NEW ISSUE-FULL BOOK-ENTRY INSURED RATING: Moody's: Aaa: S&P: AAA UNDERLYING RATING: Moody's: Aa3: S&P: A+ (See "RATINGS" and ''BOND INSURANCE" herein.)
In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California ("Bond Counsel"), under existing statutes, regulations, mlings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. In addition, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to the Bond constitutes original issue discount. (See "LEGAL MATTERS - Tax Matters" herein with respect to tax consequences relating to the Bonds.)
$76,954,040,30 MORGAN HILL UNIFIED SCHOOL DISTRICT (Santa Clara County, California) 2006 General Obligation Refunding Bonds Dated: Date of Delivery Due: August 1, as shown on inside cover
The Morgan Hill Unified School District (Santa Clara County, California) 2006 General Obligation Refunding Bonds (the "Bonds"), in the aggregate principal amount of $76,954,040.30, are being issued by the Morgan Hill Unified School District (the "District") to advance refund the District's outstanding General Obligation Bonds, Election of 1999, Series 2000 and General Obligation Bonds, Election of 1999, Series 2002 (collectively, the "Refunded Bonds"), which were authorized at an election of the registered voters of the District held on June 8, 1999, at which two-thirds or more of the persons voting on the proposition voted to authorize the issuance and sale of $72,500,000 principal amount of general obligation bonds of the District, and to pay costs of issuance associated with the Bonds.
The Bonds are general obligations of the District, payable solely from the proceeds of ad valorem taxes, which the Board of Supervisors of Santa Clara County is empowered and obligated to levy, without limitation of rate or amount, upon all property within the District subject to taxation by the District (except upon certain personal property which is taxable at limited rates).
The Bonds will be issued in book-entry fonn only, and will be initially issued and registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (collectively referred to herein as "DTC"). Purchasers of the Bonds (the "Beneficial Owners") will not receive physical certificates representing their interests in the Bonds.
Interest with respect to the Current Interest Bonds accrues from the Date of Delivery and is payable semiannually on February 1 and August 1 of each year, commencing February 1, 2007. Payment to owners of $1,000,000 or more in principal amount of the Current Interest Bonds, at the owner's option, will be made by wire transfer. The Current Interest Bonds are issuable as fully registered Bonds in denominations of $5,000 or any integral multiple thereof.
The Capital Appreciation Bonds are dated the Date of Delivery and accrete interest from such date, compounded semiannually on February 1 and August 1 of each year, commencing February 1, 2007, and are payable only at maturity. The Capital Appreciation Bonds are issuable as fully registered Bonds in Maturity Value amounts of $5,000 or any integral multiple thereof.
Payments of principal and Maturity Value of and interest on the Bonds will be made by U.S. Bank National Association, as Bond Registrar and Paying Agent, to DTC for subsequent disbursement to DTC Participants who will remit such payments to the Beneficial Owners of the Bonds. (See "APPENDIX F - Book-Entry Only System.")
The Current Interest Bonds are subject to redemption prior to maturity as described herein. The Capital Appreciation Bonds are not subject to redemption prior to maturity.
The scheduled payment of the principal of and interest on the Bonds when due will be guaranteed under an insurance policy issued concurrently with the delivery of the Bonds by Ambac Assurance Corporation (the "Insurer"). (See "BOND INSURANCE" herein and "APPENDIX E - Fonn of Bond Insurance Policy.") Ambac
Maturity Schedule (See inside front cover)
This cover page contains infonnation for general reference only. It is not a summary of all the provisions of the Bonds. Investors must read the entire official statement to obtain infonnation essential in making an infonned investment decision.
The Bonds are offered when, as and if issued, subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, Bond Counsel to the District. It is anticipated that the Bonds in definitive form will be available for delivery to Cede & Co., as nominee of The Depository Tmst Company, on or about August 22, 2006, in New York, New York.
STONE & YOUNGBERG LLC UBS INVESTMENT BANK
The date of this Official Statement is August 4, 2006. MATURITY SCHEDULE
Base CUSIP(l): 617403
$68,180,000.00 Current Interest Serial Bonds
Maturity Principal Interest Maturity Principal Interest August 1 Amount Rate Yield CUSIP(l) August 1 Amount Rate Yield CUSJP(l) ------2007 $3,785,000 4.000% 3.500% CMO 2013 $6,570,000 5.000% 3.800% DB3 2008 3,660,000 4.000 3.560 CNS 2017 8,750,000 5.000 4.080* CX6 2009 4,140,000 4.000 3.620 CP3 2018 9,705,000 5.000 4.150* CY4 2010 4,660,000 4.000 3.660 CQ! 2019 10,740,000 4.750 4.220* CZ! 2011 5,215,000 5.000 3.700 CR9 2020 5,090,000 5.000 4.240* DAS 2012 5,865,000 5.000 3.740 CS?
$8,774,040.30 Capital Appreciation Bonds
Maturity Denominational Accretion Yield to Maturity August 1 Amount Rate Maturity Value CUSJP(l) ---- 2014 $3,071,226.00 11.250% 4.250% $7,325,000 CU2 2015 2,923,801.80 11.250 4.350 7,780,000 cvo 2016 2,779,012.50 11.250 4.420 8,250,000 cws
* Yield to call at par on August l, 2016.
(/) CUSIP Copyright 2006, American Bankers Association. CUSIP data herein is provided by Standard & Poor's CUSIP service bureau, a division of The McGraw Hill Companies. MORGAN HILL UNIFIED SCHOOL DISTRICT
BOARD OF EDUCATION
Mike Hickey, President Peter Mandel, Vice President Amina Khemici, Member Julia Hover-Smoot, Member Don Moody, Member Kathleen Sullivan,Member Shelle Thomas,Member
DISTRICT ADMINISTRATION
Dr. Alan Nishino, Superintendent Bonnie Tognazzini, Deputy Superintendent, Business Services Michael Johnson, Assistant Superintendent, Educational Services Stan Rose, Assistant Superintendent, Human Resources
PROFESSIONAL SERVICES
Bond Counsel
Stradling Y occa Carlson & Rauth, a Professional Corporation San Francisco, California
Underwriters
Stone & Youngberg LLC San Francisco, California
UBS Securities LLC San Francisco, California
Financial Advisor
California Financial Services Mission Vie;o, California
Verification Agent
Causey Demgen & Moore, Inc. Denver, Colorado
Bond Registrar, Transfer Agent, Paying Agent & Escrow Agent
U.S. Bank National Association St. Paul, Minnesota This Official Statement does not constitute an offering of any security other than the original offering of the Bonds of the District. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations other than as contained in this Official Statement, and if given or made, such other information or representation not so authorized should not be relied upon as having been given or authorized by the District. The issuance and sale of the Bonds have not been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, in reliance upon exemptions provided thereunder by Section 3(a)2 and 3(a)l2, respectively, for the issuance and sale of municipal securities. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. The information set forth herein, other than that provided by the District, has been obtained from sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give nse to any implication that there has been no change in the affairs of the District since the date hereof. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements." Such statements are generally identifiable by the terminology used, such as ''plan," ''expect," ''estimate," ''budget," ''project," ''forecast" or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The District does not plan to issue any updates or revisions to such forward-looking statements if or when the expectations, events, conditions or circumstances on which such statements are based, change or fail to occur. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREY AIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE BONDS TO CERTAIN SECURITIES DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. The Underwriter has provided the following sentence for inclusion in this Official Statement: "The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information." TABLE OF CONTENTS
INTRODUCTION ...... 1
THE DIS1RICT ...... I PURPOSE OF THE BONDS ...... ] AUTHORITY FOR ISSUANCE OF THE BONDS ...... 2 SOURCES OF PAYMENT FOR BONDS ...... 2 DESCRIPTION OF THE BONDS ...... 2 TAX MATTERS ...... 3 OFFERING AND DELIVERY OF THE BONDS ...... 3 BONDOWNER'S RISKS ...... 3 CONTINUING DISCLOSURE ...... 3 PROFESSIONALS INVOLVED IN THE OFFERING ...... 3 OTHER INFORMATION ...... 4 THEBONDS ...... 4
AUTHORITY FOR lssu ANCE ...... 4 SECURITY AND SOURCES OF PAYMENT ...... 4 GENERAL PROVISIONS ...... 5 APPLICATION AND INVESTMENT OF BOND PROCEEDS ...... 6 REDEMPTION ...... 7 DEFEASANCE ...... 9 REGISTRATION, TRANSFER AND EXCHANGE OF BONDS ...... 9 BOND INSURANCE...... 10
ESTIMATED SOURCES AND USES OF FUNDS ...... 13
DEBT SERVICE SCHEDULE...... 13
PLAN OF REFUNDING ...... 14
SANTA CLARA COUNTY INVESTMENT POOL ...... 15
THECOUNTYINVESTMENTPOOL ...... 15 CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS ...... 16
ARTICLE XIIIA OF THE CALIFORNIA CONSTITUTION ...... 17 LEGISLATION IMPLEMENTING ARTICLE XIIIA ...... 17 UNITARY PROPERTY ...... 18 ARTICLE XIIIB OF THE CALIFORNIA CONSTITUTION ...... 18 ARTICLE XIIIC AND ARTICLE XIIID OF THE CALIFORNIA CONSTITUTION ...... 19 PROPOSITIONS 98 AND ] ] ] ...... 19 PROPOSITION 39 ...... 21 PROPOSITION IA ...... 22 FUTURE INITIATIVES ...... 22 TAX BASE FOR REPAYMENT OF BONDS ...... 22
AD VALOREMPROPERTYTAXATION ...... 22 TAX LEVIES, COLLECTIONS AND DELINQUENCIES ...... 24 ALTERNATIVE METIIOD OFT AX APPORTIONMENT - "TEETER PLAN" ...... 25 TAX RATES ...... 26 PRINCIPAL TAXPAYERS ...... 27 DIRECT AND OVERLAPPING DEBT ...... 27 THE DISTRICT ...... 29 INTRODUCTION ...... 29 ADMINISTRATION ...... 29 AVERAGE DAILY ATTENDANCE ...... 30 LABOR RELATIONS ...... 30 RETIREMENT PROGRAMS ...... 31 OTHER POST-EMPLOYMENT BENEFITS ...... 31 JOINT POWERS AGREEMENTS ...... 31 DISTRICT FINANCIAL INFORMATION ...... 32 ACCOUNTING PRACTICES ...... 32 FINANCIAL STATEMENTS ...... 32 BUDGET PROCESS ...... 33 DISTRICT BUDGET ...... 34 STATE FUNDING OF EDUCATION AND REVENUE LIMITATIONS ...... 36 FEDERAL REVENUES ...... 36 OTHER ST ATE REVENUES ...... 36 OTHER LOCAL REVENUES ...... 37 DEVELOPER FEES ...... 37 STATE BUDGET ...... 37 DISTRICT DEBT STRUCTURE ...... 40 LEGAL MATTERS ...... 41 TAX MATTERS ...... 41 VERIFICATION ...... 42 CONTINUING DISCLOSURE ...... 42 LEGALITYFOR]NVESTMENTINCALIFORNIA ...... 42 ABSENCE OF MATERIAL LITIGATION ...... 43 CERTAIN LEGAL MATTERS ...... 43 RATINGS ...... 43
UNDERWRITING ...... 43
ADDITIONAL INFORMATION ...... 44
APPENDIX A Excerpts from the 2004-05 Audited Financial Statements of the District ...... A-1 APPENDIXB Form of Opinion of Bond Counsel ...... B-1 APPENDIXC F onn of Continuing Disclosure Certificate ...... C-1 APPENDIXD Economy of the City of San Jose and Santa Clara County ...... D-1 APPENDIXE F onn of Bond Insurance Policy ...... E-1 APPENDIXF Book-Entry Only System ...... F-1 APPENDIXG Accreted Value Tables ...... G-1
11 $76,954,040.30 MORGAN HILL UNIFIED SCHOOL DISTRICT (Santa Clara Connty, California) 2006 General Obligation Refnnding Bonds
INTRODUCTION
This Official Statement, which includes the cover page and appendices hereto, provides information in connection with the sale of Morgan Hill Unified School District (Santa Clara County, California) 2006 General Obligation Refnnding Bonds, in the principal amount of $76,954,040.30 (the "Bonds").
This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A fnll review should be made of the entire Official Statement. The offering of Bonds to potential investors is made only by means of the entire Official Statement.
The District
The Morgan Hill Unified School District (the "District") is located in southern Santa Clara County, California (the "County), and encompasses approximately 300 square miles, including all of the city of Morgan Hill, the southern portion of the city of San Jose, and adjacent unincorporated territory of the County including the community of San Martin. The District has 10 elementary schools for grades K- 6, two middle schools for grades 7-8, and two comprehensive high school for grades 10-12, and one continuation high school for grades 10-12. Enrolhnent in the District for the 2004-05 school year was 8,594 students and 8, 734 students for the 2005-06 school year.
The District is governed by a seven-member Board of Education, each member of which is elected to a four-year term. Elections for positions to the Board are held every two years, alternating between three and four available positions. The management and policies of the District are administered by a Superintendent appointed by the Board who is responsible for day to day District operations as well as the supervision of the District's other key personnel. Dr. Alan Nishino is the District Superintendent.
Purpose of the Bonds
The proceeds from the sale of the Bonds will be used (i) to advance refund the District's outstanding General Obligation Bonds, Election of 1999, Series 2000 (the "Series 2000 Bonds") and General Obligation Bonds, Election of 1999, Series 2002 (the "Series 2002 Bonds," and, together with the Series 2000 Bonds, the "Refunded Bonds"), to pay the debt service on the Series 2000 Bonds and Series 2002 Bonds, including principal, due on and prior to August 1, 2010 and August 1, 2011, respectively, and pay the respective redemption premium thereon, and to pay when due the principal and interest on the outstanding capital appreciation Series 2002 Bonds and (ii) to pay all legal fmancial and contingent costs in connection with the issuance of the Bonds. In addition, a portion of the net premium will be deposited in the Building Fund for the Refunded Bonds and applied to projects authorized by District voters at the June 8, 1999 election.
Concurrently with the issuance of the Bonds, the District will enter into an Escrow Agreement (the "Escrow Agreement") with U.S. Bank National Association (the "Escrow Agent"), pursuant to which the District will deposit in an escrow fund for the benefit of the Refunded Bonds, cash and certain non callable United States governmental obligations ("Federal Securities"), which, together with interest and earnings thereon, shall be sufficient to pay (i) the debt service due on the Series 2000 Bonds and Series 2002 Bonds due on and before August 1, 2010 and August 1, 2011, respectively, as well as the principal and interest on the outstanding capital appreciation Series 2002 Bonds, and (ii) the redemption price of the Series 2000 Bonds and the Series 2002 Current Interest Bonds maturing on and after August 1, 2011 and August 1, 2012 respectively, on the first optional redemption date for such bonds of August 1, 2010 and August 1, 2011, respectively.
Authority for Issuance of the Bonds
The Bonds are issued pursuant to certain provisions of the State of California Government Code and other applicable law, and pursuant to a resolution adopted by the Board of Education of the District. See "THE BONDS - Authority for Issuance" herein.
Sources of Payment for Bonds
The Bonds represent general obligations of the District, payable solely from the proceeds of ad valorem taxes. The Board of Supervisors of the County has power and is obligated to annually levy ad valorem taxes for the payment of the Bonds and the interest thereon upon all property within the District subject to taxation by the District without limitation of rate or amount ( except certain personal property which is taxable at limited rates). See "THE BONDS - Security" herein.
Description of the Bonds
Current Interest and Capital Appreciation Bonds. The Bonds will be issued as current interest bonds (the "Current Interest Bonds") and capital appreciation bonds (the "Capital Appreciation Bonds"). The Current Interest Bonds mature on August 1 in the years indicated on the inside front cover hereof. The Capital Appreciation Bonds are payable only at maturity and will not pay interest on a current basis.
The Maturity Value of each Capital Appreciation Bond is equal to its accreted value upon the maturity date thereof ('Maturity Value"), being composed of its initial denominational amount ("the Denominational Amount") and the interest accreting thereon between the delivery date and its respective maturity date.
Form and Registration. The Bonds will be issued in fully registered form only (without coupons), initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), and will be available to actual purchasers of the Bonds (the "Beneficial Owners") in the denominations set forth on the inside cover, under the book-entry only system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described herein. Beneficial Owners will not be entitled to receive physical delivery of the Bonds. See "APPENDIX F - Book-Entry Only System." In the event that the book-entry only system described below is no longer used with respect to the Bonds, the Bonds will be registered in accordance with the Resolution described herein. See "THE BONDS - Registration, Transfer and Exchange of Bonds."
Denominations. Individual purchases of interests in the Bonds will be available to purchasers of the Bonds in the denominations of $5,000 principal amount or $5,000 Maturity Value, as applicable, or any integral multiple thereof (although one Capital Appreciation Bond may have an odd Maturity Value).
Redemption. The Current Interest Bonds maturing on or after August 1, 2017 may be redeemed before maturity at the option of the District from any source of funds, on August 1, 2016 or on any date thereafter, as a whole or in part. The Current Interest Bonds maturing on or before August 1, 2016 and all of the Capital Appreciation Bonds are not subject to redemption prior to their fixed maturity dates. See "THE BONDS - Redemption."
2 Payments. Interest on the Current Interest Bonds accrues from the date of delivery of the Bonds (the "Date of Delivery"), and is payable semiannually on each February 1 and August 1, commencing February 1, 2007. Each Capital Appreciation Bond accretes in value from its Denominational Amount to its Maturity Value on the maturity thereof at the Accretion Rate per annum set forth on the inside cover, compounded semiannually on February 1 and August 1 of each year, commencing February 1, 2007, and is payable only at maturity according to the amounts set forth in the accreted value tables as shown in APPENDIX G attached hereto.
Bond Insurance. The scheduled payment of principal of and interest on the Bonds when due will be guaranteed by a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by Ambac Assurance Corporation (the "Insurer"). See "BOND INSURANCE" and "RATINGS" herein.
Tax Matters
In the opinion of Stradling Y occa Carlson & Rauth, a Professional Corporation, San Francisco, California, Bond Counsel, based on existing statutes, regulations, rulings and judicial decisions and assuming compliance with certain covenants and requirements described herein, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income tax. In addition, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to the Bond constitutes original issue discount, and the amount of original issue discount that accrues to the owner of the Bond is excluded from gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. See "LEGAL MATTERS - Tax Matters" herein.
Offering and Delivery of the Bonds
The Bonds are offered when, as and if issued, subject to approval as to the validity by Bond Counsel. It is anticipated that the Bonds will be available for delivery in New York, New York on or about August 22, 2006.
Bondowner's Risks
The Bonds are general obligations of the District, payable solely from the proceeds of ad valorem taxes, which may be levied without limitation as to rate or amount ( except with respect to certain personal property which is taxable at limited rates) on all taxable property in the District. For more complete information regarding the District's financial condition and taxation of property within the District, see "THE DISTRICT."
Continuing Disclosure
The District will covenant for the benefit of bondholders to make available certain fmancial information and operating data relating to the District and to provide notices of the occurrence of certain enumerated events, if material, in compliance with S.E.C. Rule 15c2-12(b)(5). The specific nature of the information to be made available and of the notices of material events is summarized below under the caption "APPENDIX C - Form of Continuing Disclosure Certificate."
3 Professionals Involved in the Offering
Stradling Y occa Carlson & Rauth, a Professional Corporation, is acting as Bond Counsel to the District with respect to the Bonds. Stradling Y occa Carlson & Rauth, a Professional Corporation, is located at 44 Montgomery Street, Suite 4200, San Francisco, California 94104. California Financial Services is acting as fmancial advisor to the District with respect to the issuance of the Bonds. California Financial Services is located at 412 Humboldt Street, Santa Rosa, California 95404. Stradling Yocca Carlson & Rauth, a Professional Corporation, and California Financial Services will receive compensation from the District contingent upon the sale and delivery of the Bonds. U.S. Bank National Association, San Francisco, California, has been appointed as the agent of the County Treasurer in acting as Paying Agent for the Bonds.
Other Information
This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of documents referred to herein and information concerning the Bonds are available from the Superintendent, Morgan Hill Unified School District, 15600 Concord Circle, Morgan Hill, California 95037, telephone: (408) 201-6000. The District may impose a charge for copying, mailing and handling.
No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations other than as contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the District. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.
This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The summaries and references to documents, statutes and constitutional provisions referred to herein do not purport to be comprehensive or definitive, and are qualified in their entireties by reference to each of such documents, statutes and constitutional provisions.
The information set forth herein, other than that provided by the District, has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose.
THE BONDS
Authority for Issuance
The Bonds are issued pursuant to the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of the Government Code of the State of California (the "Act") and other applicable law, and pursuant to a resolution adopted by the Board of Education of the District on June 13, 2006 (the "Resolution").
4 Security aud Sources of Paymeut
The Bonds are general obligations of the District, payable solely from the proceeds of ad valorem taxes. The Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxes, without limitation as to rate or amount, for the payment of the interest on and principal and Maturity Value of the Bonds, upon all property subject to taxation by the District ( except certain personal property which is taxable at limited rates). Such taxes will be levied annually in addition to all other taxes during the period that the Bonds are outstanding in an amount sufficient to pay the principal and Maturity Value of and interest on the Bonds when due. Such taxes, when collected, will be placed by the County in the District's 2006 General Obligation Refunding Bonds Debt Service Fund (the "Debt Service Fund"), which is segregated and maintained by the County and which is irrevocably pledged for the payment of the Bonds and interest thereon when due. Although the County is obligated to levy an ad valorem tax for the payment of the Bonds, and will maintain the Debt Service Fund pledged to the repayment of the Bonds, the Bonds are not a debt of the County. No funds or moneys of the County are pledged or obligated to the repayment of the Bonds.
The moneys in the Debt Service Fund, to the extent necessary to pay the principal and Maturity Value of and interest on the Bonds as the same becomes due and payable, shall be transferred by the County to the Paying Agent (as defined herein). The Paying Agent will in tum remit the funds to DTC for remittance of such principal and interest to its Participants (as defined herein) for subsequent disbursement to the Beneficial Owners of the Bonds.
The amount of the annual ad valorem tax levied by the County to repay the Bonds will be determined by the relationship between the assessed valuation of taxable property in the District and the amount of debt service due on the Bonds in any year. Fluctuations in the annual debt service on the Bonds and the assessed value of taxable property in the District may cause the annual tax rate to fluctuate. Economic and other factors beyond the District's control, such as economic recession, deflation of land values, a relocation out of the District by one or more major property owners, or the complete or partial destruction of such property caused by, among other events, an earthquake, flood or other natural disaster, could cause a reduction in the assessed value of the District and necessitate an unanticipated increase in annual tax levy.
Geueral Provisious
The Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co., as nominee of DTC. Purchasers will not receive certificates representing their interests in the Bonds.
Interest with respect to the Current Interest Bonds accrues from the Date of Delivery, and is payable semiannually on February I and August I of each year ( each an "Interest Payment Date"), commencing February I, 2007. Interest on the Current Interest Bonds shall be computed on the basis of a 360-day year of twelve 30-day months. Each Current Interest Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless it is authenticated as of a day during the period from the 16th day of the month immediately preceding any Interest Payment Date to and including such Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, or unless it is authenticated on or before January 15, 2007, in which event it shall bear interest from its date; provided, that if, at the time of authentication of any Current Interest Bond interest is in default on any outstanding Current Interest Bonds, such Current Interest Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on the outstanding Current Interest Bonds. The Current Interest Bonds are issuable in denominations of $5,000 principal amount or any integral multiple thereof. The Current Interest Bonds mature on August I, in the years and amounts set forth on the inside cover hereof.
5 The Capital Appreciation Bonds are dated the Date of Delivery of the Bonds. The Capital Appreciation Bonds are issuable in the denominations of $5,000 Maturity Value or any integral multiple thereof. One Capital Appreciation Bond may have an odd Maturity Value. No Capital Appreciation Bond shall have principal maturing on more than one date. Each Capital Appreciation Bond shall accrete interest from the Date of Delivery.
The Capital Appreciation Bonds are payable only at maturity, and will not pay interest on a current basis. The Capital Appreciation Bonds accrete in value from the Date of Delivery at the accretion rates per annum set forth on the inside cover, compounded semiannually on February I and August I of each year, commencing February I, 2007. The Maturity Value of a Capital Appreciation Bond (the "Maturity Value") is its Accreted Value at its maturity date. Interest with respect to each Capital Appreciation Bond is represented by the amount each Capital Appreciation Bond accretes in value from its initial principal amount on the Date of Delivery (the "Denominational Amount") to the date for which Accreted Value is calculated. The Accreted Value (the "Accreted Value") of a Capital Appreciation Bond is calculated by discounting on a 30-day month, 360 day year basis its Maturity Value on the basis of a constant interest rate (the "Accretion Rate") compounded semiannually on February I and August I, of each year to the date for which an Accreted Value is calculated, and if the date for which Accreted Value is calculated is between February I and August I, by pro-rating the Accreted Values to the closest prior or subsequent February I or August I. See "DEBT SERVICE SCHEDULE" and "APPENDIX G - Accreted Value Tables."
The principal of the Current Interest Bonds and the Maturity Value of the Capital Appreciation Bonds shall be payable in lawful money of the United States of America to the registered owner thereof, upon the surrender thereof at the principal corporate trust office of the Bond Registrar. The interest on the Current Interest Bonds shall be payable in lawful money to the person whose name appears on the bond registration books of the Bond Registrar as the registered owner thereof as of the close of business on the 15th day of the month preceding any Interest Payment Date (a "Record Date"), whether or not such day is a business day, such interest to be paid by check or draft mailed on such Interest Payment Date to such registered owner at such registered owner's address as it appears on such registration books or at such address as the registered owner may have filed with the Bond Registrar for that purpose. The interest payments on the Current Interest Bonds shall be made in immediately available funds ( e.g., by wire transfer) to any registered owner of at least $1,000,000 of outstanding Current Interest Bonds who shall have requested in writing such method of payment of interest on the Current Interest Bonds prior to the close of business on the Record Date immediately preceding any Interest Payment Date.
