NEW ISSUE — BOOK-ENTRY ONLY RATINGS: Moody’s (Assured Guaranty Municipal Corp.): “Aa3” (negative outlook) S&P (Assured Guaranty Municipal Corp.): “AAA” (negative outlook) Moody’s (Underlying): “Aa3” (See “RATINGS” herein) In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, based upon an analysis of existing statutes, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, as described herein, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, and is exempt from State of California (“State”) personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding other federal or State tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein. $51,448,327.30 SAN MARCOS SCHOOLS FINANCING AUTHORITY Lease Revenue Bonds, Series 2010 Dated: Date of Delivery Due: August 15 as shown below The San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 (the “Bonds”) are special obligations of the San Marcos Schools Financing Authority (the “Authority”) and are being issued for the purpose of providing funds to (i) finance capital projects for the San Marcos Unified School District (the “District”); (ii) fund the Reserve Fund in an amount equal to $2,394,097.77 and acquire a Debt Service Reserve Insurance Policy in a coverage amount of $2,300,000.00; (iii) fund capitalized interest on the Bonds through August 15, 2010; and (iv) pay certain costs of issuance of the Bonds. See “FINANCING PLAN” herein. The Bonds are subject to optional redemption, special mandatory redemption and mandatory sinking fund redemption prior to maturity, as described herein. The Bonds are special obligations of the Authority secured by Revenues, consisting primarily of Lease Payments to be made by the District pursuant to the Lease Agreement, certain amounts on deposit under the Trust Agreement, and certain investment earnings thereon (all such capitalized terms are defined herein). The District has covenanted in the Lease Agreement to make the Lease Payments for the Site, to include all such Lease Payments in each of its budgets and to make the necessary annual appropriations for all such Lease Payments. The District’s obligation to make Lease Payments is subject to abatement in the event of damage or destruction of the Site or a taking of the Site (either in whole or in part, temporarily, or in part permanently) by eminent domain proceedings as further described herein. See “SECURITY FOR THE BONDS” herein. The Bonds will be issued as current interest bonds (the “Current Interest Bonds”) and capital appreciation bonds (the “Capital Appreciation Bonds”). Interest on the Current Interest Bonds accrues from the date of delivery of the Bonds, and is payable semiannually by check mailed on February 15 and August 15 of each year, commencing August 15, 2010. The Capital Appreciation Bonds are dated the date of delivery of the Bonds and accrete interest from such date, compounded semiannually on February 15 and August 15 of each year, commencing August 15, 2010. The Bonds will be issued as fully-registered bonds in book-entry form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), NewYork, New York. Purchasers will not receive certificates representing their interest in the Bonds. The Bonds will be issued in denominations of $5,000 principal amount or Maturity Value, as applicable, or any integral multiple thereof. Payments of principal or Accreted Value of and interest on the Bonds will be paid by Union Bank, N.A., Los Angeles, California, as trustee, to DTC for subsequent disbursement to DTC participants who will remit such payments to the beneficial owners of the Bonds. See “THE BONDS — Book-Entry System” herein. THE BONDS ARE NOTA DEBT OF THE DISTRICT, MEMBER AGENCIES OF THE AUTHORITY, STATE OR ANYOF THEIR POLITICAL SUBDIVISIONS (OTHERTHAN THE AUTHORITY). THE BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHOR- ITYAND ARE NOT SEPARATE OBLIGATIONS OF ANY OF ITS MEMBERS. NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, THE STATE OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. The scheduled payment of principal of (or, in the case of the Capital Appreciation Bonds, the Accreted Value) and interest on the Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Bonds by ASSURED GUARANTY MUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITYASSURANCE INC.) (“AGM” or the “Insurer”). This cover page contains certain information for quick reference only. It is not a summary of this financing. Prospective investors should read the entire Official Statement and all documents to obtain information essential to making an informed decision. Maturity Schedules (see inside cover page) The Bonds are offered when, as and if issued, subject to the approval as to their legality by Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, and subject to certain other conditions. Certain matters will be passed on for the Authority and the District by Bowie, Arneson, Wiles & Giannone, LLP as counsel thereto, and Best Best & Krieger LLP, San Diego, California, as Disclosure Counsel. The Underwriter is represented by McFarlin & Anderson LLP, Lake Forest, California. The Insurer is represented by its Associate General Counsel. It is anticipated that the Bonds will be available for delivery in book-entry form through the facilities of DTC on or about June 22, 2010. Dated: June 3, 2010
Transcript
NEW ISSUE — BOOK-ENTRY ONLY RATINGS:Moody’s (Assured Guaranty Municipal Corp.): “Aa3” (negative outlook)
S&P (Assured Guaranty Municipal Corp.): “AAA” (negative outlook)Moody’s (Underlying): “Aa3”
(See “RATINGS” herein)In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, based upon an analysis of existing
statutes, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliancewith certain covenants, as described herein, interest on the Bonds is excluded from gross income for federal income tax purposes underSection 103 of the Internal Revenue Code of 1986, and is exempt from State of California (“State”) personal income taxes. In the furtheropinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternativeminimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. BondCounsel expresses no opinion regarding other federal or State tax consequences relating to the ownership or disposition of, or the accrual orreceipt of interest on, the Bonds. See “TAX MATTERS” herein.
Lease Revenue Bonds, Series 2010Dated: Date of Delivery Due: August 15 as shown below
The San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 (the “Bonds”) are special obligations of theSan Marcos Schools Financing Authority (the “Authority”) and are being issued for the purpose of providing funds to (i) finance capitalprojects for the San Marcos Unified School District (the “District”); (ii) fund the Reserve Fund in an amount equal to $2,394,097.77 andacquire a Debt Service Reserve Insurance Policy in a coverage amount of $2,300,000.00; (iii) fund capitalized interest on the Bonds throughAugust 15, 2010; and (iv) pay certain costs of issuance of the Bonds. See “FINANCING PLAN” herein.
