1, 2015. (b) Reflects 2015 estimated population as 2016 figure is not yet available. (c) Includes the Bonds and the Note, but does not include the Refunded Obligations. Preliminary, subject t o change. (d) Estimated Values for fiscal year 2018.

Table 3 - TAX RATE, LEVY AND COLLECTION HISTORY

Fiscal Tax Tax Percentage of Ye ar End Rate Levy (a) Total Collections 2013 0.009937 $ 15,691,474 98.60% 2014 0.010000 16,440,431 98.24% 2015 0.010000 17,535,697 98.33% 2016 0.010000 18,847,434 98.06% 2017 0.009271 19,241,750 97.30% (b)

(a) Source: Issuer. (b ) Through March 31, 2017.

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Table 4 - TOP TAXPAYERS

% of Total Nature 2016 Net Taxable 2016 Net Taxable (a) (a) Name of Taxpayer of Property Assessed Valuation Assessed Valuation Oncor Electric Delivery Electric Utility $ 999,999,990 0.48% Northpark Land Partners Retail 645,793,980 0.31% Oncor Electric Delivery Electric Utility 419,137,190 0.20% Crescent Real Estate Group Commercial 409,725,000 0.20% Southwestern Bell Telephone Co. Telephone Utility 370,325,200 0.18% Atmos Energy Mid-Tex Oil & Gas 353,614,750 0.17% AT&T Mobility LLC Telephone Utility 322,430,720 0.16% Texas Instruments Inc Semiconductor Mfg. 300,100,000 0.14% TIAAA Insurance & Annuity 275,570,000 0.13% Galleria Mall Inv. LP Shopping Center 245,000,000 0.12% 4,341,696,830 2.10%

(a) Source: DCAD and local tax assessor/collector.

Table 5 - TAX ADEQUACY

Estimated Average Annual Debt Service Requirements $ 10,269,110 (a) 0.0051$ 0.0051$ per $100 AV against the 2016 Net Taxable AV, at 98% collection, produces $ 10,357,272

Estimated Maximum Annual Debt Service Requirements (2018) $ 15,632,278 (a) 0.0077$ 0.0077$ per $100 AV against the 2016 Net Taxable AV, at 98% collection, produces $ 15,637,449

(a) Includes the Bonds, the Note and excludes the Refunded Obligations. Preliminary, subject to change.

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TAB LE 6 - ES TIMATED OVERLAP P ING DEB T

The following summary of estimated ad valorem tax bonds of taxing entities in the District was compiled from a variety of sources listed below. No representation is made with respect to the accuracy or completion of the information obtain fromsources other than the District. Furthermore, certain entities listed below may have issued substantial amounts of bonds since the dates shown in this table and may have capital improvement programs requiring the issuance of a substantial amounts of additional bonds. Sources include: The Texas Municipal Reports compiled and published by the Municipal Advisory Council of Texas and the Dallas County Appraisal District.

Total Estimated % Overlapping Taxing Jurisdiction Debt (a) Overlapping Debt

Addison, Town of $ 91,100,000 100.00% $ 91,100,000 Balch Springs, City of 12,270,000 100.00% 12,270,000 Carrollton, City of 165,015,000 47.45% 78,299,618 Carrollton-Farmers Branch ISD 211,775,000 80.78% 171,071,845 Cedar Hill ISD 121,184,246 100.00% 121,184,246 Cedar Hill, City of 73,670,000 97.32% 71,695,644 Cockrell Hill, City of 5,120,000 100.00% 5,120,000 Coppell ISD 288,134,166 100.00% 288,134,166 Coppell, City of 63,740,000 98.00% 62,465,200 Dallas Co 216,450,000 100.00% 216,450,000 Dallas Co CCD 266,580,000 100.00% 266,580,000 Dallas Co Flood Control Dist # 1 26,905,000 100.00% 26,905,000 Dallas Co Hospital Dist 718,480,000 100.00% 718,480,000 Dallas Co Utility & Reclamation Dist 208,550,000 100.00% 208,550,000 Dallas ISD 2,934,695,000 100.00% 2,934,695,000 Dallas, City of 1,632,810,997 94.95% 1,550,354,042 Denton Co LID # 1 8,645,000 5.92% 511,784 Denton Co RUD #1 - 5.92% - DeSoto ISD 143,109,614 100.00% 143,109,614 DeSoto, City of 68,435,000 100.00% 68,435,000 Duncanville ISD 209,751,096 100.00% 209,751,096 Duncanville, City of 6,520,000 100.00% 6,520,000 Farmers Branch, City of 36,250,000 100.00% 36,250,000 Ferris ISD 29,599,428 4.01% 1,186,937 Ferris, City of 2,385,000 7.58% 180,783 Garland ISD 564,701,425 100.00% 564,701,425 Garland, City of 439,820,000 99.80% 438,940,360 Glenn Heights, City of 17,055,000 70.20% 11,972,610 Grand Prairie ISD 492,784,498 100.00% 492,784,498 Grand Prairie, City of 237,175,000 49.58% 117,591,365 Grapevine, City of 130,647,994 2.64% 3,449,107 Grapevine-Colleyville ISD 470,887,687 13.06% 61,497,932 Highland Park ISD [Dallas] 274,910,000 100.00% 274,910,000 Hutchins, City of 5,792,000 100.00% 5,792,000 Irving Flood Control Dist Section I 6,165,000 100.00% 6,165,000 Irving Flood Control Dist Section III 420,000 100.00% 420,000 Irving ISD 447,255,000 100.00% 447,255,000 Irving, City of 375,975,000 100.00% 375,975,000 Lancaster ISD 146,239,468 100.00% 146,239,468 Lancaster MUD # 1 5,565,000 100.00% 5,565,000 Lancaster, City of 78,135,000 100.00% 78,135,000 Lewisville, City of 91,680,000 0.78% 715,104 Mesquite ISD 490,699,333 100.00% 490,699,333 Mesquite, City of 143,655,000 99.56% 143,022,918 Northwest Dallas Co Flood Control Dist 15,835,000 100.00% 15,835,000 Ovilla, City of 5,435,000 8.22% 446,757 Richardson ISD 408,794,992 100.00% 408,794,992 Richardson, City of 215,385,000 57.68% 124,234,068 Rowlett, City of 67,695,000 85.88% 58,136,466 Sachse, City of 35,160,000 60.48% 21,264,768 Seagoville, City of 7,940,000 98.23% 7,799,462 Sunnyvale ISD 58,852,581 100.00% 58,852,581 Sunnyvale, Town of 7,325,000 100.00% 7,325,000 Valwood Improvement Auth of Dallas Co, Texas 15,032,760 100.00% 15,032,760 Wilmer, City of 1,871,000 100.00% 1,871,000 Wylie, City of 80,200,000 0.59% 473,180 Estimated Overlapping Debt $ 11,675,197,128

The District $ 76,800,000 (b) 100.00% 76,800,000 Total Estimated & Overlapping Debt $ 11,751,997,128

(a) Gross Debt. (b) Includes the Bonds, the Note and excludes the Refunded Obligations. Preliminary, subject to change.

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Table 7 - PROFORMA DEBT SERVICE REQUIREMENTS

FYE The Bonds* The Note* Parity Debt Estimated Estimated 30-Jun Principal Interest Principal Interest Principal Interest Total Levy(a) Coverage 2018 $ - $ 1,802,994 $ 12,280,000 $ 462,206 -$ $ 813,428 $ 15,358,628 $ 20,722,832 1.35 2019 - 1,798,000 - - - 813,428 2,611,428 20,722,832 7.94 2020 - 1,798,000 - - 6,310,000 784,228 8,892,228 20,722,832 2.33 2021 6,775,000 1,798,000 - - 6,495,000 561,028 15,629,028 20,722,832 1.33 2022 7,050,000 1,527,000 - - 6,765,000 290,278 15,632,278 20,722,832 1.33 2023 7,330,000 1,245,000 - - - - 8,575,000 20,722,832 2.42 2024 7,625,000 951,800 - - - - 8,576,800 20,722,832 2.42 2025 7,925,000 646,800 - - - - 8,571,800 20,722,832 2.42 2026 8,245,000 329,800 - - - - 8,574,800 20,722,832 2.42 $ 44,950,000 $ 11,897,394 $ 12,280,000 $ 462,206 $ 19,570,000 $ 3,262,388 $ 92,421,988

Estimated Average Annual Debt Service Requirements $ 10,269,110 Estimated Maximum Annual Debt Service Requirements (2018) $ 15,632,278

* Preliminary, subject to change.

(a) Levy calculation based on tax year 2016 TAV of $207,228,323,960 and a tax rate of $0.01.

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TABLE 8 - NO AUTHORITY TO ISSUE

Amount Heretofore Authorized but Date Authorized Purpose Authorized Issued The Bonds Unissued The Issuer has no authorized but unissued bonding capacity, and has no authority to order a bond election for such purpose.

However, the Issuer may incur other financial obligations payable from its collection of maintenance taxes and other sources of revenue, including maintenance tax notes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes.

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Table 9 – OTHER OBLIGATIONS

Technology Purchases

The Issuer has acquired a comprehensive bus safety technology system, which includes an automated stop arm violation management system, to be utilized in connection with the Issuer's Stop Arm Camera Program, partially through a private, owner-financed transaction (the "Bus Technology Purchase"). In connection with the Bus Technology Purchase, the Issuer entered into a promissory note (the "Promissory Note") with the seller in the amount of $18,334,000. Payments of the Promissory Note are secured by a pledge of the Issuer's Available Revenues. Subsequent to several monthly installment payments and the payment of $6,000,000 from the proceeds of the Issuer's Public Property Finance Contractual Obligations, Taxable Series 2014 to the seller as part of the Bus Technology Purchase, the Promissory Note was sold by the original holder to a non-related third party. The new note holder subsequently restructured the Note of $12,090,000 to payments of $355,975.76 beginning in February 2015, interest remaining at 3%. (See “Figure 3-Other Obligations”; Footnote 3)

Capital Leases

On March 12, 2015, DCS entered into a Master Lease Agreement as the lessor to supply digital video equipment and software to a third party. The lease qualifies as a direct-financing lease, runs for a period of five years, and calls for payments of $183,249 to be received each quarter, which commenced on June 10, 2015. Interest from the lease is recognized over the term of the agreement using the effective interest method as a component of other revenues. The total of future minimum lease payments to be received from the lease agreements is $3,481,730.

On December 2, 2015, and December 15, 2015, respectively, DCS contracted to lease additional units of digital video equipment, via two separate lease schedules. Each new lease schedule is subject to the same terms and conditions of the March 12, 2015, Master Lease Agreement. The leases qualify as capital leases, run for a period of five years, and are payable quarterly beginning in March 2016. On October 21,2016 and November 7, 2016 DCS entered into Master Equipment/Lease Purchases with Texas Capital Bank, N.A. and Wells Fargo Equipment Finance, Inc., for the purchase of school buses and technology equipment.

The following is a description of the outstanding lease obligations of the Issuer – including the Technology purchase.

FYE Lease Lease Lease Lease Lease Lease Lease Lease Lease Lease 30-Jun 20150625-1 20150625-2 20150625-3 20150625-4 20150625-5 20150625-6 20150625-7 20150625-8 20150625-9 20150625-10 2018 767,896.6 418,768.6 661,787.3 228,276.0 958,600.0 232,464.0 628,280.0 284,819.8 224,088.0 136,127.1 2019 767,896.6 418,768.6 661,787.3 228,276.0 718,950.0 232,464.0 628,280.0 284,819.8 224,088.0 136,127.1 2020 767,896.6 418,768.6 661,787.3 228,276.0 - 232,464.0 628,280.0 284,819.8 224,088.0 136,127.1 2021 191,974.2 104,692.2 165,446.8 57,069.0 - 116,232.0 471,210.0 284,819.8 224,088.0 136,127.1 2022 ------2023 ------2024 ------2025 ------

FYE Lease Lease Lease Vendor Capital Capital Capital Capital 30-Jun 20150306-01 20150306-02 20150306-03 Note Lease #1 Lease #2 Lease #3 Lease #4 Total 2018 698,088 395,816 286,914 2,491,830 397,064 178,394 1,083,780 2,509,427 12,582,421 2019 698,088 395,816 286,914 - 400,156 178,394 1,083,780 2,509,427 9,854,032 2020 523,566 395,816 286,914 - 403,494 178,394 1,083,780 2,509,427 8,963,898 2021 - 197,908 286,914 - 407,092 178,394 1,083,780 2,509,427 6,415,175 2022 - - - - 100,367 59,465 1,083,780 2,509,427 3,753,039 2023 ------1,083,780 2,509,427 3,593,207 2024 ------1,083,780 2,509,427 3,593,207 2025 ------180,630 209,118 389,748

* Does not include Sale Leaseback payments.

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TAB LE 1 0 - S CHEDULE OF CHANGES IN NET P OS TION (a)

FOR FISCAL YEAR END 2016 2015 2014 2013 2012

Revenues: Property taxes $ 18,786,726 $ 17,418,999 $ 16,384,774 $ 15,656,373 $ 15,513,395 Investment earnings 20,260 24,726 27,624 41,859 58,584 Charges for services 88,002,308 80,405,086 83,110,809 67,120,349 50,575,945 Operating grants and contributions 26,426,651 2,669,038 919,961 1,528,996 3,406,263 Capital grants and contributions - - - 1,151,242 144,632 State aid - 25,133,293 23,864,206 22,401,362 26,017,157 Miscellaneous 635,998 430,328 741,976 513,493 768,144 Total Revenues $ 133,871,943 $ 126,081,470 $ 125,049,350 $ 108,413,674 $ 96,484,120

Expe ns e s : Instructional resources and media services $ 728,534 $ 755,010 $ 783,421 $ 504,645 $ 629,090 Guidance, counseling and evaluation 509,948 481,087 525,366 554,330 542,188 Student (Pupil) Transportation 88,019,124 85,038,306 86,712,741 87,700,279 65,597,623 Extracurricular Activities 7,380,126 6,596,712 6,286,468 6,037,966 5,842,579 General administration 14,313,376 9,324,883 8,102,883 8,104,500 6,730,260 Plant Maintenance and Operations 2,463,200 2,199,389 2,785,496 2,188,466 2,958,486 Data Processing Services 3,873,903 7,954,717 6,997,629 4,882,963 5,747,530 Security and Monitoring Services 5,691,747 4,717,497 6,936 - - Community services - - - - 25,508 Debt Service Interest and fiscal charges 1,084,479 1,426,469 1,183,261 1,088,028 232,056 Bond issuance cost and fees - - 419,839 182,250 229,203 Non-Dallas County School Districts 21,972,252 18,332,160 14,994,219 12,454,826 5,802,402 Total Expenses $ 146,036,689 $ 136,826,230 $ 128,798,259 $ 123,698,253 $ 94,336,925

Special Item: Loss on disposal of assets $ - $ - $ (567,246) $ - $ -

Beginning Net Position $ 44,048,804 $ 57,883,854 $ 62,200,009 $ 77,484,588 $ 75,337,393 Prior Period Adjustments - (3,090,290) (b) - - - Increase (Decrease) in Net Position (12,164,746) (c) (10,744,760) (d) (4,316,155) (e) (15,284,579) (f) 2,147,195 Ending Net Position $ 31,884,058 $ 44,048,804 $ 57,883,854 $ 62,200,009 $ 77,484,588

(a) Source: Issuer's audited financial reports. (b) Implementation of GASB 68 and GASB 71 reporting requirements necessitated this adjustment. (c) For FY 2016, the Issuer's government-wide expenses increased due to GASB 68 reporting requirements (pension expense) and a net increase in general and administrative expenses. (d) The decrease was due to the payment of principal and interest on public property finance contractual obligations in the amounts of $7,050,000 and $1,426,469, respectively. (e) The decrease was due to a $4,045,000 bond issue for working capital which increased liabilities without an offsetting asset and $6,000,000 of the $20,350,000 2014 series bond issues were used to acquire assets recorded in businesstype activities. (f) The decrease was due to an increase in the cost of providing student transportation services by $22,828,919 and an increase of $1,374,240 in general administration expenditure.

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(a) TABLE 11 - SCHEDULE OF GENERAL FUND REVENUES AND EXPENDITURES

FOR FISCAL YEAR END 2016 2015 2014 2013 2012

General Fund Revenues: Local and Operational Sources $ 91,545,769 $ 83,101,275 $ 89,805,603 $ 71,251,927 $ 62,697,631 State Program Revenues 23,444,985 25,133,293 21,652,724 21,227,146 24,839,988 Federal Program Revenues 1,420,345 832,262 1,148,704 2,092,344 3,550,895 Total General Fund Revenues $ 116,411,099 $ 109,066,830 $ 112,607,031 $ 94,571,417 $ 91,088,514

General Fund Expenditures: Instruction $ 134,980 $ 55,664 $ 58,939 $ 61,193 $ 48,058 Instructional Resources and Media 554,646 622,618 618,403 585,635 557,770 Guidance, Counsel & Evaluation. Serv. 502,749 484,005 525,366 554,330 542,188 Student (Pupil) Transportation 78,556,822 77,198,774 78,730,847 68,220,284 63,356,133 Extracurricular Activities 7,571,269 6,289,610 6,286,468 6,037,966 5,842,579 General Administration 10,364,843 9,141,914 8,091,713 7,991,853 6,593,572 Plant Maintenance and Operations 1,684,393 1,672,122 1,959,481 1,527,337 1,398,555 Security and Monitoring Services 5,766,936 4,723,498 6,936 - - Data Processing Services 4,139,342 3,918,368 3,942,717 3,702,009 3,900,550 Principal on Long-Term Debt 9,810,000 7,050,000 6,908,180 6,844,199 2,430,499 Interest on Long-Term Debt 2,084,452 2,427,553 1,842,604 1,538,951 297,794 Facilities Acquisition and Construction 308,106 582,405 656,587 573,853 1,366,081 Total General Fund Expenditures $ 121,478,538 $ 114,166,531 $ 109,628,241 $ 97,637,610 $ 86,333,779

Excess (Deficiency) of revenues over expenditures $ (5,067,439) (b) $ (5,099,701) (f) $ 2,978,790 $ (3,066,193) (g) $ 4,754,735

Other Sources $ (16,391,645) (c) $ 19,581,593 $ 4,208,655 $ - $ (7,984,900) (i)

Net change in fund balance $ (21,459,084) (d) $ 14,481,892 $ 7,187,445 $ (3,066,193) (h) $ (3,230,165) (j) Beginning fund balance 27,969,836 13,487,944 6,300,499 9,366,692 12,596,857 Ending General Fund Balance $ 6,510,752 (e) $ 27,969,836 $ 13,487,944 $ 6,300,499 $ 9,366,692

(a) Source: Issuer's audited financial reports. (b) Expenditures associated with instruction, general administration, extracurricular activities, and security and monitoring services in the General Fund exceeded appropriations by $38,680; $116,364; $8,999, and $439,795, respectively. (c) Includes net transfers from the General Fund to the Stop Arm Funds of $16,795,372 were not budget ed, and since t he int erfund borrowings bet ween those funds are not expected to be repaid within a reasonable time, the internal balances between the funds have been reduced by the transfers. (d) Includes interfund transfers of $17,795,372 from the General Fund to the Dallas County Stop Arm Fund and Texserve Stop Arm Fund. (e) At the end of FY 2016, the Issuer had an unassigned fund balance of $4,926,321. (f) Revenue decreases were primarily due to the expiration of certain transportation sub-contracts in 2015 that operated at higher cost per route than the traditional routes run solely by DCS’ vehicles. (g) For FY 2013, this deficiency was attributable primarily to increases in transportation route costs and repayment of principal and interest on long-term debt. (h) For FY 2013, this deficiency was attributable primarily to increases in transportation route costs and repayment of principal and interest on long-term debt. (i) Includes a transfer to the Capital Projects Fund to pay for facilities construction and other needs. (j) Includes a transfer to the Capital Projects Fund to pay for facilities construction and other needs.

A-8

(a) TABLE 12 - LOCAL REVENUE SOURCES

FOR FISCAL YEAR END 2016 2015 2014 2013 2012

Source of Local Revenue Property taxes $ 18,747,884 $ 17,429,065 $ 16,360,989 $ 15,626,307 $ 15,560,469 Operational charges to schools for transportation (b) 53,258,931 47,072,141 54,802,117 39,276,814 31,309,108 Contributions from schools capital purchases - - - - - Charges for psychological services (b) 351,772 347,576 341,290 385,723 362,610 Charges for school district monitors (b) 6,817,450 6,613,063 6,212,194 5,735,546 5,251,006 Charges for summer school transportation 1,005,189 1,461,395 1,092,517 915,135 1,149,598 Charges to others for transportation services 145,092 205,515 279,815 176,876 182,193 Charges for extracurricular transportation services 8,830,850 7,910,518 8,642,876 7,440,940 7,246,769 Charges for technology services (b) 508,857 357,774 354,316 551,404 797,224 Charges for instructional resources 189,010 151,219 217,705 115,327 - Charges for workers compensation services 369,256 383,896 429,520 451,965 - Charges for school resource officers 531,820 444,608 - - - Publications workshop 153,466 44,980 53,710 49,910 34,500 Child Safety Trust Fund distribution 433,818 538,977 - - - Investment income 19,562 20,792 16,121 20,797 36,010 Other income 182,812 119,756 1,002,433 505,183 768,144 Total Local Revenue $ 91,545,769 $ 83,101,275 $ 89,805,603 $ 71,251,927 $ 62,697,631

(a) Source: Issuer's audited financial reports. (b) These revenues are generated pursuant to the intergovernmental contracts between the Issuer and the independent school districts under which the Issuer provides the indicated service.