Application and Investment of Bond Proceeds
The net proceeds from the sale of the Bonds shall be paid to the Escrow Agent to the credit of the escrow fund for the Refunded Bonds (the "Escrow Fund") established under the Escrow Agreement.
Pursuant to the Escrow Agreement, the amount deposited in the Escrow Fund shall be used to purchase certain Federal Securities, which, together with any available cash held uninvested in such fund and the interest and earnings on such securities and cash, shall be sufficient to pay i) the redemption price of the Series 2000 Bonds, which will equal the principal amount thereof to be redeemed on August I, 2010, with a one percent premium, as well as the debt service due on the Series 2000 Bonds on and before such date, and ii) the redemption price of the Series 2002 Current Interest Bonds maturing on and after August I, 2012, which will equal the principal amount thereof to be redeemed on August I, 2011, with a I% premium, the debt service due on the Series 2002 Bonds on and before such date, as well as the principal and interest on the outstanding capital appreciation Series 2002 Bonds.
The sufficiency of the securities and cash on deposit in the Escrow Fund, together with realizable interest and earnings thereon, to pay the redemption prices of the Refunded Bonds, and the debt service
6 due on the Refunded Bonds, on the above-referenced dates will be verified by Causey Demgen & Moore, Inc. (the "Verification Agent"). As a result of the deposit and application of funds so provided in the Escrow Agreement, the Refunded Bonds, assuming the accuracy of the Verification Agent's computations, will be defeased and the obligation of the County to levy ad valorem taxes for payment of the Refunded Bonds will also be defeased.
Surplus moneys, if any, in the Escrow Fund, when received by the District from the sale of the Bonds or following the redemption of the Refunded Bonds, shall be kept separate and apart in the Debt Service Fund and used only for payment of the principal of and interest on the Bonds. Any excess proceeds of the Bonds not needed for the authorized purposes for which the Bonds are being issued shall be transferred to the Debt Service Fund and applied to the payment of the principal of and interest on the Bonds. If, after payment in full of the Bonds, there remain excess proceeds, any such excess amounts shall be transferred to the General Fund of the District.
Moneys in the Debt Service Fund are expected to be invested through the Santa Clara County Investment Pool. See "SANTA CLARA COUNTY INVESTMENT POOL" herein.
In addition, a portion of the net premium will be deposited in the Building Fund for the Refunded Bonds and applied to projects authorized by District voters at the June 8, 1999 election.
Redemption
Optional Redemption. The Current Interest Bonds maturing on or before August I, 2016 are not subject to redemption prior to their fixed maturity dates. The Current Interest Bonds maturing on or after August I, 2017 may be redeemed prior to their respective stated maturity dates at the option of the District, from any source of funds, on August I, 2016 or on any date thereafter, as a whole or in part, at a redemption price equal to the principal amount of the Current Interest Bonds called for redemption, together with interest accrued thereon to the date fixed for redemption, without premium.
The Capital Appreciation Bonds are not subject to redemption prior to maturity.
Selection of Bonds for Redemption. Whenever provision is made for the redemption of Bonds and less than all Bonds are to be redeemed, the Paying Agent, upon written instruction from the District, shall select Bonds for redemption as so directed by the District and if not directed, in inverse order of maturity. Within a maturity, the Paying Agent, in a manner determined by the District, shall select Bonds for redemption by lot. The portion of any Bond to be redeemed in part shall be in the principal amount of $5,000 or any integral multiple thereof.
Notice of Redemption. Notice of any redemption of Bonds will be mailed, postage-prepaid, not less than thirty (30) nor more than sixty (60) days prior to the redemption date (i) to the respective Registered Owners thereof at the addresses appearing on the bond registration books, (ii) to the Securities Depositories described below, and (iii) to one or more of the Information Services described below. Notice of redemption to the Securities Depositories and the Information Services may be given by facsimile transmission or overnight delivery service in lieu of by mail. Each notice of redemption will specify (a) the Bonds or designated portions thereof (in the case of redemption of the Bonds in part but not in whole) which are to be redeemed, (b) the date of redemption, (c) the place or places where the redemption will be made, including the name and address of the Paying Agent, ( d) the redemption price, (e) the CUSIP numbers (if any) assigned to the Bonds to be redeemed, (f) the Bond numbers of the Bonds to be redeemed in whole or in part and, in the case of any Bond to be redeemed in part only, the principal amount of such Bond to be redeemed, and (g) the original issue date, interest rate, and stated maturity date of each Bond to be redeemed in whole or in part. Such redemption notice will further state that on the specified date there shall become due and payable upon each Bond or portion thereof being redeemed
7 at the redemption price thereof, together with the interest accrued to the redemption date, and that from and after such date, interest with respect thereto shall cease to accrue.
"Information Services" means Financial Information, Inc. 's "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Moody's Municipal and Government, 5250 77 Center Drive, Suite 150, Charlotte, North Carolina 28217, Attention: Called Bond Department; and Standard and Poor's J.J. Kenny Information Services' "Called Bond Record," 55 Water Street, 45th Floor, New York, New York 10041.
"Securities Depositories" shall mean The Depository Trust Company, 55 Water Street, New York, New York 10041, Tel: (212) 855-1000 or Fax: (212) 855-7320.
The actual receipt by any Bondowner or any Information Service or Securities Depository of notice of such redemption shall not be a condition precedent to redemption, and neither failure to receive, failure to publish such notice nor any defect in such notice shall affect the validity of the proceedings for the redemption of such Bonds or the cessation of interest on the date fixed for redemption.
The notice or notices required for redemption will be given by the Paying Agent or its designee. A certificate by the Paying Agent that notice of call and redemption has been given to Owners of Bonds and to the appropriate Securities Depositories and Information Services shall be conclusive as against all parties, and no Bondowner whose Bond is called for redemption may object thereto or object to the cessation of interest on the fixed redemption date by any claim or showing that said Bondowner failed to actually receive such notice of call and redemption.
Payment of Redeemed Bonds. When notice of redemption has been given, substantially as described above, and when the amount necessary for the redemption of the Bonds called for redemption is set aside for such purpose in the Debt Service Fund, as described below, the Bonds designated for redemption in such notice shall become due and payable on the date fixed for redemption thereof and upon presentation and surrender of said Bonds at the place specified in the notice of redemption with the form of assignment endorsed thereon executed in blank, said Bonds will be redeemed and paid at the redemption price thereof out of the Debt Service Fund. All unpaid interest payable at or prior to the redemption date will continue to be payable to the respective Owners, but without interest thereon.
Partial Redemption of Bonds. Upon the surrender of any Bond redeemed in part only, the Paying Agent will execute and deliver to the Owner thereof a new Bond or Bonds of like tenor and maturity and of authorized denominations equal in principal amount to the unredeemed portion of the Bond surrendered. Such partial redemption is valid upon payment of the amount required to be paid to such Owner, and the District will be released and discharged thereupon from all liability to the extent of such payment.
Effect of Notice of Redemption. If on the applicable designated redemption date, money for the redemption of the Bonds to be redeemed, together with interest thereon to the date fixed for redemption, is held by the Paying Agent so as to be available therefor on such redemption date and if notice of redemption thereof will have been given, substantially as described above, then from and after such redemption date, interest with respect to the Bonds to be redeemed will cease to accrue and become payable.
Bonds No Longer Outstanding. When any Bonds ( or portions thereof) which have been duly called for redemption prior to maturity or with respect to which irrevocable instructions to call for redemption prior to maturity at the earliest redemption date have been given to the Paying Agent, in form satisfactory to it, and if sufficient moneys shall be held by the Paying Agent irrevocably in trust for the payment of the redemption price of such Bonds or portions thereof, and, accrued interest with respect
8 thereto to the date fixed for redemption, then such Bonds will no longer be deemed outstanding and shall be surrendered to the Paying Agent for cancellation.
Defeasance
All or any portion of the outstanding maturities of the Bonds may be defeased prior to maturity in the following ways:
(a) Cash: by irrevocably depositing with an independent escrow agent selected by the District an amount of cash which together with amounts then on deposit in the Debt Service Fund (as herein defmed) is sufficient to pay all Bonds outstanding and designated for defeasance (including all Principal, Maturity Value and interest and premium, if any) at or before their maturity date; or
(b) Govermnent Obligations: by irrevocably depositing with an independent escrow agent selected by the District noncallable Govermnent Obligations, together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon and moneys then on deposit in the Debt Service Fund together with the interest to accrue thereon, be fully sufficient to pay and discharge all Bonds outstanding and designated for defeasance ( including all Principal, Maturity Value and interest represented thereby and prepayment premiums, if any) at or before their maturity date; then, notwithstanding that any of such Bonds shall not have been surrendered for payment, all obligations of the District and the County with respect to all such designated outstanding Bonds shall cease and terminate, except only the obligation of the County and the Bond Registrar or an independent escrow agent selected by the District to pay or cause to be paid from funds deposited pursuant to paragraphs (a) or (b) of this Section, to the owners of such designated Bonds not so surrendered and paid all sums due with respect thereto.
For purposes of this Section, Government Obligations shall mean:
Direct and general obligations of the United States of America (which may consist of obligations of the Resolution Funding Corporation that constitute interest strips), or obligations that are unconditionally guaranteed as to principal and interest by the United States of America, or "prerefunded" municipal obligations rated in the highest rating category by Moody's Investors Service or Standard & Poor's. In the case of direct and general obligations of the United States of America, Govermnent Obligations shall include evidences of direct ownership of proportionate interests in future interest or principal payments of such obligations. Investments in such proportionate interests must be limited to circumstances where (a) a bank or trust company acts as custodian and holds the underlying United States obligations; (b) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying United States obligations; and ( c) the underlying United States obligations are held in a special account, segregated from the custodian's general assets, and are not available to satisfy any claim of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated; provided that such obligations are rated or assessed "AAA" by Standard & Poor's or "Aaa" by Moody's Investors Service.
Registration, Transfer and Exchange of Bonds
The Paying Agent will keep or cause to be kept at its principal corporate trust office sufficient books for the registration and transfer of the Bonds, which shall at all times be open to inspection by the District, and, upon presentation for such purpose, the Paying Agent shall, under such reasonable
9 regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books Bonds as provided in the Resolution.
In the event that the book-entry only system as described in Appendix F is no longer used with respect to the Bonds, the following provisions will govern the registration, transfer, and exchange of the Bonds.
Any Bond may, in accordance with its terms, be transferred, upon the books required to be kept by the Paying Agent, by the person in whose name it is registered, in person or by the duly authorized attorney of such person, upon surrender of such Bond to the Paying Agent for cancellation, accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Paying Agent.
No transfer of the Bonds shall be required to be made by the Paying Agent during the period from (1) the close of business on the applicable Record Date to and including the succeeding Interest Payment Date, or (2) the close of business on the date on which notice is given that such Bond has been selected for redemption in whole or in part, to and including such designated redemption date.
The Bonds may be exchanged for Bonds of other authorized denominations of the same maturity and interest payment mode, by the owner thereof, in person or by the duly authorized attorney of such owner, upon surrender of such Bond to the Paying Agent for cancellation, accompanied by delivery of a duly executed request for exchange in a form approved by the Paying Agent.
No exchange of Bonds shall be required to be made by the Paying Agent during the period (1) from the close of business on the applicable Record Date to and including the succeeding Interest Payment Date, or (2) from the close of business on the date on which notice is given that such Bond has been selected for redemption in whole or in part, to and including such designated redemption date.
Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the designated District officials shall execute and the Paying Agent shall authenticate and deliver a new Bond or Bonds of the same series, maturity and interest payment mode, for a like aggregate principal amount. The Paying Agent shall require the payment by the owner of Bonds requesting any such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange.
BOND INSURANCE
The following information has been provided by the Insurer for use in this Official Statement, and neither the District nor the Underwriters take any responsibility for the accuracy or completeness thereof Reference is made to APPENDIX E for a specimen ofthe Insurer's policy with respect to the Bonds.
Payment Pursuant to Financial Guaranty Insurance Policy. Ambac Assurance has made a commitment to issue a fmancial guaranty insurance policy (the "Financial Guaranty Insurance Policy") relating to the Bonds effective as of the date of issuance of the Bonds. Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New York, in New York, New York or any successor thereto (the "Insurance Trustee") that portion of the Accreted Value of and interest on the Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defmed in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such Maturity Value and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Paying Agent. The insurance will extend for the term of the Bonds and, once issued, cannot be canceled by Ambac Assurance.
10 The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates, in the case of Maturity Value, and on stated dates for payment, in the case of interest. If the Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Bonds, Ambac Assurance will remain obligated to pay principal of and interest on outstanding Bonds on the originally scheduled interest and principal payment dates including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration, except to the extent that Ambac Assurance elects, in its sole discretion, to pay all or a portion of the accelerated principal and interest accrued thereon to the date of acceleration (to the extent unpaid by the Obligor ). Upon payment of all such accelerated principal and interest accrued to the acceleration date, Ambac Assurance's obligations under the Bond Insurance Policy shall be fully discharged.
In the event the Paying Agent has notice that any payment of Maturity Value or interest on a Bond which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a fmal, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available.
The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty Insurance Policy does not cover:
I. payment on acceleration, as a result of a call for redemption ( other than mandatory sinking fund redemption) or as a result of any other advancement of maturity.
2. payment of any redemption, prepayment or acceleration premium.
3. nonpayment of Maturity Value or interest caused by the insolvency or negligence of any Trustee, Paying Agent or Bond Registrar, if any.
If it becomes necessary to call upon the Financial Guaranty Insurance Policy, payment of Maturity Value requires surrender of Bonds to the Insurance Trustee together with an appropriate instrument of assigmnent so as to permit ownership of such Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Holder entitlement to interest payments and an appropriate assigmnent of the Holder's right to payment to Ambac Assurance.
Upon payment of the insurance benefits, Ambac Assurance will become the owner of the Bond, appurtenant coupon, if any, or right to payment of principal or interest on such Bond and will be fully subrogated to the surrendering Holder's rights to payment.
In the event that Ambac Assurance were to become insolvent, any claims arising under this Policy would be excluded from coverage by the California Insurance Guaranty Association, established pursuant to the laws of the State of California.
Ambac Assurance Corporation. Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, with admitted assets of approximately $9,417,000,000 (unaudited) and statutory capital of $5,879,000,000 (unaudited) as of March 31, 2006. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve. Standard & Poor's Credit Markets Services, a Division of The McGraw-Hill
II Companies, Moody's Investors Service and Fitch Ratings have each assigned a triple-A financial strenglh rating to Ambac Assurance.
Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Bonds.
Ambac Assurance makes no representation regarding the Bonds or the advisability of investing in the Bonds and makes no representation regarding, nor has it participated in the preparation of, the Official Statement other than the information supplied by Ambac Assurance and presented under the headings "THE BONDS -Bond Insurance."
Available Information. The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the "Company"), is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports, proxy statements and other information can be read and copied at the SEC's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC, including the Company. These reports, proxy statements and other information can also be read at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York 10005.
Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance's administrative offices and its telephone number are One State Street Plaza, 19th Floor, New York, New York, 10004 and (212) 668 0340.
Incorporation of Certain Documents by Reference. The following documents filed by the Company with the SEC (File No. 1-10777) are incorporated by reference in this Official Statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and filed on March 13, 2006;
2. The Company's Current Report on Form 8-K dated and filed on April 26, 2006;
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 2006 and filed on May 10, 2006;
4. The Company's Current Report on Form 8-K dated July 25, 2006 and filed on July 26, 2006;and
5. The Company's Current Report on Form 8-K dated and filed on July 26, 2006.
All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information."
12 ESTIMATED SOURCES AND USES OF FUNDS
The estimated sources and uses of funds with respect to the Bonds will be applied as follows:
Sources of Funds Principal Amount of Bonds $76,954,040.30 Original Issue Premium 10 514 128.75 Total Sources $87,468, 169.05
Uses of Funds Escrow Fund $75,461,926.17 Refunded Bonds Building Fund0 > 10,424,791.58 Costs oflssuanceC2> I 581 451.30 Total Uses $87,468, 169.05
(]) A portion of the net premium will be deposited in the Building Flllld for the Refunded Bonds and applied to projects authorized by District voters at the Jlllle 8, 1999 election. C2) All costs of issuance, including insurance premium and Underwriters' discollllt.
DEBT SERVICE SCHEDULE
The following table shows the debt service schedule with respect to the Bonds (assuming no optional redemptions).
Current Interest Bonds Ca12ital A1212reciat:ion Bonds Year Annual Annual Annual Annual Ending Principal Interest Principal Accreted Interest Total Annual (August 1) Payment Payrnent0> PayrnentC2> PayrnentC2> Debt Service 2007 $3,785,000.00 $3,031,884.17 $6,816,884.17 2008 3,660,000.00 3,068,300.00 6,728,300.00 2009 4,140,000.00 2,921,900.00 7,061,900.00 2010 4,660,000.00 2,756,300.00 7,416,300.00 2011 5,215,000.00 2,569,900.00 7,784,900.00 2012 5,865,000.00 2,309,150.00 8,174,150.00 2013 6,570,000.00 2,015,900.00 8,585,900.00 2014 1,687,400.00 $3,071,226.00 $4,253, 77 4.00 9,012,400.00 2015 1,687,400.00 2,923,801.80 4,856,198.20 9,467,400.00 2016 1,687,400.00 2,779,012.50 5,470,987.50 9,937,400.00 2017 8,750,000.00 1,687,400.00 10,437,400.00 2018 9,705,000.00 1,249,900.00 10,954,900.00 2019 10,740,000.00 764,650.00 11,504,650.00 2020 5 090 000.00 254 500.00 5 344 500.00 Total $68,180,000.00 $27,691,984.17 $8,774,040.30 $14,580,959.70 $119,226,984.17
(!) Interest payments on the Current Interest Bonds will be made semiannually on February 1 and August 1 of each year, commencing February 1, 2007. (2) The Capital Appreciation Bonds are payable only at maturity on August 1 of each year, and interest on such Capital Appreciation Bonds is compounded semianmtally on February 1 and August 1, commencing February 1, 2007.
13 PLAN OF REFUNDING
The Bonds will provide funds for the advanced refunding of $36,385,000.00 aggregate principal amount of the outstanding Series 2000 Bonds and the advance refunding of $32,122,753.80 aggregate principal amount of the outstanding Series 2002 Bonds. From the proceeds of the sale of the Bonds, the Escrow Agent is to deposit in the Escrow Fund an amount of money which, together with other money to be deposited therein, will be sufficient (in the determination of an independent certified public accountant, selected by the District, who shall certify such determination in writing) to provide for the redemption of all the outstanding Series 2000 Bonds and the outstanding Series 2002 Bonds, together with accrued interest and redemption premiums thereon (the "Advance Refunding"). The redemption price for the Series 2000 Bonds maturing on and after August 1, 2011, to be redeemed on August 1, 2010, will be 101 % of the principal amount of such Series 2000 Bonds, together with accrued interest thereon. The redemption price for the current interest Series 2002 Bonds maturing on and after August 1, 2012, to be redeemed on August 1, 2011, will be 101 % of the principal amount of such current interest Series 2002 Bonds, together with accrued interest thereon.
While the Series 2000 Bonds will not actually be redeemed until August 1, 2010 and the Series 2002 Bonds will not actually be redeemed until August 1, 2011, pursuant to the Escrow Agreement all outstanding Refunded Bonds will be deemed discharged upon the issuance of the Bonds and the deposit with the Escrow Agent of the net proceeds of the Bonds, which will be adequate to purchase Federal Securities (as defined in the Refunded Bond Resolution), the interest on and principal of which when paid, together with money, if any, deposited with the Escrow Agent, will be sufficient to provide for the Advance Refunding.
All amounts from the sale of the Bonds which are to be deposited in the Escrow Fund are to be deposited with the Escrow Agent pursuant to the Escrow Agreement between the District and the Escrow Agent, and such amounts are to be invested and applied in accordance with the Escrow Agreement.
14 SANTA CLARA COUNTY INVESTMENT POOL
The following information has been provided by the County, and the District and Underwriter take no responsibility for the accuracy or completeness thereof Further information may be obtained from the County Director ofFinance.
The Couuty Iuvestmeut Pool
The following is a general description of the County's investment policy, current portfolio holdings, investment policies and practices, and valuation procedures. For the most part, the information has been adapted from material prepared by Santa Clara County for use as disclosure information on securities issues. The information has been obtained from sources which are believed to be reliable but is not guaranteed as to accuracy or completeness, nor has such information been audited by the District, the Underwriter or its fmancial advisor. All questions related to the County Treasury and the investment practices of the Director of Finance should be directed to the Director of Finance at 70 West Hedding Street, San Jose, California 95110, telephone (408) 299-5200.
The County Director of Finance has authority to implement and oversee the investment of funds on deposit in the County's commingled investment pool (the "Investment Pool"). The Investment Pool is maintained by the County Director of Finance for the investment of liquid funds of the County and certain governmental entities located in the County, including fire protection districts and other special districts. Interest earned is deposited quarterly into participating funds. Any investment losses are shared proportionately by all funds in the pool.
The County's current investment policy (the "Investment Policy") was last modified on January 5, 2005. The County's Investment Policy is approved annually by the County Treasury Oversight Committee and the Board of Supervisors. Copies of the approved Investment Policy are circulated annually to local agencies with funds on deposit in the Investment Pool.
The Treasury Oversight Committee is established by the Board of Supervisors to advise the County Director of Finance in the management and investment of the Investment Pool. Members of the Oversight Committee represent the County and other local govermnents which together comprise the Investment Pool and other segregated investments. Members of the Oversight Committee are nominated by the County Director of Finance and confirmed by the Board of Supervisors and include the following: (i) County Director of Finance, (ii) representative appointed by the Board of Supervisors, (iii) representative selected by a majority of the presiding officers of the governing bodies of the school districts in the County that are required or authorized to deposit funds in the Investment Pool, (iv) County Superintendent of Schools or his/her designee, (v) representative selected by a majority of the presiding officers of the governing bodies of the school districts and community college districts in the County and (vi) members of the public that have expertise in, or an academic background in, public finance.
The Oversight Committee approves the Investment Policy, reviews and monitors the County Director of Finance's quarterly investment reports, reviews depositories for County funds and broker/dealers and banks as approved by the County Director of Finance, and causes an annual audit to be conducted to determine the Investment Pool's compliance with all relevant investment statutes and ordinances as well as the Investment Policy.
The Investment Policy states that preservation of principal and maintenance of liquidity is of primary concern, with earnings to be at market rates of return commensurate with minimum levels of risk.
As of June 30, 2006, the Treasury Pool had 67% of its assets invested in U.S. Agency Securities, 32% of its assets invested in other money market instruments (including commercial paper, and medium 15 term notes), and 1% of its assets invested in local agency investment fund. As of June 30, 2006, the cost value of the Treasury Pool was $3,619,915,184 and the market value was $3,587,861,242. The following table summarizes the composition of the Treasury Pool as of June 30, 2006.
SANTA CLARA COUNTY TREASURY POOL Portfolio Com position (as of June 30, 2006)
Cost Value %of Total Type of Maturity ($ millions) Cost Value
Local Agency Investment Funds 40 11% Corporate Bonds 374 10.3 Federal Agency Issues-Coupon 2,276 62.9 Treasury Notes 25 0.7 Federal Agency Discount 94 2.6 Negotiable Certificates of Deposit 15 04 Commercial Paper 795 22.0 TOTAL $3,619 1000%
As of June 30, 2006, the weighted average maturity of the Treasury Pool was 478 days. As of such date, the Treasury Pool had 54% of its assets invested in securities maturing in less than one year, 18% of its assets invested in securities maturing in one to two years, and 28% of its assets invested in securities maturing in over two years. The following table summarizes the maturity structure of the Treasury Pool as of June 30, 2006.
SANTA CLARA COUNTY TREASURY POOL Maturity Structure of Portfolio (as of June 30, 2006)
Cost Value %of Total Type of Maturity ($ millions) Cost Value
Less than 1 year $954 54% 1 year to 2 years 2,259 18 2 years to 5 years 406 28 $3,619 100%
The County reports that 0% of the Treasury Pool consists of leveraged funds. The County reports that none of the Treasury Pool is invested in derivatives. The County reports that it is current practice for the Director of Finance to mark the portfolio to market on a quarterly basis. Such evaluations are performed by the County. The County reports that it expects the Treasury Pool will have sufficient liquid funds to meet disbursement requirements of participants through the next six months.
CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES AND APPROPRIATIONS
The principal and Maturity Value of and interest on the Bonds are payable from the proceeds of an ad valorem tax levied by the County for the payment thereof See "THE BONDS - Security and Sources of Payment." Articles XIIIA, XIIIB, XIIIC and XIIID of the Constitution, Propositions 98 and I I I, and certain other provisions of law discussed below, are included in this section to describe the potential effect of these Constitutional and statutory measures on the ability of the District to levy taxes
16 and spend tax proceeds for operating and other purposes, and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the District to levy taxes for payment of the Bonds. The tax levied by the County for payment of the Bonds was approved by the District's voters in compliance withArticleXIIIA, ArticleXIIIC, and all applicable laws.
Article XIIIA of the California Constitntion
Article XIIIA ("Article XIIIA") of the State Constitution limits the amount of ad valorem taxes on real property to 1% of "full cash value" as determined by the county assessor. Article XIIIA defines "full cash value" to mean "the county assessor's valuation of real property as shown on the 1975-76 bill under "full cash value," or thereafter, the appraised value of real property when purchased, newly constructed or a change in ownership has occurred after the 1975 assessment," subject to exemptions in certain circumstances of property transfer or reconstruction. The "full cash value" is subject to annual adjustment to reflect increases, not to exceed 2% for any year, or decreases in the consumer price index or comparable local data, or to reflect reductions in property value caused by damage, destruction or other factors.