The Bonds are subject to optional redemption, special mandatory redemption and mandatory sinking fund redemption prior to maturity,as described herein.
The Bonds are special obligations of the Authority secured by Revenues, consisting primarily of Lease Payments to be made by theDistrict pursuant to the Lease Agreement, certain amounts on deposit under the Trust Agreement, and certain investment earnings thereon (allsuch capitalized terms are defined herein). The District has covenanted in the Lease Agreement to make the Lease Payments for the Site, toinclude all such Lease Payments in each of its budgets and to make the necessary annual appropriations for all such Lease Payments. TheDistrict’s obligation to make Lease Payments is subject to abatement in the event of damage or destruction of the Site or a taking of the Site(either in whole or in part, temporarily, or in part permanently) by eminent domain proceedings as further described herein. See “SECURITYFOR THE BONDS” herein.
The Bonds will be issued as current interest bonds (the “Current Interest Bonds”) and capital appreciation bonds (the “Capital AppreciationBonds”). Interest on the Current Interest Bonds accrues from the date of delivery of the Bonds, and is payable semiannually by check mailed onFebruary 15 and August 15 of each year, commencing August 15, 2010. The Capital Appreciation Bonds are dated the date of delivery of theBonds and accrete interest from such date, compounded semiannually on February 15 and August 15 of each year, commencing August 15,2010.
The Bonds will be issued as fully-registered bonds in book-entry form, initially registered in the name of Cede & Co., as nominee of TheDepository Trust Company (“DTC”), New York, New York. Purchasers will not receive certificates representing their interest in the Bonds.The Bonds will be issued in denominations of $5,000 principal amount or Maturity Value, as applicable, or any integral multiple thereof.Payments of principal or Accreted Value of and interest on the Bonds will be paid by Union Bank, N.A., Los Angeles, California, as trustee, toDTC for subsequent disbursement to DTC participants who will remit such payments to the beneficial owners of the Bonds. See “THEBONDS — Book-Entry System” herein.
THE BONDS ARE NOT A DEBT OF THE DISTRICT, MEMBER AGENCIES OF THE AUTHORITY, STATE OR ANY OF THEIRPOLITICAL SUBDIVISIONS (OTHER THAN THE AUTHORITY). THE BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHOR-ITYAND ARE NOT SEPARATE OBLIGATIONS OF ANY OF ITS MEMBERS. NEITHER THE FULL FAITH AND CREDIT NOR THETAXING POWER OF THE DISTRICT, THE STATE OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THEPAYMENT OF THE BONDS. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANYCONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION.
The scheduled payment of principal of (or, in the case of the Capital Appreciation Bonds, the Accreted Value) and interest on the Bondswhen due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Bonds by ASSURED GUARANTYMUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) (“AGM” or the “Insurer”).
This cover page contains certain information for quick reference only. It is not a summary of this financing. Prospective investors shouldread the entire Official Statement and all documents to obtain information essential to making an informed decision.
Maturity Schedules(see inside cover page)
The Bonds are offered when, as and if issued, subject to the approval as to their legality by Bowie, Arneson, Wiles & Giannone, NewportBeach, California, Bond Counsel, and subject to certain other conditions. Certain matters will be passed on for the Authority and the District byBowie, Arneson, Wiles & Giannone, LLP as counsel thereto, and Best Best & Krieger LLP, San Diego, California, as Disclosure Counsel. TheUnderwriter is represented by McFarlin & Anderson LLP, Lake Forest, California. The Insurer is represented by its Associate General Counsel. Itis anticipated that the Bonds will be available for delivery in book-entry form through the facilities of DTC on or about June 22, 2010.
Dated: June 3, 2010
pbrubake
Text Box
2010-0078
MATURITY SCHEDULE
Lease Revenue Bonds, Series 2010 Base CUSIP® Number(1): 79875Y
(1) Copyright 2010, American Bankers Association. CUSIP® data herein is provided by Standard & Poor’s CUSIP® Service Bureau, a Division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP® Service Bureau.
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Table of Contents Page Page
INTRODUCTION ........................................... 1 The Bonds .................................................. 1 The Authority............................................. 2 The District ................................................ 2 Risk Factors ............................................... 2 Municipal Bond Insurance......................... 2 Tax Matters ................................................ 2 Continuing Disclosure ............................... 3 Professionals Involved in the Offering ...... 3 Forward Looking Statements..................... 3 General....................................................... 4
ESTIMATED SOURCES AND USES OF FUNDS ............................................................ 5 FINANCING PLAN ........................................ 5
The Project ................................................. 5 The Site ...................................................... 5 Substitution or Release of Site................... 6
THE BONDS ................................................... 6 Payment of Principal and Interest .............. 6 Registration of the Bonds........................... 7 Redemption ................................................ 7 The Trustee .............................................. 10 Debt Service Schedule ............................. 10 Book-Entry System.................................. 12
SECURITY FOR THE BONDS.................... 12 General..................................................... 12 Pledge of Revenues.................................. 12 Lease Payment Fund................................ 13 Bond Fund................................................ 13 Reserve Fund ........................................... 13 Lease Payments........................................ 15 Covenant to Budget and Appropriate ...... 16 Covenant Regarding Application of Redevelopment Payments........................ 16 Pledge Agreement.................................... 18 Estimated Debt Service Coverage on the Bonds from Redevelopment Payments and Surplus Net Special Taxes ................ 21 Limited Obligation................................... 21 Abatement ................................................ 21 Action on Default..................................... 22 Insurance .................................................. 22 Additional Bonds ..................................... 23
BOND INSURANCE .................................... 24 The Insurance Policy................................ 24 Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.) ........................................ 25
THE AUTHORITY ....................................... 26
THE DISTRICT ............................................ 27 Introduction ............................................. 27 General Information ................................ 27 Administration......................................... 27 Key Personnel.......................................... 27 Employee Relations................................. 28 Retirement Systems ................................. 28 Other Post Employment Benefits (“OPEB”)................................................. 28 Insurance.................................................. 29
DISTRICT FINANCIAL INFORMATION.. 29 Significant Accounting Policies and Audited Financial Reports ....................... 29 Budget Process ........................................ 33 State Funding of Education ..................... 37 Revenue Sources ..................................... 37 Developer Fees ........................................ 39 Outstanding Debt; Other Financial Obligations .............................................. 40 Lease Purchase Agreement...................... 41 Assessed Valuations ................................ 42 Largest Taxpayers ................................... 43 Direct and Overlapping Debt................... 43