A-9

(a) TAB LE 1 3 - S TATEMENT OF NET P OS TION

FOR FISCAL YEAR END 2016 2015 2014 2013 2012

Assets: Cash and cash equivalents $ 10,565,083 $ 26,174,162 $ 16,982,099 $ 9,548,522 $ 25,553,857 Property taxes - delinquent 786,330 740,289 743,082 722,611 708,359 Allowance for uncollectible taxes (156,915) (156,915) (156,915) (156,915) (155,739) Due from other governments (net) 14,418,814 7,927,210 11,515,589 11,517,899 10,511,099 Other receivables (net) 1,819,017 3,771,772 2,475,822 1,484,285 263,329 Inventories 13,865,687 5,836,990 11,987,320 17,973,438 1,757,804 Net investment in capital lease - current 2,052,392 519,559 - - - Deferred expenditures - - - - 99,988 Prepayments 4,240,317 3,889,074 - 4,195,238 - Capital Assets: Land 2,422,846 2,422,846 2,136,071 2,136,071 1,665,884 Building and improvements 31,973,204 31,859,768 31,742,741 23,395,798 23,361,298 Accumulated depreciation - buldings (9,986,693) (9,137,941) (8,267,711) (7,441,696) (6,806,675) Vehicles 128,784,927 133,023,844 123,459,686 109,362,467 104,765,476 Accumulated depreciation - vehicles (75,923,666) (73,668,803) (63,562,335) (60,906,855) (60,794,091) Furniture and equipment 46,815,203 38,470,859 31,062,028 23,071,709 18,937,319 Accumulated depreciation - furniture & equipment (28,255,982) (20,116,418) (12,432,649) (11,751,195) (6,586,394) Intangible assets 25,252,941 25,438,552 24,978,215 1,777,718 1,959,110 Accumulated depreciation - intangible assets (4,033,169) (2,477,111) (862,210) (1,296,049) (1,259,975) Construction in progress 82,543 - - 5,350,996 319,712 Net investments in capital lease - noncurrent 6,798,549 2,356,817 - - - Restricted cash and cash equivalents 248,724 249,540 250,081 1,780,860 - Total Assets $ 171,770,152 $ 177,124,094 $ 172,050,914 $ 130,764,902 $ 114,300,361

Deferred Outflows of Resources: Deferred outflows related to pensions 9,469,028 1,114,414 - - - Total Deferred Outflows of Resources $ 9,469,028 $ 1,114,414 $ - $ - $ -

Liabilities: Accounts Payable $ 4,113,072 $ 1,320,152 $ 5,872,392 $ 2,801,852 $ 4,693,386 Accrued interest payable 317,522 250,093 226,244 102,140 57,121 Payroll deductions & withholdings payable 1,080,368 1,267,682 1,104,446 1,523,713 2,103,063 Accrued wages payable 566,256 634,449 415,065 386,794 198,885 Due to other governments 1,536,042 4,357,618 2,879,788 34,839 - Unearned revenue 3,250,573 13,359 61,853 1,290 - Accrued expenses 1,443,344 2,740,721 2,266,138 2,580,871 2,479,231 Long-term liabilities: Due within one year 23,425,843 15,484,871 9,469,651 10,247,515 4,702,756 Due within more than one year 100,251,288 104,591,001 91,871,483 50,885,879 22,581,331 Net pension liability 11,868,669 2,702,925 - - - Total Liabilities $ 147,852,977 $ 133,362,871 $ 114,167,060 $ 68,564,893 $ 36,815,773

Deferred Inflows of Resources: Deferred outflows related to pensions 1,502,145 826,833 - - - Total Deferred Inflows of Resources $ 1,502,145 $ 826,833 $ - $ - $ -

Net Position: Invested in capital assets, net of related debt $ 38,099,054 $ 51,844,752 $ 58,438,044 $ 41,818,481 $ 49,232,841 Restricted 248,724 249,540 250,081 5,569,161 - Unrestricted (6,463,720) (b) (8,045,488) (c) (804,271) (d) 14,812,367 28,251,747 Total Net Position $ 31,884,058 $ 44,048,804 $ 57,883,854 $ 62,200,009 $ 77,484,588

(a) Source: Issuer's audit ed financial report s. (b) Remaining out st anding debt used t o acquire relat ed capit al assets. (c) Remaining out st anding debt used t o acquire relat ed capit al assets. (d) Remaining out st anding debt used t o acquire relat ed capit al assets.

A-10

TABLE 14 - SUMMARY OF REFUNDED OBLIGATIONS*

Pub Property Finance Contractual Obligations, Series 2012-B

Maturity Date Amount Call Date Call Price 12/1/2017$ 3,715,000 5/30/2017 100 12/1/2018 3,795,000 5/30/2017 100 12/1/2019 3,890,000 5/30/2017 100 12/1/2020 3,995,000 5/30/2017 100 $ 15,395,000

Pub Property Finance Contractual Obligations, Series 2013

Maturity Date Amount Call Date 6/1/2017$ 735,000 Escrowed to maturity 6/1/2018 3,165,000 Escrowed to maturity 6/1/2019 2,885,000 Escrowed to maturity 6/1/2020 3,025,000 Escrowed to maturity $ 9,810,000

Pub Property Finance Contractual Obligations, Series 2012

Maturity Date Amount Call Date 6/1/2017$ 2,360,000 Escrowed to maturity 12/1/2017 2,380,000 Escrowed to maturity $ 4,740,000

Pub Property Finance Contractual Obligations, Series 2012-A

Maturity Date Amount Call Date 6/1/2017$ 1,320,000 Escrowed to maturity 12/1/2017 1,350,000 Escrowed to maturity 6/1/2018 1,375,000 Escrowed to maturity 12/1/2018 1,410,000 Escrowed to maturity 6/1/2019 1,440,000 Escrowed to maturity $ 6,895,000

Pub Property Finance Contractual Obligations, Series 2014

Maturity Date Amount Call Date 6/1/2018$ 500,000 Escrowed to maturity 6/1/2019 3,230,000 Escrowed to maturity $ 3,730,000

* Preliminary, subject to change.

A-11 [THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX B

EXCERPTS FROM THE ISSUER’S AUDITED FINANCIAL REPORT FOR YEAR ENDED JUNE 30, 2016

[THIS PAGE INTENTIONALLY LEFT BLANK] r- r 2016 ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2016

OL 58

«1 ~ T\ J iw, 5151 Blvd. Dallas, Texas 75228

Dallas County Schools # Mrcni I Jiiuatiiui lliruu l J ^ 'llicnini' ^ [THIS PAGE INTENTIONALLY LEFT BLANK] DALLAS COUNTY SCHOOLS ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED JUNE 30, 2016

Prepared by: The Business Department 5151 Samuell Blvd. Dallas, TX 75228 [THIS PAGE INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS

Exhihit/Tahle Page

Certificate of Board i

Financial Section

Independent Auditor's Report 1 Management's Discussion and Analysis 6 Basie Financial Statements 17 Government-Wide Statements: A-l Statement of Net Position 19 B-1 Statement of Activities 20 Governmental Funds Financial Statements: C-l Balance Sheet 21 C-2 Reconciliation of the Governmental Funds Balance Sheet to the Government-Wide Statement of Net Position 22 C-3 Statement of Revenues, Expenditures, and Changes in Fund Balances 23 C-4 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Government-Wide Statement of Activities 24 Proprietary Funds Financial Statements: D- l Statement of Net Position 25 D-2 Statement of Revenues, Expenses, and Changes in Fund Net Position 26 D-3 Statement of Cash Flows 27 Notes to the Financial Statements 30

Required Supplementary Information 67 G-l Schedule of Revenues, Expenditures and Changes in Fund Balance- General Fluid - Budget and Actual 68 G-2 Schedule of DCS’ Proportionate Share of the Net Pension Liability - Teacher Retirement System of Texas 69 G-3 Schedule of DCS’ Contributions-Teacher Retirement System of Texas 70 Notes to the Required Supplementary Information 71

Other Schedule 73 J-l Schedule of Delinquent Taxes Receivable 74 Dallas County Schools 9c Strengthening Education Through Service Dallas County Schools ^k Strengthening Education Through Service

CERTIFICATE OF BOARD

Dallas County Schools Dallas 057-000 Name of School District County Co.-Dist. Number

We, the undersigned, certify ttat the attached financial reports of the above named school district were reviewed and (check one) V approved disapproved for the year ended June 30, 2016, at a meeting of the Board of School Trustees of such school district on the 25th day of April , 2017.

/ Signature of Interim Superintendent Signatui card President

i Dallas County Schools 9c Strengthening Education Through Service

FINANCIAL SECTION

iii

Dallas County Schools Strengthening Education Through Service

iv weaver Assurance Tax Advisory ^-

Independent Auditor's Report

Board of Trustees Dallas County Schools 5151 Samuell Blvd. Dallas, Texas 75228

Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities, the business-type activities, and each major fund of Dallas County Schools (DCS) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise DCS' basic financial statements as listed in the table of contents.

Management 's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor' s Responsibility

Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

AN INDEPENDENT MEMBER OF WEAVER AND TIDWELL. L.L.P. 400 WEST ILLINOIS, SUITE 1550, MIDLAND. TX 79701 BAKER TILLY INTERNATIONAL CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS P: 432 683 5226 F: 432 683 9182 Board of Trustees Dallas County Schools

Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, and each major fund of DCS as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying financial statements have been prepared assuming that DCS will continue as a going concern. As discussed in Note 18 to the financial statements, DCS has incurred recurring losses from operations and has an unrestricted deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 18. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis, budgetary comparison information, schedule of the DCS’ proportionate share of the net pension liability, and schedule of DCS’ contributions on pages 6-16 and 68-72 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audit was conducted for the purpose of forming opinions on the financial stafements that collectively comprise DCS’ basic financial statements. The schedule of delinquent taxes receivable is presented for purposes of additional analysis and is not a required part of the basic financial statements.

2 Board of Trustees Dallas County Schools

The schedule of delinquent taxes receivable is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of delinquent taxes receivable is fairly stated, in all material respects, in relation to the basic financial statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated April 25, 2017, which is available under separate cover, on our consideration of DCS’ internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering DCS’ internal control over financial reporting and compliance.

WEAVER AND TIDWELL, L.L.P.

Midland, Texas April 25, 2017

3 Dallas County Schools 'k Strengthening Education Through Service

4 MANAGEMENT’S DISCUSSION AND ANALYSIS

5 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

As management of Dallas County Schools’ (“ DCS” ), we offer readers of DCS’ annual financial report this narrative overview and analysis of DCS’ financial performance during the fiscal year ended June 30, 2016. We encourage readers to consider the information presented here in conjunction with additional information furnished in the independent auditor’s report, on pages 1 through 3, and DCS’ basic financial statements, which begin on page 17.

FINANCIAL HIGHLIGHTS

• DCS’ government-wide expenses totaled $146,036,689 for the year ended June 30, 2016, an increase of $9,210,459 over the prior year. The increase was primarily due to reporting, in fiscal year 2016, pension expense of $6,822,274 related to GASB 68 and a net increase in general and administrative expense of $4,985,716 over fiscal 2015. • During the year, DCS’ total net position decreased by $12,164,746. DCS’ total expenses of $146,036,689, exceeded DCS’ total revenues of $133,871,943, which consists of program revenues of $114,428,959 and general revenues of $19,442,984. • As of June 30, 2016, DCS reported combined ending governmental fund balance of $6,596,303. Of this total at year’s end, DCS had unassigned fund balance of $4,926,321 or 75% of total fund balance available in the General Fund to meet DCS’ ongoing obligations. • General revenues related to governmental activities accounted for $19,033,812 or 18.9% of total revenues from governmental activities. Program specific revenues in the form of charges for services and grants and contributions (program revenues) accounted for $100,955,008 or 84.1% of total revenues from governmental activities. • At June 30, 2016, DCS’ combined assets and deferred outflows exceeded its liabilities and deferred inflows by $11,699,889 (net position), and the unrestricted net position of governmental activities reported a cumulative deficit of $17,250,847 as of June 30, 2016.

Liquidity Risk

Liquidity risk is the risk of not having sufficient liquid financial resources to satisfy current obligations as they become due, or the need to engage in borrowing activities at the detriment of incurring excessive costs in the process. During fiscal year ended June 30, 2013, DCS’ Board of Trustees approved the implementation of a Student Safety/Stop Arm Camera Program (the “ Program” ) with the objective of reducing the incidence of possible injuries caused specifically to school children by the violation of motor vehicles illegally passing stopped school buses with stop arm extended and lights flashing for the purpose of loading and unloading students. The Program, as designed, was expected to be self-sufficient and have the ability to repay the debt with revenues from collections on citations.

DCS accounts for the Program via two distinct proprietary “ Stop Arm” funds that were established during fiscal 2013. In recent years, the Student Safety/Stop Arm Camera Program experienced collectability challenges and declining revenues. As a direct result, the Program relied upon on General Fund resources to supplement stop arm operations and service the stop arm debt as they matured.

6 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

Liquidity Risk - continued

During the current fiscal year, and after a preliminary financial review by a newly appointed Interim Chief Financial Officer, DCS was deemed to be under financial stress. To address the condition, DCS, in February 2017, implemented a layoff via a reduction in force directive to achieve a budgeted reduction of 120 employees. Also in February 2017, DCS engaged the services of an independent registered municipal advisors to assist DCS with a range of financial advisory services that includes long-term debt restructuring. To date, the municipal financial advisors is going forward with a “ Plan of Finance” that was recommended to DCS, which received a unanimous approval from the Board of Trustees. In addition, DCS has taken steps to outsource the management of stop arm program operations inside and outside of Dallas County.

Budgetary challenges, prolonged deficit in the Stop Arm Funds, and debt ratings below investment grade could affect DCS’ ability to access credit markets and will likely increase the costs of borrowing. Continued improvements in liquidity is dependent upon the elimination DCS’ accumulated deficit and revitalization of the declining stop arm operations. It is DCS’ intent to arrange its financial affairs in accordance with the Plan of Finance recommended by the municipal financial advisors and manage its budgets to eliminate the current deficit in the Stop Arm Funds and provide for future balanced financial operations. DCS’ current plans include implementing further workforce reductions and regaining overall operating efficiencies.

OVERVIEW OF THE FINANCIAL STATEMENTS

The financial section consists of three parts 1) management’s discussion and analysis (this section), 2) the basic financial statements, and 3) required supplementary information. The basic financial statements include two kinds of statements that present different views of DCS.

• This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Position and the Statement of Activities. These provide information about the activities of DCS as a whole and present both a long-term and short term view of DCS’ property and debt obligations and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. • The remaining statements are the fund financial statements that report DCS’ operations in more detail than the government-wide statements by providing information about DCS’ most significant funds. For general governmental activities, these statements reflect the flow of current financial resources and supply the basis for tax levies and the appropriations budget. The governmental funds statements tell how general government services were financed in the short-term as well as what remains for future spending. For proprietary activities, fund financial statements tell how goods or services of DCS were sold to external customers and how funds were accumulated and costs were allocated internally among various functions.

7 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

The financial statements also include notes to the financial statements that provide narrative explanations or additional data needed for full disclosure and are essential to a complete understanding of the data provided in the government-wide statements and the fund financial statements. The statements are followed by a section of required supplementary information that supports the financial statements.

This annual report contains other supplementary information in addition to the basic financial statements and the notes to the financial statements. This Management’s Discussion and Analysis is required supplementary information under governmental accounting standards. The report section labeled “ Required TEA Schedules” contain data that provide assurance that DCS is using supplied funds in compliance with the terms of funding sources.

Figure A- l summarizes the major features of DCS’ financial statements, including the portion of government they cover, and the types of information they contain.

Figure A-l Ma jor Features of the District's Government-wide and Fund Financial Statements Fund Statements Government-Wide Type of Statement Governmental Funds Proprietary Fund

Entire District's government The activities of the district that The activities of the district that Scope and the District's component are not proprietary are not governmental activities units

* Statement of Net Position * Balance Sheet * Statement of Revenues, Requiredfinancial * Statement of net position * Statement of revenues, Expenses, and Changes in Net statements * Statement of activities expenditures and changes in Position * fund balances Statement of Cash Flows

Modified accrual accounting Accounting basis and Accrual accounting and Full Accrual basis accounting and and current financial resources measurement focus economic resources focus economic resources focus focus

All assets, deferred inflows of Only assets expected to be used resources, liabilities, and up and liabilities that come due All assets and liabilities, both Type of asset/liability deferred inflows of resources, during the year or soon financial and capital, and short¬ information both financial and capital, and thereafter with no capital assets term and long-term short-term and long-term included

Revenues for which cash is received during or soon after All revenues and expenses the end of the year; All revenues and expenses during Type of infiow/ouflow during the year, regardless of expendiuires when goods or the year, regardless of when cash information when cash is received or paid services have been received and is received or when cash is paid payment is due during the year or soon thereafter

8 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

GOVERNMENT-WIDE FINANCIAL STATEMENTS

The government-wide financial statements - consisting of the Statement of Net Position and the Statement of Activities - report information about DCS’ as a whole. These statements are designed to provide readers with a broad overview of DCS’ finances. The government-wide statements apply the accrual basis of accounting, which is similar to the accounting basis used by most private-sector companies. The Statement of Net Position includes all of DCS’ assets, liabilities, and deferred inflows/outflows of resources, with the difference reported as net position. The Statement of Activities presents information that shows how DCS’ net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event that gives rise to the change occurs, regardless of the timing of related cash flows.

The two government-wide financial statements report DCS’ net position and changes in net position. Net position (the difference between assets, deferred inflows/outflows and liabilities) provide one measure of DCS’ financial health, or financial position. Over time, increases or decreases in DCS’ net position are one indicator of whether its financial health is improving or deteriorating. To fully assess the overall health of DCS, however, additional factors should be considered. For example, changes in the property tax base in Dallas County and levels of state funding.

DCS’ operational functions include transportation services; instructional and media services; guidance, counseling, and evaluation services; extracurricular activities; data processing services; plant maintenance and operations; security and monitoring services; and general administration. Charges for Services accounted for approximately 66% of the revenues that financed those activities; support from operating grants and contributions provided another 21%; property taxes accounted for 13%.

FUND FINANCIAL STATEMENTS

The fund financial statements provide more detailed information about DCS’ most significant funds, as opposed to DCS as a whole. A fund is a self-balancing set of accounts segregated for specific purposes in accordance with laws and regulations. Certain funds are required by State law and/or by bond covenants. The Board of Trustees has established other funds to control and manage money for particular purposes or to show that it is properly using resources or grants.

DCS uses two types of funds:

Governmental Funds - DCS’ basic services are included in governmental funds, which focus on (1) how cash and other financial assets can readily be converted to cash and (2) the balances left at year- end that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps one determine whether there are more or fewer financial resources available to finance services. Because this information does not encompass the additional long-term focus of the government-wide statements, additional information is provided on subsequent pages, to explain the relationship (or differences) between them.

9 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

Proprietary Funds - Services for which DCS charges a fee are reported in proprietary funds. The two types of Proprietary Funds are Enterprise Funds and Internal Service Funds. Currently, DCS does not use any Internal Service Funds. DCS however uses three (3) Enterprise Funds to report the same functions presented as Business-type Activities in the government-wide financial statements. These Funds are Texserve Transportation and Technology Fund, Dallas County Stop Arm Fund, and Texserve Stop Arm Fund. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail.

FINANCIAL ANALYSIS OF DCS AS A WHOLE

Net Position - DCS’ combined net position at June 30, 2016, was $31,884,058. The unrestricted component of net position, however, was an accumulated deficit of $6,463,720. A large portion of net position ($38 million) reflects DCS’ investment in capital assets (e.g., vehicles, buildings, and furniture and equipment), less any related debt used to acquire those assets that is still outstanding. Although DCS’ investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. (See Table A- l ).