Article XIIIA requires a vote of two-thirds percent of the qualified electorate of a city, county, special district or other public agency to impose special taxes, while totally precluding the imposition of any additional ad valorem, sales or transaction tax on real property. Article XIIIA exempts from the 1% tax limitation any taxes above that level required to pay debt service (a) on any indebtedness approved by the voters prior to July 1, 1978, or (b ), as the result of an amendment approved by State voters on July 3, 1986, on any bonded indebtedness approved by two-thirds of the votes cast by the voters for the acquisition or improvement of real property on or after July 1, 1978, or (c) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% or more of the votes cast on the proposition, but only if certain accountability measures are included in the proposition. The tax for payment of the Bonds falls within the exception described in (b) of the immediately preceding sentence. In addition, Article XIIIA requires the approval of two-thirds of all members of the state legislature to change any state taxes for the purpose of increasing tax revenues.
Legislation Implementing Article XIIIA
Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax ( except to pay voter-approved indebtedness). The 1% property tax is automatically levied by the county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1979.
Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the annual adjustment not to exceed 2% are allocated among the various jurisdictions in the "taxing area" based upon their respective "situs." Any such allocation made to a local agency continues as part of its allocation in future years.
All taxable property value included in this Official Statement is shown at 100% of taxable value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value.
Both the United States Supreme Court and the California State Supreme Court have upheld the general validity of Article XIIIA.
17 Unitary Property
Some amount of property tax revenue of the District is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions ("unitary property"). Under the State Constitution, such property is assessed by the State Board of Equalization ("SBE") as part of a "going concern" rather than as individual pieces of real or personal property. State assessed unitary and certain other property is allocated to the counties by SBE, taxed at special county wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year.
The California electric utility industry has been undergoing significant changes in its structure and in the way in which components of the industry are regulated and owned. Sale of electric generation assets to largely unregulated, nonutility companies may affect how those assets are assessed, and which local agencies are to receive the property taxes. The District is unable to predict the impact of these changes on its utility property tax revenues, or whether legislation may be proposed or adopted in response to industry restructuring, or whether any future litigation may affect ownership of utility assets or the State's methods of assessing utility property and the allocation of assessed value to local taxing agencies, including the District. Because the District is not a basic aid district, taxes lost through any reduction in assessed valuation will be compensated by the State as equalization aid under the State's school financing formula. See "DISTRICT FINANCIAL INFORMATION."
Article XIIIB of the California Constitution
Article XIIIB ("Article XIIIB") of the State Constitution, as subsequently amended by Propositions 98 and 111, respectively, limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and in population and for transfers in the financial responsibility for providing services and for certain declared emergencies. As amended, Article XIIIB defines:
(a) "change in the cost of living" with respect to school districts to mean the percentage change in California per capita income from the preceding year, and
(b) "change in population" with respect to a school district to mean the percentage change in the average daily attendance of the school district from the preceding fiscal year.
For fiscal years beginning on or after July I, 1990, the appropriations limit of each entity of government shall be the appropriations limit for the 1986-87 fiscal year adjusted for the changes made from that fiscal year pursuant to the provisions of Article XIIIB, as amended.
The appropriations of an entity of local government subject to Article XIIIB limitations include the proceeds of taxes levied by or for that entity and the proceeds of certain state subventions to that entity. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to the entity from (a) regulatory licenses, user charges and user fees (but only to the extent that these proceeds exceed the reasonable costs in providing the regulation, product or service), and (b) the investment of tax revenues.
Appropriations subject to limitation do not include (a) refunds of taxes, (b) appropriations for debt service such as the Bonds, ( c) appropriations required to comply with certain mandates of the courts or the federal government, ( d) appropriations of certain special districts, ( e) appropriations for all qualified capital outlay projects as defmed by the legislature, (f) appropriations derived from certain fuel and vehicle taxes and (g) appropriations derived from certain taxes on tobacco products.
18 Article XIIIB includes a requirement that all revenues received by an entity of government other than the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be returned by a revision of tax rates or fee schedules within the next two subsequent fiscal years.
Article XIIIB also includes a requirement that 50% of all revenues received by the State in a fiscal year and in the fiscal year immediately following it in excess of the amount permitted to be appropriated during that fiscal year and the fiscal year immediately following it shall be transferred and allocated to the State School Fund pursuant to Section 8.5 of Article XVI of the State Constitution. See "Propositions 98 and 111" below.
Article XIIIC and Article XIIID of the California Constitution
On November 5, 1996, the voters of the State of California approved Proposition 218, popularly known as the "Right to Vote on Taxes Act." Proposition 218 added to the California Constitution Articles XIIIC and XIIID (respectively, "Article XIIIC" and "Article XIIID"), which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges.
According to the "Title and Summary" of Proposition 218 prepared by the California Attorney General, Proposition 218 limits "the authority of local governments to impose taxes and property-related assessments, fees and charges." Among other things, Article XIIIC establishes that every tax is either a "general tax" (imposed for general governmental purposes) or a "special tax" (imposed for specific purposes), prohibits special purpose government agencies such as school districts from levying general taxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote; and also provides that the initiative power will not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIIC further provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIID deals with assessments and property related fees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development.
The District does not impose any taxes, assessments, or property-related fees or charges which are subject to the provisions of Proposition 218. It does, however, receive a portion of the basic 1% ad valorem property tax levied and collected by the County pursuant to Article XIIIA of the California Constitution. The provisions of Proposition 218 may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District thereby causing such local governments to reduce service levels and possibly adversely affecting the value of property within the District.
Propositions 98 and 111
On November 8, 1988, voters approved Proposition 98, a combined initiative constitutional amendment and statute called the "Classroom Instructional Improvement and Accountability Act" (the "Accountability Act"). Certain provisions of the Accountability Act have, however, been modified by Proposition 111, discussed below, the provisions of which became effective on July I, 1990. The Accountability Act changes State funding of public education below the university level and the operation of the State's appropriations limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (hereinafter referred to collectively as "K-14 school districts") at a level equal to the greater of (a) the same percentage of General Fund revenues as the percentage
19 appropriated to such districts in 1986-87, and (b) the amount actually appropriated to such districts from the General Fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The Accountability Act permits the Legislature to suspend this formula for a one-year period.
The Accountability Act also changes how tax revenues in excess of the State appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 school districts. Any such transfer to K-14 school districts would be excluded from the appropriations limit for K-14 school districts and the K-14 school district appropriations limit for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 school districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to K-14 school districts is 4% of the minimum State spending for education mandated by the Accountability Act.
Since the Accountability Act is unclear in some details, there can be no assurances that the Legislature or a court might not interpret the Accountability Act to require a different percentage of General Fund revenues to be allocated to K-14 school districts, or to apply the relevant percentage to the State's budgets in a different way than is proposed in the Governor's Budget.
On June 5, 1990, the voters approved Proposition 111 (Senate Constitutional Amendment No. 1) called the "Traffic Congestion Relief and Spending Limit Act of 1990" ("Proposition 111") which further modified Article XIIIB and Sections 8 and 8.5 of Article XVI of the State Constitution with respect to appropriations limitations and school funding priority and allocation.
The most significant provisions of Proposition 111 are summarized as follows:
a. Annual Adjustments to Spending Limit. The annual adjustments to the Article XIIIB spending limit were liberalized to be more closely linked to the rate of economic growth. Instead of being tied to the Consumer Price Index, the "change in the cost of living" is now measured by the change in California per capita personal income. The definition of "change in population" specifies that a portion of the State's spending limit is to be adjusted to reflect changes in school attendance.
b. Treatment of Excess Tax Revenues. "Excess" tax revenues with respect to Article XIIIB are now determined based on a two-year cycle, so that the State can avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year are under its limit. In addition, the Proposition 98 provision regarding excess tax revenues was modified. After any two-year period, if there are excess State tax revenues, 50% of the excess are to be transferred to K-14 school districts with the balance returned to taxpayers; under prior law, 100% of excess State tax revenues went to K-14 school districts, but only up to a maximum of 4% of the schools' minimum funding level. Also, reversing prior law, any excess State tax revenues transferred to K-14 school districts are not built into the school districts' base expenditures for calculating their entitlement for State aid in the next year, and the State's appropriations limit is not to be increased by this amount.
c. Exclusions from Spending Limit. Two exceptions were added to the calculation of appropriations which are subject to the Article XIIIB spending limit. First, there are excluded all appropriations for "qualified capital outlay projects" as defmed by the Legislature. Second, there are excluded any increases in gasoline taxes above the 1990 level (then nine cents per gallon), sales and use taxes on such increment in gasoline taxes,
20 and increases in receipts from vehicle weight fees above the levels in effect on January I, 1990. These latter provisions were necessary to make effective the transportation funding package approved by the Legislature and the Governor, which expected to raise over $15 billion in additional taxes from 1990 through 2000 to fund transportation programs.
d. Recalculation of Appropriations Limit. The Article XIIIB appropriations limit for each unit of govermnent, including the State, is to be recalculated beginning in fiscal year 1990-91. It is based on the actual limit for fiscal year 1986-87, adjusted forward to 1990-91 as if Proposition 111 had been in effect.
e. School Funding Guarantee. There is a complex adjustment in the formula enacted in Proposition 98 which guarantees K-14 school districts a certain amount of State general fund revenues. Under prior law, K-14 school districts were guaranteed the greater of (I) 40.9% of State general fund revenues (the "first test") or (2) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrolhnent (the "second test"). Under Proposition 111, schools will receive the greater of (I) the first test, (2) the second test, or (3) a third test, which will replace the second test in any year when growth in per capita State general fund revenues from the prior year is less than the annual growth in California per capital personal income. Under the third test, schools will receive the amount appropriated in the prior year adjusted for change in enrollment and per capita State general fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test will become a "credit" to schools which will be paid in future years when State general fund revenue growth exceeds personal income growth.
Proposition 39
On November 7, 2000, California voters approved an amendment ( commonly known as Proposition 39) to the California Constitution. This amendment (I) allows school facilities bond measures to be approved by 55% (rather than two-thirds) of the voters in local elections and permits property taxes to exceed the current I% limit in order to repay the bonds and (2) changes existing statutory law regarding charter school facilities. As adopted, the constitutional amendments may be changed only with another Statewide vote of the people. The statutory provisions could be changed by a majority vote of both houses of the Legislature and approval by the Governor, but only to further the purposes of the proposition. The local school jurisdictions affected by this proposition are K-12 school districts, including the District, community college districts, and county offices of education. As noted above, the California Constitution previously limited property taxes to I% of the value of property. Prior to Proposition 39, property taxes could only exceed this limit to pay for (I) any local govermnent debts approved by the voters prior to July I, 1978 or (2) bonds to acquire or improve real property that receive two-thirds voter approval after July I, 1978.
The 55% vote requirement applies only if the local bond measure presented to the voters includes: (I) a requirement that the bond funds can be used only for construction, rehabilitation, equipping of school facilities, or the acquisition or lease of real property for school facilities; (2) a specific list of school projects to be funded and certification that the school board has evaluated safety, class size reduction, and information technology needs in developing the list; and (3) a requirement that the school board conduct annual, independent fmancial and performance audits until all bond funds have been spent to ensure that the bond funds have been used only for the projects listed in the measure. Legislation approved in June 2000 places certain limitations on local school bonds to be approved by 5 5% of the voters. These provisions require that the tax rate levied as the result of any single election be
21 no more than $60 (for a unified school district), $30 (for a high school or elementary school district), or $25 (for a community college district), per $100,000 of taxable property value. These requirements are not part of this proposition and can be changed with a majority vote of both houses of the Legislature and approval by the Governor.
Proposition lA
On November 2, 2004, California voters approved Proposition IA, which amends the State constitution to significantly reduce the State's authority over major local government revenue sources. Under Proposition IA, the State can not (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-third approval of both houses of the State Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Beginning, in 2008-09, the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (i) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (ii) approval of the shift by the State Legislature with a two thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition IA does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments with in a county. Proposition IA also amends the State Constitution to require the State to suspend certain State laws creating mandates in any year that the State does not fully reimburse local governments for their costs to comply with the mandates. This provision does not apply to mandates relating to schools or community colleges or to those mandates relating to employee rights.
Future Initiatives
Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID of the California Constitution and Propositions 98 and 111 were each adopted as measures that qualified for the ballot pursuant to the State's initiative process. From time to time other initiative measures could be adopted further affecting District revenues or the District's ability to expend revenues. The nature and impact of these measures cannot be anticipated by the District.
TAX BASE FOR REPAYMENT OF BONDS
The information in this section describes ad valorem property taxation, assessed valuation, and other measures of the tax base of the District. The Bonds are payable solely from ad valorem taxes levied and collected by the County on taxable property in the District.
Ad Valorem Property Taxation
District property taxes are assessed and collected by the County at the same time and on the same rolls as the special district property taxes. Assessed valuations are the same for both District and County taxing purposes.
The valuation of secured property is established as of January I and is subsequently equalized in August. Property taxes are payable in two installments due November I and February I, respectively, and become delinquent on December 10 and April IO for each respective instalhnent. Taxes on unsecured property (personal property and leasehold) are due on August 31 of each year based on the preceding fiscal year's secured tax rate and become delinquent on October 31.
22 State law exempts from taxation $7,000 of the full cash value of an owner-occupied dwelling, but this exemption does not result in any loss of revenue to local agencies, since the State reimburses local agencies for the value of the exemptions.
All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, non-profit hospitals, and charitable institutions.
Future assessed valuation growth allowed under Article XIIIA (new construction, certain changes of ownership, 2% inflation) will be allocated on the basis of "situs" among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of "base" revenues from the tax rate area. Each year's growth allocation becomes part of each agency's allocation in the following year. The availability of revenue from growth in tax bases to such entities may be affected by the establishment of redevelopment agencies which, under certain circumstances, may be entitled to revenues resulting from the increase in certain property values.
For assessment and collection purposes, property is classified as either "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State-assessed property and real property having a tax lien which is sufficient, in the opinion of the assessor, to secure payment of the taxes. Unsecured property comprises all property not attached to land such as personal property or business property. Boats and airplanes are examples of unsecured property. Unsecured property is assessed on the "unsecured roll."
23 ASSESSED VALUATION Morgan Hill Unified School District Fiscal Years 1980-81 To 2006-07
Fiscal Year Total Annual % Change
1980-81 $1,019,933,476 1981-82 1, 153,281, 127 1307% 1982-83 1,296,891,078 12.45 1983-84 1,430,437,651 10.30 1984-85 1,493,043,578 4.38 1985-86 1,751,338,738 17.30 1986-87 1,989,284,039 13.59 1987-88 2,213,948,236 11.29 1988-89 2,410,918,284 8.90 1989-90 2,739,455,277 13.63 1990-91 2,992,776,378 9.25 1991-92 3,290, 786,208 9.96 1992-93 3,484,291,801 5.88 1993-94 3,660,654,094 5 06 1994-95 3,703,610,058 1.17 1995-96 3,773,175,612 1.88 1996-97 3,975,716,607 5.37 1997-98 4, 167,080,540 4.81 1998-99 4,522,263,831 8.52 1999-00 5,005,354,347 10.68 2000-01 5,602,101,143 11.92 2001-02 6,287,470,874 12.23 2002-03 6,957,020,610 10.65 2003-04 7,557,687,614 8.63 2004-05 8,071,645,398 6.80 2005-06 9,063,570, 157 12.29 2006-07 9,783,223,577 7.94
Note: Assessed values represent net taxable assessed valuation of secured and unsecured property, incluchng the home owner's exemption. Assessed valuations ofutility property assessed by the State Board ofEqualization are not included, beginning in 1988-89. Source: California Municipal Statistics, Inc. for all years except 2006-07, for which the County of Santa Clara is the source.
Tax Levies, Collections and Delinquencies
Taxes are levied for each fiscal year on taxable real and personal property which is situated in the District as of the preceding January L A supplemental tax is levied when property changes hands or new construction is completed which produces additional revenue.
A 10% penalty attaches to any delinquent payment for secured roll taxes. In addition, property on the secured roll with respect to which taxes are delinquent becomes tax-defaulted. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty (i.e., interest) to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to auction sale by the County Tax Collector.
In the case of unsecured property taxes, a 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November 1 of the fiscal year, and a lien is recorded against the assessee. The taxing authority has four ways of 24 collecting unsecured personal property taxes: (I) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on specific property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder's office in order to obtain a lien on specified property of the taxpayer; and ( 4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee.
The County levies ( except for levies to support prior voter-approved indebtedness) and collects all property taxes for property falling within that county's taxing boundaries.
The following table shows the secured tax charges and delinquencies for taxes collected by the County from all property in the County between 1995-96 through 2004-05.
SECURED TAX CHARGES AND DELINQUENCY RATES Fiscal Years 1995-96 through 2004-05 County of Santa Clara
Secured Amt. Del. % Del. Tax Charge (l) June 30 June 30 1995-96 $3, 722,402 23(l) $115,717.71 3.11% 1 1996-97 3,876,3124]( ) 97,65843 2.52 1997-98 4,022,506.14(l) 91,388.62 2.27 1998-99 6,279, 784. 79(l) 91,398.52 146 1999-00 4,913,759 75(l) 83,097.65 1.69 2000-01 1,937,972 08c2J 44,648.56 2.30 2 2001-02 1,974,526 64( ) 38,754.26 1.96 2002-03 3,752, 162 08c2J 90,881.38 242 2 2003-04 3,697,092 24( ) 78,221.08 2.12 2004-05 9,833,503. 33(2)(3) 89,098.12 0.91
(l) Lease obligation debt service effective through fiscal year 1999-2000. 2 ( ) General obligation bond debt service effective beginning fiscal year 2000-01. 0) California Municipal Statistics does not have information as to the increase in the secured tax charge for 2004- 05, but the figures have been confirmed as correct by the County. Source: CaliforniaMW1icipal Statistics, Inc.
Alternative Method of Tax Apportionment - "Teeter Plan"
With respect to collection of property taxes, the County has adopted the Teeter Plan, which is an alternate method of tax apportionment authorized in Chapter 3, Part 8, Division I of the Revenue and Taxation Code of the State of California ( comprising Sections 470 I through 4717, inclusive) (the "Law") for distribution of certain property tax and assessment levies on the secured roll. Pursuant to the Law, the County adopted the Teeter Plan. The Teeter Plan provides for a tax distribution procedure in which secured roll taxes and assessments are distributed to participating County taxing agencies on the basis of the tax levy, rather than on the basis of actual tax collections. The County then receives all future delinquent tax payments, penalties and interest. In connection with its adoption of the Teeter Plan, the County advanced to the participating taxing agencies an amount equal to 95% of the total prior years delinquent secured property taxes and assessments (not including penalties and interest) and 100% of the current year's delinquent secured property taxes and assessments outstanding.
Once adopted by the County, the Teeter Plan remains in effect unless the County orders its discontinuance or prior to the commencement of any subsequent fiscal years the County receives a petition for its discontinuance adopted by resolution of two-thirds of the participating revenue districts in the County. Further, the County may by resolution adopted not later than July 15 of any subsequent fiscal year after a public hearing, discontinue the Teeter Plan as to any levying or assessment levying 25 agency if the rate of secured tax delinquency in that agency in any year exceeds three percent of the total of all taxes and assessments levied on the secured rolls for the agency.
Tax Rates
A representative tax rate area located within the City of Morgan Hill is Tax Rate Area 4-003. The following table summarizes the total ad valorem tax rates levied by all taxing entities in Tax Rate Area 4-003 during the period from 2001-02 to 2005-06.
SUMMARY OF ADVALOREM TAX RATES $1 PER $100 OF ASSESSED VALUATION Morgan Hill Unified School District Tax Rate Area 4-003 2001-02 2002-03 2003-04 2004-05 2005-06 General $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 Collllty Retirement Levy .0364 .0388 .0388 .0388 .0388 Collllty Library Retirement .0024 .0024 .0024 .0024 .0024 Gavilan Community College District .0135 .0130 Morgan Hill Unified School District .0331 .0574 .0522 .0522 .0475 Total All Property $1.0719 $1.0986 $1.0934 $1.1069 $1.1017 Santa Clara Valley Water District State Water Project .0053 .0063 .0075 .0086 .0069 Total Land and Improvement .0053 .0063 .0075 .0086 .0069
Source: CaliforniaMW1icipal Statistics, Inc.
26 Principal Taxpayers
The following table lists the major taxpayers in the Morgan Hill Unified School District in terms of their 2005-06 secured assessed valuations. LARGEST 2005-06 LOCAL SECURED PROPERTY TAXPAYERS Morgan Hill Unified School District
2005-06 %of Property Owner Land Use Assessed Valuation Total(') I. International Business Machines Corp. Industrial $135,010,557 155% 2. United Aircraft Corp. Testing Facilities 120,991,312 138 3. TEI-Mission West Industrial 70,484,819 0.81 4. Coyote Valley Research Park, LLC Vacant 42,701,818 0.49 5. Cordevalle Golf Club LLC Recreational 41,712,491 0.48 6. Cisco Technology Inc. Vacant 40,070,000 0.46 7. Hospira Inc. Industrial 37,923,130 0.43 8. Castle & Cooke Home CA Residential Development 37,811,994 0.43 9. North I st St. Properties Recreational 27,005,587 0.31 10. Maclyn E. and Mildred E. Morris Shopping Center 23,986,032 0.27 11. C.M. Winprop Inc. Apartrn ents 21,229,258 0.24 12. Willowbrook California Properties LLC Industrial 20,965,476 0.24 13. Llagas LLC Industrial 20,315,009 0.23 14. C&C Mountaingate Inc. Recreational 18,528,557 0.21 15. WP Investments LLC Industrial 18,113,276 0.21 16. Campus Park Associates Industrial 17,938,198 0.21 17. Woodland Residents Inc. Apartrn ents 17,871,806 0.20 18. Santa Teresa Village LLC Shopping Center 16,323,794 0.19 19. Safeway Inc. Shopping Center 16,227,050 0.19 20. Michael T. and S.P. LaBarbera Shopping Center 14 640 368 0 17 $759,850,532 8.70%
(l) 2005-06 local secured assessed valuation: $8,738,359,297 Source: California Municipal Statistics, Inc.
Direct and Overlapping Debt
Set forth below is a direct and overlapping debt report (the "Debt Report") prepared by California Municipal Statistics, Inc. and effective July 1, 2006. The Debt Report is included for general information purposes only. The District has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith.
The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District in whole or in part. Such long term obligations generally are not payable from revenues of the District ( except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency.
The contents of the Debt Report are as follows: ( 1) the first column indicates the public agencies which have outstanding debt as of the date of the Debt Report and whose territory overlaps the District; (2) the second column shows the respective percentage of the assessed valuation of the overlapping public agencies identified in column 1 which is represented by property located in the District; and (3) the third column is an apportiomnent of the dollar amount of each public agency's outstanding debt (which amount is not shown in the table) to property in the District, as determined by multiplying the total outstanding debt of each agency by the percentage of the District's assessed valuation represented in column 2. 27 STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT Morgan Hill Unified School District
2005-06 Assessed Valuation: $9,063,570, 157 Redevelopment Incremental Valuation: (2,261,160,097) Adjusted Assessed Valuation: $6,802,410,060
DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT % A1212licable Debt 7/1/06 Gavilan Joint Community College District 38.219% $ 11,058,668 Morgan Hill Unified School District 100.000 69,862,754 (!) City of San Jose 1.846 6,037,251 City of San Jose Community Facilities District No. 9 100.000 12,780,000 City of Morgan Hill 1915 Act Bonds 100.000 24,635,000 Santa Clara Valley Water District Benefit Assessment District 3.146 5 783 921 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $130,157,594
OVERLAPPING GENERAL FUND DEBT Santa Clara County General Fund Obligations 3.146% $28,946,346 Santa Clara County Board of Education Certificates of Participation 3.146 540, 168 City of Morgan Hill General Fund Obligations 100.000 7,225,000 City of San Jose General Fund Obligations 1.846 15 061 896 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $51,773,410 Less: City of San Jose self-supporting bonds (3,171,428) TOTAL NET OVERLAPPING GENERAL FUND DEBT $48,601,982
GROSS COMBINED TOTAL DEBT $181,931,004 (2) NET COMBINED TOT AL DEBT $178,759,576
(I) Excludes tlie Bonds described herein. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations.
Ratios to 2005-06 Assessed Valuation: Direct Debt ($69,862,754) ...... 077% Total Direct and Overlapping Tax and Assessment Debt ...... 1.44%
Ratios to Adjusted Assessed Valuation: Gross Combined Total Debt ...... 2.67% Net Combined Total Debt ...... 2.63%
STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/05 $0
Source: CaliforniaMW1icipal Statistics, Inc.
28 THE DISTRICT
Introductiou
The Morgan Hill Unified School District (the "District") is located in southern Santa Clara County, California (the "County), and encompasses approximately 300 square miles, including all of the city of Morgan Hill, the southern portion of the city of San Jose, and adjacent unincorporated territory of the County including the community of San Martin. The District has 10 elementary schools for grades K- 6, two middle schools for grades 7-8, and two comprehensive high school for grades 10-12, and one continuation high school for grades 10-12. Enrolhnent in the District for the 2004-05 school year was 8,594 students and 8, 734 students for the 2005-06 school year.
Admiuistratiou
The District is governed by a seven-member Board of Trustees (the "Board"), each of which is elected to a four-year term. Elections for positions to the Board are held every two years, alternating between three and four available positions. Current members of the Board, together with their office and the date their term expires, are listed below:
MORGAN HILL UNIFIED SCHOOL DISTRICT BOARD OF EDUCATION
Name Office Term Ex11ires Mike Hickey President December 2006 Peter Mandel Vice President December 2008 Amina Khemici Member December 2006 Julia Hover-Smoot Member December 2008 Don Moody Member December 2006 Kathleen Sullivan Member December 2008 Shelle Thomas Member December 2006
Dr. Alan Nishino, the Superintendent of the District, is responsible for administering the affairs of the District in accordance with the policies of the Board. Bonnie Tognazzini is the Deputy Superintendent, Business Services of the District.