IMPACT OF STATE BUDGET ON DISTRICT REVENUES ............................... 46
State Funding of Education; State Budget Process..................................................... 46 Governor’s Proposed 2010-2011 State Budget; May 2010 Revision.................... 55 Future Budgets and Actions .................... 58
CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES................................ 58
Article XIIIA of the California Constitution ............................................. 58 Article XIIIB of the State Constitution ... 59 Articles XIIIC and XIIID of the State Constitution ............................................. 60 Propositions 98 and 111 .......................... 60 Jarvis v. Connell ...................................... 61 Proposition 1A......................................... 61 Future Initiatives and Legislation............ 62
RISK FACTORS........................................... 62 No Tax Pledge ......................................... 62 Appropriation .......................................... 62 Abatement................................................ 63 Limitation on Enforcement of Remedies; No Acceleration....................................... 63 Constitutional School Funding Guarantee; State of California Finances .................... 64
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Application of Constitutional and Statutory Provisions ................................. 64 Geologic, Topographic and Climatic Conditions ................................................ 64 Economic Conditions in California ......... 65 Future State Budgets ................................ 65 Investment of District’s General Fund..... 65 No Liability by the Authority to the Owners ..................................................... 65 Hazardous Substances.............................. 66 Limitations on Remedies Available; Bankruptcy............................................... 66 State Law Limitations on Appropriations 66 Change in Law ......................................... 67 Loss of Tax Exemption............................ 67 Seismic Considerations............................ 67 Substitution of Property ........................... 67 Special Risk Factors Related to the Redevelopment Payments........................ 67 Special Risk Factors Related to Surplus Net Special Taxes .................................... 69
Opinion of Bond Counsel ........................ 77 Original Issue Discount............................ 77 Original Issue Premium ........................... 78 Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption ................... 78 Internal Revenue Service Audit of Tax-Exempt Bond Issues................................. 78
CERTAIN LEGAL MATTERS .................... 79
UNDERWRITING........................................ 79 MISCELLANEOUS...................................... 79 APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ........ A-1 APPENDIX B - AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2009 ... B-1 APPENDIX C - REDEVELOPMENT PAYMENTS................................................ C-1 APPENDIX D - FISCAL CONSULTANT’S REPORT 2009/10........................................ D-1 APPENDIX E - SURPLUS NET SPECIAL TAXES .........................................................E-1 APPENDIX F - ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES...F-1 APPENDIX G - PROPOSED FORM OF BOND COUNSEL’S OPINION ................. G-1 APPENDIX H - FORM OF CONTINUING DISCLOSURE AGREEMENT................... H-1 APPENDIX I - BOOK-ENTRY-ONLY SYSTEM .......................................................I-1 APPENDIX J - SAN DIEGO COUNTY INVESTMENT POOL ..................................J-1 APPENDIX K – SPECIMEN MUNICIPAL BOND INSURANCE POLICY .................. K-1 APPENDIX L – ACCRETED VALUE TABLE............................................................ L-1
IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENTS 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 UNDERWRITER.
THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.
This Official Statement speaks only as of its date, and the information contained herein is subject to change. This Official Statement and any continuing disclosure documents of the District and the Authority are intended to be made available through the District at the address indicated below. The District has undertaken to provide certain continuing disclosure pursuant to a Continuing Disclosure Agreement, as described herein. Copies of the resolutions and other documents relating to the issuance of the Bonds are available upon request, and upon payment to the District of a charge for copying, mailing and handling, from the office of the Assistant Superintendent, Business Services of the District at 255 Pico Avenue, Suite 250, San Marcos, California 92069.
No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Authority, the District or the Underwriter.
The information set forth herein has been obtained from the District and other sources believed to be reliable, but the accuracy or completeness of such information is not guaranteed by, and should not be construed as a representation by, the Underwriter. This information is not guaranteed as to accuracy and is not to be construed as a representation by the District, the Authority or the Underwriter.
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 any 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 a representation of facts.
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 Authority or the District since the date hereof. All summaries contained herein of the Lease Agreement, the Trust Agreement and other documents are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions.
The issuance and sale of the Bonds have not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the issuance and sale of municipal securities provided under Section 3(a)(2) of the Securities Act of 1933 and Section 3(a)(12) of the Securities Exchange Act of 1934.
Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.) (“AGM”) makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading “BOND INSURANCE” and “APPENDIX K – Specimen Municipal Bond Insurance Policy.”
SAN MARCOS SCHOOLS FINANCING AUTHORITY
BOARD OF DIRECTORS
Beckie C. Garrett, President Jay Petrek, Vice President Randy Walton, Secretary Sharon Jenkins, Treasurer David Horacek, Director
SAN MARCOS UNIFIED SCHOOL DISTRICT
GOVERNING BOARD
Beckie C. Garrett, President Jay Petrek, Vice President
Randy Walton, Clerk David Horacek, Member Sharon Jenkins, Member
DISTRICT STAFF
Kevin D. Holt, Ed.D., Superintendent Gary Hamels, Assistant Superintendent, Business Services
Kathy Tanner, Executive Director of Facilities and Services
SPECIAL SERVICES
Financial Consultant to the District and Authority
Dolinka Group, LLC Irvine, California
Bond Counsel/Authority and District Counsel
Bowie, Arneson, Wiles & Giannone Newport Beach, California
Disclosure Counsel
Best Best & Krieger LLP San Diego, California
Trustee
Union Bank, N.A. Los Angeles, California
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OFFICIAL STATEMENT
$51,448,327.30 SAN MARCOS SCHOOLS FINANCING AUTHORITY
Lease Revenue Bonds, Series 2010
INTRODUCTION
This Official Statement, including the cover page and appendices hereto, is provided to furnish information regarding the $51,448,327.30 original principal amount of San Marcos Schools Financing Authority, Lease Revenue Bonds, Series 2010 (the “Bonds”). The Bonds are being issued by the San Marcos Schools Financing Authority (the “Authority”), a joint exercise of powers authority created by a joint powers agreement between the San Marcos Unified School District (the “District”) and Community Facilities District No. 2 of the District (“CFD No. 2”).