Table A-l Dallas County Schools’ Net Position Governmental Governmental Business-Type Business-Type Activities Activities Activities Activities As of As of As of As of June 30, 2015 June 30, 2016 June 30, 2015 June 30, 2016

Current and Other Assets $ 42,630,309 $ 22,612,231 $ 8,158,630 $ 32,025,767 Capital Assets 93,648,433 82,995,713 32,167,163 34,136,441 Total Assets 136,278,742 105,607,944 40,325,793 66,162,208 Total Deferred Outflows of Resources 1,114,414 8,741,806 - 727,222 Current Liabilities 21,024,792 20,949,353 5.044.153 14,783,667 Long-Term Liabilities 82,970,653 80,313,728 24,323,273 31.806,229

Total Liabilities 103,995,445 101,263,081 29,367,426 46,589,896 Total Deferred Inflows of Resources 826,833 1,386,780 - 115,365 Net Position: Net Investment in Capital Assets 30,283,313 28,950,736 21,561,439 9,148,318 Restricted - - 249,540 248,724 Unrestricted Net Position (Deficit) 2,287,565 (17,250,847) (10,333,053) 10,787,127

Total Net Position $ 32,570,878 $ 11,699,889 S 11.477.926 $ 20,184,169

Changes in Net Position. The combined net position of DCS decreased by $12,164,746 or 27.6% over the prior year. The largest functional expenses occurred in student transportation, general administration, and extracurricular activities. The excess of student transportation cost over budget was due to the increase in driver payroll costs that stemmed from the net increase in transportation staff. Another factor was the increase in fleet maintenance costs due to higher prices paid for vehicular parts that service DCS’ aging fleet. 10 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

During the current year, the School Bus Student Safety/Stop Arm Program became more dependent on General Fund resources to supplement stop arm operations and service the stop ami debt as they matured. For the year ended June 30, 2016, the total net position of the Enterprise Funds increased by $8,706,243, primarily due to net transfers in of $16,795,372 from the General Fund. The transfers from the General Fund to the Stop Arm Funds were temporarily loaned to those funds, and since the General Fund is not expected to be repaid within a reasonable time, the interfund balances between the funds have been reduced by the transfers. Management expects the Stop Arm funds to generate positive cash flows from ongoing operations, at which time all amounts transferred in would subsequently be returned to the General Fund. (See Table A-2). Governmental Activities

Total revenue from governmental activities was $119,988,820. The amount that DCS’ taxpayers paid for these activities through property taxes was $18,786,726. Other governments and organizations subsidized certain programs with operating grants and contributions that totaled $25,299,148. Beneficiaries of the programs and services provided by DCS paid $75,655,860 of those revenues. However, the cost of all governmental activities programs and services was $124,064,437. Governmental activities decreased net position by $20,870,989. The key factors that contributed to the decrease was net pension expense related to GASB 68 and capital assets depreciation provision in the amounts of $1 ,186,785 and $14,814,411, respectively.

Table A-2 Changes in Net Position

Governmental Business-type Governmental Business-type Total Activities Activities Activities Activities 2015 2015 2016 2016 2015 2016

Property Taxes $ 17,418,999 S S 18,786,726 $ 517,418,999 518,786,726 Investment Earnings 24,726 - 20,260 - 24,726 20,260 Charges for Services 65,718,383 14,686,703 75,655,860 12,346,448 80,405,086 88,002,308 Operating Grants and Contributions 26,504,532 1,297,799 25,299,148 1,127,503 27.802.331 26,426,651 Miscellaneous 313,197 117,131 226,826 409,172 430,328 635,998 Total Revenues 109,979,837 16,101,633 119,988,820 13,883,123_ 126,081,470 133,871,943 Instructional Resources and Media Services 755,010 728,534 755,010 728,534 Guidance, Counseling, and Evaluation 481,087 509,948 - 481,087 509,948 Student Transportation 85,038,306 88,019,124 85,038,306 88,019,124 Extracurricular Activities 6,596,712 7,380,126 - 6,596.712 7,380,126 General Administration 9,324,883 14,313,376 - 9,324,883 14,313,376 Plant Maintenance and Operations 2,199.389 2.463.200 - 2,199,389 2,463,200 Security and Monitoring 4,717,497 5,691,747 - 4,717,497 5,691,747 Data Processing Services 7,954,717 3,873,903 7,954,717 3,873,903 Interest and fiscal charges 1,426,469 1,084,479 - 1,426,469 1,084,479 Non-Dallas County School Districts - 18,332,160 - 21,972,252 18,332,160 21,972,252 Total Expenses 118,494,070 18,332,160 124,064,437 21,972,252 136,826,230 146,036,689

Change in Net Position before Transfers (8,514,233) (2,230,527) (4,075,617) (8,089,129)(10.744.760)(12,164,746) Transfers (5,418,407) 5,418,407 (16,795,372) 16,795,372 - - Change in Net Position (13,932,640) 3,187.880 (20,870.989) 8,706,243 (10,744.760) (12,164,746) Beginning Net Position 49,593,808 8,290.046 32,570,878 11,477,926 57,883,854 44,048,804 Prior Period Adjustment (3,090,290) - - - (3.090,290) - Ending Net Position $ 32,570,878 $ 11.477,926 S 11,699,889 S 20,184,169 544.048.804 531.884,058

11 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

DCS’ government-wide revenues totaled $133,871,943 for the year ended June 30, 2016. A significant portion, approximately 66%, of the revenues derived from charges for services. Revenues from operating grants and contributions and from property taxes and other sources accounted for 21% and 13%, respectively. (See Figure A-2). The total cost of government-wide programs and services was $146,036,689. 60% of these costs was expensed for student transportation services, and the remainder was expensed for various other services. (See Figure A-3).

Figure A-2 Dallas County Schools Sources of Revenue for the Year Ended June 30, 2016

Property Taxes 13%

Grants and Contributions 21%

Charges For Services 66%

Figure A-3 Dallas County Schools Functional Expenses for the Year Ended June 30, 2016

Plant Maintenance Extracurricular General & Operations 5% -Administration Data Processing 2% 10% Services 3%

Security' and Monitoring Student 4% Transportation 60%

Other Services 15%

12 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

Property tax rates per $100 of assessed valuation were $0,010 in fiscal years 2016 and 2015. The effective tax rate of $0,010, plus the increase in property market values estimated assessed tax base, resulted in property tax collection rate of 99.7% of the 2015 tax levy of $18,847,434, which represents an increase of 7.5% over the prior year. Table A-3 presents the costs for each of DCS’ major functions and each function’s net cost (total cost less fees generated by the activities and intergovernmental aid). The net cost reflects financial burden that was borne by the taxpayers of Dallas County for each of these functions.

Table A-3 Net Cost of DCS’ Governmental Activities

Total Cost of Net Cost of Services Services Year Ended Year Ended Year Ended Year Ended June 30, 2015 June .30, 2016 June 30, 2015 June 30, 2016 Instructional Resources and Media Services $ 755,010 $ 728,534 $ 570,711 $ 408,928 Guidance, Counseling, and Evaluation 481,087 509,948 133,511 158,176 Student Transportation 85,038,306 88,019,124 4,020,816 (24,468) Extracurricular Activities 6,596,712 7,380,126 (1,519,321) (1,595,816) General Administration 9,324,883 14,313,376 8,940,987 13,944,120 Plant Maintenance and Operations 2,199,389 2,463,200 2,199,389 2,463,200 Security and Monitoring 4,717,497 5,691,747 3,733,912 4,726,109 Data Processing Services 7,954,717 3,873,903 6,764,681 1,944,701 Interest on Long-Term Debt 1,426,469 1,084,479 1,426,469 1,084,479 $ 118,494,070 $ 124,064,437 $ 26,271,155 $ 23,109,429

Business-Type Activities The business-type activities operated by DCS include activities under shared services and interlocal agreements with districts outside of Dallas County to provide transportation, technological, and other services to those districts on a charges for services basis in addition to activities related to the operation of a school bus student safety program both within and outside of Dallas County that allow for school bus stop arm violations to be recorded by camera. For the year ended June 30, 2016, DCS’ business-type activities reflected charges for services of $12,346,448, operating grants and contributions of $1,127,503, miscellaneous receipts of $409,172, and transfers in of $17,795,372 transferred from the General Fund to the Dallas County Stop Arm and Texserve Stop Arm Funds. With total expenses of $21,972,252, the change in net position for business-type activities was a net increase of $8,706,243, which resulted in an ending net position in the amount of $20,184,169.

FINANCIAL ANALYSIS OF DCS’ FUNDS

As noted earlier, DCS uses fund accounting to ensure and demonstrate compliance with finance- related legal requirements, bond covenants, and segregation for particular purposes. Governmental Funds - The focus of DCS’ governmental is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing DCS’ financing requirements. In particular, unassigned fund balance may serve as a useful measure of DCS’ net resources available for spending at the end of a fiscal year. The fund balance classifications that depict the relative strength of spending constraint placed on the purpose for which resources can be used are discussed in more detail in the notes to the financial statements. 13 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

As of June 30, 2016, DCS’ governmental funds reported combined ending fund balances of $6,596,303, which represents a decrease of $23,228,431 from the prior year. Fund balance of the General Fund decreased by $21,459,084 from the prior year, primarily due to transfers of $17,795,372 from the General Fund to the Dallas County Stop Arm and Texserve Stop Ann Funds.

The General Fund is the chief operating fund of DCS. General Fund revenues totaled $116,411,099, which is an increase of $7,344,269 or 6.73% from the prior year. This change was primarily due to increase in charges for local transportation services of $9,703,827. Total expenditures of the General Fund increased by $8,315,907 over the prior year, however. The increase was due primarily to reporting the School Crossing Guard program in the General Fund, which was previously accounted for in the Dallas County Stop Arm Fund and an increase in debt service payments of $2,416,899.

Proprietary Funds - As mentioned earlier, DCS’ Enterprise Funds statements provide the same type of information found in the government-wide financial statements but in more detail. The combined net position of the Enterprise Funds was $20,184,169 at June 30, 2016. Net investment in capital assets accounted for $9,148,318 of this total, and $248,724 was restricted for the school bus student safety program escrow. As of June 30, 2016, the unrestricted net position of the Enterprise Funds was $10,787,127. For the year ended June 30, 2016, the effects of GASB 68 and GASB 71 reporting, the increase in payroll costs related to operating a School Bus Safety Program in Texas, plus the increase in the dollar amount of supplies and materials purchased contributed to the decrease over fiscal 2015 in net position of the Enterprise funds by $8,089,129, before net transfers in of $16,795,372.

GENERAL FUND BUDGETARY HIGHLIGHTS

Annual budgets are adopted on a basis consistent with GAAP for the General Fund. Because DCS has a policy of careful budgetary control, DCS revised its budget four times over the course of the fiscal year. Significant budget amendments affected the following areas: • An amendment in the amount of $1,815,232 to establish revenues and appropriations related to the technology network upgrade for Carrollton-Farmers Branch Independent School District. • Budget amendments of $9,000,000 and $10,525,333, respectively, to account for proceeds to derive from new capital lease funding and for debt service requirements of the Stop Arm Fund. • An amendment in the amount of $1,030,000 to increase the appropriation for improvements and renovations to DCS’ administrative facilities. • An amendment in the amount of $1,500,000 to increase the appropriation for vehicular parts costs originally budgeted at a lower amount. • An amendment in the amount of $1,073,626 to establish revenues and appropriations related to extracurricular transportation due to a revision in the estimated number of trips to be driven for the remainder of the fiscal year.

For the fiscal year ended June 30, 2016, the net increase in appropriations between the original and final amended budget was $8,993,468. Subsequent to those amendments, actual expenditures were $801,650 below the final budget amount.

Total General Fund revenues for the year were $1,098,350 lower than the final amended budget. Revenues from local and operational sources was $3,376,160 lower than the final amended budget. The budgeted increase in revenues from local and operational sources of was due to higher anticipated revenues based on the projected increase in transportation route costs. 14 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

Also in fiscal year 2016, net transfers from the General Fund to the Stop Arm Funds of $16,795,372 were not budgeted. The amount transferred were originally loaned to the Stop Arm Funds, but since the General Fund is not expected to be repaid within a reasonable time, the interfund balances between the funds have been reduced by the transfers in accordance with the provisions of GASB Statement No. 34, “ Basic Financial Statements— and Management's Discussion and Analysis— for State and Local Governments

CAPITAL ASSETS

As of June 30, 2015, DCS had $235,331,664 invested in capital assets, including land, buildings and improvements, furniture and equipment, vehicles, and intangible assets. (See Table A-4). The total represents a net increase of $4,115,795 or 1.8% over fiscal year 2015. During the current year, DCS saw a net $4,238,917 decrease in the historical cost of vehicles and a net increase of $8,344,344 in the cost of furniture and equipment. Capital assets, primarily buses, with a total historical cost of $8,139,578 were disposed. The net increase in the historical cost of furniture and equipment resulted from the reclassification of camera inventory to equipment at the time the cameras are installed and placed in service on school buses

Table A-4 DCS’ Capital Assets

Governmental Business-type Governmental Business-type Activities Activities Activities Activities 2015 2015 2016 2016 Land $ 2,422,846 $ $ 2,422,846 $ Constmction in Progress - - 82,543 - Buildings and Improvements 31,859,768 - 31,973,204 - Furniture and Equipment 25,448,382 13,022,477 25,848,208 20,966,995 Vehicles 130,955,869 2,067,975 126,634,308 2,150,619 Intangible Assets 948,964 24,489,588 754,653 24,498,288

Total at Historical Cost 191,635,829 39,580,040 187,715,762 47,615,902

Less Accumulated Depreciation/ Amortization for: Buildings and Improvements 9,137,941 - 9,986,693 - Vehicles 72,169,737 1,499,066 74,212,883 1,710,783 Furniture and Equipment 16,386,752 3,729,666 20,317,073 7,938,909 Intangible Assets 292,966 2,184,145 203,400 3,829,769

Total Accumulated Depreciation 97,987,396 7,412,877 104,720,049 13,479,461

Net Capital Assets $ 93,648,433 $ 32,167,163 $ 82.995,713 $ 34,136,441

Please reference Note 5 to the financial statements for more detailed information on DCS’ capital assets.

15 DALLAS COUNTY SCHOOLS MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2016

DEBT ADMINISTRATION

As of June 30, 2016, DCS had combined outstanding public property finance contractual obligations and maintenance tax notes (the “ Obligations” ) in the amount of $65,800,000 that were issued to fund both governmental and business-type activities. Unamortized bond premium as of June 30, 2016, was $3,725,528. The Obligations were issued pursuant to authority conferred by the Constitution and the laws of the State of Texas, particularly the Public Property Finance Act, Chapter 271, Subchapter A, Texas Local Government Code, as amended, and by an order adopted by the DCS’ Board of Trustees. During each operating year where governmental activities Obligations remain outstanding and unpaid, the Obligations will be payable from, and secured by, the proceeds from annual property taxes levied for maintenance and operations purposes by DCS, within the limits prescribed by law, on all taxable property located within Dallas County, Texas. The Obligations are not subject to redemption prior to their stated maturity.

The accrued liability for compensated absences include earned but unused state personal days according to DCS’ employment leave policy. In accordance with DCS’ leave policy, employees who retire from DCS after participating in the Teacher Retirement System of Texas (“ TRS” ) are eligible to receive a lump-sum payment for accrued State personal leave days upon retirement. Employees hired on or after August 1, 2010, will only be eligible for reimbursement of up to a maximum of 60 total State personal leave days, whether earned at DCS or brought over from another district. More detailed information about DCS’ general long-term liabilities is presented in Note 11 to the financial statements.

ECONOMIC FACTORS AND NEXT YEAR’S BUDGETS AND RATES

DCS’ budget is developed annually and intended to provide efficient, effective, and controlled usage of the entity's resources, as well as a means to accomplish the highest priorities of the Board of Trustees. Through the budget, the Board of Trustees set the direction of DCS, allocates its resources, and establishes its priorities. Factors affecting the economy in Dallas County were considered in adopting the 2017 budget. Appropriations in the General Fund were budgeted at $145,978,720, which represents an increase of $25,496,282 from actual 2016 expenditures of $122,482,438.

For the 2016 tax year, DCS adopted a tax rate on $100.00 valuation in the amount of $0.009271. The 2016 tax rate was effectively raised by 7.86% when compared to that of 2015, and would increase taxes in 2016/2017 by approximately $20,326,715. Appraised property values are established by the Dallas Central Appraisal District, and collections are certified at 100% by Dallas County Tax Assessor/Collector’s office. Tax collection in 2016, as a percentage of the current levy, was 99.4%. DCS’ tax collections rate as a percentage of the then current year’s tax levy has been 97% or better for the past ten fiscal years.

CONTACTING DALLAS COUNTY SCHOOL’S FINANCIAL MANAGEMENT

This financial report is designed to provide the citizens of Dallas County, its taxpayers, customers, investors, and creditors with a general overview of DCS’ finances and to demonstrate DCS’ accountability for the funding DCS receives. If you have questions about this report or need additional financial information, contact DCS’ business office at 612 N. Zang Blvd., Dallas, Texas 75208, or call (214) 944-4545. 16 BASIC FINANCIAL STATEMENTS

17 Dallas County Schools Strengthening Education Through Service

18 EXHIBIT A-l DALLAS COUNTY SCHOOLS STATEMENT OF NET POSITION GOVERNMENT-WIDE JUNE 30, 2016

Primary Government Data Business Control Governmental Type Codes Activities Activities Total ASSETS 1110 Cash and cash equivalents $ 7,686,552 $ 2,878,531 $ 10,565,083 1220 Property taxes - delinquent 786,330 - 786,330 1230 Allowance for uncollectible taxes (156,915) - (156,915) 1240 Due from other governments, net 11,891,852 2,526,962 14,418,814 1290 Other receivables, net 819,981 999,036 1 ,819,017 1300 Inventories 400,251 13,465,436 13,865,687 1410 Prepayments 1 ,184, 180 3,056, 137 4,240,317 1490 Investment in capital leases - current 2,052,392 2,052,392 Capital Assets: 1510 Land 2,422,846 - 2,422,846 1520 Buildings and improvements 31.973.204 - 31,973,204 1571 Accumulated depreciation - buildings (9,986,693) - (9,986,693) 1531 Vehicles 126,634,308 2,150,619 128,784,927 1572 Accumulated depreciation - vehicles (74,212,883) ( 1 ,710,783) (75,923,666) 1530 Furniture and equipment 25,848,208 20,966,995 46,815,203 1573 Accumulated depreciation - furniture and equipment (20,317,073) (7,938,909) (28,255,982) 1540 Intangible assets 754,653 24,498,288 25,252,941 1541 Accumulated amortization - intangible assets (203,400) (3,829,769)(4,033,169) 1580 Construction in progress 82,543 - 82,543 1800 Restricted cash and cash equivalents - 248,724 248,724 1990 Investment in capital leases - noncurrent - 6,798,549 6,798,549 1000 TOTAL ASSETS 105,607,944 66,162,208 171 ,770,152 DEFERRED OUTFLOWS OF RESOURCES 1705 Deferred outflows related to pensions 8,741 ,806 727,222 9,469,028

1700 TOTAL DEFERRED OUTFLOWS OF RESOURCES 8,741,806 727,222 9,469,028 LIABILITIES 2110 Accounts payable and other current liabilities 3,434,191 678,881 4.113,072 2140 Accrued interest payable 151,328 166,194 317,522 2150 Accrued payroll deductions and withholdings 1 ,080,368 - 1 ,080,368 2160 Accrued wages payable 539,373 26,883 566,256 2180 Due to other governments 1 ,286,610 249,432 1 ,536,042 2200 Accrued expenses 3,250,573 - 3,250,573 2300 Unearned revenue 1 ,443,344 1 ,443,344 Long-Term Liabilities: 2501 Due within one year 11,206,910 12,218,933 23,425,843 2502 Due in more than one year 69,356,573 30,894,715 100,251 ,288 2540 Net pension liability 10,957,155 911,514 11 ,868,669

2000 TOTAL LIABILITIES 101,263,081 46,589,896 147,852,977 DEFERRED INFLOWS OF RESOURCES 2605 Deferred inflows related to pensions 1 ,386,780 115,365 1 ,502, 145

2600 TOTAL DEFERRED INFLOWS OF RESOURCES 1 ,386,780 115,365 1 ,502,145 NET POSITION 3200 Net Investment in capital assets 28,950,736 9,148,318 38,099,054 Restricted for: 3490 Student safety program escrow - 248,724 248,724 3900 Unrestricted (deficit) ( 17,250,847) 10,787,127 (6.463,720)

3000 TOTAL NET POSITION $ 11 ,699,889 S 20.184.169 S 31 ,884,058

The Notes to the Financial Statements are an integral part of this statement. 19 EXHIBIT B-l DALLAS COUNTY SCHOOLS STATEMENT OF ACTIVITIES GOVERNMENT-WIDE FOR THE YEAR ENDED JUNE 30, 2016

Net (Expense) Revenue Program Revenues and Changes in Net position 3 4 6 7 8 Data Operating Primary Government Control Charges for Grants and Governmental Business-type Codes Expenses Services Contributions Activities Activities Total GOVERNMENTAL ACTIVITIES 0011 Instruction $ 134,980 $ 130,596 $ S (4,384) S - S (4,384) 0012 Instructional resources and media services 593,554 189,010 - (404,544) (404,544) 0031 Guidance, counseling, and evaluation services 509,948 351,772 - (158,176) (158,176) 0034 Student transportation 88,019,124 64,598,607 23,444,985 24,468 24,468 0036 Extracurricular activities 7,380,126 8,975,942 - 1,595,816 1,595,816 0041 General administration 14,313,376 369,256 - (13,944,120) (13,944,120) 0051 Plant maintenance and operations 2,463,200 - - (2,463,200) (2,463,200) 0052 Security and monitoring services 5,691,747 531,820 433,818 (4,726,109) (4,726,109) 0053 Data processing services 3,873,903 508,857 1,420,345 (1,944,701) (1,944,701) 0072 Interest on long-term debt 1,084,479 - - (1,084,479) (1,084,479) |TG) Total governmental activities 124,064,437 75,655,860 25,299,148 (23,109,429) (23,109,429) BUSINESS-TYPE ACTIVITIES Out of County School Districts 21,972,252 12,346,448 1,127,503 - (8,498,301) (8,498,301) [TP|TOTAL PRIMARY GOVERNMENT $ 146,036,689 $ 88,002,308 S 26,426,651 (23,109,429) (8,498,301) (31,607,730)