Dr. Alan Nishino, Superintendent. Alan K. Nishino, Ed.D., earned his doctorate from the University of Southern California with a dissertation on educational technology. He has his Masters and Bachelors degrees from California State University, Long Beach. Dr. Nishino was appointed Superintendent of the District in July 2005. Prior to that, Dr. Nishino was Superintendent of the Alameda Unified School District from 2000 to 2005 and Superintendent at Castaic Union School District in northern Los Angeles County from 1995 to 2000. Dr. Nishino has also served as Assistant Superintendent for Educational Services in Eastside Union School District, and as a Principal and Administrative Assistant for Educational Technology in the Hueneme School District, both in California. Dr. Nishino began his career in education as a secondary school teacher and a high school coach in the Los Angeles Unified School District.
Bonnie Tognazzini, Deputy Superintendent, Business Services. Ms. Bonnie Tognazzini, Deputy Superintendent, was hired by the District as its Chief Fiscal Officer on October 12, 1992. She was promoted to Deputy Superintendent, Business Services in 2000. Prior to her arrival at the District, she had served as the Business Manager at North Monterey Unified School District for three years. Ms.
29 Tognazzini received a Bachelor of Science Liberal Arts degree in Business Administration from the University of New York with a concentration in business and psychology.
Average Daily Attendance
The total average daily attendance for the 2004-05 academic year was 8,207. On average throughout the District, the class size ratio is approximately 28:1 in grades 4-12 and 20:1 in grades K-3. The District has fully implemented class size reduction in grades K-3.
The following table reflects the average daily attendance for the District for the last eight years, and a projection through 2005-06.
MORGAN HILL UNIFIED SCHOOL DISTRICT AVERAGE DAILY ATTENDANCE Fiscal Years 1997-98 through 2005-06
Average Daily Fiscal Year Attendance 1997-98 8,149 1998-99 8,741 1999-2000 8,622 2000-01 8,493 2001-02 8,182 2002-03 7,994 2003-04 8,062 2004-05 8,207 2005-06(!) 8,361
1 Projected. Source: Morgan Hill Unified School District.
Labor Relations
As of June 30, 2005, the District employed 468 (35 certificated management included) full-time certificated employees and 288 full-time classified employees (including 15 classified management). These employees, except management and some part-time employees, are represented by the two bargaining units as noted below:
MORGAN HILL UNIFIED SCHOOL DISTRICT DISTRICT EMPLOYEES
Number of Employees Contract Labor Organization In Bargaining Unit Expiration Date Morgan Hill Federation of Teachers 433 June 30, 2006* Service Employees International Union, Local No. 715 273 June 30, 2006* Morgan Hill Educational Leadership Association 50 NIA
* Contract negotiations are ongoing. Employees are currently working under the terms of the expired labor contract. Source: Morgan Hill Unified School District.
30 Retirement Programs
Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System ("STRS") and classified employees are members of the Public Employees' Retirement System ("PERS").
All full-time certificated employees part1c1pate in STRS, a cost-sharing, multiple-employer contributory public employee retirement system. STRS provides retirement and disability benefits and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law.
All full-time and some part time classified employees part1c1pate in PERS, a cost-sharing multiple-employer contributory public employee retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provision are established by the State statutes, as legislatively amended, with the Public Employees' Retirement Laws. The District is part of a "cost-sharing" pool within PERS. One actuarial valuation is performed for those employers participating in the pool, and the same contributions rates applies to each.
The District was required by statute to contribute 8.25% of gross salary expenditures to STRS, and 9.116% to PERS in fiscal year 2005-06. Certificated and MHELA participants are required to contribute 8.25% and 7% of applicable gross salary to STRS and PERS, respectively. The District pays the Classified employees' share of PERS. The District's employer contributions to STRS and PERS met the required contribution rates established by law.
Other Post-Employment Benefits
The District provides an early retirement plan whereby the District will continue retirees' health benefits until age 65 for individuals that qualify. To qualify for the plan, certificated and administrative employees must be at least 55 years old and classified employees must be at least 50 years old and have been an employee of the District for ten continuous years immediately preceding retirement. Under this plan, the District has agreed to continue to provide these benefits without any additional performance from the retirees. As of June 30, 2005, 111 retirees met these eligibility requirements at a cost of $897,758 for 2004-05. The District records the cost for post-employment health benefits on a pay-as you-go method rather than when they are earned by active employees. The District has not had an actuarial study performed, but the District is currently soliciting bids to have such a study performed during the 2006-07 fiscal year.
In addition to the benefits described above, certain qualified retirees are included in a single premium annuity contract with the Principal Life Insurance Company. The total cost to the District for the contract of $1,870, 785 has been payable in five annual payments of $374, 157 beginning in fiscal year 2003-04. As of June 30, 2005, there were 34 retirees identified as qualified to receive benefits under this plan. This early retirement incentive premium expires in June 2007.
Joint Powers Agreements
The District is a member of a joint powers authority, the Santa Clara County Schools Insurance Group ("SIG"), for the operation of a common risk management and insurance program. SIG covers workers' compensation, property and liability, and employee benefits insurance for its 30 member districts. SIG is governed by a governing board consisting of representatives from member districts. The
31 governing board controls the operations of SIG, including selection of management an approval of operating budgets. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionate to their participation in SIG. The relationship between the District and SIG is such that SIG is not a component unit of the District for fmancial reporting purposes.
DISTRICT FINANCIAL INFORMATION
The information in this section concerning the District's general fund finances is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the princzpal of or interest on the Bonds is payable from the general fund of the District. The Bonds are payable from the proceeds of an ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof See "THE BONDS - Security and Sources of Payment" herein.
Accounting Practices
The accounting policies of the District conform to generally accepted accounting principles in accordance with policies and procedures of the California School Accounting Manual. This manual, according to Section 410 IO of the California Education Code, is to be followed by all California school districts. The Governmental Accounting Standards Board ("GASB") has released Statement No. 34, which makes changes in the annual fmancial statements for all govermnental agencies in the United States, especially in recording of fixed assets and their depreciation, and in the way the report itself is formatted. These requirements became effective on June 15, 2002 for the District, as well as for any other govermnental agency with annual revenues of between $10 million and $100 million. Revenues are recognized in the period in which they become both measurable and available to fmance expenditures of the current fiscal period. Expenditures are recognized in the period in which the liability is incurred.
Financial Statements
The District's general fund finances the legally authorized activities of the District for which restricted funds are not provided. General fund revenues are derived from such sources as State school fund apportiomnents, taxes, use of money and property, and aid from other governmental agencies. Audited fmancial statements for the District for the fiscal year ended June 30, 2005, and prior fiscal years, are on file with the District and available for public inspection at the Office of the Superintendent of the District, 15600 Concord Circle, Morgan Hill, California 95037, telephone: (408) 201-6000. Excerpts from the District's audited financial statements for the year ended June 30, 2005 are included in APPENDIX A hereto.
The following table reflects the District's revenues, expenditures and fund balances from fiscal year 2001-02 to fiscal year 2005-06:
32 MORGAN HILL UNIFIED SCHOOL DISTRICT General Fnnd Revennes, Expenditnres and Fnnd Balances Fiscal Years 2001-02 throngh 2005-06
Audited Audited Audited Audited Unaudited Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2001-02 2002-03 2003-04 2004-05 2005-06(1) REVENUES: Revenue Limit Source: State Apportionments $4,211,492 $2,166,718 $247,147 $5,310,888 $6,284,174 Local Sources 35 696 176 37 820 791 39 129 156 36 547 360 38 774 377 Total Revenue Limit 39,907,668 39,987,509 39,376,303 41,858,248 45,058,551 Federal Revenue 2,041,015 2,591,726 2,925,851 2,930,334 3,544,106 Other State Revenue 9, 743,905 7,611,026 7,732,806 8,467,088 9,031,587 Other Local Revenue 4,127,231 4,893,853 4,660,206 2,767,183 4,904,311 Tuition and Transfers TOT AL REVENUES 55,819,819 55,084,114 54,695,166 56,022,853 62,538,554
EXPENDITURES: Certificated Salaries 30,775,591 30,424,324 28,441,909 28,982,063 30,594,071 Classified Salaries 8,800,423 8,225,011 7,445,531 7,746,579 8,481,997 Employee Benefits 8,514,748 8,063,512 8,657,087 9,155,797 9,735,042 Books & Supplies 2,594,955 2,701,324 2,302,407 2,127,338 5,307,346 Services & Operating Expenses 4,827,914 5,126,691 4,774,757 5,025,429 6,201,050 Capital Outlay 960,155 29,084 21,730 28,962 64,547 Direct Support/Indirect Costs 762,577 39,445 1,533,450 1,565,404 (173, 792) Other Outgo 1 418 449 4 427 920 TOT AL EXPENDITURES 57,236,363 56,027,840 53,176,841 54,631,572 64,638,182
OlHER FINANCING SOURCES (Uses): Operating Transfers In 120,520 306,264 126,634 136,957 378,487 Operating Transfers Out (152,792) (655,345) (327,861) (334,067) Other Sources 175 066 Total Other Financing Sources (Uses) 142,794 306,264 (528,711) (190,904) 44,420
Excess of Revenues over Expense (1,273,750) (637,462) 989,614 1,200,377 (2,055,207)
FUND BALANCE, JULY 1 4 876 191 3 802 441 2 964 979 3 954 593 5 154 971 FUND BALANCE, JUNE 30 $3,602,441 $2,964,979 $3,954,593 $5,154,970 $3,099,764
Source: Morgan Hill Uni.fled Sclwol District. CllBased on the unaudited actuals of the District as of June 30, 2006.
For the fiscal years ended June 30, 2003 and later, the District has implemented Government Accounting Standard Board Statement Nos. 34, 37 and 38. Among the changes implemented under these revised accounting rules is a change in the presentation of the General Fund expenditures. While historical total revenue and expenditures figures are comparably consistent to prior years, the categorical breakdown of revenues and expenditures is different for the revised accounting formats. The District's financial statements for fiscal year 2004-05 under the revised reporting formats are included in APPENDIX A.
Bndget Process
The District is required by provisions of the State Education Code to maintain a balanced budget each year, in which the sum of expenditures and the ending fund balance cannot exceed the sum of revenues and the carry-over fund balance from the previous year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. The budget process for school districts was substantially amended by A.B. 1200, which became law on October 14, 1991. Portions of A.B. 1200 are summarized below.
School districts must adopt a budget on or before July 1 of each year. The budget must be submitted to the county superintendent within five days of adoption or by July 1, whichever occurs first. 33 A district may be on either a dual or single budget cycle. The dual budget option requires a revised and readopted budget by September 15 that is subject to State-mandated standards and criteria. The revised budget must reflect changes in projected income and expenses subsequent to July I. The single budget is only readopted if it is disapproved by the county office of education, or as needed. The District is on a single budget cycle and adopts its budget on or before July I.
For both dual and single budgets submitted on July I, the county superintendent will examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Education and identify technical corrections necessary to bring the budget into compliance, will determine if the budget allows the district to meet its current obligations and will determine if the budget is consistent with a financial plan that will enable the district to meet its multi-year fmancial commitments. On or before August 15, the county superintendent will approve or disapprove the adopted budget for each school district. Budgets will be disapproved if they fail the above standards. The district board must be notified by August 15 of the county superintendent's recommendations for revision and reasons for the recommendations. The county superintendent may assign a fiscal advisor or appoint a committee to examine and comment on the superintendent's recommendations. The committee must report its findings no later than August 20. Any recommendations made by the county superintendent must be made available by the district for public inspection. The law does not provide for conditional approvals; budgets must be either approved or disapproved. No later than August 20, the county superintendent must notify the Superintendent of Public Instruction of all school districts whose budget has been disapproved.
For all dual budget options and for single budget option districts whose budgets have been disapproved, the district must revise and readopt its budget by September 15, reflecting changes in projected income and expense since July I, including responding to the county superintendent's recommendations. The county superintendent must determine if the budget conforms with the standards and criteria applicable to final district budgets and not later than October 8 will approve or disapprove the revised budgets. If the budget is disapproved, the county superintendent will call for the formation of a budget review committee pursuant to Education Code § 42127.1. Until a district's budget is approved, the district will operate on the lesser of its proposed budget for the current fiscal year or the last budget adopted and reviewed for the prior fiscal year.
The District has never had an adopted budget disapproved by the County Superintendent of Schools, and has never received a "negative" certification of an Interim Financial Report pursuant to A.B. 1200.
District Budget
The following table summarizes the District's General Fund Budgets for fiscal years 2003-04 through 2006-07, the District's audited general fund results for fiscal years 2003-04 and 2004-05, and unaudited general fund results for fiscal year 2005-06.
34 MORGAN HILL UNIFIED SCHOOL DISTRICT COMPARISON OF GENERAL FUND BUDGETS AND AUDITS FISCAL YEARS 2003-04 THROUGH 2006-07 Fiscal Year Adopted Fiscal Year Adopted U11audilcd Tentative 2003·04 Budget 2004·05 Budget Actuals Bt1dget 2003·04 Aetuals 2004·05 Actuals 2005·06 2005·06"' 2006·07 REVENUES: Revenue Limit Source: State Apportiomncnts $1,832.959 $247. 147 $2,5l5.618 $5,3l0.888 $8.756,491 $6.284.174 $9.797.515 Local Sources J7.309 517 39.129.156 38.178 127 36 547.360 35.0IS 590 38.774377 38 845.935 ·r otal Revenue Limit 39.142.476 39,376.303 40,693,745 4!,858.248 43.775.081 45,058551 48,643,55{)
Federal Revenue 2,392,985 2,925,8:51 2,919,267 2!t30,334 3,297,180 3,544,106 3,113,949 Other State Revenue 6.278,730 7.732.8-06 7,604,293 S.467,088 7,726.<)04 9.031,587 8,851.014 Other Local Revenue 3.426,295 4.66(),206 2.902.574 2.767,183 2,766.979 4.904,3!1 5,010.923 Tuition and Transfers TOTAL REVENUES 51.24<1,486 54,695.165 54.()19,879 56,022.853 57,565.244 62538,554 65,619.436
EXPENDJTURJ-'S: Certificated Salaries 28,299240 28,441,909 28,468.961 28,982.062 29,87).454 30,594.07! 31,283,365 w u, Classified Salaries: 7,459,691 7,445,531 7,733,300 7,746.579 8,103,507 8,481)197 8,946,868 Benefits 8.144,814 8,657,087 9,019.061 9,155.797 9,576.648 9,735,042 10.348.,756 & Supplies 1,85L4-0S 2.302,407 2,417,005 2J27,338 2,367.287 5.307)46 3,072.071 :Services & Operating Expenses 4J177,45,8 4,774,757 53)47,932 5J}25,429 5,586,470 6,201,050 6,106,236 Capital Outlay 24,012 2L730 S3,290 28,962 64.547 9.403 l)trect SupportflndJrect Costs 1.267,823 1,533.45-0 1,489.444 1,565.404 1.580,671 (173,792 ()ther ()utg<) 4A27 920 TOTAL EXPEND!HJRES 5LJ24,446 5J,176.S4 l 54.258,993 54.631.572 57,088.037 64.638,182 64,306.243
OTHER FlN"ANCING SOURCES {Uses): Operating Transfers In 65.640 126,634 105,480 136.957 167,250 378.487 193,955 Operating TranstCrs Out (655345) (300,000) (327.861) {300000) \334,067} <310.000) Total Other Financing Sources (Uses) 65,640 (528,710) (194,520) (190.904) ( 132,750) 44.420
:Excess of Revenues over Expenses 50,400 9&9.614 {431,614) 1.200,37& 344,458 (2,055,207) 1.197,148
FUND BALANCE, Jl'l, Y 1 2.964 978 2.964 978 3.954.593 3.954 593 5 154.971 5.154 971 3099.764 PUND BALANCE, J!JNE JO $3.()15,378 $3.954,593 $3.520,959 $5,154,971 $5,499,429 $3,099.764 $4,296.912
: n Ba~d on rlie ~ma~1dited actuals of the J)istrict as {)f JtJJ1e 30, 2006. State Fuudiug of Educatiou aud Reveuue Limitatious
As a whole, California school districts receive a significant portion of their funding from State appropriations. As a result, decreases in state revenues significantly affect appropriations made by the legislature to school districts.
Annual state apportionments of basic and equalization aid to school districts for general purposes are computed up to a revenue limit per unit of average daily attendance (A.D.A.). Generally, these apportionments amount to the difference between the district's revenue limit and its property tax allocation. The revenue limit calculations are adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among all California school districts of the same type.
The following table reflects the average daily attendance and enrollment for the District for the last five years, and a projection through 2005-06.
MORGAN HILL UNIFIED SCHOOL DISTRICT Average Daily Atteudauce aud Eurollmeut aud A.D.A. Base Reveuue Limit 2000-01 through 2005-06
Average Daily A.D.A. Base Academic Year Attendance Revenue Limit Enrollment
2000-01 8,493 $4,421.71 9,185 2001-02 8,182 4,595.71 8,754 2002-03 7,994 4,688.71 8,521 2003-04 8,062 4,776.71 8,516 2004-05 8,207 4,920.26 8,594 2005-06* 8,361 5,131.26 8,734
* Projected. Source: Morgan Hill Unified School District.
In 2004-05, the District received $41,858,248 from revenue limit sources, accounting for approximately 74.7% of its General Fund revenues. For 2005-06, the District is projected to receive $45,058,551 of revenue limit sources income, which is approximately 71.6% of its General Fund revenue.
Federal Reveuues
The federal government provides funding for several District programs, including special education programs, programs under the Educational Consolidation and Improvement Act, and specialized programs such as Drug-Free Schools. The federal revenues, most of which are restricted, equaled approximately 5.2% of General Fund revenues in 2004-05 and are projected to equal approximately 5.6% of such revenues in 2005-06.
Other State Reveuues
As discussed above, the District receives State apportionment of basic and equalization aid in an amount equal to the difference between the District's revenue limit and its property tax revenues. In addition to such apportiomnent revenue, the District receives substantial other State revenues ("State
36 Sources"). In 2004-05, State Sources equaled approximately 15.1% of total General Fund revenues. In 2005-06, State Sources are projected to equal approximately 14.4% of total General Fund revenues.
Other Local Revenues
In addition to property taxes, the District receives additional local revenues. These other local revenues equaled approximately 4.9% of General Fund revenues in 2004-05 and are projected to equal approximately 7.8% of such revenues in 2005-06.
Developer Fees
The District maintains a fund, separate and apart from the General Fund, to account for developer fees collected by the District. As of June 30, 2005, residential development was assessed a fee of $3.95 per square foot. As of June 30, 2005, there was a balance of $1,618,935.72 in this fund. The following table lists the annual developer fees generated since fiscal year 1995-96.
MORGAN HILL UNIFIED SCHOOL DISTRICT District Developer Fees
Fiscal Year Amount 1995-96 $1,717,162 1996-97 1,290,960 1997-98 1,582,965 1998-99 1,559,772 1999-00 2,661,523 2000-01 2,477,135 2001-02 1,952,903 2002-03 1,727,497 2003-04 3,451,723 2004-05 2,672,399 1 2005-06( ) 3,300,278
(l) Projected. Source: Morgan Hill Unified School District.
State Budget
The following information concerning the State's budgets has been obtained from publicly available information which the District believes to be reliable; however, the District does not guaranty the accuracy or completeness of this information and has not independently verified such information. Furthermore, it should not be inferred from the inclusion of this information herein that the princzpal of or interest on the Bonds is payable from the General Fund of the District. The Bonds are payable solely from the proceeds ofan ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof
2005-06 Governor's Budget. On July 11, 2005, the Governor signed the 2005-06 Budget Act (the "2005-06 Budget"). The information in this section is adapted from the Governor's summary of the 2005-06 Budget. The 2005-06 Budget included general fund revenues of approximately $92.0 billion along with general fund expenditures of approximately $90.0 billion. The 2005-06 Budget contemplates no additional borrowing or taxes.
37 The 2005-06 Budget fully funded cost-of-living ("COLA") adjustments, K-14 student growth, restores half of the general purposes revenue limit funding reductions reflected in prior State budgets and provides over $70 million for the repayment of prior-year mandated costs for school district and community college districts. With respect to K-12 education, the 2005-06 Budget increased total K-12 funding from all sources to $62.3 billion, representing the largest year-to-year increase in State history. Total funding per pupil increases by $380, from $9,945 in fiscal year 2004-05 to $10,325 in fiscal year 2005-06. Proposition 98 funding is estimated to be $7,402 per pupil in fiscal year 2005-06, an increase of $379 per pupil from fiscal year 2004-05.
Aspects of the 2005-06 Budget pertaining to K-12 education included:
• Enrollment Growth. The 2005-06 Budget includes $193.6 million to fund enrollment growth increases for school apportionments, special education and other categorical programs. This amount includes $4.4 million deferred to fiscal year 2006-07 and reflects the Governor's goal of preserving core K-12 services despite difficult fiscal times.
• Cost ofLiving Adjustments. The 2005-06 Budget provides over $1.7 billion to provide a 4.23 percent COLA increase to K-12 programs. Of this amount, $15.7 million is deferred to fiscal year 2006-07. The 4.23 percent calculation exceeds the expected growth of the consumer price index in California.
• Revenue Limits. The 2005-06 Budget provides a net increase of $1.6 billion to school district and county office of education revenue limits, which includes funding for enrollment growth, COLA adjustment and the repayment of $328 million or approximately half of the outstanding deficit factor owed as a result of reductions made in prior fiscal years.
2006-2007 Budget The 2006-07 Budget Act was signed by the Governor on June 30, 2006 (the "2006-07 Budget"). The following information is adapted from the Legislative Analyst's budget analysis. The 2006-07 Budget assumes revenues in 2006-07 of $94.4 billion and expenditures of $101.3 billion. Proposition 98 K-14 education funding in the 2006-07 Budget increases to $55.1 billion, an increase of 10.3 percent over the revised fiscal year 2005-06 spending level.
Total funding from all sources available to K-12 education increases by $3.1 billion over the revised 2005-06 Budget, bringing total funding to $55.1 billion for the 2006-07 fiscal year. The 2005-06 revised per ADA funding of $7,777 for K-12 education represents an increase of $375 from the 2005-06 Budget Act level of $7,402. Funding per pupil for K-12 education for 2006-07 is $8,244, an increase of $467 (or 11.4%) from the revised 2005-06 level.
The 2006-07 Budget provides approximately $4. 5 billion is new ongoing K-12 expenditures, including the following significant changes to major K-12 education programs:
• Enrollment Growth and Cost-Of Living Adjustments. The budget provides $2.6 billion to fund a 5.92 percent COLA for revenue limits and most categorical programs (including statutory and discretionary COLAs). The budget also reflects a net of roughly $220 million in savings - mostly for revenue limits - due to estimates that statewide attendance will decline by 0.26 percent in 2006-07 compared to revised estimates for the preceding year. (In general, the budget does not decrease funding for categorical programs based on these declines in statewide growth rates, but rather continues to fund them at 2005-06 levels plus COLAs).
• Proposition 49 After School Program. The budget package includes $426 million in new Proposition 98 spending for after school programs, as required by Proposition 49 (passed by voters in 2002). 38 These funds were provided after the state fully funded the 2006-07 Proposition 98 mmnnum guarantee. In addition, the budget includes around $2 million in non-Proposition 98 General Fund monies for the California Department of Education to administer and evaluate the program.
• Revenue Equalization. The budget provides $350 million to reduce historical inequities in general purpose spending. Trailer bill legislation stipulates that these funds will be allocated using the current equalization methodology, which sets targets at the 90th percentile of average daily attendance and distinguishes districts by size and type.
• Economic Impact Aid Augmentation and Formula Change. The budget includes a $350 million funding increase for districts to educate economically disadvantaged and English learner students, bringing total program funding to roughly $975 million. Trailer bill legislation changes the distribution formula to address data issues and historic inequities in the distribution of funds.
• Counselors. The budget provides $200 million for additional counselors for students in grades 7-12. The trailer bill includes a requirement that, as a condition of receiving these funds, districts develop a course plan to assist low-performing 7th grade students and high school students who have not passed the California High School Exit Examination.
• Arts and Music Block Grant. The budget includes $105 million to create a new block grant, which will provide districts with supplemental funding to hire staff and purchase supplies for standards aligned instruction in arts and music.
• Expansion of Child Care Eligibility. The budget "unfreezes" child care income eligibility levels to a maximum of 75 percent of current state median income. To accommodate the projected increases in caseload as a result of the eligibility change, the budget provides $67 million for additional subsidized child care slots.
• Preschool Expansion. The budget provides $50 million for expanded preschool services. The budget also provides $50 million in one-time funds for facility loans to providers.
• Additional Support for High School Exit Exam. The budget provides an increase of $50 million for supplemental instruction for 11th and 12th grade students who have not passed the California High School Exit Examination. Combined with the $20 million that continues from the prior year, the 2006-07 budget provides $500 per student for each 12th grade student. Funds available after funding 12th grade students will be distributed for services to 11th grade students.
• Additional One-Time Funds. The budget provides an additional $2.5 billion in one-time K-12 education funds. This total is comprised of three main sources - additional funds required to meet the Proposition 98 minimum guarantee in 2005-06 ($2 billion), settle-up payments to meet Proposition 98 obligations from prior years ($258 million), and the Proposition 98 Reversion Account, which are funds that have been appropriated for K-14 education in prior years but not used ($226 million).