This Introduction does not purport to be complete, and reference is made to the body of this Official Statement, the appendices and the documents referred to herein for more complete statements with respect to the matters summarized. Capitalized terms used without definition have the meanings ascribed thereto under “Defined Terms” contained in “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS.”
The Bonds
The Bonds will be issued pursuant to a Trust Agreement, dated as of June 1, 2010 (the “Trust Agreement”), by and between the Authority and Union Bank, N.A., Los Angeles, California, as trustee thereunder (the “Trustee”).
Proceeds of the Bonds will be used for the purpose of providing funds to (i) pay for the design, construction, renovation, improvement, furnishing, equipping, acquisition, delivery and installation of new construction and modernization projects at certain District schools, support facilities and land necessary for certain of such facilities, (ii) fund the Reserve Fund for the Bonds in an amount equal to $2,394,097.77 and acquire a Debt Service Reserve Insurance Policy in the coverage amount of $2,300,000.00, (iii) pay capitalized interest through August 15, 2010, with respect to the Bonds, and (iv) pay certain costs related to the issuance and sale of the Bonds. See “FINANCING PLAN” herein.
The Bonds are special obligations of the Authority secured by Revenues (as defined below), consisting primarily of lease payments (the “Lease Payments”) to be made by the District to the Authority pursuant to a Lease Agreement, dated as of June 1, 2010 (the “Lease Agreement”), by and between the Authority and the District, pursuant to which the Authority will lease certain real property and improvements (the “Site”) to the District, and by other amounts pledged under the Trust Agreement. See “FINANCING PLAN – The Site” and “SECURITY FOR THE BONDS” herein.
The District has covenanted in the Lease Agreement to make the Lease Payments for the Site and to make payment of Additional Rent (defined below) and Reserve Replenishment Rent (defined below), if any, as provided for therein, to include all such Lease Payments, Additional Rent and Reserve Replenishment Rent (collectively, “Rental Payments”) due under the Lease Agreement in each of its budgets and to make the necessary annual appropriations for all such Rental Payments. The District has agreed in the Lease Agreement that the Rental Payments shall be paid from any legally available funds of the District. See “SECURITY FOR THE BONDS – Covenant Regarding Application of Redevelopment Payments” regarding the District’s additional covenant to apply certain pass-through tax increment received by the District to the payment of Lease Payments. See also “SECURITY FOR THE BONDS – Pledge Agreement” regarding the pledge by the Authority, the District and certain community facilities districts established by the District of certain surplus special tax revenues of such community facilities districts to the payment of Lease Payments.
The District’s obligation to make Lease Payments is subject to abatement in the event of damage or destruction of the Site or a taking of the Site (either in whole or in part, temporarily, or in part permanently) by eminent domain proceedings, as further described herein. See “SECURITY FOR THE BONDS” herein.
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THE BONDS AND THE OBLIGATION TO MAKE LEASE PAYMENTS ARE NOT A DEBT OF THE DISTRICT, THE DESIGNATED CFDS (DEFINED BELOW), THE STATE OF CALIFORNIA (THE “STATE”) OR ANY OF THEIR POLITICAL SUBDIVISIONS (OTHER THAN THE AUTHORITY). THE BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY AND ARE NOT OBLIGATIONS OF THE DISTRICT OR THE DESIGNATED CFDS. NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, THE DESIGNATED CFDS, THE STATE OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. NEITHER THE BONDS NOR THE LEASE PAYMENTS CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION.
Lease Payments are subject to complete or partial abatement in the event and to the extent that there is substantial interference with the District’s right to use and occupy any portion of the Site or any material portion thereof. See “RISK FACTORS – Abatement” herein. Abatement of Lease Payments under the Lease Agreement, to the extent payment is not made from alternative sources as discussed below, would result in all Bond owners receiving less than the full amount of principal of and interest on the Bonds. To the extent proceeds of rental interruption insurance are available or there are moneys in the Reserve Fund (as described below), Lease Payments (or a portion thereof) may be made during periods of abatement.
The Authority
The Authority was established pursuant to a joint exercise of powers agreement approved and executed by the District and CFD No. 2 (defined below) as of January 16, 2001, in accordance with the provisions of California law. The Authority was created for the purpose of providing financing for public capital improvements of the District. See “THE AUTHORITY” herein.
The District
The District was established in 1976 and comprises approximately 49 square miles of territory in the northern portion of San Diego County. The District includes the City of San Marcos (the “City”), portions of the incorporated cities of Carlsbad, Escondido and Vista and portions of unincorporated territory in the County. Approximately 60% of the territory of the District is within the jurisdictional limits and sphere of influence of the City. The District currently administers eleven elementary schools providing instruction in grades kindergarten through five, three middle schools, two comprehensive high schools and one alternative high school. The District’s 2009-10 student enrollment as of October 2009 was 18,088.
Risk Factors
Certain events could affect the ability of the District to make the Lease Payments which provide revenues to the Authority to pay the Bonds when due. See “RISK FACTORS” for a discussion of certain factors that should be considered, in addition to other matters set forth herein, in evaluating an investment in the Bonds.