General Revenues MT Property taxes 18,786,726 - 18,786,726 IE Investment earnings 20,260 - 20,260 MI Miscellaneous 226,826 409,172 635,998 Transfers (16,795,372) 16,795,372 - TR Total general rev enues and transfers 2,238,440 17,204,544 19,442,984

CN Change in net position (20,870,989) 8,706,243 (12,164,746)

NB Net position - beginning 32,570,878 11,477,926 44,048,804

NE Net position - ending S 11,699,889 S 20,184,169 S 31,884,058

The Notes to the Financial Statements are an integral part of this statement. 20 EXHIBIT C-l DALLAS COUNTY SCHOOLS BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2016

Data Capital Special Total Control General Projects Revenue Governmental Codes Fund Fund Fund Funds ASSETS 1110 Cash and cash equivalents S 7,601,001 S 85,551 $ • S 7,686,552 1220 Property taxes - delinquent 786,330 - - 786,330 1230 Allowance for uncollectible taxes (156,915) • • (156,915) 1240 Due from other governments, net 11,891,852 - - 11,891,852 1290 Other receivables 819,981 - - 819,981 1310 Inventories 400,251 - - 400,251 1410 Prepaid items 1,184,180 • • 1,184,180

1000 TOTAL ASSETS S 22,526,680 S 85,551 $ - $ 22,612,231

LIABILITIES 2110 Accounts payable 3,434,191 - - 3,434,191 2150 Accrued payroll deductions and withholdings 1,080,368 • • 1,080,368 2160 Accrued wages payable 539,373 • • 539,373 2180 Due to other governments 1,286,610 • • 1,286,610 2210 Accrued expenditures 3,250,573 • • 3,250,573

2000 TOTAL LIABILITIES 9,591,115 . . 9,591,115

DEFERRED INFLOWS OF RESOURCES 2610 Unavailable property tax revenues 571,505 - - 571,505 2620 Unavailable revenues from other governments 5,853,308 •_ •_ 5,853,308 2600 TOTAL DEFERRED INFLOWS OF RESOURCES 6,424,813 6,424,813

FUND BALANCES Nonspcndablc fund balance 3410 Inventories 400,251 - - 400,251 3430 Prepaid items 1,184,180 - - 1,184,180 3470 Restricted - 85,551 - 85,551 3600 Unassigned 4,926,321 - - 4,926,321 3000 TOTAL FUND BALANCES 6,510,752 85,551 - 6,596,303

TOTAL LIABILITIES, DEFERRED INFLOWS 4000 OF RESOURCES, AND FUND BALANCES S 22,526,680 S 85,551 $ - $ 22,612,231

The Notes to the Financial Statements are an integral part of this statement. 21 EXHIBIT C-2 DALLAS COUNTY SCHOOLS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE GOVERNMENT-WIDE STATEMENT OF NET POSITION JUNE 30, 2016

TOTAL FUND BALANCES - GOVERNMENTAL FUNDS $ 6,596,303

Amounts reported for governmental activities in the Statement of Net Position are different because:

Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in the governmental funds. 82,995,713 The net book value of property tax receivables is a deferred inflow under the modified accrual basis of accounting in the governmental funds financial statements but is recognized as revenue under the accrual basis accounting in the government-wide financial statements. 571,505 Long-term liabilities, including bonds payable ($50,405,000), compensated absences ($1,432,955), and lease finance obligations (25,000,000), arc not due and payable in the current period and, therefore, have not been reflected as liabilities in the governmental funds. (76,837,955)

Payables for bond interest that are not due in the current period are not reported as liabilities in the governmental funds financial statements. (151,328)

Governmental funds report the effect of premiums and discounts related to debt issuance as other financing sources and uses, respectively, in the year of the issue, whereas these amounts are reflected in the government-wide financial statements net of amortization. (3,725,528) Included in the items related to governmental activities long-term liabilities is the recognition of DCS' proportionate share of the net pension liability required by GASB Statement 68 in the amount of $10,957,155, deferred inflows of resources related to TRS in the amount of $1,386,780, and deferred outflows of resources related to TRS in the amount of $8,741,806 The net effect is a decrease of $3,602,129 in the Net Position of governmental activities. (3,602,129)

Revenue that is not measurable and available at year end is a deferred inflow in the governmental funds but is recognized on the accrual basis of accounting in the government-wide statements. 5,853,308

NET POSITION - GOVERNMENTAL ACTIVITIES $ 11,699,889

The Notes to the Financial Statements are an integral part of this statement. 22 EXHIBIT C-3 DALLAS COUNTY SCHOOLS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2016

Data Capital Special Total Control General Projects Revenue Governmental Codes Fund Fund Fund Funds REVENUES 5700 Local and operational sources $ 91,545,769 $ 698 S $ 91,546,467 5800 State program revenues 23,444,985 - - 23,444,985 5900 Federal program revenues 1,420,345 - - 1,420,345

5020 TOTAL REVENUES 116,411,099 698 116,411,797

EXPENDITURES Current: 0011 Instruction 134,980 134,980 0012 Instructional resources and media services 554,646 - - 554,646 0031 Guidance, counseling, and evaluation services 502,749 - - 502,749 0034 Student transportation 78,556,822 1,465,375 - 80,022,197 0036 F.xtracurricular activities 7,571,269 - - 7,571,269 0041 General administration 10,364,843 2,777 - 10,367,620 0051 Plant maintenance and operations 1,684,393 - - 1,684,393 0052 Security and monitoring services 5,766,936 - - 5,766,936 0053 Data processing services 4,139,342 - - 4,139,342 Debt service: 0071 Principal on long-term debt 9,810,000 9,810,000 0072 Interest and fiscal charges 2,084,452 - - 2,084,452 Capital outlay: 0081 Facilities acquisition and construction 308,106 . . 308,106

6030 TOTAL EXPENDITURES 121,478,538 1,468,152 122,946,690

1100 DEFICIENCY OF REVENUES UNDER EXPENDITURES (5,067,439) (1,467,454) (6,534,893)

OTHER FINANCING SOURCES (USES) 7912 Sale of real and personal property 101,834 101,834 7915 Transfers in 1,301,893 - - 1,301,893 8911 Transfers out (17,795,372) - (301,893) (18,097,265)

7080 TOTAL OTHER FINANCING USES (16,391,645) (301,893) (16,693,538)

1200 NET CHANGE IN FUND BALANCES (21,459,084)(1,467,454)(301,893) (23,228,431)

0100 FUND BALANCES - BEGINNING 27,969,836 1,553,005 301,893 29,824,734

3000 FUND BALANCES - ENDING $ 6,510,752 $ 85,551 S $ 6,596,303

The Notes to the Financial Statements are an integral part of this statement. 23 EXHIBIT C-4 DALLAS COUNTY SCHOOLS RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE GOVERNMENT-WIDE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016

NET CHANGE IN FUND BALANCES - GOVERNMENTAL FUNDS $ (23,228,431) Amounts reported for governmental activities in the Statement of Activities arc different because: Current year capital outlays arc expenditures in the governmental funds financial statements, but they arc shown as increases in capital assets in the government-wide financial statements. 4,219,511 Gross proceeds from disposals of capital assets arc recorded as other financing sources in the Hind financial statements but are reported net of historical cost less accumulated depreciation in the government-wide statement of activities. (57,820) The difference between property tax revenues earned but not available in prior periods ($532,663) and property tax revenues earned but not available in the current year ($571,505) is recognized as an increase/(dccreasc) in net position in the government-wide financial statements. 38,842 Changes in the liability for compensated absences do not require the use of current financial resources and, therefore, are not reflected in the governmental funds financial statements but are shown as (increases)/decreases in long-term liabilities. (146,035) Depreciation expense on capital assets is not recognized in the governmental funds statements under the modified accrual basis of accounting but is recognized in the govemment-wide statements under the accrual basis of accounting. (14,814,411) Governmental funds report the effect of premiums when debt is first issued, whereas these amounts arc deferred and amortized in the statement of activities. 977,597

Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net position. 9,810,000

Decrease in accrued interest from beginning of the year to the end of the year. 22,376 Changes in deferred inflows of resources derived from delayed collections of user charges reflected in the fund financial statements are shown as increases/fdecreases) in net position in the government-wide financial statements. 3,494,167 The implementation of GASB 68 required that certain expenditures for pension be dc-cxpcndcd and recorded as deferred outflows of resources. This caused an increase in the net pension liability of $8,254,230, an increase in deferred outflows of resources of $7,627,393, and an increase in deferred inflows of resources of $559,946. The net effect of this change is a decrease in net position. (1,186,785)

CHANGE IN NET POSITION - GOVERNMENTAL ACTIVITIES $ (20,870,989)

The Notes to the Financial Statements are an integral part of this statement. 24 EXHIBIT D-l DALLAS COUNTY SCHOOLS STATEMENT OF NET POSITION PROPRIETARY FUNDS JUNE 30, 2016

ENTERPRISE FUNDS Texserve Dallas Transportation County Texserve and Technology Stop Arm Stop Arm Total ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,360,933 $ 289,373 $ 228,225 $ 2,878,531 Restricted cash and cash equivalents - 248,724 - 248,724 Due from other governments 2,282,823 228,947 15,192 2,526,962 Other receivables - 11,222,811 312,487 11,535,298 Allowance for other receivables - (10,348,770) (187,492) (10,536,262) Inventories 93,554 2,625,000 10,746,882 13,465,436 Investment in capital leases - - 2,052,392 2,052,392 Prepayments 56,147 - 2,999,990 3,056,137 TOTAL CURRENT ASSETS 4,793,457 4,266,085 16,167,676 25,227,218

NONCURRENT ASSETS: Investment in capital leases - - 6,798,549 6,798,549 Furniture and equipment 248,362 166.000 20,552,633 20,966,995 Vehicles 1,805,567 267,826 77,226 2,150,619 Accumulated depreciation (1,762,171) (225,867) (7,661,654) (9,649,692) Intangible assets - 24.498,288 - 24,498,288 Accumulated amortization - (3,829,769) - (3,829,769) TOTAL NONCURRENT ASSETS 291,758 20,876,478 19,766,754 40,934,990

TOTAL ASSETS 5,085,215 25,142,563 35,934,430 66,162,208

DEFERRED OUTFLOWS OF RESOURCES Deferred outflows related to pensions 471,558 88,062 167,602 727,222

TOTAL DEFERRED OUTFLOWS OF RESOURCES 471,558 88,062 167,602 727,222 LIABILITIES CURRENT LIABILITIES: Accounts payable 356,766 287,188 34,927 678,881 Accrued wages 26,839 44 - 26,883 Accrued interest - 27,072 139,122 166,194 Due to other governments 28,536 136,313 84,583 249,432 Unearned revenue - 7,850 1,435,494 1,443,344 Bonds payable - current - - 3,715,000 3,715,000 Notes payable - current - 4,628,334 3,875,599 8,503,933 TOTAL CURRRENT LIABILITIES 412,141 5,086,801 9,284,725 14,783,667 NONCURRENT LIABILITIES: Bonds payable - - 11,680,000 11,680,000 Notes payable - 4,052,508 15,162,207 19,214,715 Net pension liability 591,060 110,379 210,075 911,514

TOTAL NONCURRENT LIABILITIES 591,060 4,162,887 27,052,282 31,806,229

TOTAL LIABILITIES 1,003,201 9,249,688 36,337,007 46,589,896

DEFERRED INFLOWS OF RESOURCES Deferred inflows related to pensions 74,807 13,970 26,588 115,365 TOTAL DEFERRED INFLOWS OF RESOURCES 74,807 13,970 26,588 115,365

NET POSITION Net Investment in capital assets 291,758 12,195,636 (3,339,076) 9,148,318 Restricted for student safety program escrow - 248,724 - 248,724 Unrestricted 4,187,007 3,522,607 3,077,513 10,787,127

TOTAL NET POSITION $ 4,478,765 $ 15,966,967 $ (261,563) $ 20,184,169

The Notes to the Financial Statements are an integral part of this statement. 25 EXHIBIT D-2 DALLAS COUNTY SCHOOLS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2016

ENTERPRISE FUNDS Texserve Dallas Transportation County Texserve and Technology Stop Arm Stop Arm Total

OPERATING REYTNUES Charges for sendees $ 10,602,585 $ 1,455,674 $ 288,189 $ 12,346,448 Operating grants and contributions 845,512 198,272 83,719 1,127,503 Other revenues 15,735 21,207 372,230 409,172

TOTAL OPERATING REVENUES 11,463,832 1,675,153 744,138 13,883,123

OPERATING EXPENSES: Payroll costs 4,460,535 714,212 1,216,477 6,391,224 Professional and contracted services 1 ,341,205 340,500 202,809 1,884,514 Supplies and materials 5,125,420 69,022 48,571 5,243,013 Depreciation and amortization 209,258 1,735,122 4,128,663 6,073,043 Other operating costs 15,126 686,856 94,545 796,527

TOTAL OPERATING EXPENSES 11,151,544 3,545,712 5,691,065 20,388,321

OPERATING INCOME (LOSS) 312,288 ( 1,870,559) (4,946,927) (6,505,198)

NONOPERATING EXPENSES Interest expense 318,012 1,265,919 1,583,931

INCOME (LOSS) BEFORE TRANSFERS 312,288 (2,188,571) (6,212,846) (8,089,129)

Transfers In - 8,532,638 11,532,729 20,065,367 Transfers out - (3,269,995) - (3,269,995)

CHANGE IN NET POSITION 312,288 3,074,072 5,319,883 8,706,243

TOTAL NET POSITION - BEGINNING 4,166,477 12,892,895 (5,581,446) 11,477,926

TOTAL NET POSITION - ENDING $ 4,478,765 $ 15,966,967 $ (261,563) $ 20,184,169

The Notes to the Financial Statements are an integral part of this statement. 26 EXHIBIT D-3 DALLAS COUNTY SCHOOLS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2016

ENTERPRISE FUNDS Tcxscrve Dallas Transportation County Texservc and Technology Stop Arm Stop Arm Totals

CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers and users S 9,538,733 $ 1 ,128,734 S (6,851,064) S 3,816,403 Cash paymenLs to employees for services (4,450,527) (765,741 ) ( 1 ,218,086) (6,434,354) Cash payments to suppliers and contractors (6,134,743) (186,561) (167,423) (6,488,727) Cash payments for other operating expenses (15,126) (686,856) (94,545) (796,527)

NET CASH USED IN OPERATING ACTIVITIES ( 1 ,061 ,663) (510,424) (8,331,118) (9,903,205) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Transfers from other funds - 8,532,638 11,532,729 20,065.367 Transfers to other funds - (3,269,995) - (3,269,995) Proceeds from sale of capital assets - 941 - 941 Acquisition of capital assets - (29,023) (614,971) (643,994) Principal paid on capital debt - (4,549,882) (2,037,297) (6,587,179) Interest paid on capital debt - (317,454) ( 1 ,176,672) ( 1 ,494,126) NET CASH PROVIDED BY CAPITAL AND RELATED FINANCING ACTIVITIES - 367,225 7,703,789 8,071,014 CASH FLOWS FROM INVESTING ACTIVITIES Payment received on lease receivable - - 855,554 855,554 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1 ,061 ,663) ( 143,199) 228,225 (976,637) CASH AND C ASH EQUIVALENTS, BEGINNING 3,422,596 681,296 - 4,103,892 CASH AND CASH EQUIVALENTS, ENDING (Including restricted cash and cash equivalents of $248,724) $ 2,360,933 $ 538,097 S 228,225 S 3,127,255

RECONCILIATION OF OPERATING INC OME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Operating income (Loss) S 312,288 $ ( 1 ,870,559) S (4,946,927) s (6,505,198) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Loss on disposal of capital asset - 7,505 - 7,505 Depreciation and amortization 209,258 1 ,735,122 4,128,663 6,073,043 Increase in due from other governments ( 1 ,946,276)(53,083) - ( 1 ,999,359) Increase in deferred outflows of resources (471,558) (88,062) (167,602) (727,222) (Increase) decrease in other receivables - 2,818,213 (45,477) 2,772,736 Decrease in due from other funds - 671,337 812 672,149 Increase in inventories (2,249) - - (2,249) (Increase) decrease in prepaid items 1 ,166,267 - (333,330) 832,937 Increase (decrease) in accrued wages 10,008 (51,529) ( 1 ,609) (43,130) Increase in accounts payable 269,150 179,169 14,896 463,215 Increase in due to other governments 28,536 87,371 12,353 128,260 (Decrease) increase in due to other funds ( 1 ,295,595) (4,074,607)(7,232,435) ( 12,602,637) (Decrease) increase in unearned revenue (7,359) 4,350 2,875 (134) Increase in pension liability 591,060 110,379 210,075 911,514 Increase in deferred inflows of resources 74,807 13,970 26,588 115,365

NET CASH USED IN OPERATING ACTIVITIES $ ( 1 ,061 ,663) $ (510,424) $ (8,331,118) s (9,903,205)

NONCASH FINANCING AND INVESTING ACTIVITIES Purchase of equipment via note payable S - S 2,625,000 S 18,205,000 s 20,830,000 Sale of equipment under direct financing lease s - $ s 5,400,000 s 5,400.000 The Notes to the Financial Statements are an integral part of this statement. 27 Dallas County Schools Strengthening Education Through Service

28 NOTES TO THE FINANCIAL STATEMENTS

29 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Dallas County Schools (DCS) operates under the Texas Education Code Subchapter G, Sec. 11.301 formerly Subchapter 17.62 of the Texas Education Code. The accounting and reporting policies of DCS reflected in the accompanying financial statements conform to accounting principles generally accepted in the United States of America (GAAP) applicable to state and local governments and to other authoritative sources identified in GASB Statement No. 56. GAAP for local governments are those promulgated by the Governmental Accounting Standards Board (GASB) and other authoritative sources identified in Statement of Auditing Standards No. 69 issued by the American Institute of Certified Public Accountants. Additionally, DCS complies with the requirements of the appropriate version of the Texas Education Agency (TEA) Financial Accountability System Resource Guide (the “ Resource Guide” ) and the requirements of contracts and grants of agencies from which it receives funding.

Reporting Entity

DCS operates under a Superintendent-Board form of government and provides the following services as authorized by its charter: transportation, audio visual aids, technology and other services. The Board of Trustees is elected by the public for six-year terms; has the authority to make decisions, appoint administrators and managers; significantly influence operations; and has the primary accountability for fiscal matters. Therefore, DCS is not included in any other governmental “ reporting entity” as defined by GASB Statement No. 14, “ The Financial Reporting Entity,” as amended by GASB 39, “ Determining Whether Certain Organizations are Component Units." The financial statements of DCS consist only of the funds of DCS. There are no component units included within the reporting entity.

Measurement Focus, Basis of Accounting, and Basis of Presentation Government-Wide Financial Statements and Proprietary Funds - The government-wide financial statements (i.e. the statement of net position and the statement of activities) and proprietary fund statements are accounted for using the economic resources measurement focus and the accrual basis of accounting. The accrual basis of accounting recognizes revenues in the accounting period in which they are earned and become measurable and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the fund statement of net position. The statement of net position and the statement of activities display information about DCS as a whole. Those statements report information on all of DCS’ non-fiduciary activities with most of the inter¬ fund activities eliminated. Governmental Activities - include programs supported primarily by taxes, state transportation funds, and other intergovernmental revenues. Business-Type Activities - include operations that rely to a significant extent on fees and charges for support.

30 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measurement Focus, Basis of Accounting, and Basis of Presentation - Continued

The government-wide statement of activities presents a comparison between direct expenses and program revenues for each function or program of DCS’ governmental activities. Direct expenses are those that are specifically associated with a service, program or department and are, therefore, clearly identifiable to a particular function. The comparison of direct expenses with program revenues identifies the extent to which each governmental function is self¬ financing or draws from the general revenues of DCS.

Amounts reported as program revenues include: 1) charges to Texas independent school districts and other customers who purchase, use or directly benefit from goods, services, or privileges provided by a given function, 2) operating grants and contributions, and 3) capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. DCS also receives funding from The Foundation School Program (FSP) for transportation services, which is included in operating grants and contributions. The FSP is the primary source of state funding for Texas school districts and is administered by the TEA. DCS must comply with the requirements and stipulations of the program. Revenues not classified as program revenues are presented as general revenues and include property taxes and investment earnings.

Fund Financial Statements - Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. The financial statements for governmental funds are a balance sheet, which generally includes only current assets and liabilities, and a statement of revenues, expenditures, and changes in fund balances, which reports on the sources (i.e. revenues and other financing sources) and uses (i.e. expenditures and other financing uses) of current financial resources. Expendable assets are assigned to the governmental fund according to the purposes for which they may or must be used. The difference between governmental fund assets and liabilities is reported as fund balance. Governmental fund financial statements include reconciliations with brief explanations to better identify the relationship between the government-wide statements and the statements for governmental funds. The fund equity of proprietary funds is segregated into net investment in capital assets, restricted net position, and unrestricted net position

Under GASB Statement No. 33, Accounting and Financial Reporting for Non-exchange Transactions,” property taxes are imposed non-exchange revenue. Assets from imposed non¬ exchange transactions are recorded when the entity has an enforceable, legal claim to the asset or when the entity receives the resources, whichever comes first. The enforceable legal claim date for property taxes is the assessment date. Therefore, DCS recognized taxes receivable and a deferred inflow of resources for taxes assessed as of October 1, 2015, that were not available as of June 30, 2016.