Future Budgets. The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State's ability to fund schools during 2005-06 as budgeted. Continued State budget shortfalls in future fiscal years could have an adverse financial impact on the District.
39 The Bonds are general obligations of the District. The State is not obligated and will not pay debt service on the Bonds.
District Debt Strnctnre
Long Term Debt. A schedule of changes in long-term debt for the fiscal year ended June 30, 2005 is shown below:
MORGAN HILL UNIFIED SCHOOL DISTRICT Schedule of Long Term Debt, as of June 30, 2005
Balance Balance Due in July 1, 2004 Additions Deductions June 30 2005 One Year General Obligation Bonds $72,077, 754 $1,030,000 $71,047,754 $1,185,000 Accreted Interest on General 865, 179 $403,211 1,268,390 Obligation Bonds Compensated Absences 237,715 53,819 291,534 291,534 Capital Lease Obligations 1 104 1 104 Totals $73,181,752 $457,030 $1,031,104 $72,607,678 $1,476,534
Source: Morgan Hill Unified School District.
40 LEGAL MATTERS
Tax Matters
In the opinion of Stradling Y occa Carlson & Rauth, a Professional Corporation, San Francisco, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, interest on the Bonds is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of corporations. In addition, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to the Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bondowner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bondowner will increase the Bondowner's basis in the applicable Bond. The amount of original issue discount that accrues to the owner of the Bond is excluded from gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax.
Bond Counsel's opinion as to the exclusion from gross income of interest on the Bonds (and original issue discount) is based upon certain representations of fact and certifications made by the District and others and is subject to the condition that the District complies 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 to assure that interest on the Bonds (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause the interest on the Bonds (and original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted to comply with all such requirements.
The amount by which a Bond Owner's original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Code; such amortizable Bond premium reduces the Bond Owner's basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond Owner realizing a taxable gain when a Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Bond premmm.
The Internal Revenue Service (the "IRS") has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds ( or by an audit of similar bonds).
Bond Counsel's opinions may be affected by actions taken ( or not taken) or events occurring ( or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Resolution and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond 41 Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the exclusion from gross income of interest on the Bonds (and original issue discount) for federal income tax purposes with respect to any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Y occa Carlson & Rauth.
Although Bond Counsel has rendered an opinion that interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the ownership of the Bonds and the accrual or receipt of interest (and original issue discount) with respect to the Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Bonds.
A copy of the proposed form of opinion of Bond Counsel is attached hereto as APPENDIX B.
Verification
Upon delivery of the Bonds, Causey Demgen & Moore, Inc., a firm of independent public accountants, will deliver a report on the mathematical accuracy of certain computations based upon certain information and assertions provided to them by the Underwriter relating to (a) the adequacy of the maturing principal of and interest on the federal securities in the Escrow Fund to pay the principal of, interest on and redemption price with respect to the Refunded Bonds and (b) the computations of yield of the Bonds and the federal securities in the Escrow Fund which support Bond Counsel's opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes.
Continuing Disclosure
The District has covenanted in a Continuing Disclosure Certificate for the benefit of holders and Beneficial Owners of the Bonds to provide certain financial information and operating data relating to the District (the "Annual Report") by not later than nine months following the end of the District's fiscal year (which currently ends on June 30), commencing with the report for the 2005-06 fiscal year (which is due not later than April 1, 2007), and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the District with each Nationally Recognized Municipal Securities Information Repository and with the appropriate State information depository, if any. The notices of material events will be filed by the District with each Nationally Recognized Municipal Securities Information Repository or with the Municipal Securities Rulernaking Board, and with the appropriate State information depository, if any. The specific nature of the information to be made available and to be contained in the notices of material events is summarized under the caption "APPENDIX C - Form of Continuing Disclosure Certificate." These covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) (the "Rule"). The District has, in the past, failed to file certain portions of its required annual reports in a timely manner as required by its prior continuing disclosure obligations. The District has since filed all such reports and is current on all filings required under its continuing disclosure obligations.
Legality for Investment in California
Under provisions of the California Financial Code, the Bonds are legal investments for commercial banks in California to the extent that the Bonds, in the informed opinion of the bank, are prudent for the investment of funds of depositors, and under provisions of the California Govermnent Code, are eligible for security for deposits of public moneys in California.
42 Absence of Material Litigation
No litigation is pending or threatened concerning the validity of the Bonds, and a certificate or certificates to that effect will be furnished to purchasers at the time of the original delivery of the Bonds. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the District's ability to receive ad valorem taxes or contesting the District's ability to issue and retire the Bonds.
Certain Legal Matters
The legal opinion of Bond Counsel, approving the validity of the Bonds, will be supplied to the original purchasers of the Bonds without cost. A copy of the proposed form of such legal opinion is attached to this Official Statement as APPENDIX B.
RATINGS
Moody's Investors Service ("Moody's") and Standard & Poor's ("S&P"), a Division of The McGraw-Hill Companies ("S&P") have assigned ratings of "Aaa" and "AAA," respectively, to the Bonds, based on the issuance by the Insurer of its Financial Guaranty Insurance Policy. The Bonds have been assigned underlying ratings of "Aa3" and "A+" by Moody's and S&P, respectively. Such ratings reflect only the views of such organizations, and any desired explanation of the significance of such ratings should be obtained from the rating agencies furnishing the same, at the following addresses: Moody's Investors Service, 99 Church Street, New York, New York 10007 and Standard & Poor's, 55 Water Street, New York, New York 10041.
Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price for the Bonds.
UNDERWRITING
Stone & Youngberg LLC and UBS Securities LLC (the "Underwriters") have agreed, pursuant to a purchase contract among the District and the Underwriters (the "Purchase Contract"), to purchase all (but not less than all) of the Bonds for a purchase price of $85,886,717.75 (which represents the stated principal amount of the Bonds of $76,954,040.30, plus original issue premium of $10,514,128.75, less Underwriters' discount of $699,745.35, less a bond insurance premium of $357,680.95, and less $524,025.00 to be deposited by the Underwriters into an account to be held by a commercial bank and used to pay costs of issuance related to the Bonds. The Purchase Contract provides that the Underwriters will purchase all of the Bonds if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the purchase contract, the approval of certain legal matters by Bond Counsel and certain other conditions. The initial offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriters. The Underwriters may offer and sell Bonds to certain dealers and others at prices lower than such initial offering prices.
43 ADDITIONAL INFORMATION
Quotations from and summaries and explanations of the Bonds, the Resolution providing for issuance of the Bonds, and the constitutional provisions, statutes and other documents referenced herein, do not purport to be complete, and reference is made to said documents, constitutional provisions and statutes for full and complete statements of their provisions.
Some of the data contained herein has been taken or constructed from District records. Appropriate District officials, acting in their official capacities, have reviewed this Official Statement and have determined that, as of the date hereof, the information contained herein is, to the best of their knowledge and belief, true and correct in all material respects and does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they were made, not misleading. This Official Statement has been approved by the District Board of Education.
MORGAN HILL UNIFIED SCHOOL DISTRICT
Isl Dr. Alan Nishino Superintendent
44 APPENDIX A
EXCERPTS FROM THE 2004-05 AUDITED FINANCIAL STATEMENTS OF THE DISTRICT (THIS PAGE INTENTIONALLY LEFT BLANK) MORGAN HILL UNIFIED SCHOOL DISTRICT COUNTY OF SANTA CLARA MORGAN HILL, CALIFORNIA
A1'<'NUAL FINANCIAL REPORT
JUNE 30, 2005 (THIS PAGE LEFT INTENTIONALLY BLANK) ~10RGAN HILL UNIFIED SCHOOL DISTR1CT
JUNE 30, 2005 ------···-----~···--- TABLE OF CONTENTS
FINANCIAL SECTION
Independent Auditor's Report A-2
Management's Discussion and Analysis A-4
Basic Financial Statements:
Government-wide Financial Statements:
Statement of Net Assets A-14
Statement of Activities A-15
Fund Financial Statements:
Balance Sheet - Governmental Funds A-16
Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets A-17
Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds A-18
Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities A-19
Statement of Net Assets - Fiduciary Funds A-20
Statement of Changes in Net Assets - Fiduciary Funds A-21
Notes to Financial Statements A-22
A-1 CERTIFIED
PUBLIC R!CHAR;:'.1 j. GOODELL CPA !... GOOl)ELL. c:''I ACCOUNTANTS Vl'Cii~IA i(_ f'ORl-SK, CPA 8:\'ER:.Y A S."-.NCHE.Z, C:'A
INDEPEN'DENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS
Board of Trustees Morgan Hill Unified School District Morgan Hill, California
We have audited the accompanying financial statements of the governmental activitfos, each major fund and !he aggregate remaining fund infonnation of the Morgan Hill Unified School District as of and for the year ended June 30, 2005, which collectively comprise the District's basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally acce,>pted in the United States of America and 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 of material misstatement. ll.n audit inciudes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of tl:te governmental activities, each major fund and the aggregate remaining fund w_formation of the Morgan Hill Unified School District at fone 30, 2005 and the changes in financial position for the year then ended, in confonnity with accounting principles generally accepted in fae United States of America.
A-2 Board of Directors Morgan Hill Unified School District Page Two
The Management's Discussion and Analysis on page 3 through 12 and the budgetary comparison information on page 45 are not a required part of the basic financial statements, but are supplementary information required by the GovL,nrnental Accounting Standards Board. We have applied certain limited procedures, consisting principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
fn accordance v,ith Government Auditing Standards, we have also issued a report dated October 28, 2005 on our consideration of Morgan Hill Unificd School District's internal controls over financial reporting and our tests of its compliance v.'ith certain pro,.,isions of laws, regulations, contracts and grants agreements and oilier matters. TI1e purpose of that report is to describe the scope of our testing of internal controls over financial reporting or on compliance, and not to provide an opinion on the internal controls over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in conjunction with this report in considering the results of our audit.
Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise Morgan Hill School District's basic financial statements. The accompanying statistical schedules, and combining non-major fund financial statements are presented for additional analysis and are not a required part of the basic fmancial statements. The accomp,uiying schedule of expenditures of federal awards is required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the basic financial statements of Morgan Hill School District. The statisticai schedules, the schedule of expenditures of federal awards and the combining non-major fund financial statements have been subjected to the auditing procedures applied in t.lie audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to tI1e basic financial statements taken as a whole.
GOODELL, PORTER & FREDERICKS, LLP Certified Public Accountants October 28, 2005
A-3 MORGAN HILL UNIFIED SCHOOL DISTRICT
MANAGEMENT DISCUSSION AND A.i"\IAL YSIS
JUNE 30, 2005
The discussion and analysis of Morga., Hitl Unified School District' 5 financial performance provides an overall review of the District's financial activities for t.l-ie fiscal year ended June 30, 2005. The intent of this discussion and analysis is to look at the District's financial performance as a whole. To provide a complete understanding of the District's financial pertormance, please read it in conjunction with the Independent Auditor's Report on page I, notes to the basic financial statements and the District's financial statements.
The Management's Discussion and Analysis (MD&A) is an element of the reporting model adopted by the Governmental Accounting Standards Board (GASB) in their Statement No. 34 Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments issued June 1999. Certain comparative information is required to be presented in the MO&A. :FINANCIAL HIGHLIGHTS The average daily attendance for the second consecutive year has increased. For 2002-2003 to 2003-04, ADA increased by 67., or .8%. for 2003-04 to 2004-05, ADA increased by 145, or 1.8%. The decrease for the general fund revenue for 2002-03 to 2003-04 wa.~ $415, 776 or (.8%) compared to an increase of $1,335,010 or 2.4% for the period 2003-04 to 2004-05. The decrease h~tween 2002-03 to 2003-04 reflects the elimination of the Morgan-Hart program, reduction in Lottery revenue and state funding. Tne increase between 2003-04 to 2004-05 reflect the increase in ADA and the reduction in the deficit factor. The decrease in district-wide funding from 2002-03 to 2003-04 was $13,783,703, or (16%) reflects one time funds received from the state for Modernization and Construction projects. The decrease in revenue from 2003-04 to 2004-05 was $3,643,659 or 5% reflecting the chm1ges described above and one-time funds from a lawsuit settlement and one-time revenues for Capital Facilities and the reduction in Developer Fees. The decrease in general fund expenses from 2002-03 to 2003-04 was $2,042,853 or (3.6%) compared to an increase of $1,127,247 or 2%. The decrease between 2002-03 to 2003-04 was due to staff reductions and other cost saving measures. The increase between 2003-04 to 2004-05 was due to increase in staff costs and contractual obligations. The increase in district-wide expenses from 2002-03 to 2003-04 was $2,334,683 or 3%, which includes the decrease described above, and reflects the on-going costs of the construction of our new high school and the renovation of several school site campuses. The increase in expenses from 2003-04 to 2004-05 was $24,255,480 or 37%, reflecting the Work In Progress for several uncompleted building or renovation projects. General Fund revenues and other sources exceeded expenditures by $1,200,378, ending the year with a fund balance of$ 5,154,970, which includes $1, l 85,179 that is legally restricted, and available reserves of $3,427,583, including the mandatory 3% Economic Uncertainty. The implementation of position control and budget blocking assisted in controlling expenditures. In complying with GASB 34, fixed assets were valued at historical costs, the total of the District's fixed assets, land, buildings, and equipment, valued on an acquisition cost basis was $ I 94.3 million. After depreciation, the June 30, 2005 hook value for fixed assets totaled$ l 59.4 million.
A-4 MORGAN HILL UNIFIED SCHOOL DISTRICT
Mt\i"\TAGEMENT DISCUSSiON AND ANALYSIS
JUNE 30, 2005
OVERVIEW OF THE FINANCIAL STATEMENTS
Ibis annual report consists of three parts - management's discussion and analysis (this section), the basic financial statements, and required supplementary information. These statements are organized so the reader can understand the Morgan Hill Unified School District as a financial whole, an entire operating entity. The statements then proceed to provide an increasingly detailed look at specific financial activities.
Components of the Financial Section
l I I I Management's l I Basic Required Discussion I Financial Supplementary and Analysis I ~tements Information ,_J-~ I ~-wide Fund Notes to the I u~::cia1 Financial Financial I Statements Statements Statements I
Summary Detail
The first two statements are district-wide financial statements, the Statement of Net Assets and Statement of Activities. These statements provide information about the activities of the whole School District, presenting both an aggregate view of the District's finances and a longer-term view of those finances. Fund financial statements provide the next level of detail. For governmental funds, these statements tell how services were financed in the short-term as well as what remains for foture spending. The fund financial statements also look at the School District's more significant funds v,"ith all other non-major funds presented in total in one colwnn. A comparison oftl:te District's general fund budget is included.
A-5 MORGAN HILL UNIFIED SCHOOL DISTRJCT
MANAGEMENT DISCUSSION AND ANALYSIS
JlJNE 30, 2005
OVERVIEW OF THE FINANCIAL STATEMENTS (CONTIN1JED)
Components of !he Financial Section (Concluded)
The financial statements also include notes that explain some of the infonnation in the statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the financial statements.
Reporting the School District as a Whole Statement ofNet Assets and the Statement ofActivities
These two statements provide information about the District as a whole using accounting methods similar to those used by private-sector companies. The statement of net assets includes all of the District's assets and liabilities using the accrual basis of accounting. This basis of accounting takes into account all of the current year's revenues and expenses regardless of when cash is received or paid. These statements report information on the district a, a whole and its activities in a way that helps answer the question, "How did we do financially during 2004-05?"
These two statements report the School District's net assets and changes in those assets. Tnis change in net assets is important because it tells the reader that, for the School District a, a whole, the financial position of the School District bas improved or diminished. The causes of this change may be the result of many factors, some financial, some not. Over time, the increases or decreases in the District's net assets, as reported in the Statement of Activities, are one indicator of whether its financial health is improving or deteriorating. The relationship between revenues and expenses indicates the District's operating results. However, the District's goal is to provide services to our students, not to generate profits as commercial entities. One must consider many other non-financial factors, such as the quality of education provided and the safety of the schools to assess the overall health of the District.
+ Increases or decreases in the net assets of the District over time are indications of whether its financial position is improving or deteriorating, respectively.
+ Additional non-financial factors such as condition of school buildings and other facilities, and changes to the property tax base of the District need to be considered in assessing the overall health of the District.
A-6 MORGAc'l' HILL UNIFIED SCHOOL DISTRICT
MANAGEMENT DISCUSSION AND ANALYSIS
JlJl\1E 30, 2005
OVERVIEW OF THE FINANCLt\L STATEMENTS (CONCLUDED)
Reporting the School District's Most Significant Funds
Fund Financial Statements
The fund financial statements provide more detailed information about the District's most significant funds - not the District as a whole. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs. Some funds are required to be established by State law. However, the District establishes other funds to control and manage money for specific purposes.
• Govenimemal Funds
Mo~1 of the School District's activities are reported in governmental funds. The major governmental funds of the District are the General Fund, Capital Facilities Fund and Building Fund a,,d Bond Interest and Redemption Fund. Governmental funds focus on how money flows into and out of the funds and the balances that remain at the end of the year. TI1ey are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's operations and services that help determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs.
t Fiduciary Funds
The District is the trustee, or fiduciary, for its student activity funds and scholarship funds. All of the District's fiduciary activities are reported in separate Statements of Fiduciary Net Assets. We exclude these activities from the Dist. A-7 MORGAN HILL lJNIFIED SCHOOL DISTRJCT MAl"l'AGEMENT DISCUSSION AND ANALYSIS JUNE 30, 2005 ------FINANCIAL ANALYSIS OF THE GOVER"lMENT-WIDE STATEMENTS The School District as a Whole The District's net assets were $104 million at June 30, 2005. Of this amount $2.9 million was unrestricted. Investments in capital assets, net of related debt, account for $88 million of the total net assets. A comparative analysis of government-wide data is presented in Table 1. (Table 1) Comparative Statement of Net Assets Governmental Activities ------'-'-'-"-·-·-- 2005 2004 Assets Cash $ 22,468,747 $ 43,754,230 Receivables 2,461,988 2,612,927 Stores Inventory 160,195 149,679 Prepaid Expenses 376,525 376,877 Capital assets 159,427, 747 132,832,127 Total assetS 184,895,202 179,725,840 Liabilities Accounts payable and other current liabilities 6,494, l l l 6,609,497 Defe1Ted revenue 1,148,444 577,764 Long-term liabilities 72,607,678 73,181,752 Total liabilities 80,250,233 80,369,013 Net Assets Invested in capital assets, net of related debt 88,379,993 60,753,269 Restricted 13,361,403 36,138,126 Unrestricted 2,903,573 2,465,432 Total net assets _L I 04,644,969 $ 99,356,827 A-8 MORGAN HILL UNIFIED SCHOOL DISTRICT l\1ANAGEMENT DISCUSSION AND ANALYSIS JUNE 30, 2005 FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMEi'll'TS (CONTINUED) The District's net asset position increased $5.2 million this fiscal year (See Table 2). The District's expenses for instructional and pupil services represented 77 percent of total expenses. The purely administrative activities of the District accounted for just 6 percent of total costs. The remaining 17 percent was spent in the areas of plant services and other expenses, interest on long-term debt, depreciation of capital a~sets and other outgo. (See Figure 2). (Table2) Comparative Statement of Change in Net Assets Governmental Activities 2004 Revenues Program revenues $ 18,161,867 $ 19,804,999 General revenues Taxes levied for general purposes 36,547,360 39,129,156 Taxes levied for other specific purpose 5,055,816 5,542,527 !'ederal and State Aid not restricted to specific purposes 9,058,799 3,497,986 Interest and investment earnings 274,075 126,670 Miscellaneous 541,487 1,505, l 45 'rota] revenues 69,639,404 -- 69&()6,481._ Expenses Instruction 36,083,!09 33,550,043 Instruction related services 6,778, 127 6,288,377 Pupil support services 7,074,936 6,351,947 General administration 3,610,431 6,557,839 Plant services 4,989,040 4,740,818 Other 5,8 l 5,617 7,813,300 Total expenses 64,351,260 65,302,324 Jncrease in net assets $ - 5,~§8,144 $ 4,304,159 A-9 MORGAN HILL lJNlFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION A,"ID ANALYSIS JUNE 30, 2005 FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS (CONTINUED) Governmental Activities As reported in the Statement of Activities, the eost of all of the District's governmental activities this year was $64 million. The amount that our loea! taxpayers fmaneed for these activities through property taxes was $41 million. Federal and State aid not restricted to specific purposes totaled $9.0 million. State and Federal Categorical revenue totaled over $14 million, or 13% of the revenue of the entire District (See Figure 1). Sources of Revenue for the 2004-05 Fiscal Year Figure 1 Fedt::ml & S1ate ('att'f,orit:13~ RevtnUI:$ 13",:i, } f~drnu & Slate Aid -'"" '' ... _ P.n:iperty Tax::. 20"; 00".1,. I Other} 1% Expenses for the Fiscal Year 2004-05 Figure 2 Plant Set1ti~es 8% Pupil Support Services __/ !!% Instruction .5.5% Instruction R.datcd Services li'% A-10 MORGAN l:IlLL UNIFIED SCHOOL DISTRICT MAc"lAGElv!ENT DISCUSSION Al:{D ANALYSIS JUNE 30, 2005 FINA..1'\!CIAL ANALYSIS OF THE FUND STATEMENTS The fund financial statements fucus on individual parts of the District's operations in more detail than the government-wide statements. The District's individual fund statements provide information on inflows and outflows and balances of spendable resources. The District's Governmental Funds reported a combined fund balance of $19 million, a decrease of $4 million from the previous fiscal year. 11ris decreare is mainly reflected in the Building Fund. The General Fund balance increased $1.2 million. General I<'und Budgetary Highlights Over the course of the year, !he District revised the annual operating budget monthly. The significant budget adjustments fell into the following categories: • Budget revisions to the adopted budget required after approval of the State budget + Budget revisions to update revenues to actual enrollment information and to update expenditures for staffing adjustments related to actual enrollments. + Adjustments required to reflect the unprecedented mid-year State cuts in revenues. • Other budget revisions are routine in nature, including adjustments to categorical revenues and expendirures based on final awards, and adjustments between expenditure categories for school and department budgets. The final revised budget for the General Fund reflected a net decrease to the ending balance of $!,410,193. The District ended the year adding $1.2 mi!Hon to the general fund ending balance. The State recommends an ending reserve for economic uncertainties of 3%. The District's ending reserve was3.0%. A-11 MORGAN HILL UNIFIED SCHOOL DISTRICT MAi"\fAGEMENT DISCUSSION AND ANALYSIS JUNE 30, 2005 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets By the end of the 2004-05 fiscal year, the District had invested $194 million in a broad range of capital assets, including school buildings, athletic facilities, administrative buildings, site improvements, vehicles, ~d equipment. The capital assets net of depreciation were $159 million at June 30, 2005, which is an increase of $26,595,620 from the previous year due to acquisitions totaling $31 million and depreciation expenses of$2.4 million. Table 3 Comparative Schedule of Capital Assets (net of depreciation) June 30, 2005 and 2004 Total Percent 2005 2004 Differcnc« Chan!,le Land $ 724,021 $ 724,021 $ 0 0% Buildings and Improvements 79,426,501 78,717,644 708,857 .9% Machinery & Equipment 784,438 60],327 183,lll 30.4% Work in Progress 78,492,787 52,789,135 25,703,652 48.7% Total $159,427,74 7 $132,832,127 $26,595,620 19.2% Long-Term Debt At June 30, 2005, the District had $72 million in long-term debt outstanding. Table4 Comparative Schedule of Outstanding Debt June 30, 2005 and 2004 2005 2004 General Obligation Bonds $72,3 l 6, 144 $72,942,933 Capital Lease Obiigations 0 1,104 Compensated Absences 291,534 237, 715 TOTAL $72,607,678 $73,181,752 The Jong-tenn debt paid by the District was approximately $1 million in 2005. A-12 MORGA.1'1 HILL UNIFIED SCHOOL DISTRICT MANAGEMENT DISCUSSION AND ANALYSIS JUNE 30, 2005 FACTORS BEARING ON THE DISTRICT'S FUTURE The District will continue to budget for stability in enrollment and average daily attendance. Changes at the top management level will provide new direction and enthusiasm. The District has a new Superintendent, Assistant Superintendent of Instructional Services and Assistant Superintendent of Hu.."llan Resources. Stabilization of the State's economic environment is desirable and would be beneficial to the District's financial environment. Management will continue to plan carefully and prudently to continue to provide the resources to meet our student's needs. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, parents, investors, and creditors v,~th a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need additional fmancial information, please contact Fred Gallacinao, Director of Fiscal Services, Morgan Hill Unified School District, 15600 Concord Circle, Morgan Hill, CA 95037. A-13 MORGAN HILL lJ1'11FIED SCHOOL DISTRJCT STATEMENT OF NET ASSETS JUNE 30, 2005 Governmental Activities Cash (Note 2) $ 22,468,747 Accounts Receivable (Note 4) 2,461,988 Stores Inventory (Note lH) 160,195 Prepaid Expenditures (Note lH) 376,525 Capital Assets (Note 6): Land $ 724,021 Buildings and Improvements 111,681,875 Machinery and Equipment 3,381,390 Work in Progress 78,492,787 Less Accumulated Depreciation (34,852,326) Total Capital Assets, Net of Depreciation 159.427,747 Total Assets 184.895.202 LIABILITIES Accounts Payable and Other Current Liabilities $ 6,494,l ll Deferred Revenue (Note JH) 1,148,444 Long-tenn Liabilities: Due Within One Year: General Obligation Bonds Payable (Note 7) $ l,185,000 Compensated Absences Payable (Note IH) 29L534 Total Due Within One Year: 1,476,534 Due After One Year: General Obligation Bonds Payable (Note 7) 71.131,144 Total Due After One YeDr: 71,131,144 Total Liabilities $ 80.250.233 NET ASSETS Invested in Capital Assets, Net of Related Debt $ 93,992,325 Restricted For. Capital Projects 2,320,234 Debt Service 2,975,267 Education Programs 1,185,180 Unrestricted 4,171,963 Total Net Assets $ 104.644 969 THE ACCOM:PANYING NOTES ARE At"J lNTEGRi,.L PART OF THESE STATEMENTS A-14 MORGAN HILL UNIFIED SCHOOL DISTRICT STA1E:MENT OF ACTIVITIES FOR THE YE.A.R E:Nl)ED JUN'E 30, 2005 Net (Expense) Revenue and Chfil'l.ges in ho gram Revenues Net Assets Charges Operating Capitai Governmental for Grants and Grants und (',ovemmenilll Activities Expenses Services Contributions Contnou1ions Activities Instruction $ 36,083,109 $ 2,546,996 $ 6,957,500 $ J,606,33] S (24,972,282) Instruction-related ser1lic.es: Supervision of instruction 1,684,825 14,256 l,750,329 79,760 Instructional librory, media and lcchnology 582,6!6 2,094 43,859 (536,663) School site administration 4,510,686 M,915 352,543 (4,143,228) Pupil Seivices: f-1ome-to school trar'.1,yo:rtation 2,&31,427 184,980 1,589,203 (1,057,244) Food services 2,160,984 1~156,035 859,015 (145,934) All other pupil services 2,082,525 264,007 (l,818,518) General administration: f)ata .processing 289,85! (289,85 !) All other general administiation 3,320,580 57,120 376,527 (2,886,933) Plant services 4,989,040 6.351 360,934 (4,621,755) Ancillary se,vices 368,309 (368,309) Cow.munity services. 35,085 (35,085) I:'.lli':rest on lor-,._g-:enn debt 3~726,492 (3,726,492) Other Outgo !,685,731 11,970 6,902 (1,666,859) Total O.:;,veIJ1_rnental ,.'\ctivities $ 64,351).60 $ 3,994,717 $ 12,560,819 ======$ 1,606,331 (46,189,393) G.."I'.eral Revenues.: ~operty Taxes Levied For: Geueral Purposes 36,547,360 ·Taxes Levied for Debt Service 4,469,204 Taxes Levied for Other Specific Purposes 586,612 Federal and State Aid not Restricted to Specific Purposes 9,058,799 Intcrcst and L11vestmcnt Earnings 274,075 Miscellaneous 541,485 Total C',eneral Revenue 51,477,535 Chat1ge in Net i\ssets 5,288,142 Nt.-t A.sset,; Beginning 99,356,827 Net Assets Ending $ !04,644,969 THE ACCO'lv!P ANYING NOTES ARE AN INTEGRAL PART OF THESE ST ATEM:ENTS A-15 MORG.A.1~ HILL ill,1FJED SCHOOL DISTRICT BALANCE SHEET GOVERl'lli1ENTAL F1Jl'.1)S JUl''l':E 30, 2005 Bond Interest Other Tots! Capital and Governmental Governmental Facilities Buildlng Redemption Funds Funds Cash in Co1mty Treasury (Note 2) $ 7,061,456 $ ] ,650,684 $ 8,004,453 $ 2,967,4% $ 2,668,477 $ 22,352,566 Cash on Hand and L'CtB:mks (Note 2) 88,824 6,857 95,681 Cash in RevolvL"g Fund (Note 2) 14,500 6,000 20,500 Accounts Recei>table (Note 4) 1,993,!08 16,485 58,893 7,771 385,731 2,461,988 Due From Other Funds (Note 5) 41~352 4,266 6,797 52:415 Stores lnver.tories (Note JR) 151,]83 9,012 160,195 Prepaid Expenses (No!c lH) 376,525 Total Asse.s s 9, 7Z6~94S $ l,667,169 $ 8,067,612 $ $ 3,082,874 $ 25,519,870 Liabilities and Fund BJ.lances Liabilities: Accounts Payable $ 3,497,921 s 48,234 $ 1,185,730 $ 379,576 $ 5,lli,461 DcferrOO Rt."Venue(Note 1H) 1,067,764 80,680 1,148,444 Due to Other Funds (Nore 5) 6,293 1,160 44,962 52)415 Total Liabilities 4,571,978 48,234 l,186,890 505,218 6,312,320 Fund Balmices (Nore !Fl): Reserved 1,727,388 $ 2,975;2.67 1510]2 4,717,667 D,,,,...sig.11.ated 3~416,050 3,416,050 llndesignated 1 ],532 l ,618,935 6,880,722 2,562,644 l l,073,833 Total Fund Balances 5,154_.970 i,618,935 6,880,722 2,975)67 2,577,656 19,207,550 Tot,J Liabilities and Fund Balfillces $ 9,726,948 $ l,667,169 $ 8,067,612 $ 2,975).67 $ 3,082,874 $ 25,519,870 T'rlE ACCOll!1P ANYING NOTES ARE AN INTEGRAL PART OF THESE STA TEMENTS A-16 MORGAN HILL UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENT AL FUNDS BALA'N'CE SHEET TO THE STATEMENT OF NET ASSETS JlJNE 30, 2005 Total fund balance ~ governmental funds $19,207,550 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets: In governmental funds, only current assets are reported. ln the statement of net assets, all assets are reported, including capital assets $194,280,073 and accumulated depreciation $34,852,326 159,427,747 Unmatured interest on long-tenn debt: In governmental funds, interest on long-term debt is not recognized until the period in which it matures and is paid. In the government-wide statement of activities, it is recognized in the period that it is incurred. The additional liability for unmatured interest owing at the end of the period was: (l,382,650) Long-tem1 liabilities are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term liabilities at year-end consist of: General obligation bonds payable $72,316, 144 Compensated absences payable 291.534 (72.607,67[! Total net assets-governmental activities $ 104.§:44,96.9 THE ACCOMPA.,'\i"YING NOTES ARE AN INTEGRAL PART OF TI-IESE STATEMENTS A-17 MORGAt'\! HILL UNIFIED SCHOOL DISTRICT ST ATE!\1ENT OF REVE1\1l!""ES, EXPENDITURES At"ID CHANGES IN FUND BALANCES GOVERNMENT AL FUNTIS FOR THE FISCAL YEAR ENDED JUNE 30, 2005 Other Tot:'.jl Capital Bond Interest Gove:n1ment.al Govcmmenllll General Fund Facilities Building and Rroemetion Funds Funds ~H\!i Revenue Limit Sources: St.ate Apportionments $ 5,310,888 $ 424,749 $ 5,735,637 Local Sources 36,547,360 36,547,360 Total Revenue Limit 41,858,248 424,749 42,282,997 Federal Revenue 2,930,334 913,767 3,844,101 Other State Revenue 8!467:088 $ 39,178 2,687,976 11,194,242 Other Local Revenue 2,767,183 $ 2,672,399 $ 275,403 4,449,225 1,954,280 12,ll&,490 Total Revenues 56,022,853 2,672,399 275,403 4,488,403 5,980,772 69,439,&30 EXPENDffiJRES Certificated Salaries 28,982,063 303,510 29,285,573 Classified Salaries 7,746,579 2,099 250~213 785,761 8,784,652 Employee Benefits 9,155,797 207 67,165 375,844 9,599,0!3 Books and Supplies 2,127,338 250 l,249,940 3,377,528 Services and Other OperaHng Expi:nditurcs 5,025,429 124,261 751,507 701,328 6,602,525 CapiT"1 Outlay 2&,962 9,087~261 18,516,855 27,633,080 Debt Ser-vice: Principal Retirt.,,ne11t 1,104 1,030,000 1,031,104 Interest and Fiscal Charges 42 3,339,750 3,339,792 Other Outgo J ,564,258 120,326 l,684,584 Total Expenditures 54,631,572 9.214 .. 080 19,585,740 4,369,750 3,536,709 91,337,851 Excess of Revenues o,;.-er t1Jn Otht.-r Financing Sources (Uses): ()pLTa.ting Transfers In (Note 5) 136,957 2,200,177 327,861 2,664,995 Opera.ting Transfers Out (Note 5) (327,861) (136,957) (2,200,177) (2,664,995) To!al Other Fimmcing Sources (Uses) (190,904) (i36,957) 2,200,177 0 (l,872,316) 0 Excess of Revenues and Other Fina..TJ.cing Sourr:eS Over {Under) Expenditures and Ot.1.er Uses 1,200,377 (6,678,638) (17,110,160) 1 l 8,653 571,747 (21,898,021) Fund Balances~ July 1, 2004 3,954,593 8,297,573 23,990,882 2,856,614 2~005,909 41,105,571 FU.t'1d Balances- Ju.71e 30, 2005 s 5. 154,970 $ 1.618.935 $ 6 880.72? $ 2.975267 $ 2.5n.656 $ 19207.550 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS A-18 MORGAN lITLL UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVER.},,,'MENTAL FU!','DS STATEMENT OF REVENLlES, EXPENDITURES AND CHANGES IN FUND BALANCE OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVIDES FOR THE YEAR ENDED JUNE 30, 2005 Net change in fund balances Total governmental funds $(2 l ,898,021) Amounts reported for governmental activities in the ;tat~ment of activities are different because: Capital outlay: governmental funds, the cost of capital assets are reported as expenditures in the period when the assets are acquired. In the statement of activities, costs of capital assets are allocated over their estimated useful lives as depreciation expense. The difference between capital outlay expemlit ures and depreciation expense for the period is: Expenditures for capital outlay: $28,822,640 Depreciation expense: (2,426.591) 26,396,049 Debt service: In governmental funds, repayments oflong-tenn debt are reported as expenditures. In the government-wide statement~, repayments oflong-tenn debt arc reported as reductions of liabilities. Expenditures for repayment of the principal portion of long-tem1 debt were: l,03 l,104 l.Jonated capital assets: ln governmental funds, donated capital assets are not reported because they do not affect current financial resources. In the government-wide statements, donated capital assets are reported as revenue and as increases to capital assets, at their fair market value on the date of donation. The fair market value of capital assets donated was: 199,571 Unma!ured interest on long-term debt: In governmental funds interest on long-tenn debt is recognized in the period that it becomes due. In the govenunent-wide statement of activities it is recognized in the period that it is incurred. lJnmatured interest owing at the end of the period, less matured interest paid during the period owing from the prior period, was: (386,741) Compensated absences: In governmental funds, compensated absences are measured by the amounts paid during the period. In the st2tement of activities compensated absences are measured by the amounts earned. The difference between compensated absences paid imd compensated absences earned was: (53.819) Total change in net assets-governmental activities (minor differences may occur due to rounding THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS A-19 MORGA:."\' HILL UNIFIED SCHOOL DISTRICT STATEMENT OF NET ASSETS FIDUCIARY FUNDS JUNE 30, 2005 Expendable Student _ Trust· Body Foundation Trust Agency Fund Fund ASSETS Cash in Hand and in Bank (Nute 2) $420,101 Total Assets 4.239 420,101 LIABILITIES Liabilities: Due to Student Groups 420.l 01 Total Liabilities 420,lOl ;t-,'"ET ASSETS Reserved for scholarships Total Net Assets THE ACCOMPAl'-JYING NOTES ARE Al~ INTEGR'\L PART OF THESE STATEMENTS A-20 MORGAt"l HILL UNIFIED SCHOOL DISTRICT STATEMENT OF CHANGES lN 1'iET ASSETS FIDUCIARY FUNDS FOR THE YEAR ENDED JUNE 30, 2005 Expendable Trust Scholarship Fund Additions Interest Income $ 145 Deductions Disbursements 0 Change in net assets (decrease) 145 Net assets July!, 2004 4.094 Net assets - June 30, 2005 $ 4,;p9 THE ACCOJ\,1PANYING NOTES ARE AN I1'H'EGRAL PART OF THESE STATEMENTS A-21 MORGA.t~ HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STA TEMENTS JUNE 30, 2005 NOTE I- SUMMARY OF SIGN1FICANT ACCOU/iT!NG POLICIES The District accounts for its financial transactions in accordance with the policies and procedures of the Department of Education's California School Accounting Manual. The accounting policies of the District conform to accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants. A. Reporting Entity The District includes all funds that are controlled by or dependent on the District's governing board for financial reporting purposes. 1bc District has considered all potential component units in detennining how to define the reporting entity, using criteria set forth in generally accepted accounting principles. B. Basis of Presentation Government-v.ide Financial Statements: The government-v.ide financial statements (i.e., the statement of net assets and ihe statement of changes in net assets) report infonnation on all of the nonfiduciary activities of the District and its component units. The governmem-v,ide statements are prepared using the economic resources measurement focus. This is the same approach used in the preparation of the fiduciary fund financial statements but differs from the manner in which governmental fund financial statements are prepared. Governmental fund financial statements, therefore, include a reconciliation with brief explanations to better identify the relationship between the government-wide statements and the statements for the governmental funds. The government-v,ide statement of activities presents a comparison between direct expenses and program revenues for each function or program of the district's governmental activities. Direct expeP-~es are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the statement of activities. Program revenues include charges paid by the recipients of goods or services offered by a program, as well as grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues which are not classified as program revenues are presented as general revenues of the District, with certain exceptions. The comparison of direct expenses with program revenues identifies the extent to which each governmental function is self-financing or draws from the general revenues of the District. A-22 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS Jll1'rE 30, 2005 NOTE I- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINTJED) B. Basis of Presentation (Concluded) Fund Financial Statements: Fund financial statements report detailed information about the District. The focus of governmental fund frnancial statements is on major funds rather than reporting funds by type. Each major governmental fund is presented in a separate column, and all non-major funds are aggregated into one column. Fiduciary funds are repmied by fund type. Tne accounting and financial treatment applied to a fund is determined by its measurement focus. All governmental funds are accounted for using a flow of current financial resources measurement focus. With this measurement focus, only current asset and current liabilities are generally included on the balance sheet. The Statement of Revenues, Expenditures, and Changes in Fund Balances for these funds present increa~es (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing u.~es) in net current assets. Fiduciary funds are reported using the economic resources measurement focus. C. Basis of Acco@!in.g Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Government-wide financial statements are prepared using the accrual basis of accoW1ting. Governmental funds use the modified accrual basis of accounting. Fiduciary funds use the accrual basis of accounting. Revenues - exchange and non-exchange transactions: Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded under the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. "Available" means the resources will be collected vtithin the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, "available" means collectible within the current period or within 60 days after year-end. A-23 MORGAJ'1 HILL UNIFIED SCHOOL DISTRJCT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE I- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. Basis of Accounting ( Condud'efil Kon-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, grants, and entitlements. Under the accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants and entitlements is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are to be used or the fiscal year when use is first permitted; matching requirements, in which the District must provide local resources to be used for a specific purpose; and expenditure requirements, in which the resources are provided to the District on a reimbursement basis. Under the modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Deferred revenue: Deferred revenue arises when assets are received before revenue recognition criteria have been satisfied. Grants and entitlements received before eligibility requirements are met are recorded as deferred revenue. On goverrunental fund financial statements, receivables associated with non-exchange transactions that will not be collected within the availability period have also been recorded as deferred revenue. Expenses/expenditures: On the accrual basis of accounting, expenses are recognized at the time a liability is incurred. On the modified accrual basis of accounting, expenditures are generally recognized in the accounting period in which the related fund liability is incurred, as under the accrual basis of accounting. However, u.rider the modified accrual basis of accounting, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Allocations of cost, such as depreciation and amortization, are not recognized in the governmental funds. \Vhen bou'l restricted and unrestricted resources are available for use, it is the District's policy to use restricted resources first, then unrestricted resources as they are needed. A-24 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUE_m D. Fund Accounting The accounts of 1he District a:re organized on the basis of funds, each of which is considered to be a separate accounting entity. 111e operations of each fund arc accounted for with a separate set of self-balancing accounts that comprise its a,sets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate. District resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent and the means by which spending activities are controlled. The District's accounts are organized into major, non-major, and fiduciary funds as follows: MAJOR GOVERNMENTAL FUNDS l. General Fund is the general operating fund of the District. It is used to account for all financial resources except those require to be accounted for in another fund. 2. Capital Facilities Fund is use to account for resources received from developer impact fees assessed under the provisions of the California Environmental Quality Act. 3. J3uilding Fund is used to account for the acquisition of major governmental capital facilities and building from the sale of bond proceeds. 4. Born! Interest and Redemption Fund is used to account for the accumulation of resources for, and the repayment of, district bonds, interest and related costs. NON-MAJOR GOVERNMENTAL FUNDS fulecial Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. The District maintains five non-major special revenue funds: 1. Deferred Maintenance Fund is used for the purpose of major repair or replacement of District property. 2. Cafeteria Fund is used to account for revenues received and expenditures made to operate the District's cafeteria program. 3. Adult Education Fund is used to account for resources committed to adult education programs maintained by the District. A-25 MORGAN HILL UNIFIED SCHOOL DISTRlCT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 ------~ NOTE l- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Fund Accounting (Continued) Special Revenue Funds (Concluded) 4. Child Development Fund is used to account for resources committed to child development programs maintained hy the District. 5. Special Reserve Fund for Other T11an Capital Outlay is used to acc011.'1t for revenues reserved by the Board of Trustees for a specific program or project. .Qwjta)Proiccts Funds arc used to account for the acquisition and/or construction of all major capital assets. The District maintains two non-major capital project funds: 1. Mello-Roos Fund is used to ,iccount for the accumulation of resources received from the Mello-Roos Assessment District. 2. County School Facilities Fund is used to account for the deposit of funds received as part of the School Facilities Act of 1998 for the on-going and major maintenance of building programs under the jurisdiction of the Leroy F. Greene School Facilities Act of 1998. FIDUCIARY FUNDS: Expendable Trust Funds are used to account for assets held by the District as trustee. The District maintains one Scholarship Fund, which is used to provide financial assistance to students of the District. Agencv Funds are used to account for assets of others for which the District acts as an agent. The District maintains agency funds to account for the activities of the various student body clubs, the high school and both middle schools. The District maintains student body funds, which are used to account for the raising and expending of money to promote the general welfare, morale, and educational experience of the student body. The amounts reported for student body funds represent the combined totals of all schools v.ithin the District. A-26 MORGr'LN' HILL lJNlFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 1- SUMMA.RY OF SIGNlFJC,c\t\i'T ACCOillffING POLICIES (CONTINlJED) Budgets and Budgetarv Acco].l!lting Annual budgets are adopted on a basis consistent v.>ith generally accepted accounting principles for all governmental funds. By state law, the District's governing board must adopt a final budget no later than July l . A public hearing must be conducted to receive comments prior to adoption. The District's governing board satisfied these requirements. "These budgets are revised by the District's Board of Trustees and District Superintendent during the year to give consideration to unanticipated income and expenditures. Tl1e original and final revised are presented for the General Fund and Major Special Revenue Funds as required supplementary information in the financial statements. Formal budgetary integration was employed as a management control device during the year for all budgeted funds. The District employs budget control by minor object and by individual appropriation accounts. Expenditures cannot legally exceed appropriations by major object account. (See Note 3.) The District did not adopt budgets for the Bond Interest and Redemption Fund. F. Encumbrances Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated ,vhen the commitments are paid. All encumbrances are liquidated at June 30. G. Estimates The preparation of the financial statements in confonnity ,v:ith accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. A-27 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 1- SUMMARY OF SIGNIFICANT ACCOTJNTING POLICIES (CONTINUED) H. Assets. Liabilities and Eguitv 1. Deposits and In vestments Cash balances held in banks and in revolving funds are insured to $100,000 by the Federal Deposit Insurance Corporation. In accordance with Education Code Section 41001, the District maintains substantially all of its cash in the County Treasury. The county pools these funds 'i\ith those of other district~ in the county and invests the cash. These pooled funds are carried at cost, which approximates market value. Interest earned is deposited quarterly into participating fonds. Any investments losses are proportionately shared by all funds in the pool. The county is authorized lo deposit cash and invest excess funds by California Government Code Section 53648 et seq. 'fhe funds maintained by the county are either secured by federal depository insurance or are collateralized. Investments Valuation - In accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments andfor External Investment Pools, highly liquid market investments "ith maturities of one year or less at time of purchase are stated at amortized cost. /Vl other investments are stated at fair value. Market value is used as fair value for those securities for which market quotations are readily available. However, the District's financial statements do not reflect the fair value of investments as the differences between total investment cost and fair value has been determined to be immaterial. 2. Capital Assets Capital assets purchased or acquired with an original cost of $20,000 or more are reported at r,Jstorical cost or estimated historical cost. Contributed assets are reported at fair market value as of the date received. Additions, improvements, and oilier capital outlays that significantly extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed as incurred_ A-28 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FlNAi"!CIAL STATEMENTS JUNE 30, 2005 NOTE 1- SUM1'1ARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUl;ill H. Asse~.,.Liabilities an\i.r:',(Juitv (Continued) 2. Capital Assets Depreciation on ali assets is provided on the straight-line basis over the follov.ing estimated useful lives: Estimated Useful Exam oles Life in Years Land NIA Site improvements Paving, flagpoles, retaining walls, sidewalks, fencing, outdoor lighting 20 School buildings 50 Portable classrooms 25 HVAC systems Heating, ventilation and air conditions systems 20 Roofing 20 Interior construction 25 Carpet replacement 7 ElectricaliP!umbing 30 Sprinkler/fire system Fire suppression systems 25 Outdoor equipment Playground, radio towers, fuel tanks, pumps 20 Machinery & tools Shop & maintenance equipment, tools 15 Kitchen equipment Appliances 15 Custodial equipment Floor scrnbbers, vacuums, other 15 Science & engineering Lab equipment, scientific apparatus lO Furniture & accessories Classroom & other furniture 20 Business machines Fax, duplicating & printing equipment IO Copiers 5 Communication equipment Mobile, portable radios, non-computerfaed 10 Computer hardware PCs, printers, network hardware 5 Computer software Instructional, other short-term 5 to IO Computer software Administrative or long-term IO to 20 Audio visual equipment Projectors, cameras (still & digital) lO Athletic equipment Gymnastics, football, weight machines, wrestling mats 10 Musical instruments Pianos, strings, bra~s, percussion JO Library books Collections 5 to 7 Licensed vehicles Buses, other on-road vehicles 8 Contractors equipment Major off-road vehicles, front-end loaders, large tractors, mobile air compressor lO Grounds equipment Mowers, tractors, attachments 15 A-29 MORGA'I\! HILL UNIFIED SCHOOL DISTR1CT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 ------· ··---- ·--·· ··---·--·· ···---··--· NOTE J. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINlJED) H. Assets. Liabilities and Equity (Continued) 3. Deferred Revenue Cash received for federal and state special projects and programs is recognized as revenue to the extent that qualified expenditures have been incurred. Deferred revenue is recorded to the extent that cash received on specific projects and programs exceeds qualified expenditures. 4. Compensated Absences All vacation pay is accrued when incurred in the government-wide financial statements. A liability for these amounts is reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Accumulated sick leave benefits are not recognized as liabilities of the District. The District's policy is to record sick leave as an operating expense in the period taken, since such benefits do not vest, nor is payment probable; however, unused sick leave is added to t,'ie creditable service period for calculation of retirement benefits when the employee retires. 5. Long-Term Obligations In the govermnent-wide financial statements, Jong-term debt and other long-tenn obligations are reported as liabilities in the Statement of Net Assets. 6. Net Assets In the govemn1ent-wide financial statements, net assets are classified in the follo,.,,ing categories: Lrivested in Capital Assets, net of Related Debt - This an10unt consists of capital assets net of accumulated depreciation and reduced by outstanding debt that attributed to t,',e acquisition, construction, or improvement of the assets. Restricted Net Assets • This amount is restricted by external creditors, granters, contributors, laws or regulations of other governments. Unrestricted Net Assets · This an10unt is all net assets that do not meet the definition of "invested in capital assets, net of related debt" or "restricted net assets.I! A-30 MORGA.