Municipal Bond Insurance
Concurrently with the issuance of the Bonds, Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance, Inc.) will issue its Municipal Bond Insurance Policy (the “Insurance Policy”) with respect to the Bonds. The Insurance Policy guarantees the scheduled payment of principal of (or, in the case of the Capital Appreciation Bonds, the Accreted Value) and interest on the Bonds when due as set forth in the Insurance Policy included as APPENDIX K to this Official Statement. See “BOND INSURANCE” herein.
Tax Matters
In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, based upon an analysis of existing statutes, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, as described herein, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, and is exempt from State personal income taxes. In the further opinion
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of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal, individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding other federal or State consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS – Opinion of Bond Counsel.”
Continuing Disclosure
In order to assist the original purchaser and underwriter of the Bonds in complying with Rule 15c2-12(b)(5) of the Securities and Exchange Commission, the Authority and the District will undertake, pursuant to the Lease Agreement and a Continuing Disclosure Agreement, to provide certain annual financial information and notices of the occurrence of certain events, if material. See “CONTINUING DISCLOSURE” herein.
Except as provided in the following sentence, neither the Authority nor the District has failed to comply, in all material respects, with any annual or material event reporting requirements of any undertakings. The District unintentionally failed to timely file the annual report for Fiscal Year 2004-05 pursuant to the undertaking entered into for the School Facilities Improvement District No. 1 of the San Marcos Unified School District 2004 General Obligation Refunding Bonds. Such annual report has since been completed and was filed on April 15, 2010.
Professionals Involved in the Offering
Dolinka Group, LLC, Irvine, California, is the Authority’s and the District’s financial consultant with respect to the Bonds. The proceedings of the Authority in connection with the issuance of the Bonds are subject to the approval as to their legality of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel to the Authority. Bowie, Arneson, Wiles & Giannone is also serving as counsel to the Authority and the District. Best Best & Krieger LLP, San Diego, California, will serve as Disclosure Counsel to the District and the Authority. McFarlin & Anderson LLP, Lake Forest, California, is serving as counsel to the Underwriter. The Insurer is represented by its Associate General Counsel. Union Bank, N.A., Los Angeles, California, will act as the Trustee under the Trust Agreement.
Forward Looking Statements
Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “project,” “budget” or similar words. Such forward-looking statements include, but are not limited to certain statements contained in the information under the caption “APPENDIX E – SURPLUS NET SPECIAL TAXES – Estimated Assessed Value-to-Lien Ratios,” “APPENDIX E – SURPLUS NET SPECIAL TAXES – Estimated Surplus Net Special Taxes for Each Designated CFD” and “APPENDIX F - ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND NET SURPLUS SPECIAL TAXES.”
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. NEITHER THE AUTHORITY NOR THE DISTRICT PLANS TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT.
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General
This Official Statement speaks only as of its date, and the information contained herein is subject to change. All references herein to the Trust Agreement, the Lease Agreement and the Pledge Agreement are qualified in their entirety by reference to the Trust Agreement, the Lease Agreement and the Pledge Agreement and all references to the Bonds are further qualified by reference to the definitive Bonds and to the terms thereof which are contained in the Trust Agreement.
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ESTIMATED SOURCES AND USES OF FUNDS
The anticipated sources and uses of funds relating to the Bonds, excluding accrued interest which will be deposited in the Interest Account of the Bond Fund, are summarized below.
Sources Principal Amount of Bonds $51,448,327.30 Less Net Original Issue Discount (719,614.45) Less Purchaser’s Discount (643,104.09) Total Sources $50,085,608.76
Uses Deposit to Construction Fund(1) $46,184,224.69 Deposit to Costs of Issuance Fund(2) 1,167,948.28 Deposit to the Reserve Fund 2,394,097.77 Deposit to Capitalized Interest Account of the Bond Fund(3) 339,338.02 Total Uses $50,085,608.76
(1) This amount will be used to finance capital projects for the District. See “FINANCING PLAN – The Project” herein. (2) This amount includes legal, financial advisory, rating agency, printing, Insurance Policy and Debt Service Reserve Policy premiums and fees and other miscellaneous Costs of Issuance. (3) This amount will be used to pay capitalized interest on the Bonds through August 15, 2010.
FINANCING PLAN
The Project
The Project will include the design, construction, renovation, installation, improvement, furnishing, equipping, acquisition, delivery and installation of new construction and modernization projects at the school sites identified below, and such costs shall include, but not be limited to, preparation, planning, engineering and architectural work, infrastructure and related expenses, site preparation, project management costs, and related geotechnical, State planning review costs, environmental review and mitigation costs, local government planning and/or environmental costs and fees for, including, but not limited to, the following District schools and the support facilities and land necessary for these school facilities: (a) Alvin Dunn Elementary School; (b) Carrillo Elementary School; (c) Discovery Elementary School; (d) Knob Hill Elementary School; (e) La Costa Meadows Elementary School; (f) Mission Hills High School; (g) Paloma Elementary School; (h) Richland Elementary School; (i) San Elijo Elementary School; (j) San Elijo Middle School; (k) San Marcos Middle School; (1) San Marcos High School; (m) Twin Oaks Elementary School; (n) Twin Oaks High School; (o) Woodland Park Middle School, (p) San Marcos Elementary School and (q) Foothills High School.
The Site
The Site consists of an approximate 44-acre site and improvements that comprise the District’s Mission Hills High School. The Mission Hills High School was constructed to accommodate 1,700 students and opened its doors in August 2004. Built as a comprehensive high school, Mission Hills High School offers the facilities necessary to serve a full range of academic programs and includes specialized spaces for the sciences, arts and career oriented programs to complement the basic classroom learning spaces. In addition, Mission Hills High School has a library, theater, gymnasium and athletic stadium. The District estimates that the current value of the Site is approximately $81 million, based upon estimated land values and existing improvements thereon.