31 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measurement Focus, Basis of Accounting, and Basis of Presentation - Continued Inter-fund activities between governmental funds and proprietary funds appear as other resources and other uses on the governmental funds statement of revenues, expenditures and changes in fund balance and on the proprietary fund statement of revenues, expenses and changes in net position. Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are reported as “ due to/due from other funds. All interfund transactions between governmental funds are eliminated on the government-wide financial statements. Any residual balances outstanding between governmental activities and business-type activities are reported in the government- wide financial statements as “ internal balances.”

DCS reports its financial activities through the use of “ fund accounting” . The activities of DCS are organized on the basis of funds. The operations of each fund are accounted for within a separate set of self-balancing accounts to reflect results of activities. Fund accounting segregates funds according to their intended purposes to assist management in demonstrating compliance with finance-related legal and contractual provisions. The accounting and reporting treatment applied to a fund is determined by its measurement focus. The focus of fund financial statements is on major funds rather than on reporting funds by type. Separate financial statements are provided for governmental funds and proprietary fund types. Each major governmental fund and proprietary fund is presented in separate columns in the financial statements.

DCS reports the following major governmental funds:

General Fund - The General Fund is DCS’ primary operating fund. This fund is used to account for all financial resources, except those required by law or administrative action to be accounted for in another fund. The General Fund is always reported as a major fund in the governmental fund financial statements. The General Fund is a budgeted fund, and any fund balances are considered resources available for current operations. This fund also accounts for the activities of the School Crossing Guards program within the City of Dallas.

Special Revenue Fund - This fund is used to account for DCS’ Evacuation/Ground Support Transportation Program. Resources used in the program derive from compensation received for providing emergency ground transportation and evacuation services.

Capital Projects Fund - This fund accounts for all proceeds of bond issuances and any earnings on investments of the fund. Revenue from the sale of bonds is used for acquiring and replacing transportation, technology, and other equipment and for renovating existing buildings and facilities.

Additionally, DCS reports the following proprietary funds.

Texserve Transportation and Technology Fund - This fund accounts for DCS’ activities under shared services and interlocal agreements with districts outside of Dallas County to provide transportation, technological, and other services to those districts on a charges for services basis. 32 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measurement Focus, Basis of Accounting, and Basis of Presentation - Continued

Dallas County Stop Arm Fund - This fund accounts for the activities related to the enforcement of an ordinance passed by municipalities within Dallas County that allows for school bus stop arm violations to be recorded by camera.

Texserve Stop Ann Fund - This fund accounts for the activities related to the enforcement of school bus stop arm camera violations that occur outside of Dallas County.

Basis of Accounting - Basis of accounting determines when transactions are recorded in the financial records and are reported on the financial statements. Government-wide financial statements and proprietary funds statements are prepared using the accrual basis of accounting. Governmental funds are accounted for under the modified accrual basis of accounting.

Revenues - Revenues resulting from exchange transactions, in which each party receives essentially equal value, are recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenues are recorded in the fiscal year in which the resources are both measurable and available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. Property taxes and interest associated with the current fiscal year are susceptible to accrual and are considered to be available if collected within 60 days of the fiscal year end.

Revenues from local sources include property taxes. Property tax revenues and revenues received from the state are recognized under the susceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash, because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available at the earnings date.

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. All other revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

Grant funds are considered to be earned and are recognized as revenue to the extent of expenditures made the provisions of the grant-unless otherwise stipulated. Accordingly, when grant funds are received in advance of being earned, they are recorded as unearned revenues until related expenditures have been made and all grant criteria are met.

33 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measurement Focus, Basis of Accounting, and Basis of Presentation - Continued

Expenses/Expenditures - On the accrual basis of accounting, expenses are recognized at the time they are incurred, if measurable, except for certain compensated absences and claims and judgments, which are recognized when obligations are expected to be liquidated with expendable available financial resources.

The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable. Allocations of cost, such as depreciation, are not recognized in governmental funds.

Deposits and Investments

DCS’ cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments. For presentation on the financial statements, investments in the cash management pool and investments with an original maturity of three months or less at the time they are purchased by DCS are considered to be cash equivalents. Investments with an initial maturity of more than three months are reported as investments. Investments are recorded at fair value.

Inventories and Prepaid items

Inventories in the General Fund and in the Texserve transportation and technology fund consist of vehicle parts, automotive fuels, and supplies, which are accounted for using the consumption method. Under the consumption method, these items are carried in an inventory account of the respective fund at cost using the weighted average method of accounting and are subsequently charged to expenditures or expensed when consumed or requisitioned. Prepaid items are accounted for using the consumption method and are recognized as expenditures over the periods in which the service is provided.

Inventories in the Texserve Stop Arm Fund consist of digital video and audio equipment to be installed on buses that operate in the school bus safety student safety program. The inventories are reclassified as capital assets and depreciated over their estimated economic lives in the proprietary fund at the time the equipment is installed and placed in service.

Certain payments to vendors and service providers reflect costs that are applicable to future accounting periods. Such costs are recorded as prepaid items in both the government-wide and the fund financial statements. In governmental funds, inventories on hand at year’s end and prepaid items are reported as a component of non-spendable fund balance.

34 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Pensions

The fiduciary net position of TRS has been determined using the flow of economic resources measurement focus and full accrual basis of accounting. This includes, for purposes of measuring the net pension liability; deferred outflows of resources and deferred inflows of resources related to pensions; pension expense; and information about assets, liabilities, and additions to/deductions from TRS' fiduciary net position. Benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.

Capital Assets

Capital assets, which include buildings and improvements; furniture and equipment; vehicles; buses; and intangible assets, are reported in the applicable governmental or business-type activities columns within the government-wide statement of net position. All capital assets are reported at cost (or estimated historical cost) and updated for additions and/or retirements during the year. Donated assets are recorded at their estimated fair values as of the date received. DCS defines a capital asset as an asset with an initial, individual cost of $5,000 and an estimated useful life of more than one year.

The costs of all reported capital assets are depreciated. The costs of improvements are capitalized, while the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an assets life are not. Improvements are depreciated over the remaining useful lives of the related capital assets.

Intangible assets reported in the governmental activities column in the government-wide financial statements consist of duplication rights and purchased software license agreements. Generally, duplication rights are amortized over their contractual lives based on the period of the agreement. The method used to amortize the purchased software licenses is based on the revenue generated from the sale of licenses during the period over the estimated total revenue to be generated from the licenses. Intangible assets reported under business-type activities consist of exclusive rights to operate a school bus safety program in the state of Texas, which are being amortized on the straight-line basis over 15 years.

Capital assets are depreciated using the straight-line method over the following estimated useful lives:

Description Estimated Service Lives Buildings and improvements 40 Years Furniture and equipment 5 Years Vehicles (other than buses) 5 Years Buses 10 Years Intangible assets 3 - 1 5 Years

35 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Long-term Liabilities In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Position. Bonds payable are reported inclusive of applicable bond premium or discount. Bond issuance costs are reported as expenditures when incurred. Losses on refunding are capitalized and amortized over the shorter of the life of the new issuance or the life on existing debt using the effective interest method. Premiums and discounts are deferred and amortized over the life of the related debt using the effective interest method.

In the fund financial statements, governmental funds recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received from debt issuances are also reported as other financing sources, while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

Accumulated State and Personal Leave

In accordance with DCS’ employment leave policies, compensated absences include earned but unused state personal days to be used as determined by the employee. DCS’ Board Policy provides for compensation to employees who are eligible to retire under the Teacher Retirement System of Texas (“ TRS” ), in the amount equal to the value of their respective unused state personal leave days upon their retirement. This policy allows an employee who retires from DCS through TRS to receive, following termination of employment, a lump-sum payment for accrued leave days. Employees hired on or after August 1, 2010, however, are only eligible for reimbursement up to a maximum of 60 total state personal leave days, whether earned at DCS or brought over from another Texas school district.

Deferred Outflows/Deferred Inflows of Resources

In addition to assets, the statement of net position may report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position (a decrease in assets in excess of any related decrease in liabilities or an increase in liabilities in excess of any related increase in assets) that is applicable to a future reporting period and will not be recognized as an outflow of resources (expense/expenditure) until that time. DCS has one item that qualifies for reporting in this category:

Deferred outflows of resources for pension - Reported in the government wide and proprietary funds’ financial statement of net position, this deferred outflow stems from pension plan contributions made after the measurement date of the net pension liability and the results of differences between expected and actual actuarial experiences. The deferred outflows of resources related to pensions resulting from DCS’ contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the next fiscal year. The other pension-related deferred outflows will be amortized over the expected remaining service lives of all employees (active and inactive employees) that are provided with pensions through the pension plan.

36 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Deferred Outflows/Deferred Inflows of Resources - Continued

In addition to liabilities, the statement of net position sometimes reports a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position (an increase in assets in excess of any related increase in liabilities or a decrease in liabilities in excess of any related decrease in assets) that applies to a future period(s) and will not be recognized as an inflow of resources (revenue) until that time. DCS has two items that qualify for reporting in this category:

Deferred inflows of resources for unavailable revenues - The governmental funds report unavailable revenues, which arises only under the modified accrual basis of accounting, from property tax levies and from customer receivables. These amounts are deferred and recognized as an inflow of resources in the period within which the amounts become available.

Deferred inflows of resources for pensions - Reported in the government wide and the proprietary funds’ financial statement of net position, these deferred inflows result primarily from differences between projected and actual earnings on pension plan investments. These amounts will be amortized over a closed five-year period. Interfund Receivables and Payables

Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are reported as “ due to/from other funds” . All interfund transactions between governmental funds are eliminated on the government-wide financial statements. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as “ internal balances”.

Allowance for Doubtful Accounts

Management performs an annual evaluation of the collectability of accounts receivable based upon factors such as credit history, general economic factors, and the age of receivables. However, DCS is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature. As of June 30, 2016, management has established an allowance in the General Fund for uncollectible taxes of $156,915 and an allowance for amounts due from other governments of $1,158,412. Also at June 30, 2016, allowances for uncollectible unpaid stop arm program citations in the amount of $10,348,770 and $187,492 have been reported in the Dallas County Stop Arm Fund and in the Texserve Stop Arm Fund, respectively.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses/expenditures. Actual results may differ from those estimates. 37 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Net Position

In the government-wide financial statements, the difference between the District's total assets, deferred outflows of resources and liabilities and deferred inflows of resources represents net position. Net position displays the following three components:

Net investment in capital assets - This component of net position reports capital assets net of accumulated depreciation and reduced by outstanding debt that is directly attributed to the acquisition, construction, or improvement of the capital assets.

Restricted net position - This amount is restricted by creditors, grantors, contributors, or laws or regulations of other governments. Unrestricted net position - This component of net position is the difference between the assets, deferred inflows of resources, and liabilities that are not reported in "net investment in capital assets" or "restricted net position." It represents the amount available for future operations.

At June 30, 2016, governmental activities in the government-wide statement of net position reported an accumulated deficit net position of $17,250,847. This resulted primarily from transfers from the General Fund to the Dallas County Stop Arm and the Texserve Stop Arm Funds for operations and to cover the debt service requirements in those funds. See Note 18 - Subsequent Events - for details of DCS’ Plan of Finance to help eliminate the deficit. Data Control Codes

In accordance with the Financial Accountability System Resource Guide published by TEA, DCS has adopted and installed an accounting system that meets the minimum requirements prescribed by the State Board of Education and uses the Data Control Code structure prescribed by TEA. TEA requires school districts to display these codes in the financial statements filed with TEA in order to insure accuracy in building a state-wide database for policy development and funding plans.

NOTE 2. EXCESS OF EXPENDITURES OVER APPROPRIATIONS

For the year ended June 30, 2016, expenditures associated with instruction, general administration, extracurricular activities, and security and monitoring services in the General Fund exceeded appropriations by $38,680; $116,364; $8,999, and $439,795, respectively. The primary reason for the unfavorable variance associated with providing security and monitoring services was a net increase of thirty-five employees in the school crossing guard program. The excess of general administration cost over budget was due to the increase in total payroll cost that stemmed from over staffing in the risk management and staff development departments. The increase in those functional expenditures was covered by unassigned fund balance of the General Fund. Also in fiscal year 2016, net transfers from the General Fund to the Stop Arm Funds of $16,795,372 were not budgeted, and since the interfund borrowings between those funds are not expected to be repaid within a reasonable time, the internal balances between the funds have been reduced by the transfers. 38 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. DEPOSITS AND INVESTMENTS

The funds of DCS must be deposited and invested under the terms of a depository contract, the contents of which are set out in the depository contract law. The depository bank places approved pledged securities for safekeeping and trust with DCS’ agent bank in an amount sufficient to protect DCS’ funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank’s dollar amount of Federal Deposit Insurance Corporation (“ FDIC” ) insurance coverage.

At June 30, 2016, the carrying amount of DCS’ deposits (cash and certificates of deposit) was $10,813,807 and the banks’ balance was $12,227,895. DCS’ cash deposits at June 30, 2016, and during the year then ended, were covered entirely by FDIC insurance or by pledged collateral held by DCS’ agent banks in DCS’ name.

In addition, the following is disclosed regarding coverage of combined balances on the date of the highest deposit:

a. Name of banks: Bank of America, N.A., Comerica Bank, and JPMorgan Chase, N.A.

b. The fair value of securities pledged as of the date of the highest combined balance on deposit was $27,742,027.

c. The highest combined balances of cash, savings, and time deposit accounts amounted to $27,205,473, which occurred during the month of July 1, 2015.

Legal and Contractual Provisions Governing Deposits and Investments

The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires DCS to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit. DCS maintains an investment policy that authorizes DCS to invest in obligations of the U.S. Treasury and U.S. agencies, municipal securities and repurchase agreements, and the State Treasurer’s investment pool or similar public fund investment pools.

39 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. DEPOSITS AND INVESTMENTS-CONTINUED Legal and Contractual Provisions Governing Deposits and Investments - Continued The Act also requires DCS to have independent auditors perform test procedures related to investment practices as provided by the Act. DCS is in substantial compliance with the requirements of the Act and with local policies. In accordance with the Public Funds Investment Act, DCS has adopted a deposit and investment policy.

Cash and cash equivalents at June 30, 2016, are classified in the accompanying financial statements as follows:

Statement of Net Position Amount Governmental activities $ 7,686,552 Business-type activities 3,127,255 Total cash and cash equivalents $ 10.813.807

Cash and cash equivalents at June 30, 2016, consisted of the following:

Demand deposits with financial institutions $ 10,813,807 Total cash and cash equivalents $ 10.813.807 Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment is held to maturity, the greater the sensitivity of its fair value to changes in market interest rates. In accordance with its investment policy, DCS manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to one year or less. As of June 30, 2016, DCS did not invest in any securities that are highly sensitive to interest rate fluctuations.

Disclosures Relating to Credit Risk

Credit risk is the risk that a security issuer of an investment will not fulfill its obligation to the holder of the investment. This type of risk is typically expressed in terms of the credit ratings issued by a nationally recognized statistical rating organization. State law limits investments in local government pools to those that are rated AAA or equivalent by at least one Nationally Recognized Statistical Rating Organization (NRSRO). All investment pools policies require a rating of AA or better from a nationally recognized rating organization. Government agency securities are not considered to have credit risk in that the U.S. government explicitly guarantees them.

Concentration of Credit Risk

This type of risk is defined as investment positions of 5% or more in the securities of a single issuer. The investment policy of DCS contains no limitations on the amount that can be invested in the securities of a single issuer. As of June 30, 2016, DCS was not exposed to concentration of credit risk because DCS did not invest in any external investment pools.

40 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. DEPOSITS AND INVESTMENTS-CONTINUED

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act and DCS’ investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits.

The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless waived by the governmental unit). The market value of the pledged securities in the collateral pool must be equal to at least the bank balance less FDIC insurance at all times. At June 30, 2016, DCS deposits and certificates of deposit with financial institutions were fully collateralized.

NOTE 4. PROPERTY TAXES

Property taxes are levied each October 1 on the assessed value listed as of the prior January 1 for all real and business personal property located in Dallas County in conformity with Subtitle E, Texas Property Tax Code. Taxes are due upon receipt of the tax bill and are delinquent if not paid before February 1 of the year following the year in which they were imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed.

The assessed value of the roll upon which the levy for the 2016 fiscal year was based on was $188,190,199,007 (on January 1, 2015), which resulted in a tax levy of $18,847,434 for the year ended June 30, 2016. The 2015 tax levy reflects an adjusted rendition penalty of $28,414. The tax rate levied for the year ended June 30, 2016, to finance General Fund operations was $0.010000 per $100 valuation.

Delinquent Taxes Receivable

Allowances for uncollectible tax receivables are based on historical experience in collecting property taxes and historical experience of adjustments to tax receivables. Uncollectible personal property taxes are periodically reviewed and written off in accordance with the Texas property Tax Code, but DCS is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature.

41 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. CAPITAL ASSETS

Capital asset activities for the year ended June 30, 2016, were as follows:

Balance Balance 6/30/2015 Additions Reductions 6/30/2016 Governmental activities: Capital assets, not being depreciated: Land $ 2,422,846 $ $ - $ 2,422,846 Construction in progress - 82,543 - 82,543 Total capital assets, not being depreciated 2,422,846 82,543 . 2,505,389 Capital assets, being depreciated: Buildings 31,859,768 113,436 - 31,973,204 Vehicles 130,955,869 3,623,706 (7,945,267) 126,634,308 Furniture and equipment 25,448,382 399,826 - 25,848,208 Intangible assets 948,964 - (194,311) 754,653 Total capital assets, being depreciated 189,212,983 4,136,968 (8,139,578) 185,210,373 Less accumulated depreciation for: Buildings (9,137,941)(848,752) - (9,986,693) Vehicles (72,169,737)(9,930,593) 7,887,447 (74,212,883) Furniture and equipment (16,386,752)(3,930,321) - (20,317,073) Intangible assets (292,966) (104,745) 194,311 (203,400)

Total accumulated depreciation (97,987,396) (14,814,411) 8,081,758 (104,720,049) Total capital assets being depreciated - net 91,225,587 (10,677,443) (57,820) 80,490,324 Governmental activities capital assets - net $ 93,648,433 $ (10,594,900) $ (57,820) $ 82,995,713

Business-type activities: Capital assets, being depreciated: Vehicles $ 2,067,975 $ 97,549 $ (14,905) $ 2,150,619 Furniture and equipment 13,022,477 7,944,518 - 20,966,995 Intangible assets 24,489,588 8,700 - 24,498,288

Total capital assets being depreciated 39,580,040 8,050,767 (14,905) 47,615,902 Less accumulated depreciation for: Vehicles (1,499,066)(218,176) 6,459 (1,710,783) Furniture and equipment (3,729,666) (4,209,243) - (7,938,909) Intangible assets (2,184,145) (1,645,624) - (3,829,769) Total accumulated depreciation (7,412,877) (6,073,043) 6,459 (13,479,461) Business-type activities capital assets - net $ 32,167,163 $ 1,977,724 $ (8,446) $ 34,136,441

42 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. CAPITAL ASSETS - CONTINUED

Depreciation and amortization expense was charged to functions as follows: Governmental activities: Amount Student transportation $ 9,930,593 Plant maintenance and operations 848,752 General administraion 3,930,321 Instructional resources and media services 104,745

Total depreciation expense $ 14,814,411 Business-type activities: Enterprise funds $ 6,073,043

NOTE 6. INVESTMENT IN CAPITAL LEASES

During the fiscal year ended June 30, 2016, DCS contracted to sublease additional units of digital video equipment, via three separate lease schedules, under a Master Lease Agreement (the “ Agreement” ) dated March 12, 2015. Each new lease schedule is subject to the same terms and conditions of the March 12, 2015, Agreement and mature over a period of five years. All four of the existing leases are direct financing leases, meet the criteria for capital lease qualification, and are recorded as the gross investment in the leases, which equals the sum of the minimum lease payments to be received. The difference between the gross investment in the leases and the carrying cost of the leased assets is recorded as unearned revenue that is amortized over the term of the lease. Interest is recognized using the effective interest method and is reported as a component of other revenues. As of June 30, 2016, unearned revenues related to the capital leases was $1,430,119, which is reported together with unearned Stop Arm Fund adjudication hearing fees of $13,225 in the balance of $1,443,344 of unearned revenues in the Enterprise Funds statement of net position.

Total future minimum lease payments to be received for each of the five succeeding fiscal years and the net investment in capital leases of June 30, 2016, are as follows:

Year Ending June 30, Amount 2017 $ 2,052,392 2018 2,052,392 2019 2,052,392 2020 1,869,143 2021 824,622 Total minimum lease payments 8,850,941 Less: amount representing interest (1,430,119)

Net investment in capital leases $ 7,420,822

43 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. DUE FROM OTHER GOVERNMENTS

DCS receives entitlements from the state of Texas through the School Foundation Program. To fulfill its mission to strengthen education through service, DCS provides related services to independent public school districts within and outside of Dallas County under four distinct classifications - transportation, information technology, instructional media, and psychology. Amounts due from local and state governments, as reported in the fund financial statements as of June 30, 2016, are summarized below: Due From Dallas County Out of County Texas Independent Independent Education Fund School Districts School Districts Agency Total

General Fund S 10,018,538 $ $ 1,873,314 S 11,891,852 Texserve Transportation and Technology 2,198,596 84,227 2,282,823 Dallas County Stop Arm Fund 72,298 156,649 228,947 Texserve Stop Arm Fund 15,192 15,192 Total $ 10,018,538 $ 2,270,894 $ 2,129,382 $ 14,418,814

NOTE 8. TRANSFERS

Related interfund receipts and disbursements are classified as “ transfers-in” and “ transfers-out” in the financial statements. Transfers during the year ended June 30, 2016, were as follows: Transfers In Dallas County Texserve General Fund Stop Ann Stop Arm 'Total Transfers Out Special Revenue Fund $ 301,893 $ S S .301,893 Dallas County Stop Arm Fund 1,000,000 - 2,269,995 3,269,995 General Fund - 8,532,638 9,262,734 17,795,372 Total $ 1,301,893 $ 8,532,638 $ 11,532,729 $ 21,367,260

The transfer to the General Fund from the Special Revenue Fund was due to the reassignment of special revenue fund balance to be used for general operations rather than for emergency response.