~ HILL UNIFIED SCHOOL D!STRJCT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE I- SU:tvl1v1ARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. Assets. Liabilities and Equitv (Continued) 7. Use of Restricted/Unrestricted Net Assets When an expense is incurred for purposes for which both restricted and unrestricted net assets are available, the District's policy is to apply restricted net assets first 8. J:y.nd Balance Reserves and Designations The District's fund balances at June 30, 2005 consisted of the following: Bnnd Interest Capital and Other GencraJ Facilities Building Redemption Go\'emmenta! Fund El!illl Fund _fund Furuu Total Reserved For: Revolving Fund $ 14,500 $ 6,000 $ 20,500 Stores Inventories 151,183 9,012 I 60,195 Prepaid Expenditures 376,525 376,525 LegaIJy Restricted Balances l,!85,180 l, I 85, 180 Debt Service $2,975,267 2,975,267 Unreserved: Designated for: Econornic Uncertainties 1,648,783 l,648,783 Other Program Carryovers 1, 767,267 l,767,267 Undesignated, Reponed in: General fund 11532 l l,532 Capital Projects Funds $1,618,935 $6,880,722 8,499,657 SpcciaJ Revenue funds ------$2,562,644 2.562.644 Total Fund Balances ~5 l~.210 $.L6JK91~ 56,8.SQ.?:g $2.9J5,2(il $25Z:Z 6~6 ~19207-2~ Reser,ations of the ending fund balance indicate the portions of fund balance not appropriable for expenditure or amounts legally segregated for a specific future use. The reserve for revolving fund and stores inventory reflects the portions of fund balances represented by revolving fund cash and stores inventory, respectively. These amounts are not available for appropriation and expenditure at the balance sheet date. Designations of the ending fund balance indicate tentative plans for financial resource utilization in a future period. A-31 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS mNE30,2005 NOTE l- SUMMARY OF SlGNIFICANT ACCOUNTING POLICIES (COJ:-.i'TINUED) H. Assets, Liabilities and Equity (Concluded) 9 . Revenue Lirnit/Propertv Tax The District's revenue limit is received from a combination of local property taxes, state apportionments, and other local sources. The county is responsible for assessing, collecting, and apportioning property taxes. Taxes are levied for each fiscal year on taxable reaI and personal property in the county. The levy is based on the assessed values as of the preceding January 1, which is also the lien date. Property taxes on the secured roll are due on November 1 and February J, and taxes become delinquent after December IO and April 10, respt->ctively. Property taxes on the unsecured roll are due on the lien date (January I), and become delinquent if unpaid by August 31. Secured property taxes are recorded as revenue when apportioned, in the fiscal year of the levy. The county apportions secured property tax revenue in accordance with the alternate method of distribution prescribed by Section 4 705 of the California Revenue and Taxation Code. Tius alternate method provides for crediting each applicable fund with its total secured taxes upon completion of the secured tax roll - approximately October l of each year. Tbe County Auditor reports the amount of the District's allocated property tax revenue to the California Department of Education. Property taxes are recorded as local revenue limit sources by the District. The California Department of Education reduces the District's entitlement by the District locaI property tax revenue. The balance is paid from the state General Fund, and is known as the State Apportionment. The District's Base Revenue Limit is the amount of general purpose tax revenue, per average daily attendance (ADA), that the District is entitled to by law. Tius amount is multiplied by the second period ADA to derive the District's total entitlement. A-32 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 1- SUMMARY OF SIGNIFICANT ACCOlJNTING POLICIES (CONCLUDED) 1. hn.12!ementation of New GASB Pronouncements The District adopted new accounting standards in order to confonn to the following Governmental Accounting Standards Board Statements: Statement No. 40, Deposit and Investment Risk Disclosures GASB Statement No. 40 addresses selected issues and amends GASB Statements No. 3, Deposits with Financial Institutions. Investments, (including Repurchase Agreements), and Reverse Repurchase Agreements. The Statement address common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. The Statement requires certain disclosures of investments that have fair values that are highly sensitive to ch,mges in interest rates. NOTE 2 - CASH AND INVESTlv1E'NTS A. Cash 'fl1e District had the following cash at June 30, 2005: Credit Fair Quality Value RatiI11t Cash on Hand and in Bank $ 520,021 $ 520,02! Not Rated Cash in Revolving Fund 20,500 20,500 Not Rated Cash in County Treasury 22.303.390 22.352.566 Not Rated Total Cash $22.843,911 $_22,893.087 Cash on Hand. In Banks and in Revolving Fund Cash balances in banks, and revolving funds are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). These amounts are held within various financial institutions. As of June 30, 2005, the carrying amount of the District's accounts was $420,021, of which $78,589 was not collateralized or insured v..'ith securities held by the pledging financial institution in the District's name as discussed in the following: A-33 MORGAN I-IlLL UNIFIED SCHOOL DISTRICT NOTES TO FINAi1\JCIAL STA IB\1ENTS JUl'{E 30, 2005 NOTE 2 • CASH AND INVESTMENTS (CONTfl\<'UED) A. Cash (Concluded) Cash on Hanoi In Banks and in Revolving Fund (Concluded) The California Government Code requires California banks and savings and loan associations to secure the District's caqh deposits by pledging securities as collateral. This Code states that collateral pledged in this manner shall have the effect of perfecting a security interest in such collateral superior to those of a general creditor. Thus, collateral for cash deposits is considered to be held in the District name. According to California law, the market value of pledged securities ,vith banking institutions must equal at least 110% of the District cash deposits. California law also allows institutions to secure District deposits by pledging first trust deed mortgage notes having a value of 150% of the District's total cash deposits. 'The District may waive collateral requirements for cash deposits, which are fully insured up to $100,000 by the Federal Deposit insurance Corporation. (The District, however, has not waived the collateralization requirements.) The District follows the practice of pooling cash and investments of all funds, except for funds required to be held by fiscal agents under the provisions of bond indentures. Interest income earned on pooled cash and investments is allocated on a quarterly basis to the various funds based on average daily cash and investment balances. Interest income from ca9h and investments .,.,ith fiscal agents is credited directly to the related fund. Cash in County Treasury In accordance vvith Education Code Section 41001, the District maintains substantially all of its cash \,iih tl1e Cmmty Treasury as part of the common investment pool, which totaled $22,352,566 as of June 30, 2005. The fair market value of this pool as of ihat date, as provided by the pool sponsor, was $22,303,390. The District is considered to be an involuntary participant in the external investment pool. Interest is deposited into participating funds. The county is restricted by Government Code Section 53635, pursuant to Section 5360!, to invest in time deposits, U.S. government securities, state registered warrants, notes or bonds, State Treasurer's investment pool, bankers' acceptances, commercial paper, negotiable certificates of deposit, and repurchase or reverse repurcha<;e agreements. A-34 MORGAN HILL UNIFIED SCHOOL DISTRJCT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 2 - CASH A." B. Summarv of Cash and Investments The following is a summary of cash and investments at June 30, 2005: Fiduciary Funds Governmental Statement of Activities Net Assets ~22.468,747 $ 424.340 $22.893,0.87 C. Risk Disclosures Custodial credit risk is the risk that, in the event of a bank failure, the District's deposits might not be recovered. The District has not adopted a deposit policy for custodial credit risk. As of June 30, 2005, $78,589 of the $420,021 were exposed to custodial credit risk as follows: Uninsured and uncollateralized D. Interest Rate Risk As a means of limiting its exposure to fair value losses arising from rising interest rates, the District's investment policy required that at least 30% of the District's investment portfolio mature in less than one year. Additional limitations are that the average maturity of the investment portfolio v.ill not exceed three years, and no investment will have a maturity of more than five years from its date of purchase. At June 30, 2005, the District had the following investment maturities: Investment Maturities (In Years) Investment Type Fair Value Less than l l to 2 2 to 3 3 to 4 County Treasury $2?)03.39Q $17,918543 $2,138.895- $ 695,8~ $1.550_,,{LSti NOTE 3 - EXCESS OF EXPENDITURES OVER APPROPRIATIONS As of June 30, 2005 there were no excess of expenditures over appropriations in individual funds. A-35 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FIN,\1'\JCIAL STATEMENTS JUNE 30, 2005 Accounts receivable at June 30, 2005 consist of the following: Bond Interest and All Other General Capital Building Redemption Governmental Fund Facilities Fund Fund Funds Total Federal Government Categorical J.,jd Prcg_!"am $ 514335 $ 335.375 $ 849,710 State Goverr..ment Revenue Limit 7,181 7,181 Categorical Aid Programs 448,642 34,293 482,935 Lottery 566,140 566,140 Other 115.796 ll57% Total State Government l,137,759 34,293 l,172,052 Local Government 147,559 147,559 Interest l 17,195 $ 16,485 $ 58,893 $7,771 $ 16,063 216,407 Miscellaneous 76,260 --·------·- Total Accounts Receivable ll.9..23, LQl! L_~5. LJt5J;JJ l:1,4JS~,2~~ NOTE 5 · INTERFlND TRAi"ISACTIONS Interfund transactions are reported as either loans, services provided, reimbursements, or transfers. Loans a.re reported as interfund receivables and payables, as appropriate, and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures/expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers among governmental or proprietary funds are netted as part of the reconciliation to the government-wide financial statements. A-36 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 5 - lNTERFill Interfund Transfers lnterfund transfers consist of operating transfers from funds receiving revenue to funds through which the resources are to be expended. Interfund transfers for the 2004-2005 fiscal year were as follov.'S: . Funds Transfers Out General Fund $ 136,957 $ 327,861 Capital Facilities Fund !36,957 Building Fund 2,200,177 Non-Major Goverrm1ental Funds County Schoo! Facilities 1,610,836 Deferred Maintenance 327,861 Mello-Roos Fund 589.341 Total $2.§~.995 ~2~ti64.99~ Transfer of $327,861 from Lhe General Fund to the Deferred Maintenance Fund to support State match requirements. Transfer of $136,957 from the Capital Facilities Fund to the General Fund reflected $77,905 for administrative fees and S59,m2 for off-site safety improvements. Transfer of $1,610,836 from the County School Facilities Fund to the Building FUlld for modernization funds received for the Burnett Elementary, Machado Elementary, San :Martin Elementary 2.nd Los Paseos Multi-Purpose Room addition. Transfer of $589,341 from the Mello-Roos Fund to the Building fund for the Los Pa,eos Multi-Purpose Room addition. A-37 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 5 - INTERFUND TRANSACTIONS (CONCLUDED) Interfund Receivables/PayabJes (Due Fromffiue To) Individual fund interfund receivable and payable balances at June 30, 2005 are as follow,: Interfund lnterfund Receivable0~ Pavables General Fund $ 41,352 $ 6,293 Building Fund 4,266 l,l 60 Non-Major Governmental Funds: Adult Education Fund 12,284 Child Development Fund 878 Cafeteria Fund 6,797 27,534 Mello-Roos Fund 1,981 County School Facilities Fund ____2.285 Totals S 52ALS NOTE 6 - CAPITAL ASSETS AND DEPRECIATION Capital asset activity for the year ended June 30, 2005, is shown below: Balance Balance July l, 2004_ Additions D~9-uctions June 30. 2005 Capital assets, note being depreciated: Land $ 724,021 $ 724,021 Work in progress 52,789.135 $28.672,676 $ 2.969 024 78.492.787 Total capital assets, not being depreciated 53.513.156 . 28,672.676 2,969,024 7\l_:'16.808 Capital assets being depreciated: Buildings !08,689,981 2,991,894 111,681,875 Equipment 3,!35.895 326.665 8l.l70 3 381.390 Tota! capital assets, being depreciated 111,825.876 3.31&.559 81.l 70 115.063.265 Less accumulated depreciation for: Buildings 29,972,337 2,283,037 32.255,374 Equipment 2 534 568 143.554 _..]_U70 2.596.952 Total accumulated depreciated 32.506,905 2.426.591 8l.!70 34.852.326 Total capita! asse'cS, being depreciated, net 79.318.971 89!.968 ..J! 80210.939 Govern.~enta] activities capital assets, net fil n s1;?,,12.1 $2!L&l ,li44 li.2.26,2,.!)M $.)S.2.421~7.,G A-38 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JlJNE 30, 2005 NOTE 6 · C1\PlTAL ASSETS M1) DEPRECIATION (CONCLUDED) Depredation expense was charged to governmental activities as follows: Instruction $1,897,107 School Site Administration 126,183 Food Services 161,854 All Other General Administration 194,128 Plant Services Total NOTE 7 GENERAL OBLJGATION BONDS The Morgan Hill Unified School District General Obligation Bonds, Election of 1999, Series 2000 (the "Series 2000 Bonds"), in the aggregate principal amount of $38,000,000, were issued by the County of Santa Clara on behalf of the District. The Series 2000 Bonds were authorized at a special election of the registered voters of the District held on June 8, 1999, at which more than two-thirds of the persons voting on the proposition voted to authorize the issuance and sale of not to exceed $72,500,000 principal amount of general obligation bonds to finance the acquisition and construction of school facilities for the District. The Morgan Hill Unified School District General Obligation Bonds, Series 2002 (the "Series 2002 Bonds"), in the aggregate principal amount of $34,497,753.80 were issued by the County of Santa Clara on behalf of the District to finance the construction of new high school, renovations to the existing Live Oak High School, and the construction of a new elementary school. This consists of $28,210,000 in Current Interest Series Bonds and $6,287, 753.80 in Capital Appreciation Bonds. The Bonds are payable solely from ad valorem property taxes levied and collected by the County of Santa Clara. The Board of Supervisors of the County has power and is obligated to annually levy ad valorem taxes for the payment of interest on, and principal of, upon all property subject to taxation by the District without limitation of rate or amount (except certain personal property which is taxable at limited rates). A-39 MORGAN HILL UNIFIED SCHOOL DISTRJCT NOTES TO FINANCIAL ST ATEMENTS JTJNE 30, 2005 ·---···------NOTE 7 - .QENERbL OBLIGATION BONDS {CONCLUDED) The outstanding general obligation bonded debt of the Morgan Hill Unified School District as of June 30, 2005 is: Accreted Maturity Amount of Interest Redeemed Date of Interest Date Original Outstanding Current Current Outstanding Issue Rate (August 1) Issue Jyjy.1, 2004 .YeEJI Year J1me 30, 20..92 2000 4.6%-5.5% 2025 $38,000,000 $37,580,000 $ 320,000 $37,260,000 2002 3.5%-5.25% 2020 28,210,000 28,210,000 710,000 27,500,000 2002 5.5%-5.6% 2026 6.287.754 -1Jj_2,933 $ 403.21 J ---- _ _Ll56.144 Total $72,421,75~ in.9:ibin $._4Q3.2.U Sl.,QJQ,,Ql)_Q ,l;7:fdlfi.l±:l A. Current Interest Bonds The annual requirements to amortize the 2000 general obligation bonds payable, outstanding as of June 30, 2005, are as follows: Year Ended June 30 Principal Interest Total 2006 $ 395,000 $ l,987,852 $ 2,382,852 2007 480,000 l,967,727 2,447,727 2008 570,000 1,943,577 2,513,577 2009 665,000 l,915,172 2,580,172 2010 770,000 1,882,167 2,652,167 2011-2015 5,640,000 8,716,698 14,356,698 2016-2020 9,575,000 6,751,367 16,326,367 2021-2025 15,260,000 3,316,500 18,576,500 2026 3.905.000 107 388 4,012,388 Totals ,$37,260.Q.QQ .$2§,5.88A48. wM!L~ A-40 MORGAN HILL lJNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL ST A TEMENTS JUNE 30, 2005 NOTE 7 - GENERAL OBLIGATION BONDS (CQNTINUED) A. £:urrent Interest Bonds The annual requirements to amortize the 2002 General Obligation Bonds payable, outstanding as of June 30, 2005, are as follows: Year Ended Iune30 Principal Interest Total 2006 $ 790,000 $ 1,307,583 $ 2,097,583 2007 875,000 l ,278,445 2,153,445 2008 965,000 1,246,245 2,211,245 2009 1,060,000 l,210,808 2,270,808 2010 1,160,000 1,163,258 2,323,258 2011-2015 7,770,000 4,827,967 12,597,967 2016-2020 l l,865,000 2,452,210 14,317,210 2021 --1,ill 5,000 79.145 Totals $2L500.000 $1.3.565.66] !4J,06\Q6l B. The outstanding Series 2002 Capital Appreciation Bonds at June 30, 2005 is as follows: Amount of Date Original of Interest Maturity Issue Accreted Outstanding Issue Rate 0/o- Date (PrincioaQ IDJ.erest June 30, 2005 2002 5.50% 2022 s l, 135,948 $ 226,087 $ l,362,035 2002 5.53~0 2023 1,097.428 220,]98 1,317,626 2002 5.56% 2024 l,062,03 I 214,084 l,276,115 2002 5.58% 2025 1,028.614 208,713 1,237,327 2002 5.60% 2026 996,134 202,674 1.198,808 2002 5.60% 2027 967 599 196.634 l.!64,233 Totals L.!i~~:U.Zi4 $______] .2(18 :l.9,2 ~ 7,i5.6.l41 The 2002 Capital Appreciation Bonds mature through 2027 as follows: Year Ended June 30 Principal Interest Total 2022 $ 1, 135,947 $ 2,124,053 $ 3,260,000 2023 1,097,428 2,247,572 3,345,000 2024 l,062,031 2,377,969 3,440,000 2025 1,028,614 2,506,386 3,535,000 2026 996,135 2,637,504 3,633,639 2027 967.599 2.762.401 3,730.000 Totals $ 6.787.754 $1.1.655.885 $2Q.213.639 A-41 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 ------·------NOTE 8 - LONG-TERM DEBT A schedule of changes in long-term debt for the year ended June 30, 2005 is shown below: Due Balance Balance Within One July 1.2004 AddjJiQ!1ll Deductions June 30, 2005 Year General Obligation Bonds $72,077, 754 $1,030,000 $71,047,754 $1,185,000 Accreted Interest on General Obligation Bonds 865,179 $ 403,211 l,268,390 0 Compensated Absences 237,715 53.819 291,534 291,534 Capital Lease Obligations 1.104 ___ _Ll!:/4 __ .. ___ 0 Totals $11J.8.L152 LJ2c7-J13Q $1.0ll,,LQ:! ,W,.60Z,67!! $ LA 1.6,i:J:! The Dis1rict has chosen not to report Other Postemployment Benefits as long-term liabilities (see Note 9). Therefore, this liability is not included in the schedule above. The accrued vacation will be paid by the General Fund. Payments on the general obligation bonds are made by the Bond Interest and Redemption Fund with local revenues. NOTE 9 - OTHER POST EMPLOYMENT BENEFITS The District provides an early retirement plan whereby the District will continue retirees' health benefits until age 65 for individuals that qualify. To qualify for the plan, certificated and administrative employees must be at least 55 years old and classified employees must be at least 50 years old and have been an employee of the District for ten continuous years immediately proceeding retirement. Under this plan, the District has agreed to continue to provide these benefits without any additional performance from the retirees. On June 30, 2005, 11 l retirees met these eligibility requirements at a cost of $897,758 for 2004-2005. The District records the cost for postemployment health benefits when there is a cash outlay (the pay-as-you-go method) rather than when they are earned by active employees (the actuarial method). The estimated cost based upon current participants is $2,445,213. If the costs were recognized by the actuarial method, they would be significantly greater. In addition to the benefits described above, certain qualified retirees are included in the single premium annuity contract with the Principal Life Insurance Company. The total cost to the District for the contract ($1,870,785) is payable in five annual payments of $374, 157 beginning in 2003-2004. There are currently 34 retirees identified as qualified to receive benefiis under this plan. A-42 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE l 0-EMJ'LOYEE RETIREMENT SYSTEMS Qualified employees are covered under cost-sharing multiple-employer contributory retirement plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System (STRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). A. State Teachers' Retirement Svstem (STRS) I'lan Description. The Morgan Hill Unified School District contributes to the State Teachers' Retirement System (STRS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by STRS. The plan provides retirement, disability, and survivor benefits to beneficiaries. Benefit provisions are established by state statutes, as kgislatively amended, within the State Teachers' Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the SIRS annual financial report may be obtained from the STRS, 7667 Folsom Boulevard, Sacramento, California 95826. Funding Policy. Active plan members are required to contribute 8.0% of their salary and the Morgan Hill Unified School District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers' Retirement Board. The required employer contribution rate for fiscal year 2004-2005 was 8.25% of annual payroll. The contribution requirements of the plan members are established by state statute. The Morgan Hill Unified School District's contributions to STRS for the fiscal year ending June 30, 2005, 2004, and 2003 were $2,586,316, $2,371,177 and $2,568,240, respectively, and equal 100% of the required contributions for each year. B. Caiifomia Public Emplovees Retirement Svstem (CalPERS) Plan Description. The Morgan Hill Unified School District contributes to the School Employer Pool under the California Public Employees' Retirement System (Ca!PERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by Ca!PERS. The plan provides retirement and disability benefits, annual cost-of-li,ing adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, ·within the Public Employees' Retirement Law. CalPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS' annual financial report may be obtained from the Ca!PERS Executive Office -400 P Street ·-Sacramento, CA 95814. A-43 MORGAN HILL UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE l O~ EMPLOYEE RETIREMENT SYSTEMS (CONCLUDED) B. California P1.J.li]ic Employees Retirement System (CalPERS) (Concluded) Funding Policy. Active plan members are required to contribute 7.0%, which the District pays for union members, of their salary and the Morgan Hill Unified School District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate ate those adopted by the Ca!PERS Board of Administration. The required employer contribution rate for fiscal 2004-2005 was 9.952% of annual payroll. The contribution requirements of the plan members are established by State statute. The Morgan Hill Unified School District's contributions to Ca!PERS for the fiscal year ending June 30, 2005, 2004 and 2003 were $759,441, $789,176 and $231,370, respectively and equal l 000/o of the required contributions for each year. C. Social Security As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (STRS or PERS) must be covered by social security or an alternative plan. The District has elected to use Social Security. D. On Behalf Payment The State of California makes contributions to STRS and PERS on behalf of the District These payments consist of State General Fund contributions to STRS and contributions to PERS for the year ended June 30, 2005. Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures, however, guidance received from the California Department of Education advises local education agencies not to record these amounts in the Annual Financial and Budget Report. Tnese amounts also have not been recorded in these financial statements. NOTE 11 - STUDENT BODY FUND The Student Body Funds often engage in activities which involve cash transactions. These transactions are not subject to adequate internal accounting control prior to deposits being recorded in the bank accounts. It has been determined on a cost benefit basis that providing increased internal control in this area does not justify the additional costs that would be necessary to control receipts prior to the point of deposit. A-44 MORGAN IBLL UN1FIED SCHOOL DISTRlCT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 NOTE 12 - COMMIIMENTS AND CONTINGENCIES State and Federal Allowance, Award. and Grmts The District has received state and federal funds for specific purposes that are subject to review and audit by the gr.J11tor agencies. If the review or audit discloses exceptions, the District may incur a liability to grantor agencies. NOTE i3 - JOINT VENTURES The District participates in a joint power authority ("JPA"), the Santa Clara County Schools Insurance Group ("SIG"). The relationship between the District and the JP A is such that the JPA is not a component unit of the Morgan Hill Unified School District for financial reporting purposes. Santa Clara County Schools Insurance Group - The JPA arranges for and provides workers' compensation, property and liability, and employee benefits insurance for its thirty member school districts. Each member school district has a representative on the Joint Powers Board which governs the mai,agcment and financing of JPA activities. Each member District pays a premium commensunite with the level of coverage requested and shares surpluses and deficits proportionate to their participation in the JPA. NOTE 14- SUBSEQUENT EVENTS Tax Revenue Anticipation Notes On July 6, 2005, the District issued $7,920,000 in tax revenue anticipation notes at a premium of $100,109. The TRANS are a general obligation of the District and are payable from revenues and ca~h receipts to be generated by the District. There are no contractual obligations related to the issuance other than the TRANS agreement. The notes mature on July 6, 2006 and bear interest at 2.60%. Proceeds from the notes can be drawn upon during the year if cash shortages arise. A-45 MORGAN HILL UNIFIED SCHOOL DISTRICT STATEMENT OF REVE?--.1JES, EXPENDITURES, AND CHA,"IGES IN FUND BALANCES - BUDGET (NON-GAAP) AND ACTUAL GENER.AL FUND FOR THE FISCAL YEAR ENDED JUN"E 30, 2005 Bud0 eted Amounts Variance with Actual Final Budget (Budgetary Positive- Oricinal Final Basis) {Negative) REVENUES Revenue Limit Sources: State Apportionments $ 2,721,433 $ 5,307,888 $ 5,3 I0,888 $ 3,000 Local Sources 37.972.312 36547 360 36.547.360 Total Revenue Limit 40,693,745 41,855,248 41,858).48 3,000 Federal Revenue 2,919,267 3,239,665 2,930,334 (309,331) Other State Revenue 7,504,293 8,809,981 8,467,088 (342,893) Other Local Revenue 7,902.574 3.812.111 2. 767.183 (1.044.928) Total Revenues 54.019.879 57. 717.005 56.0?2.853 (L694.152) EXPENDITURES Certificated Salaries 28,468,961 29, 130,984 28,982,063 148,921 Classified Salaries 7,733,300 8,015,918 7,746,579 269,339 Employee Benefits 9,019,061 9,245,320 9,155,797 89,523 Books and Supplies 2,417,005 3,939,739 2,127,338 l,812,401 Services and Other Operating Expenditures 5,047,932 6,499,249 5,025,429 l .4 73,820 Capital Outlay 83,290 283,012 28,962 254,050 Debt Sen~ce: Principal Retire,rn:nt l, 104 1,104 ], 104 Interest and Fiscal Charges 42 42 42 Other Outgo 1.488.298 l.683,969 l.564.258 119.?ll Total Expenditures 54.258.993 58 799,337 54.631.572 4.167.765 Excess of Revenues Over (Under) Expenditures (239.114) ( l.082.332) 1.391,281 2.4 73.613 Other Financing Sources (Uses): Operating Transfers In 105,480 136,957 !36,957 Operating Transfers Out (300.000) (327,861} (321 861) 0 Total Other Financing Sources (Uses) (194.520) (327.8611 (190.904) ]36.957 Excess of Revenues and Other Sources Over (Under) Expenditures and Other Uses (433,634) (l,410,193) l,200,377 2,6 I0,570 Fund Balances - July l, 2004 3.954.593 3.954.593 3.954.593 0 Fund Balances - June 30, 2005 li 3,520,959 li 2,544400 $ 5 15:4 970 $ 2 610 j70 TI-IE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS A-46 APPENDIX B FORM OF OPINION OF BOND COUNSEL August 22, 2006 Board of Education Morgan Hill Unified School District Members of the Board of Education: We have examined a certified copy of the record of the proceedings relative to the issuance and sale of $76,954,040.30 Morgan Hill Unified School District 2006 General Obligation Refunding Bonds (the "Bonds"). As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation. Based on our examination as bond counsel of existing law, certified copies of such legal proceedings and such other proofs as we deem necessary to render this opinion, we are of the opinion, as of the date hereof and under existing law, that: I. Such proceedings and proofs show lawful authority for the issuance and sale of the Bonds pursuant to Articles 9 and 11 of Chapter 3 of Part I of Division 2 of Title 5 of the California Government Code, and a resolution of the Board of Education of the District (the "Resolution"). 2. The Bonds constitute valid and binding general obligations of the District, payable as to both principal and interest from the proceeds of a levy of ad valorem taxes on all property subject to such taxes in the District, which taxes are unlimited as to rate or amount. 3. Under existing statutes, regulations, rulings and judicial decisions, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, such interest may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of corporations. 4. Interest on the Bonds is exempt from State of California personal income tax. 5. The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Bonds constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bondowner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bondowner will increase the Bondowner's basis in the applicable Bond. Original issue discount that accrues to the Bondowner is excluded from the gross income of such owner for federal income tax purposes, is B-1 not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. 