The District is the owner of fee title to the Site. The Site will be leased by the District to the Authority pursuant to a Site Lease, dated as of June 1, 2010, by and between the District, as lessor, and the Authority, as lessee. The Site will be leased back to the District by the Authority pursuant to the Lease Agreement.
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Substitution or Release of Site
The District shall have the right, but only upon the prior written consent of the Insurer, to substitute alternate real property for any portion of the Site or to release a portion of the Site from the Lease Agreement pursuant to the terms thereof. Any such substitution or release of any portion of the Site shall be subject to certain specific conditions set forth in the Lease Agreement, which are conditions precedent to such substitution or release. The conditions precedent to such substitution and release include, among other such conditions, the following:
• an Independent Appraiser (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – DEFINITIONS) shall find (and shall have delivered a certificate to the District, the Trustee and the Insurer setting forth its findings) that the Site, as constituted after such substitution or release: (i) has an annual fair rental value greater than or equal to 105% of the maximum amount of Lease Payments payable by the District in any Rental Period (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – DEFINITIONS), and (ii) has a useful life equal to or greater than the useful life of the Site as constituted prior to such substitution or release;
• the District shall provide the Trustee with an Opinion of Bond Counsel (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – DEFINITIONS) to the effect that such substitution or release will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes; and
• the District shall certify to the Authority that the substituted real property is of approximately the same degree of essentiality to the District as the portion of the Site for which it is being substituted.
See “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – THE LEASE AGREEMENT – Substitution or Release of Site” for the other conditions which must be satisfied before the District may substitute alternative real property for any portion of the Site or to release a portion of the Site from the Lease Agreement.
THE BONDS
Payment of Principal and Interest
The Bonds will be issued as current interest bonds (the “Current Interest Bonds”) and capital appreciation bonds (the “Capital Appreciation Bonds”).
Current Interest Bonds. The Current Interest Bonds will be dated the date of their delivery, will bear current interest at the rates and mature on August 15 in the years indicated on the inside cover page hereof. Interest on the Current Interest Bonds will be payable semi-annually on each February 15 and August 15 (the “Payment Dates”), commencing August 15, 2010. Interest on each Current Interest Bond shall be payable on each Payment Date until maturity or earlier redemption, computed using a year of 360 days comprised of twelve 30-day months. Interest on any Current Interest Bond shall be payable from the Payment Date next preceding the date of authentication thereof, unless: (i) it is authenticated on or before a Payment Date and after the close of business on the preceding Record Date (defined below), in which event interest shall be payable from such Payment Date; or (ii) it is authenticated prior to the first Record Date, in which event interest thereon shall be payable from the Dated Date; provided, however, that if on the date of authentication of any Current Interest Bond interest thereon is in default, interest thereon shall be payable from the Payment Date to which interest has previously been paid or made available for payment or if no interest has been paid or made available for payment, from the Dated Date.
Capital Appreciation Bonds. The Capital Appreciation Bonds will be dated the date of their delivery. The Capital Appreciation Bonds are payable only at maturity and will not pay interest on a current basis. The maturity value of a Capital Appreciation Bond is equal to the Accreted Value (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS) upon the maturity thereof (the “Maturity Value”), being composed of its original principal amount (the “Denominational Amount”) and the interest accreting thereon between the date of delivery thereof and its respective maturity date.
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General. Interest on the Current Interest Bonds is payable in lawful money of the United States of America on each Payment Date to the persons shown as the registered Owners of the Current Interest Bonds on the registration books of the Trustee (the “Registration Books”) as of the first day of the calendar month of the Payment Date (whether or not such day is a business day) (the “Record Date”), payable by check mailed by first-class mail to such Owners on the Payment Date. Payment of such interest, at the option of any Owner of at least $1,000,000 in aggregate principal amount of Current Interest Bonds, will be transmitted by wire transfer to an account in the United States if such Owner makes a written request of the Trustee prior to the first day of the calendar month of the Payment Date specifying the account address. The notice may provide that it will remain in effect for subsequent interest payments until changed or revoked by another written notice.
The Bonds are payable as to principal or Accreted Value, as applicable, upon surrender thereof at the Office of the Trustee. The principal or Accreted Value of the Bonds, as applicable, shall be payable by check in lawful money of the United States of America.
Registration of the Bonds
The Bonds will be issued as fully-registered bonds in book-entry form and in the denomination of $5,000 principal amount or $5,000 Maturity Value, as applicable, or any integral multiple thereof. The Bonds will be dated June 22, 2010, will bear or accrete interest at the rates per annum and will mature on the dates and in the principal amounts, or Maturity Values, as applicable, as set forth on the inside cover page hereof.
Notwithstanding the foregoing, while the Bonds are held in the book-entry system of DTC, all such payments of principal, interest, Maturity Value and premium, if any, will be made to Cede & Co. as the registered owner of the Bonds, for subsequent disbursement to Participants (as defined in Appendix I) and beneficial owners. See “Book-Entry System” below.
Redemption
Optional Redemption. The Current Interest Bonds maturing on or before August 15, 2020, are not subject to optional redemption prior to maturity. Current Interest Bonds maturing on or after August 15, 2021, are subject to redemption prior to maturity from any funds legally available therefor and deposited with the Trustee and on deposit in the Optional Redemption Account of the Redemption Fund, in whole or in part on any date, on or after August 15, 2020, at the principal amount of the Current Interest Bonds to be redeemed, plus accrued but unpaid interest to the redemption date, without premium.
The Capital Appreciation Bonds are not subject to optional redemption prior to maturity.
Special Mandatory Redemption from Insurance or Condemnation Proceeds. The Current Interest Bonds are subject to mandatory redemption prior to maturity, as a whole or in part on any date, at a redemption price equal to the principal amount thereof plus accrued but unpaid interest to the redemption date, without premium, from Net Proceeds (as defined in APPENDIX A – SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS - DEFINITIONS) deposited in the Mandatory Redemption Account of the Redemption Fund pursuant to the Trust Agreement following an event of damage to, or destruction, theft or condemnation of, the Site or any portion thereof or loss of the use or possession of the Site or any portion thereof due to a title defect.