The transfer to the General Fund from Dallas County Stop Arm Fund was made to return cash that was previously transferred into Dallas County Stop Arm Fund for operations.

The $17,795,372 transferred from the General Fund to the Dallas County Stop Ann and Texserve Stop Arm Funds was temporarily loaned to those funds. Since the General Fund was not expected to be fully repaid within the succeeding 12 months, the “ Due To” and “ Due From” have been reclassified as transfers in accordance with the applicable provisions of GASB Statement 34. Management expects the Stop Arm funds to generate positive cash flows from ongoing operations, at which time all amounts transferred in would subsequently be returned to the General Fund.

44 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. FUND BALANCES— GOVERNMENTAL FUNDS The fund balance amounts for governmental funds are presented in accordance with GASB Statement No. 54, “ Fund Balance Reporting and Governmental Fund Type Definitions,” the objective of which is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. Fund balance classifications under GASB Statement 54 are Nonspendable, Restricted, Committed, Assigned, and Unassigned. These classifications reflect not only the nature of funds but also provide clarity to the level of restriction placed upon fund balances. Fund balance can have different levels of constraint, such as external versus internal compliance requirements. Unassigned fund balance is a residual classification within the General Fund.

Under GASB Statement No. 54, Fund balances are classified as follows:

Nonspendable: This classification includes amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact, such as fund balance associated with inventories.

Restricted: This classification includes amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments.

Committed: This classification includes amounts that can be used only for specific purposes determined by a formal action of the Board of Trustees, which is the highest level of decision¬ making authority for DCS. The Board of Trustees establishes (and modifies or rescinds) fund balance commitments by passage of a resolution. This can be done through adoption and amendment of the budget. These amounts cannot be used for any other purpose unless the Board removes or changes the constraint by exercising the same type of action originally used to commit the funds. DCS had no committed fund balance as of June 30, 2016.

Assigned: This classification includes amounts that are constrained by DCS’ intent to be used for a specific purpose but are neither restricted nor committed. The intent can be expressed by the Board of Trustees or through the Board of Trustees delegating this responsibility to other individuals within DCS by Board resolution. Under DCS’ current adopted policy, only the Board of Trustees or the Budget and Finance Committee may assign amounts for specific purposes. As of June 30, 2016, DCS had no assigned fund balance.

Unassigned: This classification includes residual positive fund balance within the General Fund which has not been classified within any other spendable classifications. A negative unassigned fund balance may be reported in other governmental funds if expenditures incurred for specific purposes exceeded the amounts restricted, committed, or assigned to those specific purposes.

The details of the fund balances are included in the Governmental Funds Balance Sheet. When both restricted and unrestricted funds are available for use, it is DCS’ policy to use restricted resources first, then unrestricted resources as they are needed. When expenditure is incurred for which assigned or unassigned fund balances are available, DCS considers amounts to have been spent first out of assigned funds, then unassigned funds as needed.

45 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. SALE-LEASEBACK OF PROPERTY

In June 2015, DCS sold property consisting of land, buildings, and equipment (the “ Property” ) to a buyer-lessor for $25,000,000 and immediately entered into lease agreements (the “ Agreements’) with the buyer-lessor to lease 100% of the Property back over a primary lease term of 20 years. The Agreements provide DCS with the option to repurchase the Property at fair value and include options to renew and extend the terms of the leases for additional periods, with fixed rents as specified in the Agreements.

The Agreements provide DCS with the option to repurchase the Property at fair value and include options to renew and extend the terms of the leases for additional periods, with fixed rents as specified in the Agreements. DCS’ option to repurchase the Property in the future is considered continued involvement under the provisions of GASB 62, “ Codification of Accounting and Financial Reporting Guidance in Pre-November 30, 1989 FASB and AICPA Pronouncements,” and, therefore, DCS has applied the financing method in accounting for the transaction. Under the financing method, the undepreciated cost and related accumulated depreciation of the Property remain on DCS’ statement of net position and no sale is recognized. Instead, the sale price of the Property is recorded as a lease finance obligation and each lease payment is recorded as interest expense. The initial term of the leases, which became effective in June 5, 2015, is 20 years, with monthly rental payments that began July 1, 2015. For the year ended June 30, 2016, DCS recorded interest expense of $2,172,165 related to the leases. In accordance with GASB 62, the total lease financing obligation related to this transaction was $25,000,000 at June 30, 2016.

At June 30, 2016, interest expense to be recognized over the term of the leases related to the Property is $43,626,955. Annual future lease payments as of June 30, 2016, are as follows:

Year Ending, June 30, Amount 2017 $ 2,193,897 2018 2,215,836 2019 2,237,994 2020 2,260,374 2021 2,252,978 2022-2026 11,761,935 2027-2031 12,361,913 2032-2035 8,342.028

Total minimum lease payments $ 43,626,955

46 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. LONG-TERM LIABILITIES

Long-term liabilities of DCS consist of bonds payable; capital leases payable; and accrued compensated absences. Debt service requirements for public property finance contractual obligations and the maintenance tax notes are payable from annual ad valorem taxes levied for maintenance and operations and from other future revenues of the DCS.

Changes in Long-term Liabilities

The following is a summary of changes in long-term debt for governmental activities and business-type activities for the year ended June 30, 2016: Beginning finding Due Within Balance Additions Reductions Balance One Year Governmental activities: Public Property Finance CO's $60,215,000 $ $ 9,810,000 $ 50,405,000 $ 10,075,000 Unamortized Premium on CO's 4,703,125 - 977,597 3,725,528 971,202 Lease finance obligation 25,000,000 - - 25,000,000 - Compensated absences 1 ,286,920 484,889 338,854 1 ,432,955 160,708 Total long-term liabilities $91,205,045 $ 484,889 $ 11,126,451 $ 80,563,483 $ 11,206,910

Business-type activities: Notes payable $1.3,475,827 $20,830,000 $ 6,587,179 $ 27,718,648 $ 8,503,933 Public Property Finance CO's 15,395,000 - - 15,395,000 3,715,000 Total long-term liabilities $28,870,827 $20,830,000 $ 6,587,179 $ 4.3,113,648 $12,218,933

The accrued compensated absences reported as long-term liabilities of the governmental activities are generally liquidated by the General Fund.

Bonded Debt Payable

Bonds payable for governmental activities as of June 30, 2016, consisted of the following individual issues: Interest Bonds Bonds Rate Outstanding at Outstanding at Description Payable July 1, 2015 Issued Retired June 30, 2016 Public Property Finance Contractual Obligations, Series 2012 2.00% to 4.00% $ 11,650,000 $ $ 4,575,000 $ 7,075,000 Public Properly Finance Contractual Obligations, Series 2012A 2.00% to 5.00% 13,635,000 . 2,500,000 11,135,000 Public Properly Finance Contractual Obligations, Series 2013 2.00% to 5.00% 10,535,000 - 725,000 9,810,000 Maintenance Tax Note, Series 2014 1.00% to 1.50% 4,045,000 - 2,010,000 2,035,000 Public Property Finance Contractual Obligations, Series 2014 3.20% to 5.00% 20,350,000 20,350,000

$60,215,000 $ $ 9,810,000 $ 50,405,000

47 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. LONG-TERM LIABILITIES-CONTINUED

The following table summarizes the annual debt «service requirements to maturity of bonds payable for governmental activities at June 30, 2016:

Year Ending June 30, Bond Principal Bond Interest Total 2017 $ 10,075,000 $ 1.815,940 $ 11,890,940 2018 8,770,000 1,572,227 10,342,227 2019 8,965,000 1,309,528 10,274,528 2020 9,335,000 935,477 10,270,477 2021 6,495,000 561,028 7,056,028 2022 6,765,000 290,278 7,055,278 $ 50,405,000 $ 6,484,478 $ 56,889,478

Notes Payable - Business-type Activities Effective July 8, 2015, DCS entered into a second Master Government Obligation Contract (the “ Contract” ) with a third party to finance the purchase of additional digital video equipment and software, under separate schedules, as agreed upon by both parties. During the current fiscal year, and subject to the terms and conditions of the Contract, DCS had made additional equipment and software purchases under twelve separate promissory note payable schedules at a total cost of $20,831,000. Payments of principal plus interest are due quarterly through February 2021. Purchase under the initial schedule was transacted on July 1, 2015, and the first scheduled payment was made on October 1, 2015. The notes are direct obligations of DCS and are payable from available revenues that are not associated with the proceeds from annual ad valorem taxes. The notes payable are subordinate to the public property Finance Contract Obligation Series 2012-B.

DCS is also obligated under a privately financed note agreement that was entered into to finance the purchase of software license and franchise rights to operate a school bus student safety program on a fee-for-service basis within the state of Texas. Payments of principal, plus interest at the rate of 3.00%, are due monthly through January 2018. This note is included in total notes payable in the schedule of long-term liabilities of business-type activities. Bond Payable - Business-type Activities On December 1, 2014, DCS restructured the terms of the outstanding 2012B Obligations after obtaining the consent of holders of 100% of the outstanding 2012B Obligations. The 2012B Obligations are payable from all available funds that DCS may lawfully use to pay amounts due on the Obligations but excluding receipts from ad valorem taxes and any state and federal funding. Accordingly, the 2012B Obligations are senior to obligations under the public property finance contractual obligations, the maintenance tax notes, the privately financed note, and schedules under the Master Government Obligation Contracts.

48 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. LONG-TERM LIABILITIES - CONTINUED

Long-term Liabilities - Business-type Activities

Long-term liabilities for business-type activities as of June 30, 2016, consisted of the following: Outstanding Outstanding Interest Debt at Debt at Description Rates July 1, 2015 Issued Retired June 30, 2016 Public Property Finance Contractual Obligations Series 2012-B 2.75% to 3.375% $ 15,395,000 $ - $ - $ 15,395,000 Notes Payable 3.00% to 5.95% 13,475,827 20,830,000 6,587,179 27,718,648

$ 28,870,827 $ 20,830,000 $ 6,587,179 $ 43,113,648

The following table summarizes the annual debt service requirements to maturity of the outstanding long-term liabilities of business-type activities at June 30, 2016:

Year Ending June 30, Principal Interest Total 2017 $ 12,218,933 $ 1,820,851 $ 14,039,784 2018 11,269,702 1,324,017 12,593,719 2019 8,970,896 872,491 9,843,387 2020 8,480,187 443,441 8,923,628 2021 2,173,930 62,536 2,236,466 $ 43,113,648 $ 4,523,336 $ 47,636,984

NOTE 12. DEFINED BENEFIT PENSION PLAN

Plan Description

DCS participates in a cost-sharing multiple- employer defined benefit pension that has a special funding situation. The plan is administered by the Teacher Retirement System of Texas (TRS). TRS' defined benefit pension plan is established and administered in accordance with the Texas Constitution, Article XVI, Section 67 and Texas Government Code, Title 8, Subtitle C. The pension trust fund is a qualified pension trust under Section 401(a) of the Internal Revenue Code. The Texas Legislature establishes benefits and contribution rates within the guidelines of the Texas Constitution. The pension's Board of Trustees does not have the authority to establish or amend benefit terms. All employees of public, state-supported educational institutions in Texas who are employed for one- half or more of the standard work load and who are not exempt from membership under Texas Government Code, Title 8, Section 822.002 are covered by the system.

49 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

Pension Plan Fiduciary Net Position

Detailed information about the Teacher Retirement System's fiduciary net position is available in a separately-issued Comprehensive Annual Financial Report that includes financial statements and required supplementary information. That report may be obtained on the Internet at http://www.trs.state.tx.us/about/documents/cafr.pdf#CAFR; by writing to TRS at 1000 Red River Street, Austin, TX, 78701-2698; or by calling (512) 542-6592.

Benefits Provided.

TRS provides service and disability retirement, as well as death and survivor benefits, to eligible employees (and their beneficiaries) of public and higher education in Texas. The pension formula is calculated using 2.3 percent (multiplier) times the average of the five highest annual creditable salaries times years of credited service to arrive at the annual standard annuity. Except for members who are grandfathered in, the three highest annual salaries are used.

The normal service retirement is at age 65 with 5 years of credited service or when the sum of the member's age and years of credited service equals 80 or more years. Early retirement is at age 55 with 5 years of service credit or earlier than 55 with 30 years of service credit. There are additional provisions for early retirement if the sum of the member's age and years of service credit total at least 80, but the member is less than age 60 or 62 depending on date of employment, or if the member was grandfathered in under a previous rule. There are no automatic post-employment benefit changes; including automatic COLAs. Ad hoc post¬ employment benefit changes, including ad hoc COLAs can be granted by the Texas Legislature as noted in the Plan description above.

Contributions

Contribution requirements are established or amended pursuant to Article 16, section 67 of the Texas Constitution, which requires the Texas legislature to establish a member contribution rate of not less than 6% of the member's annual compensation and a state contribution rate of not less than 6% and not more than 10% of the aggregate annual compensation paid to members of the system during the fiscal year. Texas Government Code section 821.006 prohibits benefit improvements, if, as a result of the particular action, the time required to amortize TRS’ unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or, if the amortization period already exceeds 31 years, the period would be increased by such action.

Employee contribution rates are set in state statute, Texas Government Code 825.402. Senate Bill 1458 of the 83rd Texas Legislature amended Texas Government Code 825.402 for member contributions and established employee contribution rates for fiscal years 2014 thru 2017. It also added a 1.5% contribution for employers not paying Old Age Survivor and Disability Insurance (OASDI) on certain employees effective for fiscal year 2016 as discussed in Note 1 of the TRS 2014 CAFR.

50 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED Contributions -continued

The 83rd Texas Legislature, General Appropriations Act (GAA) established the employer contribution rates for fiscal years 2015 and 2016. Contribution Rates 2015 2016 Member 6.7% 7.2% Non-Employer Contributing Entity (State) 6.8% 6.8% Employers 6.8% 6.8%

Dallas County Schools 2015 Employer Contributions $ 994,200 Dallas County Schools 2015 Member Contributions $ 4,044,149 Dallas County Schools 2015 NECE On-Behalf Contributions $ 4,012,026

Contributors to the plan include members, employers and the state of Texas as the only non¬ employer contributing entity. The state contributes to the plan in accordance with state statutes and the General Appropriations Act (GAA).

As the non-employer contributing entity for public education, the state of Texas contributes to the retirement system an amount equal to the current employer contribution rate times the aggregate annual compensation of all participating members of the pension trust fund during that fiscal year, reduced by the amounts described below, which are paid by the employers.

Employers, including public schools, are required to pay the employer contribution rate in the following instances: • On the portion of the member's salary that exceeds the statutory minimum for members who are entitled to the statutory minimum under Section 21.402 of the Texas Education Code. • During a new member's first 90 days of employment. • When any part or all of an employee's salary is paid by federal funding sources, a privately sponsored source, non-educational and general funds, or by local funds.

In addition to the employer contributions listed above, there are two additional surcharges to which an employer is subject:

• When employing a retiree of the Teacher Retirement System, the employer shall pay both the member contribution and the state contribution as an employment-after retirement surcharge. • When a school district does not contribute to the Federal Old-Age, Survivors and Disability Insurance (OASDI) Program for certain employees, the district must contribute 1.5% of the state contribution rate for certain instructional or administrative employees; and 100% of the state contribution rate for all other employees

51 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

Actuarial Assumptions

The total pension liability in the August 31, 2015, actuarial valuation was determined using the following actuarial assumptions:

Valuation Date August 31, 2015 Actuarial Cost Method Individual Entry Age Normal Asset Valuation Method Market Value Single Discount Rate 8.00% Long-term expected Investment Rate of Return* 8.00% Inflation 2.50% Salary Increases, Including Inflation 3.50% to 9.00% Payroll Growth Rate 3.50% Benefit Changes During the Year ...None Ad Hoc Post Employment Benefit Changes None The actuarial methods and assumptions are primarily based on a study of actual experience for the four year period that ended August 31, 2014, and adopted on September 24, 2015.

Discount Rate

The single discount rate used to measure the total pension liability was 8.0%. There was no change in the discount rate since the previous year. The projection of cash flows used to determine the discount rate assumed that contributions from plan members and those of the contributing employers and the non-employer contributing entity are made at the statutorily required rates. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The long-term rate of return on pension plan investments is 8%. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.

52 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

Discount Rate -continued

The best estimates of geometric real rates of return for each major asset class included in the System’s target asset allocation as of August 31, 2015, are summarized below:

Long-Term Expected Real Return Portfolio Real Asset Class Target Allocation Geometric Basis Rate of Return* Global Equity U.S. 18.0% 7.0% 1.0% Non-U.S. Developed 13.0% 7.3% 0.8% Emerging Markets 9.0% 8.1% 0.7% Directional Hedge Funds 4.0% 5.4% 0.1% Private Equity 13.0% 7.0% 1.1% Stable Value U.S. Treasuries 11.0% 2.9% 0.1% Absolute Return 0.0% 4.0% 0.0% Stabel Value Hedge Funds 4.0% 5.2% 0.1% Cash 1.0% 2.0% 0.0% Real Return Global Inflation Linked Bonds 3.0% 3.1% 0.0% Real Assets 16.0% 7.3% 1.1% Energy and Natural Resources 3.0% 8.8% 0.2% Commodities 0.0% 3.4% 0.0% Risk Parity Risk Parity 5.0% 8.9% 0.3% Inllation Expectation 2.2% Alpha 0% 1.0% 100% 8.7%

* The Expected Contribution to Returns incorporates the volatility drag resulting from the conversion between Arithmetic and Geometric mean returns.

Discount Rate Sensitivity Analysis

The following schedule shows the impact of the Net Pension Liability if the discount rate used was 1% less than and 1% greater than the discount rate that was used (8%) in measuring the 2015 Net Pension Liability:

1% Increase 1% Decrease in Discount Rate in Discount Rate Discount Rate (7.0%)(8.0%) (9.0%) Dallas County Schools proportion share of the net pension liability: $ 18,595,967 $ 11,868,669 $ 6,265,248

53 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

Pension Liabilities, Pension Expense, Deferred Outflows of Resources, and Deferred Inflows of Resources Related to Pensions

As of June 30, 2016, DCS reported a net pension liability of $11,868,669, as its proportionate share of TRS’ net pension liability. This liability reflects a reduction for state pension support provided to DCS. The amount recognized by DCS as its proportionate share of the net pension liability, the related State support, and the total portion of the net pension liability that was associated with DCS were as follows:

Amount DCS’ proportionate share of the collected net pension liability $ 11,868,669 State's proportionate share that is associated with the DCS' total 47,881,012 $ 59,749,681

The net pension liability was measured as of August 31, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The employer's proportion of the net pension liability was based on the employer's contributions to the pension plan relative to the contributions of all employers to the plan for the period September 1, 2014, thru August 31, 2015.

At August 31, 2015, the employer's proportion of the collective net pension liability was .000335760%, which represented an increase from .000101190% as of August 31, 2014. At August 31, 2014, DCS’ proportionate share of the net pension liability was $2,702,925. Changes Since the prior Actuarial Valuation

The following are changes to the actuarial assumptions or other inputs that affected measurement of the total pension liability since the prior measurement period. Economic Assumptions 1. The inflation assumption was decreased from 3.00% to 2.50 % 2. The ultimate merit assumption for long-service employees was decreased from 1.25% to 1.00%. 3. In accordance with the observed experience, there were small adjustments in the service-based promotional/longevity component of the salary scale. 4. The payroll growth assumption was lowered from 3.50% to 2.50% Mortality Assumptions

5. The post-retirement mortality tables for non-disabled retirees were updated to reflect recent TRS member experience. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB. 6. The post-retirement mortality tables for disabled retirees were updated to reflect recent TRS member experience. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB.

54 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

Changes Since the prior Actuarial Valuation Mortality Assumptions - continued 7. The pre-retirement mortality tables for active employees were updated to use 90% of the recently published RP-2014 mortality table for active employees. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB.

Other Demographic Assumptions

8. Previously, it was assumed 10% of all members who has contributed in the past 5 years to be an active member. This was an implicit rehire assumption because teacher have historically had a high incidence of termination employment for a time and then returning to the workforce at a later date. This methodology was modified to add a more explicit valuation of the rehire incidence in the termination liabilities, and therefore these 10% are no longer being counted as active members. 9. There were adjustments to the termination patterns for members consistent with experience and future expectations. The termination patterns were adjusted to reflect the rehire assumption. The timing of the termination decrement was also changed from the middle of the year to the beginning to match the actual pattern in the data. 10. Small adjustments were made to the retirement patterns for members consistent with experience and future expectations. 11. Small adjustments to the disability patterns were made for members consistent with experience and future expectations. Two separate patterns were created based on whether the member has 10 years of service or more. 12. For members that become disabled in the future, it is assumed 20% of them will choose a 100% joint and survivor annuity option.