6. The amount by which a Bondowner's original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity ( or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Code; such amortizable Bond premium reduces the Bondowner's basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bondowner realizing a taxable gain when a Bond is sold by the Bondowner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Bondowner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Bond premmm. The opinions expressed herein may be affected by actions taken ( or not taken) or events occurring ( or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Resolution and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. No opinion is expressed herein as to the exclusion from gross income of interest (and original issue discount) for federal income tax purposes with respect to any Bond if any such action is taken or omitted based upon the advice of counsel other than ourselves. Other than expressly stated herein, we express no opinion regarding tax consequences with respect to the Bonds. The opinions expressed herein as to the exclusion from gross income of interest ( and original issue discount) on the Bonds are based upon certain representations of fact and certifications made by the District and others and are subject to the condition that the District complies 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 to assure that such interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted to comply with all such requirements. The rights of the owners of the Bonds and the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted to the extent constitutionally applicable and their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. Respectfully submitted, Stradling Y occa Carlson & Rauth B-2 APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the "Disclosure Certificate") is executed and delivered by the Morgan Hill Unified School District (the "District") in connection with the issuance of $76,954,040.30 2006 General Obligation Refunding Bonds (the "Bonds"). The Bonds are being issued pursuant to a Resolution of the District dated June 13, 2006 (the "Resolution"). The District covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters in complying with S.E.C. Rule 15c2-12(b)(5). SECTION 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. "Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. "Dissemination Agent" shall mean initially the District, or any successor Dissemination Agent designated in writing by the District (which may be the District) and which has filed with the District a written acceptance of such designation. "Holders" shall mean registered owners of the Bonds. "Listed Events" shall mean any of the events listed in Section 5( a) of this Disclosure Certificate. "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. The National Repositories currently approved by the Securities and Exchange Commission is located at the web site http://www.sec.gov/consumer/nrmsir.htm. "Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. "Repository" shall mean each National Repository and each State Repository. "Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "State" shall mean the State of California. C-1 "State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Certificate, there is no State Repository. SECTION 3. Provision of Annual Reports. (a) The District shall, or shall cause the Dissemination Agent to, not later than nine months following the end of the District's fiscal year (which shall be April I of each year, so long as the District's fiscal year ends on June 30), commencing with the report for the 2005-06 fiscal year, provide to the Participating Underwriter and each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f). (b) Not later than thirty (30) days (nor more than sixty (60) days) prior to said date the Dissemination Agent shall give notice to the District that the Annual Report shall be required to be filed in accordance with the terms of this Disclosure Certificate. Not later than fifteen (15) Business Days prior to said date, the District shall provide the Annual Report in a format suitable for reporting to the Repositories to the Dissemination Agent (if other than the District). If the District is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the District shall send a notice to each Repository in substantially the form attached as Exhibit A with a copy to the Dissemination Agent. The Dissemination Agent shall not be required to file a Notice to Repositories of Failure to File an Annual Report. ( c) The Dissemination Agent shall file a report with the District stating it has filed the Annual Report in accordance with its obligations hereunder, stating the date it was provided and listing all the Repositories to which it was provided. SECTION 4. Content of Annual Reports. The District's Annual Report shall contain or include by reference the following: I. The audited financial statements of the District for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District's audited fmancial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited fmancial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. 2. Material fmancial information and operating data with respect to the District of the type included in the Official Statement in the following categories (to the extent not included in the District's audited financial statements): (a) The District's approved annual budget for the then-current fiscal year; C-2 (b) Assessed value of taxable property in the District as shown on the most recent equalized assessment role; ( c) If the County no longer includes the tax levy for payment of the Bonds in its Teeter Plan, the property tax levies, collections, and delinquencies of the District for the most recently completed fiscal year; and ( d) Top ten property owners in the District for the then-current fiscal year, as measured by secured assessed valuation, the amount of their respective taxable value, and their percentage of total secured assessed value, if material. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference. SECTION 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material: I. principal and interest payment delinquencies. 2. non-payment related defaults. 3. modifications to rights of Bondholders. 4. optional, contingent or unscheduled bond calls. 5. defeasances. 6. rating changes. 7. adverse tax opinions or events affecting the tax-exempt status of the Bonds. 8. unscheduled draws on the debt service reserves reflecting financial difficulties. 9. unscheduled draws on the credit enhancements reflecting financial difficulties. 10. substitution of the credit or liquidity providers or their failure to perform. 11. release, substitution or sale of property securing repayment of the Bonds. (b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall as soon as possible determine if such event would be material under applicable federal securities laws. (c) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the District shall promptly file a notice C-3 of such occurrence with the Repositories or provide notice of such reportable event to the Dissemination Agent in format suitable for filing with the Repositories. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Resolution. The Dissemination Agent shall have no duty to independently prepare or file any report of Listed Events. The Dissemination Agent may conclusively rely on the District's determination of materiality pursuant to Section 5(b ). SECTION 6. Termination of Reporting Obligation. The District's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5( a). SECTION 7. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent ( or substitute Dissemination Agent) to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign upon fifteen (15) days written notice to the District. Upon such resignation, the District shall act as its own Dissemination Agent until it appoints a successor. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the District pursuant to this Disclosure Certificate and shall not be responsible to verify the accuracy, completeness or materiality of any continuing disclosure information provided by the District. The District shall compensate the Dissemination Agent for its fees and expenses hereunder as agreed by the parties. Any entity succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor Dissemination Agent without the execution or filing of any paper or further act. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; ( c) The amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds; and (d) No duties of the Dissemination Agent hereunder shall be amended without its written consent thereto. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the District shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type ( or in the case of a change of accounting principles, on the presentation) of fmancial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed C-4 in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(a), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the fmancial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Certificate any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an event of default under the Resolution, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance. SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate. The Dissemination Agent acts hereunder solely for the benefit of the District; this Disclosure Certificate shall confer no duties on the Dissemination Agent to the Participating Underwriter, the Holders and the Beneficial Owners. The District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's gross negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. The Dissemination Agent shall have no liability for the failure to report any event or any financial information as to which the District has not provided an information report in format suitable for filing with the Repositories. The Dissemination Agent shall not be required to monitor or enforce the District's duty to comply with its continuing disclosure requirements hereunder. SECTION 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. Date: August 22, 2006 MORGAN HILL UNIFIED SCHOOL DISTRICT By: Deputy Superintendent, Business Services C-5 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name of District: MORGAN HILL UNIFIED SCHOOL DISTRICT Name of Bond Issue: 2006 General Obligation Refunding Bonds Date oflssuance: August 22, 2006 NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Certificate relating to the Bonds. The District anticipates that the Annual Report will be filed by ______ MORGAN HILL UNIFIED SCHOOL DISTRICT By [form only; no signature required] C-6 APPENDIXD ECONOMY OF THE CITY OF MORGAN HILL AND SANTA CLARA COUNTY The following economic data for the City ofMorgan Hill (the "City") and Santa Clara County (the "County") are presented for information purposes only. The Bonds are not a debt or obligation of either the City or the County. General The County is one of the nine counties in the greater metropolitan San Francisco Bay Area. The County is the home of "Silicon Valley," the birthplace of the semiconductor and computer industries in the United States. The economies of the City and the County are based largely on the primary and secondary businesses associated with the computer and electronics industry. Population The following table lists population figures for the City of Morgan Hill, the County of Santa Clara and the State at various intervals during the forty-six year period beginning in 1960. Population Estimates Calendar Years 1960 through 2006 Calendar City of County of State of Year<1J Morgan Hill Santa Clara California 1960 NIA 658,700 15,717,204 1970 5,579 1,065,313 20,039,000 1980 17,060 1,295,071 23,782,000 1990 23,928 1,497,577 29,828,496 1991 NIA NIA NIA 1992 NIA NIA NIA 1993 25,650 1,542,100 31,150,000 1994 26,200 1,558,500 31,418,000 1995 27,000 1,568,200 31,617,000 1996 28,100 1,586,400 31,387,000 1997 29,300 1,612,700 32,207,000 1998 30,750 1,638,300 32,657,000 1999 31,850 1,658,000 33,140,000 2 2000< ) 33,586 1,682,585 33,873,086 3 2001 ( ) 34,169 1,701,317 34,441,561 2002 34,729 1,715,301 35,088,671 2003 34,885 1,726,791 35,691,472 2004 35,630 1,738,374 36,245,016 2005 36,279 1,752,653 36,728,196 2006 37,091 1,773,258 37,172,015 (]) As of January 1. (2) As of April 1, 2000. (3) 2001-2006 with 2000 DRU Benchmark. Source: California Department of Finance and the U.S. Census Bureau. D-1 Industry aud Em ploymeut With respect to the County and the State, the following table summarizes the civilian labor force, employment and unemployment for the calendar years 2000 through 2005. SAN JOSE METROPOLITAN STATISTICAL AREA (SANTA CLARA COUNTY) Civiliau Labor Force, Employmeut aud Uuemploymeut Caleudar Years 2000 through 2005 Auuual Averages Unemployment Year Area Labor Force Em2loyment Unem2loyment Rate 2000 Santa Clara County 967,100 936,100 31,000 3.2% California 16,587,500 16,024,300 833,200 4.9 2001 Santa Clara County 967,100 917,200 49,900 5.2 California 17,152,100 16,220,000 932,100 54 2002 Santa Clara County 918,000 839,900 78,100 8.5 California 17,330,700 16, 168,200 1, 162,500 6.7 2003 Santa Clara County 877,100 802,200 74,900 8.5 California 17,403,900 16,212,600 1,191,300 6.7 2004 Santa Clara County0 > 854,300 797,000 57,300 6.7 Califomia0 > 17,499,600 16,407,900 1,091,700 6.2 2005 Santa Clara County 848,700 801,700 47,000 5.5 California 17,695,600 16,746,900 948,700 54 Cl) The methodologies for calculating labor force data was changed in 2005, starting with the year 2004. Previously released data is not comparable to the new data March 2005 benchmark. Data are not seasonally adjusted. Source: U.S. Department of Labor-Bureau of Labor Statistics, California Employment Development Department. D-2 The following table shows the annual average industry employment for Santa Clara County between 2001 and 2005. ANNUAL AVERAGE INDUSTRY EMPLOYMENT San Jose-Sunnyvale-Santa Clara MSA (2001-2005) 2001 2002 2003 2004 2005 Farm 7,000 6,900 6,600 6,700 6,400 Natural Resources and Mining 200 200 200 100 200 Construction 49,900 44,400 41,600 43,000 44,300 Manufacturing 247,600 208,500 182,800 174,200 171,100 Wholesale Trade 41,200 36,200 34,100 34,500 35,600 Retail Trade 91,000 86,000 83,600 82,900 83,400 Transportation, Warehousing and Utilities 16,600 15,200 14,300 13,500 13,200 Information 42,000 34,300 31,400 32,600 34,700 Financial Activities 35,700 35,600 35,100 35,400 36,200 Professional and Business Services 204,500 167,300 160,300 158,600 159,600 Education and Health Services 90,400 91,700 93,500 95,000 96,500 Leisure and Hospitality 73,300 68,800 69,000 70,900 72,300 Other Services 26,700 26,400 25,300 25,000 25,100 Government 98 800 102 500 99 200 96 300 96 000 Total All Industries 1,024,900 924,100 876,900 868,700 874,400 Note: The unemployment rates are calculated using unrounded data. Data may not add up due to rounding. * Does not include proprietors, self-employed, llllpaid volunteers or family workers, domestic workers in households and person involved in labor/management trade disputes. Employment reported by place of work. March 2005 Benchmark. Source: California Employment Development Department. D-3 Major Employers The table below lists the major employers in the San Jose and Silicon Valley Area, as ranked by number of employees, for the calendar year 2005. 1 SAN JOSE AND SILICON VALLEY AREA Cl LARGEST PRIVATE-SECTOR EMPLOYERS Ten Largest Employers 2005 Number of Name Type of Business Employees Cisco Systems Inc. Computer network equipment manufacturer 13,000 Stanford University Higlier education, hospital, medical research 12,000 Hewlett-Packard Co. T eclinology solutions provider 8,000 Lockheed Martin Missiles & Space Aerospace systems 7,400 IBM Computer hardware, software and business solutions 7,000 Intel Corp. Microprocessors manufacturer 6,136 New United Motor Manufacturing Automotive Manufacturing 5,800 Inc. Applied Material Inc. Semiconductor Manufacturing 4,130 Google Inc. Web Search Engine and Advertising 3,021 Agilent Technologies Inc. Communications, electronics, etc. solutions & services 2,632 Cl) Silicon Valley includes: Santa Clara Collllty, Scotts Valley in Santa Cruz Collllty; Fremont, Newark and Union City in Alameda Collllty; and Atherton, Belmont, East Palo Alto, Foster City, Menlo Park, Redwood City, Redwood Shores, San Carlos and San Mateo in San Mateo Collllty. Source: The San Jose Business Journal "Book of Lists", published July 29, 2005. The table below sets forth the largest public sector employers in the San Jose and Silicon Valley area, as of July 29, 2005, based on the number of employees. 1 SAN JOSE AND SILICON VALLEY AREA Cl LARGEST PUBLIC-SECTOR EMPLOYERS Ten Largest Employers 2005 Number of Name Type of Business Employees Santa Clara County County government 15,316 City of San Jose Municipal government 7,325 San Jose Unified School District Public education 3,027 San Jose State University Higher education 2,439 Santa Clara Valley Transportation Authority Public transportation & congestion management 2,148 Foothill-De Anza Community College Dist. Community college district 1,742 Santa Clara Unified School District Public Education 1,329 Santa Clara County Office of Education Resource for school districts, children & 1,110 community City of Palo Alto Municipal government 1,091 Oak Grove Elementary School District Public Education 1,064 Source: The San Jose Business Journal "Book of Lists", published July 29, 2005. D-4 Construction Activity Provided below are the building permits and valuations for the City of Morgan Hill and the County of Santa Clara for calendar years 2001 through 2005. CITY OF MORGAN HILL Building Permits and Valuations For Years 2001 through 2005 (dollars in thousands) 2001 2002 2003 2004 2005 Residential $ 31,705 $ 61,372 $ 83,215 $ 78,054 $ 90, 159 Non-Residential 78 659 20 867 33 544 22 670 17 875 TOTAL' $110,364 $ 82,239 $116,759 $ 100,724 $ 108,034 New Dwelling Units Single Family 105 160 239 203 264 Multiple Family -0- 66 72 38 8 TOTAL 105 226 311 241 272 ' Columns may not add to totals due to rounding. Source: Construction Industry Research Board. COUNTY OF SANTA CLARA Building Permits and Valuations For Years 2001 through 2005 (dollars in thousands) 2001 2002 2003 2004 2005 Residential $ 1,051,509 $ 1,087,303 $ 1,466,390 $ 1,406,210 $ 1,557,012 Non-Residential 2 254 823 1 330 557 972 912 915 828 1 301 122 TOTAL' $ 3,306,332 $ 2,417,860 $ 2,438,814 $ 2,322,038 $ 2,858,134 New Dwelling Units Single Family 1,642 2,057 2,320 2,689 2,577 Multiple Family 4 318 2 456 5 170 2 816 3 295 TOTAL 5,960 4,513 7,490 5,505 5,872 ' Columns may not add to totals due to rounding. Source: Construction Industry Research Board. Income "Effective Buying Income" is defined as personal income less personal tax and nontax payments, a number often referred to as "disposable" or "after-tax" income. Personal income is the aggregate of wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor's income, rental income (which includes imputed rental income of owner-occupants of non farrn dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fmes, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as "disposable personal income." D-5 The following table summarizes the total effective buying income for the County of Santa Clara, the State and the United States for the period 2000 through 2004. COUNTY OF SANTA CLARA Effective Buying Income 2000 through 2004 Total Effective Median Household 1 Area Buying Income( ) Effective Buying Income 2000 Santa Clara County $47,115,360 $72,124 California 652, 190,282 44,464 United States 5,230,824,904 39,129 2001 Santa Clara County $47, 134,074 $67,504 California 650,521,407 43,532 United States 5,303,481,498 38,365 2002 Santa Clara County $46,138,910 $62,725 California 647,879,427 42,484 United States 5,340,682,818 38,035 2003 Santa Clara County $46,787,053 $62,584 California 674,721,020 42,924 United States 5,466,880,008 38,291 2004 Santa Clara County $47,476,338 $62,614 California 705,108,410 43,915 United States 5,652,909,567 39,324 (l) Dollars in thousands. Source: Sales & Marketing Management, The Survey of Buying Power, Demographics USA D-6 Retail Trade The following table shows a five-year history of taxable sales for the City of Morgan Hill and the County of Santa Clara. CITY OF MORGAN HILL Taxable Sales 2000 through 2004 ($ in thousands) 2000 2001 2002 2003 2004 Apparel Stores Group $ 1,962 $ 3,371 $ 7,264 $ NIA $ 7,485 General Merchandise Group 70,090 73,234 70,762 61,037 54,236 Food Stores Group 23,892 24,531 23,831 22,935 23,249 Eating & Drinhng Group 39,946 41,530 39,152 38,012 43,499 Household Group 13,417 11,470 9,996 9,002 8,498 Building Material Group 9,321 7,874 6,320 5,692 27,643 Automotive Group 32,521 39,229 NIA NIA NIA Service Stations 34,763 33,375 41,076 46,126 59,399 All Other Retail Stores Group 65 523 61 322 99 549 96 873 97 378 Total Retail Stores $291,435 $296,296 $297,950 $279,677 $321,387 All Other Outlets 148,507 153,486 100,118 98,912 118,768 Total All Outlets $439,942 $449,782 $398,068 $378,589 $440,155 Source: ''Taxable Sales in California (Sales & Use Tax)", California State Board of Equalization. COUNTY OF SANTA CLARA Taxable Sales 2000 through 2004 ($ in thousands) 2000 2001 2002 2003 2004 Apparel Stores Group $ 876,453 $ 883,398 $ 881,919 $ 929,499 $1,051,020 General Merchandise Group 2,855,114 2,720,353 2,569,589 2,589,324 2,718,351 Specialty Stores Group 4,465,260 3,489,325 2,952,488 2,908,599 3,059,427 Food Stores Group 843,1838 860,852 833,852 819,927 819,649 Eating & Drinhng Group 2,292,309 2,239,031 2,136,888 2,139,328 2,283,192 Household Group 1,177,607 968,206 851,488 798,640 830,504 Building Material Group 1,354,643 1,316,587 1,278,024 1,314,681 1,539,664 Automotive Group 5,381,836 4,948,874 4,440,287 4,556,375 4,936,455 All Other Retail Stores Group 527 079 510 078 480 649 458 721 485 805 Total Retail Stores $19,773,484 $17,936,704 $16,425,184 $16,515,094 $17,724,067 Business and Personal Services 1,942,965 1,897,485 1,577,240 1,335,625 1,190,570 All Other Outlets 15,587,213 12,299,058 9,451,518 9,211,944 9,576,939 Total All Outlets $37,348,644 $32,133,247 $27,453,942 $27,062,663 $28,491,576 Source: ''Taxable Sales in California (Sales & Use Tax)", California State Board of Equalization. D-7 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIX E FORM OF BOND INSURANCE POLICY (THIS PAGE INTENTIONALLY LEFT BLANK) Ambac Assurance CorpOO!tion Ambac One Seate Street Plaza, 15th Floor New York, New York 10004 Financial Guaranty Insurance Policy Te!,,ph,,ne; (212) 668-0340 Ohligor: Policy Number: Prerniurn; Ambac Assurance Corpor,,1tion (Ambac), a Wi$.(Ol1Sin stock itrSurance i11 consideration of pr.em1u1n and to the terms of rhis P()licv, to The York~ as .. ·-····, fur i:he benefit of rhe T·{oJde':rs. that of ahd interest on the abov,,-descrili",' Ohligaci,,i,s") which shall become Due for reason of Nonpayment Ambac will tnake such to the lnsw:ance lffistee within one (1) business day rollovvmg Nonpayment. a and surrender to the Insurance Trustee of such un uncanceled and bearer form free of any advetse claim, the Insurance Trustee will:ftt'iblJP£C principal and interest which is then D..ie for Payment but is unpaid. tJpon such disburse en the surrendered Obligations and/or coupons and shall be fully subrogated to :all of Hol The premiwn on this Policy is nor refundable for any reason, including payment of the Obligations does uot !usu.re loss of any or other acceleradon payment which ar any time Obligation, than at the sole nor against any risk orhet than Nonpayment. ln witness whereof, Ambll£' has caused this PoJicy to be affixed wJth a facsimile of its seal and robe by its duly authorized off1cers in f.JA:simHe co become effecrive as irs original seal and upon virtue of the co1,mter:signatm:e of its authorized representative. fd/ ;f?..L_ Ptesident Effective Date~ Authorized Rep11,senta,tive THE BANK OF NEW YORK th« ir has agreed ro perforn1 d1e duties of Insurance Trustee undt~r thJi:; Policy. Form No,; 2B-OO l 2 (l/01) ~~Authori7.ed Offic-er of Jnsurance Trustee E-1 Amba,; Assmance Corporation One State Street Plaza, 15th Floor Ambac New York, New York 10004 Telephone: (212) 668-0340 Endorsement Policy fur: Attl!ched to and furmlng part of Polley No.: In the event that Ambac Assunuice Corporation :G{)ip~~~li'l{e~, any claims arising under the Policy would be excluded fro>n:l'.'CO'l'l,llL2tt e,. <:::ai~rruia, Insurance Guaranty Association, established pursuant to ,ei.11ih,all be het to vary, alter, waive or extend any of the terms, conditions, provisions, agreements bo e mentioned Policy other than as above stated. WJ~elfeci,;' Ambac has caused tllis EndorSeruent ro be affixed with a fucsimile of its corporate seal and to ,,gµ=Jl;):, Ambac Assurance Corporation President Secretary Authorized Representative FomtNo.:ZB-0015 0197) E-2 APPENDIX F BOOK-ENTRY ONLY SYSTEM The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy or completeness thereof. The District cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confinnation or ownership interest in the Bonds, or ( c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Official Statement. 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. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 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, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant F-1 through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds 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 Bonds 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 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. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. 's consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the District or Paying Agent, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, Paying Agent, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the District or Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. F-2 Discontinnation of Book-Entry Only System; Payment to Beneficial Owners In the event that the book-entry system described above is no longer used with respect to the Bonds, the following provisions will govern the payment, transfer and exchange of the Bonds. The principal of and interest on the Bonds and any premium due upon the redemption thereof prior to the maturity will be payable in lawful money of the United States of America upon presentation and surrender of the Bonds at the office of the Paying Agent, initially located in Redwood City, California. Any Bond may be exchanged for Bonds of like tenor, maturity and authorized denomination upon presentation and surrender at the principal office of the Paying Agent, together with a request for exchange signed by the Registered Owner or by a person legally empowered to do so in a form satisfactory to the Paying Agent. A Bond may be transferred only on the Bond registration books (the "Bond Register") by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation at the office of the Paying Agent, accompanied by delivery of a written instrument of transfer in a form approved by the Paying Agent, duly executed. Upon exchange or transfer, the Paying Agent shall register, authenticate and deliver a new Bond or Bonds of like tenor and of any authorized denomination or denominations requested by the Owner equal in aggregate to the umuatured principal amount of the Bond surrendered and accreting interest at the same rate and maturing on the same date. Neither the District nor the Paying Agent will be required (i) to issue or transfer any Bonds during a period beginning with the opening of business on the 15th business day next preceding either any maturity date or any date of selection of Bonds to be redeemed and ending, as applicable, with the close of business on the maturity date or day on which the applicable notice of redemption is given or (ii) to transfer any Bonds which have been selected or called for redemption in whole or in part. The information in this section concerning DTC and DTC 's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof F-3 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXG ACCRETED VALUE TABLE (THIS PAGE INTENTIONALLY LEFT BLANK) Ang IO, 2006 11 :54 am Prepared by UBS Securities !LC (Finance 5.(]17 morgan_hi11:MIIUSD-06REFSC2,06Rl'FSC2) Page 1 llOND ACCR!rl'ED VA I .UH TA Ill .E Morgan Hill Unified School :District 2006 (L(J, Refunding Bonds Final Nun1bcrs {:apitoJ Capital Capital Appreciation Appreciation Bonds Bonds Bonds 0810112014 118111112015 (18/(I I /2016 Date l L25'?11 IL25% I L25% 1)8/22/20(16 2,096.41) 1.879.05 1.684.25 0210112007 2,200.20 1,972.IO 1,767.65 08101/2007 2323.95 2.083.05 1.867.10 1)2/1)1 /20(18 2,454.71) 2.2rnJ.20 1.972.1() 0810112008 2,592.80 2,323.95 2,083.05 02101/2009 2.738.60 2.454.70 2.200.20 1)8/1)1 /20(19 2,892.65 2.592.80 2.323.95 0210112010 3J)55.40 2,738.60 2,454.7() 08101/20JO 3.227.25 2.892.65 2.592.80 1)2/1)1/2011 J,41)8.l\1) J,()55.40 2.738.6() 0810112011 3,600.55 3,227.25 2,892.65 02101/2012 3.803.05 3.408.80 3.055.40 1)8/1)1/2012 4,017.rnJ J.6rnJ.55 3.227.25 0210112013 4,242.95 3,803.05 3,408.8() 08101/2013 4.481.60 4.017.00 3.600.55 1)2/1)1/2014 4,7).,.71) 4,242.95 3.80).05 0810112014 s,m10.oo 4,481.60 4,017.0() 02101/2015 4.733.70 4.242.95 1)8/1)112015 5.(~~).(~) 4.481.60 0210112016 4,733.70 08/01/2016 5.000.00 G-1 (THIS PAGE INTENTIONALLY LEFT BLANK)