The Capital Appreciation Bonds are subject to mandatory redemption prior to maturity, as a whole or in part on any date, as a redemption price equal to the Accreted Value thereof on the redemption date, without premium, from Net Proceeds deposited in the Mandatory Redemption Account of the Redemption Fund pursuant to the Trust Agreement following an event of damage to, or destruction, theft or condemnation of, the Site or any portion thereof or loss of the use or possession of the Site or any portion thereof due to a title defect.
Sinking Fund Redemption. The Current Interest Bonds maturing on August 15, 2035, are subject to sinking fund redemption, in part, by lot, on August 15, 2034, and on each August 15 thereafter prior to maturity, from Sinking Fund Payments on deposit in the Sinking Fund Redemption Account of the
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Redemption Fund, at the principal amount of such Current Interest Bonds to be redeemed, without premium, plus accrued but unpaid interest to the redemption date as indicated on the following table:
Sinking Fund Redemption Date
(August 15)
Principal Amount
To be Redeemed 2034 $2,525,000 2035 (maturity) 3,965,000
The Current Interest Bonds maturing on August 15, 2040, are subject to sinking fund redemption, in
part, by lot, on August 15, 2036, and on each August 15 thereafter prior to maturity, from Sinking Fund Payments on deposit in the Sinking Fund Redemption Account of the Redemption Fund, at the principal amount of such Bonds to be redeemed, without premium, plus accrued but unpaid interest to the redemption date as indicated on the following table:
Sinking Fund Redemption Date
(August 15)
Principal Amount
to be Redeemed 2036 $4,375,000 2037 4,470,000 2038 4,385,000 2039 4,600,000 2040 (maturity) 4,805,000
In the event of a partial redemption of the Current Interest Bonds maturing on August 15, 2035, or on
August 15, 2040, Sinking Fund Payments for such Current Interest Bonds shall be proportionately reduced pursuant to calculations made by the Trustee.
Selection of Bonds for Redemption. Whenever provision is made in the Trust Agreement for the redemption of Bonds (other than from Sinking Fund Payments for sinking fund redemption) and less than all Outstanding Bonds are to be redeemed, an Authority Representative shall direct the principal amount of each maturity of Bonds to be redeemed. Within a maturity, the Trustee shall select Bonds for redemption by lot. Redemption by lot shall be in such manner as the Trustee shall determine; provided, however, that (a) the portion of any Current Interest Bond to be redeemed in part shall be in the principal amount of $5,000 or any integral multiple thereof and (b) the portion of any Capital Appreciation Bonds to be redeemed shall be in integral multiples of the Accreted Value per $5,000 Maturity Value of Capital Appreciation Bonds.
In the event that Bonds are to be subject to optional and sinking fund redemption or special mandatory and sinking fund redemption on the same date, the Trustee shall first select the Bonds to be redeemed by lot for sinking fund redemption. Upon the occurrence of optional redemption or special mandatory redemption, the Trustee shall immediately notify the Insurer in writing of the Bonds selected for redemption, which shall be subject to the Insurer’s approval, which approval shall not be unreasonably withheld or delayed. A failure by the Insurer to object to the Bonds selected for such redemption within five Business Days shall, for all purposes, be deemed an approval of such selection.
Notice of Redemption. When redemption is authorized or required pursuant to the provisions of the Trust Agreement, the Trustee shall give to the Owners and the Insurer notice of the redemption of the Bonds at the expense of the Authority. Such redemption notice shall specify: (a) that the whole or a designated portion of the Bonds is to be redeemed, (b) the numbers (if less than all the Bonds of a maturity are to be redeemed) and CUSIP® numbers of the Bonds to be redeemed, (c) the date of notice and the date of redemption, (d) the place or places where the redemption will be made including the name and address of any redemption agent, and (e) descriptive information regarding the Bonds, including the dated date, interest rates and stated maturity dates. Such notice shall further state that on the specified redemption date there shall become due and payable upon each Bond to be redeemed, the principal or Accreted Value, as applicable (or portion) with respect thereto, together with interest accrued or accreted, as applicable, to said redemption date and redemption premium, if any, and that from and after such redemption date interest with respect thereto shall cease to accrue or accrete, as applicable, and be payable (or in the case of a partial redemption, interest shall cease to
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accrue or accrete, as applicable, with respect to such redeemed portion) from and after this date fixed for redemption.
Neither failure to receive any redemption notice nor any defect in such redemption notice so given shall affect the sufficiency of the proceedings for the redemption of the Bonds.
Any notice of redemption may specify that redemption of the Bonds designated for redemption on the specified redemption date will be subject to the receipt by the Authority of moneys sufficient to cause such redemption (and will specify the proposed source of such moneys), and neither the Authority, the District nor the Trustee will have any liability to the Owners of any Bonds, or any other party, as the result of the Authority’s failure to redeem the Bonds designated for redemption as a result of insufficient moneys therefor.
Partial Redemption of Bonds. Upon surrender of any Bond redeemed in part only, the Trustee shall execute, and deliver to the Owner thereof, at the expense of the Authority, a new Bond or Bonds in an amount equal in aggregate principal amount to the unredeemed portion of the Bond surrendered and of the same interest rate and the same principal Payment Date. Such partial redemption shall be valid upon payment of the amount thereby required to be paid to such Owner, and the Authority, the District and the Trustee shall be released and discharged from all liability to the extent of such payment.
Rescission of Notice of Optional Redemption. The Authority may rescind any optional redemption of the Bonds, and notice thereof, for any reason on any date prior to the date fixed for such redemption by causing written notice of the rescission to be given to the Owners of the Bonds so called for redemption. Notice of rescission of redemption shall be given in the same manner in which the Redemption Notice was originally given. The actual receipt by the Owner of any Bond of notice of such rescission shall not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice shall not affect the validity of the rescission. Neither the Authority nor the Trustee shall have any liability to the Owners of any Bonds, or any other party, as a result of the Authority’s decision to rescind the redemption of any Bonds pursuant to the provisions of the Trust Agreement.