Actuarial Methods and Policies

13. The method of using celled data in the valuation process was changed to now using individual data records to allow for better reporting of some items, such as actuarial gains and losses by source.

There were no changes of benefit terms that affected measurement of the total pension liability during the measurement period .

55 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. DEFINED BENEFIT PENSION PLAN - CONTINUED

There was a change to employer contribution requirements that occurred after the measurement date of the net pension liability and the employer's reporting date. A 1.5% contribution for employers not paying Federal Old-Age, Survivors and Disability Insurance (OASDI) on certain instructional and administrative employees went into law effective September 1, 2014.

For the year ended June 30, 2016, DCS recognized pension expense of $6,822,274 and revenue of $6,822,274 for support provided by the State of Texas.

At June 30, 2016, DCS reported its proportionate share of the TRS' deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Deferred Outflows Deferred Inflows of Resources of Resources

Differences between expected and actual economic experience $ 34,766 $ 456,124 Changes in actuarial assumptions 146,118 423,422 Difference between projected and actual investment earnings 2,922,989 619,594 Changes in proportion and difference between the employer’s contributions and the proportionate share of contributions 5,359,565 3,005 Contributions paid to TRS subsequent to the measurement date 1 ,005,590 -

Total $ 9,469,028 $ 1 ,502,145

The amount $1,005,590 reported as deferred outflows of resources related to pensions that resulted from contributions made subsequent to the measurement date will be recognized as a reduction of the net pension liability for the year ending June 30, 2017. The net amounts of the employer's balances of deferred outflows and deferred inflows of resources related to pensions will be recognized in pension expense as follows:

Year Ending June 30, PCS' Pension Expense

2017 $ 1 ,319,253 2018 1 ,319,253 2019 1 ,319,253 2020 1 ,525,784 2021 792,865 2022 684,885

At June 30, 2016, DCS reported Deferred Outflows of Resources and Deferred Inflows of Resource related to the TRS pension plan as follows:

Deferred Outflows Deferred Inflows of of Resources Resources

Total net amounts as of August 31, 2015, Measurement Date $ 8,463,438 $ 1 ,502,145 Contribution made subsequent to the Measurement Date 1 ,005,590

Reported by Dallas County Schools as of June 30, 2016 $ 9,469,028 $ 1 ,502,145

56 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. POSTEMPLOYMENT HEALTH BENEFITS

Plan Description

DCS contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple-employer defined benefit post-employment health care plan administered by the Teacher Retirement System of Texas. TRS-Care Retirement Plan provides health care coverage for certain persons (and their dependents) who retired under the Teacher Retirement System of Texas. The statutory authority for the program is Texas Insurance Code, Chapter 1575. Section 1575.02 grants the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants.

TRS issues a publicly available financial report that includes financial statements and required supplementary information for TRS-Care. That report may be obtained by visiting the TRS web site at www.trs.state.tx.us under the TRS Publications heading, by writing to the Communications Department of the Teacher Retirement System of Texas at 1000 Red River Street, Austin, Texas 78701, or by calling the TRS Communications Department at (800)-223-8778.

Funding Policy

Contribution requirements are not actuarially determined but are legally established each biennium by the Texas Legislature. Texas Insurance Code, Sections 1575.202, 203, and 204 establish state, active employee, and public school contributions, respectively.

Funding for free basic coverage is provided by the program based upon public school district payroll. Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. Funding for optional coverage is provided by those participants selecting the optional coverage. DCS’ and active public school employee contribution rates were 0.55% and 0.65% of public school payroll, respectively, for fiscal years 2016, 2015, and 2014. The State of Texas’ contributions as a percentage of payroll were set at 1.0% for fiscal years 2016, 2015; and 2014. For the fiscal years ended June 30, 2016, 2015, and 2014, respectively, the State’s contributions to TRS-Care were $643,062; $605,544; and $543,877, active members’ contributions were $415,348; $393,607; and $353,406; and DCS’ contributions were $356,321; $333,050; and $299,038. Actual contributions equaled the required contributions for the fiscal periods presented.

Medicare Part D - On-Behalf Payments

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which was effective January 1, 2006, established prescription drug coverage for Medicare beneficiaries known as Medicare Part D. One of the provisions of Medicare Part D allows for TRS-Care to receive retiree drug subsidy payments from the federal government to offset certain prescription drug expenditures for eligible TRS-Care participants. These on-behalf payments have been recognized as equal revenues and expenditures by DCS in the amount of $298,445, $408,164, and $241,133 for the years ended June 30, 2016, 2015, and 2014, respectively.

57 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 14. REVENUE FROM LOCAL AND INTERMEDIATE SOURCES

During the year ended June 30, 2016, General Fund revenues from local and intermediate sources consisted of the following:

Property taxes $ 18,747,884 Operational charges to local districts for transportation services 53,258,931 Charges for psychology services 351,772 Charges for monitor services 6,817,450 Charges for summer school transportation 1,005,189 Charges for charter school transportation 145,092 Charges for extracurricular transportation 8,830,850 Charges for technology services 508,857 Charges for instructional resources 189,010 Charges for workers compensation services 369,256 Charges for school resource officers services 531,820 Charges for publications workshop participation 153,466 Child Safety Trust Fund distribution 433,818 Investment income 19,562 Other local income 182,812

Total S 91.545,769

NOTE 15. RISK MANAGEMENT

DCS is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. For the year ended June 30, 2016, DCS maintained commercial insurance to cover liabilities. There were no significant reductions in coverage during the past fiscal year, and there were no settlements exceeding insurance coverage for each of the past three fiscal years. Effective September 1, 2001, DCS changed its vehicle liability coverage from fully-insured to partially- self-insured.

Effective September 1, 2005, DCS chose to eliminate the purchase of an aggregate retention for its partially self-funded Workers’ Compensation Program. After review of claims trends and exposure risks, management determined that an ultimate specific attachment point of $500,000 per occurrence would better manage the potential for loss. Within this attachment point there is a “ cash flow” yearly limit per occurrence over a three year period. In year one, the cash flow limit is $200,000, in year two, the limit is $150,000 and in year three, the limit is $150,000. If a claim reaches $500,000 prior to the beginning of the third year, the carrier will begin paying the claim for the remaining life of the claim. DCS currently purchases excess coverage to statutory limits through the Safety National Insurance Company. Claims administration has been provided by Alternative Service Concepts, LLP since September 1, 2007. From September 1, 1999, through August 31, 2007, claims were administered by the Texas Association of School Boards.

58 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 15. RISK MANAGEMENT - CONTINUED

Beginning September 1, 1999, DCS established its partial self-funding Workers’ Compensation Program. Through its historical review of the Workers’ Compensation Partial Self-Insurance Program, DCS projected a liability of $1,500,364 as of June 30, 2016, for the ultimate loss reserve of the program, which is included in accrued expenditures in the General Fund. The accrued liability for Workers’ Compensation self-insurance of $1,500,364 includes incurred but not reported claims. This liability is based on the requirements of GASB Statement 10, “ Accounting and Reporting for Risk Financing and Related Insurance Issues,” which requires a liability for claims to be reported when it is probable that a loss has occurred as of the date of the financial statements and the amount of the loss can be reasonably estimated. This includes provisions for claims reported but not paid and claims incurred but not reported. Because actual claim liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing the liability seldom results to an exact amount. Year Ended Year Ended June 30, 2015 June 30, 2016 Claims payable, beginning of year $ 1,738,043 $ 1,638,088 Claims incurred and changes in estimate 384,495 914,109 Claims payments (484,450) (1,051,833) Claims payable, end of year $ 1,638,088 $ 1,500,364

Beginning September 1, 2001, DCS established its automotive liability self-insurance program. For the year ended June 30, 2016, Milliman, Inc. (Milliman) was retained by Dallas DCS to perform an independent analysis of DCS’ automobile liability self-insurance program. Milliman’s analysis included an estimate of the unpaid losses and allocated loss adjustment expenses of $1,750,209 as of June 30, 2016, for the ultimate loss reserve of the program.

DCS’ statutory limits of legal liability as it pertains to automotive liability is $100,000 per person for bodily injury, $300,000 per occurrence of bodily injury, and $100,000 per occurrence of property damage as of June 30, 2016. Claims administration is provided by Sedgwick CMS.

The accrued liability for automotive liability self-insurance of $1,750,206 includes incurred but not reported claims. This amount is included in accrued expenditures in the General Fund as of June 30, 2016, and is based on the requirements of GASB Statement 10.

Because actual claim liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing the liability does not result necessarily in an exact amount.

Year Ended Year Ended June 30, 2015 June 30, 2016 Claims payable, beginning of year $ 528,095 $ 1,102,631 Claims incurred and changes in estimate 2,145,262 2,634,240 Claims payments (1,570,726) (1,986,662) Claims payable, end of year $ 1,102,631 $ 1,750,209

59 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. CONTINGENCIES

DCS has intergovernmental agreements with several Texas independent school districts under which DCS transports students to and from schools within each client district for the purpose of the instructional day and for extracurricular activities. In the event of dissolution of an agreement by either party, title to the buses initially purchased by a client district, or previously owned by the client district, would revert to the client district.

DCS is the defendant in a number of lawsuits arising principally in the normal course of operations. In the opinion of management, the outcome of these lawsuits will not have a materially adverse effect on the accompanying financial statements and, accordingly, DCS has not recorded provisions for any losses.

DCS participates in federal and state programs whereby DCS receives financial resources from numerous federal and state governmental agencies in the form of grants. In connection with these grants, DCS is required to comply with specific terms and agreements, as well as applicable federal and state laws and regulations. Such compliance is subject to review and audits by the grantor agencies and their representatives, including audits under the “ Single Audit” concept and compliance examinations that build upon such audits.

NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS GASB issued Statement No. 73, “ Accounting and Financial Reporting for Pensions and Related Assets that are not within the scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statement 67 and 68,” which will become effective September 2016.

The objective of this Statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pension plans that are not within the scope of Statement 68. It also amends certain provisions of Statement No.67, “ Financial Reporting for Pension Plans” and Statement 68 for pension plans and pensions that are within their respective scopes. The provisions of this statement become effective September 30, 2016. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable.

60 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED GASB issued Statement No. 74, “ Financial Reporting for Postemployment Benefit Plans Other than Pension Plans,” which will become effective September 30, 2017. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement also includes requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, “ Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans,” as amended, Statement 43, and Disclosures. This Statement also includes requirements to address financial reporting for assets accumulated for purposes of providing defined benefit OPEB through OPEB plans that are not administered through trusts that meet the specified criteria. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable. GASB issued Statement No. 75, “ Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions,” which will become effective September 30, 2016. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (OPEB). This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and interperiod equity, and creating additional transparency. This Statement replaces the requirements of Statements No. 45, “ Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions” , as amended, and No. 57, “ OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans,” for OPEB. Statement No. 74, “ Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans,” establishes new accounting and financial reporting requirements for OPEB plans. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable. GASB issued Statement No. 76,“ The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments,” which will become effective September 30, 2016. The objective of this Statement is to identify-in the context of the current governmental financial reporting environment-the hierarchy of accounting principles generally accepted in the United States of America (GAAP). The "GAAP hierarchy" consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This Statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and non-authoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable.

61 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED GASB issued Statement No. 77, “ Tax Abatement Disclosures,” which will become effective September 30, 2017. The requirements of this Statement improve financial reporting by giving users of financial statements essential information that is not consistently or comprehensively reported to the public at present. Disclosure of information about the nature and magnitude of tax abatements will make these transactions more transparent to financial statement users. As a result, users will be better equipped to understand (1) how tax abatements affect a government's future ability to raise resources and meet its financial obligations and (2) the impact those abatements have on a government's financial position and economic condition. This Statement requires governments that enter into tax abatement agreements to disclose certain information about the agreements. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable. GASB issued Statement No. 78, “ Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans,” which will become effective September 30, 2017. The objective of this statement is to address a practice issue regarding the scope and applicability of Statement No. 68,“ Accounting and Financial Reporting for Pensions.” This issue is associated with pensions provided through certain multiple-employer defined benefit pension plans and to state or local governmental employers whose employees are provided with such pensions. Prior to the issuance of this statement, the requirements of Statement 68 applied to the financial statements of all state and local governmental employers whose employees are provided with pensions through pension plans that are administered through trusts and meet the criteria in paragraph 4 of that statement. This statement amends the scope and applicability of Statement 68 to exclude pensions provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit pension plan that (1) is not a state or local governmental pension plan, (2) is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local governmental employers, and (3) has no predominant state or local governmental employer (either individually or collectively with other state or local governmental employers that provide pensions through the pension plan). This statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosures; and required supplementary information for pensions that have the characteristics described above. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable. GASB issued Statement No. 79, “ Certain External Investment Pools and Pool Participants,” which will be effective for periods beginning after June 15, 2016.

The objective of this Statement is to address for certain external investment pools and their participants the accounting and financial reporting implications that result from changes in the regulatory provisions referenced by previous accounting and financial reporting standards. This Statement applies to all state and governmental entities. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable.

62 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED GASB issued Statement No. SO, “ Blending Requirements for Certain Component Units - an amendment of GASB Statement No. 14,” effective for periods beginning after June 15, 2016. The objective of this statement is the improvement of financial reporting by clarifying the financial statement presentation requirements for certain component units. This statement applies to all state and governmental entities. DCS will evaluate the impact of the standard on its financial statements and will take necessary steps to implement it, where applicable. GASB issued Statement No.81:“ Irrevocable Split-Interest Agreements” in March 2016. This statement requires that a government that receives resources pursuant to an irrevocable split interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. Furthermore, this Statement requires that a government recognize assets representing its beneficial interests in irrevocable split-interest agreements that are administered by a third party, if the government controls the present service capacity of the beneficial interests. This standard becomes effective for districts in fiscal year 2018. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it, where applicable. GASB Statement No. 82:“ Pension Issues - an amendment of GASB Statements No.67, No.68, and No. 73” in March 2016. This Statement addresses certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Specifically, this Statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. This standard becomes effective for districts in fiscal year 2017. DCS will evaluate the impact of the standard on its financial statements and will take the necessary steps to implement it.

NOTE 18. GOING CONCERN The accompanying 2016 financial statements of DCS were prepared on a going concern basis. The going concern basis assumes that DCS will continue to operate in the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations.

63 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 18. GOING CONCERN - CONTINUED

During the year ended June 30, 2016, DCS’ total net position decreased by $12,164,746, and the unrestricted net position of governmental activities reported a cumulative deficit of $17,250,817 at year’s end. Also in fiscal 2017, two local independent public school districts for whom DCS provides services terminated their interlocal transportation agreement with DCS effective from the end of the 2016/2017 school year, which had no impact on the results of operations for the year ended June 30, 2016. The ability to continue as a going concern can, however, be impacted by the loss of additional transportation contracts with local independent school districts. During fiscal years 2013, 2014, and 2015, the Student Safety/Stop Arm Camera Program experienced collectability challenges and declining revenues. As a result of the above conditions, the program operated at a deficit by incurring operating losses and negative changes in net position and cash flows.

In addition, the Texas Senate Committee on Higher Education voted to send to the Texas Senate floor a Bill that, if passed by the Texas Senate, would abolish DCS as a transportation agency in Dallas County.

Management is taking the steps necessary to ensure DCS continues as a solvent organization: • To provide additional short-term working capital for general operations, DCS typically issues Tax Anticipation Notes that are repaid within the same fiscal year. For fiscal years 2016 and 2017, however, DCS did not enter into any short-term borrowing arrangements, which contributed to the low available working capital subsequent to June 30, 2016. DCS’ management recognized the need to raise capital in order to fund its operations in the short term and has taken action to address this financing need. These steps include zero based budgeting and implementation of a finance plan.

• In March 2017, management engaged the services of municipal advisors to review DCS’ outstanding debt obligations, in light of the current financial condition noted above, and propose a Plan of Finance that would provide working capital and immediate debt service relief for the remainder of fiscal year 2017 and the fiscal years immediately following. The Plan of Finance proposes a restructure of a portion of DCS’ outstanding Limited Tax debt obligations, along with the issuance of Tax Anticipation Notes, each to be closed before the end of May 2017. On March 8, 2017, DCS’ Board of Trustees voted unanimously to approve the Plan of Finance. Under the Plan of Finance, DCS proposes to issue limited tax refunding bonds that would provide proceeds to refund the restructured portion of the outstanding Limited Tax debt and pay the costs associated with the issuance of the refunding bonds. • DCS’ Finance Department will 1) use an activity-based budgeting approach to determine true costs and to provide financial transparency to all customers; 2) conduct monthly budget meetings to enforce proper budgetary controls; 3) strengthen purchasing procedures through proper budgeting, bidding, and requisitioning processes; and 4) establish Key Performance Indicators to measure and monitor financial health.

Management believes the provisions of the service agreement and leasing arrangements discussed in NOTE 19. Subsequent Events, along with the restructuring of debt and issuance of Tax Anticipation Notes, will generate sufficient capital to operate beyond the next 12 months. 64 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 19. SUBSEQUENT EVENTS

Service Agreement

On January 1, 2017, DCS entered into a service agreement (the “ Agreement” ) with a third- party vendor that would assume managerial responsibility for the operation, development, distribution, and general overall management of the School Bus Student Safety Program (the “ Program” ) within the state of Texas. For these services, the vendor will be paid a Service Fee of $190,000 each month during the term of the Agreement. In addition to the Service Fee, the vendor would be entitled to monthly payments equal to fifty percent of monthly collections in excess of $350,000 paid to and received by DCS for operations of the Program within Dallas County, Texas.

With respect to program operations outside of Dallas County, the vendor would assume, effective from January 1, 2017, all development and managerial responsibility in connection with the operation, assembly, and distribution outside of Dallas County, Texas on behalf of DCS. For the services performed outside of Dallas County, the vendor shall be entitled to receive all revenue generated from the operations of the business outside of Dallas County but shall pay to DCS: (i) regular payments of $400,000.00 per month commencing March 1, 2017, and continuing each month until March 1, 2023, and (ii) payments equal to $15.00 per paid citation received by the vendor from the business outside of Dallas County, commencing March 1, 2019.

Under the terms of the Agreement, DCS has committed to receive monthly fixed payments in exchange for direct cash flows from Program operations over those future periods. The financial reporting criteria addressed by GASB Statement 48, “ Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues,” requires DCS to evaluate its level of involvement in the future generation of Program revenues to determine whether the transaction should be recorded a sale or as collateralized borrowing. DCS will apply the provisions of GASB Statement 48 in reporting its fiscal 2017 financial statements.

New Borrowings

On October 31, 2016, DCS entered into a capital lease purchase agreement as lessee with a bank to lease 173 school buses plus 173 school bus digital camera kits that are to be installed on those buses. The cost of the buses and equipment under the capital lease was $18,975,025. The annual interest rate on the capital lease is 4.2572%, and the lease requires monthly principal and interest payments of $242,564 for the first 59 months and $209,119 for the remaining 34 months of the lease term.

DCS entered into a similar capital lease arrangement with a finance company on November 7, 2016, under which DCS leased 77 school buses plus 77 digital camera kits that are to be installed on the buses. The cost of the 77 buses and camera equipment under the capital lease was $8,220,690. The annual interest rate on the lease is 3.27%, and the lease requires monthly principal and interest payments of $105,201 for the first 59 months and $90,315 for the remaining 34 months of the lease term.

65 DALLAS COUNTY SCHOOLS NOTES TO THE FINANCIAL STATEMENTS

NOTE 19. SUBSEQUENT EVENTS - CONTINUED

Debt Ratings

On February 16, 2017, Moody’s Investors Service downgraded the DCS’ General Obligation Limited Tax bonds ratings from Baal to Baa3. Concurrently, Moody’s downgraded the ratings on DCS’ Amended and restated Promissory notes outstanding from Ba3 to Bl . The downgrades in the DCS’ credit ratings limit DCS’ access to capital, including borrowing for cash flow purposes.

66 REQUIRED SUPPLEMENTARY INFORMATION

67 EXHIBIT G-l DALLAS COUNTY SCHOOLS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2016

Data Control Budget Variance With ('odes Original Final Actual Final Budget REVENUES 5700 Local and operational sources $ 91,142,729 $ 94,921,929 S 91.545,769 $ (3,376,160) 5800 State program revenues 22,288,291 22,587,520 23,444,985 857,465 5900 Federal program revenues - - 1,420,345 1,420,345

5020 TOTAL REVENUES 113,431,020 117,509,449 116,411,099 (1,098,350)

EXPENDITURES Current: 0011 Instruction 76,300 96,300 134.980 (38.680) 0012 Instructional resources and media services 746,908 746,908 554,646 192,262 0031 Guidance, counseling, and evaluation services 491,658 547,658 502,749 44,909 0034 Student transportation 76,366,442 78,659,903 78,556,822 103,081 0036 Extracurricular activities 6,299,649 7,562,270 7,571,269 (8,999) 0041 General administration 9,826,679 10,248.479 10,364,843 (116,364) 0051 Plant maintenance and operations 2,011,118 2,115,105 1,684,393 430,712 0052 Security and monitoring sendees 1,537,103 5,327,141 5,766,936 (439,795) 0053 Data processing services 5,040,311 5,055,872 4,139,342 916,530 Debt sendee: 0071 Principal on long-term debt 9,810.000 9,810.000 9,810,000 . 0072 Interest on long-term debt 2,084.452 2,084.452 2.084,452 - 0081 Facilities acquisition and construction - 1,030,000 308,106 721,894

6030 TOTAL EXPENDITURES 114,290,620 123,284,088 121,478,538 1,805,550

1100 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (859,600) (5,774,639)(5,067,439) 707.200

OTHER FINANCING SOURCES (USES) 7912 Sale of real and personal property 101,834 101,834 7915 Transfers in - - 1,301,893 1,301,893 8911 Transfers out - - (17,795,372) (17,795,372)

TOTAL OTHER FINANCING USES (16,391,645) (16,391,645)

NET CHANGE IN FUND BALANCES (859,600) (5,774,639) (21,459,084) (15,684,445)

0100 FUND BALANCES - BEGINNING 27,969.836 27,969,836 27.969,836 .

3000 FUND BALANCES - ENDING S 27,110,236 $ 22,195,197 S 6.510.752 $ (15.684,445)

68 EXHIBIT G-2 DALLAS COUNTY SCHOOLS SCHEDULE OF DCS’ PROPORTIONATE SHARE OF THE NET PENSION LIABILITY TEACHER RETIREMENT SYSTEM OF TEXAS FOR THE YEAR ENDED JUNE 30, 2016

2016 2015

DCS' Proportion of Net Pension Liability 0.000335760% 0.000101190%

DCS' Proportionate share of Net Pension liability $ 11,868,669 S 2,702,925 State’s Proportionate Share of the Net Pension Liability associated with DCS 47,881,012 38,405,789 $ 59,749,681 S 41,108,714

DCS’ Covered-Employee Payroll $ 61,013,812 $ 54,590,622 DCS' Proportionate Share of the Net Pension Liability as a percentage of its covered- Employee Payroll 19.45% 4.95% Plan Fiduciary Net Pension as a Percentage of the Total Pension Liability 78.43% 83.25%

Note: GASB 68, Paragraph 81.2.a requires that the information on this schedule be data from a period corresponding with the period covered as of the measurement date of August 31, 2015, for the year 2016 and August 31, 2014, for year 2015.

Note: In accordance with GASB #68, paragraph 138, only two years of data are presented, "The information for all periods for the 10-year schedules that are to be presented as required supplementary information may not be available initially. In these cases, during the transition period, that information should be presented for as many years as are available." This schedule does not include information that is not measured in accordance with the requirements of GASB Statement 68.

69 EXHIBIT G-3 DALLAS COUNTY SCHOOLS SCHEDULE OF DCS’ CONTRIBUTIONS TEACHER RETIREMENT SYSTEM OF TEXAS FOR THE YEAR ENDED JUNE 30, 2016

2016 2015

Contractually Required Contributions $ 1,047,816 $ 924,784 Contribution in Relation to the Contractually Required Contribution (1,047,816) (924,784) Contribution Deficiency (Excess) $ - $ -

DCS' Covered Employee Payroll $ 64,306,165 $ 60,554,375

Contributions as a percentage of Covered Employee Payroll 1.63% 1.53%

Note: GASB 68, Paragraph 81 requires that the data in this schedule be presented as of the District's respective fiscal years as opposed to the time periods covered by the measurement dates ending August 31, 2014, for Fiscal Year 2015 and August 31, 2015, for Fiscal Year 2016.

Note: In accordance with GASB #68, paragraph 138, only two years of data are presented, "The information for all periods for the 10-year schedules that are to be presented as required supplementary information may not be available initially. In these cases, during the transition period, that information should be presented for as many years as are available.” This schedule does not include information that is not measured in accordance with the requirements of GASB Statement 68.

70 DALLAS COUNTY SCHOOLS NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED JUNE 30, 2016

NOTEA. BUDGETARY DATA

The Board of Trustees (the “ Board” ) adopts an “ appropriated budget” on a GAAP basis for the General Fund. DCS is required to present the adopted and final amended budgeted revenues and expenditures for this fund. The legal level of budgetary control is the functional level in the General Fund. DCS compares the final amended budget to actual revenues and expenditures.

The following procedures are followed in establishing the budgetary data:

1. Prior to the end of each fiscal period, DCS prepares a budget for the next succeeding fiscal year that begins July 1. The operating budget includes proposed expenditures and the means of financing them.

2. A meeting of the Board is then called for the purpose of adopting the proposed budget. At least ten days public notice of the meeting must be given.

3. Prior to July 1 each period, the budget is legally enacted through resolution by the Board. Once the budget is approved, it can only be amended at the function and fund level with the approval of a majority of the members of the Board. Amendments are approved before the fact, are reflected in the official minutes of the Board, and are not made after the end of the fiscal period. Because DCS has a policy of careful budgetary control, several budget amendments were necessary during the fiscal year.

4. Budgeted amounts are amended by the Board. All budget appropriations lapse at the end of each fiscal period.

71 DALLAS COUNTY SCHOOLS NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED JUNE 30, 2016

NOTE B. PENSION INFORMATION

Changes of benefit terms.

There were no changes of benefit terms that affected measurement of the total pension liability during the measurement period.

Changes of assumptions.

The following are changes to the actuarial assumptions or other inputs that affected measurement of the total pension liability since the prior measurement period:

Economic Assumptions 1. The inflation assumption was decreased from 3.00% to 2.50 % 2. The ultimate merit assumption for long-service employees was decreased from 1.25% to 1.00%. 3. In accordance with the observed experience, there were small adjustments in the service- based promolional/longevity component of the salary scale. 4. The payroll growth assumption was lowered from 3.50% to 2.50% Mortality Assumptions 5. The post-retirement mortality tables for non-disabled retirees were updated to reflect recent TRS member experience. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB. 6. The post-retirement mortality tables for disabled retirees were updated to reflect recent TRS member experience. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB. 7. The pre-retirement mortality tables for active employees were updated to use 90% of the recently published RP-2014 mortality table for active employees. Mortality rates will be assumed to continue to improve in the future using a fully generational approach and Scale BB. Other Demographic Assumptions 8. Previously, it was assumed 10% of all members who has contributed in the past 5 years to be an active member. This was an implicit rehire assumption because teacher have historically had a high incidence of termination employment for a time and then returning to the workforce at a later date. This methodology was modified to add a more explicit valuation of the rehire incidence in the termination liabilities, and therefore these 10% are no longer being counted as active members. 9. There were adjustments to the termination patterns for members consistent with experience and future expectations. The termination patterns were adjusted to reflect the rchirc assumption. The timing of the termination decrement was also changed from the middle of the year to the beginning to match the actual pattern in the data. 10. Small adjustments were made to the retirement patterns for members consistent with experience and future expectations. 11. Small adjustments to the disability patterns were made for members consistent with experience and future expectations. Two separate patterns were created based on whether the member has 10 years of service or more. 12. For members that become disabled in the future, it is assumed 20% of them will choose a 100% joint and survivor annuity option. Actuarial Methods and Policies 13. The method of using celled data in the valuation process was changed to now using individual data records to allow for better reporting of some items, such as actuarial gains and losses by source.

72 OTHER SCHEDULE

73 DALLAS COUNTY SCHOOLS SCHEDULE OF DELINQUENT TAXES RECEIVABLE YEAR ENDED JUNE 30, 2016

1 3 10 Assessed/Appraised Beginning Tax Value for School Balance Fiscal Year * Rate Tax Purposes July 1, 2015

2007 and prior years 0.005034 $ 146,317,744,795 $ 88,208 2008 0.004714 161,248,084,345 14,333 2009 0.004928 170,582,361,268 20,078 2010 0.005212 165,317,676,481 24,166 2011 0.010000 158,179,482,962 70,629 2012 0.010000 155,514,580,710 73,526 2013 0.009937 157,695,312,615 82,760 2014 0.010000 164,158,531,709 108,856 2015 0.010000 175,072,562,521 257,733 2016 0.010000 188,190,199,007 -

1000 Totals $ 740,289

* Fiscal year 2010 represents a 10-month transitional year for the period from September 1, 2009, through June 30, 2010. Years preceding 2010 are from September 1 through August 31. Beginning and end dates of fiscal years subsequent to 2010 are July 1 and June 30, respectively.

74 EXHIBIT J-l

20 31 40 50 Current Entire Ending Year's Total Year's Balance Total Levy Collections Adjustments June 30, 2016

$ - $ 2,563 $ 5,813 $ 91,458 - 717 (3,125) 10,491 - 1,262 (6,913) 11,903 - 1,978 (9,363) 12,825 - 8,642 (18,125) 43,862 - 10,957 336 62,905 - 13,963 (4,778) 64,019 - 20,604 (2,104) 86,148 - 1,793 (137,149) 118,791 18,847,434 18,444,455 (119,051) 283,928

$ 18,847,434 $ 18,506,934 $ (294,459) $ 786,330

75 Dallas County Schools Strengthening Education Through Service

APPENDIX C

FORM OF BOND COUNSEL OPINION

[THIS PAGE INTENTIONALLY LEFT BLANK] 600 Travis, Suite 4200 Houston, Texas 77002 +1.713.220.4200 Phone +1.713.220.4285 Fax andrewskurth.com

DRAFT

______, 2017

WE HAVE ACTED as Bond Counsel for the Dallas County Schools (the “District”) in connection with an issue of bonds (the “Bonds”) described as follows:

DALLAS COUNTY SCHOOLS LIMITED TAX REFUNDING BONDS, SERIES 2017, dated May 1, 2017, in the aggregate principal amount of $______.

The Bonds mature, bear interest, are not subject to redemption prior to maturity and may be transferred and exchanged as set out in the Bonds and in the order (the “Order”) adopted by the Board of Trustees of the District authorizing their issuance.

WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income under federal income tax law. In such capacity we have examined the Constitution and laws of the State of Texas; federal income tax law; and a transcript of certain certified proceedings pertaining to the issuance of the Bonds and the obligations that are being refunded (the “Refunded Obligations”) with the proceeds of the Bonds, as described in the Order. Certain of the Refunded Obligations are being currently refunded (the “Currently Refunded Obligations”), and certain of the Refunded Obligations are being refunded upon maturity (the “Refunded Upon Maturity Obligations”). The transcript contains certified copies of certain proceedings of the District and U.S. Bank National Association (the “Paying Agent/Registrar for the Currently Refunded Obligations” and the “Escrow Agent”); the report (the “Report”) of Grant Thornton LLP, which verifies the sufficiency of the deposits made with the Escrow Agent and Paying Agent/Registrar for the Currently Refunded Obligations for the defeasance of the Refunded Obligations and the mathematical accuracy of certain computations of the yield on the Bonds and the obligations acquired with the proceeds of the Bonds; certain certifications and representations and other material facts within the knowledge and control of the District, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Bonds and the firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations. We have also examined executed Bond No I-1.

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Bonds. Our role in connection with the District’s Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein.

BASED ON SUCH EXAMINATION, it is our opinion as follows:

(1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently in effect; the Bonds constitute valid and legally binding obligations of the District enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Bonds may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of judicial discretion in appropriate cases; and the Bonds have been authorized and delivered in accordance with law;

(2) The Bonds are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, for maintenance and operations purposes, within the limits of $0.01 per $100 of taxable valuation, as prescribed by law, on all taxable property located within Dallas County, which taxes have been pledged irrevocably to pay the principal of and interest on the Bonds; and

(3) The deposit with the Paying Agent/Registrar for the Currently Refunded Obligations pursuant to the Order and the order authorizing the issuance of the Currently Refunded Obligations (the “Currently Refunded Order”) constitutes the discharge and final payment of the Currently Refunded Obligations; in reliance upon the accuracy of the calculations contained in the Report, the Currently Refunded Obligations, having been discharged and paid, are no longer outstanding and the lien on and pledge of available revenues as set forth in the Currently Refunded Order will be appropriately and legally defeased; the holders of the Currently Refunded Obligations may obtain payment of the principal of, redemption premium, if any, and interest on the Currently Refunded Obligations only out of the funds provided therefor now held by the Paying Agent/Registrar for the Currently Refunded Obligations; and therefore the Currently Refunded Obligations are deemed to be fully paid and no longer outstanding, except for the purpose of being paid from the funds provided therefor.

(4) The escrow agreement between the District and the Escrow Agent (the “Escrow Agreement”) has been duly executed and delivered and constitutes a binding and enforceable agreement in accordance with its terms; the establishment of the Escrow Fund pursuant to the Escrow Agreement and the deposit made therein constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Upon Maturity Obligations; in reliance upon the accuracy of the calculations contained in the Report, the

C-2 ______, 2017 Page 3

Refunded Upon Maturity Obligations, having been discharged and paid, are no longer outstanding and the lien on and pledge of ad valorem taxes and other revenues as set forth in the orders authorizing their issuance will be appropriately and legally defeased; the holders of the Refunded Upon Maturity Obligations may obtain payment of the principal of, redemption premium, if any, and interest in the Refunded Upon Maturity Obligations only out of the funds provided therefor now held in escrow for that purpose by the Escrow Agent pursuant to the terms of the Escrow Agreement; and therefore the Refunded Upon Maturity Obligations are deemed to be fully paid and no longer outstanding, except for the purpose of being paid from the funds provided therefor in such Escrow Agreement.

BASED ON OUR EXAMINATION AS DESCRIBED ABOVE, it is further our opinion that, subject to the restrictions hereinafter described, interest on the Bonds is excludable from gross income of the owners thereof for federal income tax purposes under existing law and is not subject to the alternative minimum tax on individuals or, except as hereinafter described, corporations. The opinion set forth in the first sentence of this paragraph is subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted in the Order to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. The Code and the existing regulations, rulings and court decisions thereunder, upon which the foregoing opinions of Bond Counsel are based, are subject to change, which could prospectively or retroactively result in the inclusion of the interest on the Bonds in gross income of the owners thereof for federal income tax purposes.

INTEREST ON the Bonds owned by a corporation (other than an S corporation, a regulated investment company, a real estate investment trust (REIT), a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT)) will be included in such corporation's adjusted current earnings for purposes of calculating such corporation's alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by the Code is computed.

EXCEPT AS DESCRIBED HEREIN, we express no opinions as to any other matters except with respect to the excludability of the interest on the Bonds from gross income from the owners thereof for federal income tax purposes.

IN PROVIDING THE FOREGOING OPINIONS, we have relied upon representations of the District with respect to matters solely within the knowledge of the District, which we have not independently verified, and have assumed the accuracy and completeness thereof.

IN ADDITION, EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from

C-3 ______, 2017 Page 4

the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

C-4 600 Travis, Suite 4200 Houston, Texas 77002 +1.713.220.4200 Phone +1.713.220.4285 Fax andrewskurthkenyon.com

May 30, 2017

WE HAVE ACTED as Bond Counsel for Dallas County Schools (the “District”) in connection with an issue of maintenance tax and refunding notes (the “Notes”) described as follows:

DALLAS COUNTY SCHOOLS TAX ANTICIPATION NOTES, TAXABLE SERIES 2017, dated May 1, 2017, in the aggregate principal amount of $______.

The Notes mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Notes and in the resolution (the “Resolution”) adopted by the Board of Trustees of the District authorizing their issuance.

WE HAVE ACTED as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Notes under the Constitution and laws of the State of Texas. In such capacity we have examined the Constitution and laws of the State of Texas; and a transcript of certain certified proceedings pertaining to the issuance of the Notes. The transcript contains certified copies of certain proceedings of the District; certain certifications and representations and other material facts within the knowledge and control of the District, upon which we rely; and certain other customary documents and instruments authorizing and relating to the issuance of the Notes. We have also examined executed Bond No. I-1 of this issue.

WE HAVE NOT BEEN REQUESTED to examine, and have not investigated or verified, any original proceedings, records, data or other material, but have relied upon the transcript of certified proceedings. We have not assumed any responsibility with respect to the financial condition or capabilities of the District or the disclosure thereof in connection with the sale of the Notes. Our role in connection with the District’s Limited Offering Memorandum prepared for use in connection with the sale of the Notes has been limited as described therein.

BASED ON SUCH EXAMINATION, it is our opinion as follows:

(1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Notes in full compliance with the Constitution and laws of the State of Texas presently in effect; the Notes constitute valid and legally binding obligations of the District enforceable in accordance with the terms and conditions thereof, except to the extent that the rights and remedies of the owners of the Notes may be limited by laws heretofore or hereafter enacted relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors of political subdivisions and the exercise of

C-5 ANDREWS KURTH KENYON LLP Austin Beijing Dallas Dubai Houston London New York Research Triangle Park Silicon Valley The Woodlands Washington, DC May 30, 2017 Page 2

judicial discretion in appropriate cases; and the Notes have been authorized and delivered in accordance with law;

(2) The Notes are payable, both as to principal and interest, from the receipts of an annual ad valorem tax levied, without legal limit as to rate or amount, upon all taxable property located within the District, which taxes have been pledged irrevocably to pay the principal of and interest on the Notes;

IN ADDITION, EXCEPT AS DESCRIBED ABOVE, we express no opinion as to any federal, state or local tax consequences under present law, or future legislation, resulting from the ownership of, receipt or accrual of interest on, or the acquisition or disposition of, the Notes. Prospective purchasers of the Notes should be aware that the ownership of obligations, such as the Notes, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax- exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualified for the earned income credit. For the foregoing reasons, prospective purchasers should consult their tax advisors as to the consequences of investing in the Notes.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

C-6

APPENDIX D

2017-2018 BUDGET OF THE ISSUER

[THIS PAGE INTENTIONALLY LEFT BLANK] 2017-2018 Budget Draft FOR FISCAL YEAR 2017-2018 Summary of Estimated Revenues, Appropriated Expenditures

2017-18 BUDGET FUND ESTIMATED REVENUES: 199 5700 LOCAL REAL & PERSONAL PROPERTY TAXES $ 19,000,000.00 INTEREST EARNINGS 16,500.00 REVENUE FROM LOCAL SCHOOL DISTRICTS 65,550,000.00 EXTRACURRICULAR REIMBURSEMENT FROM ISDS 8,000,000.00 OTHER 3,000,083.00 5700 TOTAL LOCAL 95,566,583.00

199 5800 STATE STATE FOUNDATION REVENUE 18,500,000.00 TRS ON-BEHALF PAYMENT 3,800,000.00 TEA HEALTH INSURANCE/STAFF ALLOTMENT 1,300,000.00 STATE GRANT 5800 TOTAL STATE 23,600,000.00

199 TOTAL FUND 199 119,166,583.00

460 504 PROGRAM 400,000.00

470 5700 LOCAL SAFETY PARTNERSHIP 2,500,000.00

470 TOTAL FUND 470 2,500,000.00

471 5700 LOCAL STOP ARM-OUT OF COUNTY 4,800,000.00

471 TOTAL FUND 471 4,800,000.00

711 5700 LOCAL OUT OF COUNTY REIMBURSEMENTDRAFT 04/14/2017 3,000,000.00

5800 STATE STATE FOUNDATION REVENUE 400,000.00

711 TOTAL FUND 711 3,400,000.00

756 GLORIA SHIELDS 120,000.00

TOTAL ESTIMATED REVENUES ALL FUNDS $ 130,386,583.00

D-1 2017-2018 Budget Draft FOR FISCAL YEAR 2017-2018 Summary of Estimated Revenues, Appropriated Expenditures

2017-18 BUDGET FUND APPROPRIATED EXPENDITURES 199 12 INSTRUCTIONAL MEDIA SERVICES $ 500,516.80

199 31 GUIDANCE & COUNSELING SERVICES 650,360.52

199 34 STUDENT TRANSPORTATION 76,749,707.32

199 36 EXTRACURRICULAR ACTIVITIES 6,523,892.81

199 41 ADMINISTRATIVE ACTIVITIES 8,089,630.63

199 51 MAINTENANCE SERVICES 2,008,914.28

199 52 POLICE 671,863.15

199 52 SRO-DUNCANVILLE, CFB ISDs 688,854.00

199 52 SCHOOL CROSSING GUARDS 4,088,952.69

199 53 DATA PROCESSING SERVICE 3,292,045.85

199 71 DEBT SERVICES 6,476,363.00

199 81 FACILITIES ACQUISITION -

460 41 504 PROGRAM 376,000.00

470 52 SAFETY PARTNERSHIP 2,430,000.00

470 71 STOP ARM - IN COUNTY DEBT SERVICE 5,155,969.00

471 52 STOP ARM - OUT OF COUNTY -

471 71 STOP ARM - OUT OF COUNTY-DEBT SERVICE 4,026,129.00 6182 DRAFT 04/14/2017 2012 BOND

6185 2014 BOND

740 53 VIRTUAL DESKTOPS

756 11 GLORIA SHIELDS WORKSHOP 104,500.00

711 31 OUT OF COUNTY PSYCHOLOGY SERVICES 94,781.12

711 34 OUT OF COUNTY TRANSPORTATION SERVICES 2,537,102.80

711 36 OUT OF COUNTY EXTRACURRICULAR ACTIVITIES 180,905.38

711 52 SRO-Out of County ISDs 1,500.00

711 53 OUT OF COUNTY DATA PROCESSING SERVICES 591,857.81

6000 TOTAL APPROPRIATED EXPENDITURES 125,239,846.16

D-2

DALLAS COUNTY SCHOOLS (A political subdivision located in Dallas County, Texas) • Limited Tax Refunding Bonds, Series 2017 and Tax Anticipation Note, Taxable Series 2017