Effect of Redemption. Notice of redemption having been given, and the moneys for the redemption, including interest to the applicable redemption date, having been set aside in the Redemption Fund, the portion of Bonds to be redeemed shall become due and payable on said redemption date, and, upon presentation and surrender thereof at the office or offices specified in such notice, such Bonds shall be paid at the redemption price with respect thereto, plus any unpaid and accrued interest to said redemption date.
When any Bond or portion thereof has 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 Trustee, in form satisfactory to it, and sufficient money shall be held by the Trustee irrevocably in trust for the redemption price of such Bond or portion thereof, and accrued interest thereon to the date fixed for redemption, all as provided in the Trust Agreement, then such Bond or portion thereof shall no longer be deemed Outstanding under the provisions of the Trust Agreement.
Purchase in Lieu of Redemption. Without the prior written consent of the Insurer, no Bonds shall be purchased by the Authority, the District or any of its affiliates, in lieu of redemption, unless such Bonds are redeemed, defeased or cancelled. With the prior written consent of the Insurer, money held in the Redemption Fund and money held in the Principal Account of the Bond Fund may be used to reimburse the Authority for the purchases of Bonds that would otherwise be subject to redemption from such moneys upon the delivery of such Bonds to the Trustee for cancellation at least 10 days prior to the date on which the Trustee is required to select Bonds for redemption. The purchase price of any Bonds purchased by the Authority shall not exceed the applicable redemption price of the Bonds which would be redeemed (accrued interest to be paid from the Interest Account of the Bond Fund). Any such purchase must be completed prior to the time notice would otherwise be required to be given to redeem the related Bonds. All Bonds so purchased shall be surrendered to the Trustee for cancellation and applied as a credit against the obligation to redeem Bonds from such moneys.
Transfer of Bonds. Each Bond shall be transferable only upon the Bond Register which shall be kept for that purpose at the Principal Office of the Trustee, by the registered Owner thereof in person or by his attorney duly authorized in writing, upon surrender thereof, together with a written instrument of transfer
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satisfactory to the Trustee, duly executed by the registered Owner or his duly authorized attorney. Upon the transfer of any such Bond, the Trustee shall provide in the name of the transferee, a new Bond, or Bonds, of the same aggregate principal amount and maturity as the surrendered Bonds (unless there has occurred a partial redemption of such Bond in which case the principal amount of the new Bond shall be equal to the unredeemed principal portion of the Bond submitted for transfer).
Exchange of Bonds. Bonds may be exchanged at the Principal Office of the Trustee for a like aggregate principal amount of bonds of other authorized denominations of the same maturity and interest rate.
The Trustee
Union Bank, N.A., Los Angeles, California, has been appointed as the initial Trustee for the Bonds under the Trust Agreement. See “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Trust Agreement” for a further description of the rights and obligations of the Trustee under the Trust Agreement.
Debt Service Schedule
The table below sets forth the annual debt service for the Bonds based on the maturity schedule and interest rates set forth on the inside cover page of this Official Statement.
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Table 1
Debt Service Schedule San Marcos Schools Financing Authority
Lease Revenue Bonds, Series 2010 Capital Appreciation Bonds Current Interest Bonds
Period Ending Principal Interest Paid at Maturity
Final Accreted Value Principal Interest
Semi-Annual Debt Service
Total Annual Debt Service
August 15, 2010 $339,338.02 $339,338.02 $339,338.02 February 15, 2011 1,152,468.75 1,152,468.75 August 15, 2011 1,152,468.75 1,152,468.75 $2.304,937.50 February 15, 2012 1,152,468.75 1,152,468.75 August 15, 2012 $110,000.00 1,152,468.75 1,262,468.75 2.414,937.50 February 15, 2013 1,151,368.75 1,151,368.75 August 15, 2013 110,000.00 1,151,368.75 1,261,368.75 2,412,737.50 February 15, 2014 1,149,718.75 1,149,718.75 August 15, 2014 115,000.00 1,149,718.75 1,264,718.75 2,414,437.50 February 15, 2015 1,147,993.75 1,147,993.75 August 15, 2015 120,000.00 1,147,993.75 1,267,993.75 2,415,987.50 February 15, 2016 1,145,593.75 1,145,593.75 August 15, 2016 220,000.00 1,145,593.75 1,365,593.75 2,511,187.50 February 15, 2017 1,142,293.75 1,142,293.75 August 15, 2017 330,000.00 1,142,293.75 1,472,293.75 2,614,587.50 February 15, 2018 1,135,693.75 1,135,693.75 August 15, 2018 445,000.00 1,135,693.75 1,580,693.75 2,716,387.50 February 15, 2019 1,126,793.75 1,126,793.75 August 15, 2019 570,000.00 1,126,793.75 1,696,793.75 2,823,587.50 February 15, 2020 1,116,818.75 1,116,818.75 August 15, 2020 705,000.00 1,116,818.75 1,821,818.75 2,938,637.50 February 15, 2021 1,104,040.63 1,104,040.63 August 15, 2021 850,000.00 1,104,040.63 1,954,040.63 3,058,081.26 February 15, 2022 1,088,103.13 1,088,103.13 August 15, 2022 1,005,000.00 1,088,103.13 2,093,103.13 3,181,206.26 February 15, 2023 1,068,003.13 1,068,003.13 August 15, 2023 1,170,000.00 1,068,003.13 2,238,003.13 3,306,006.26 February 15, 2024 1,044,603.13 1,044,603.13 August 15, 2024 1,350,000.00 1,044,603.13 2,394,603.13 3,439,206.26 February 15, 2025 1,016,759.38 1,016,759.38 August 15, 2025 1,545,000.00 1,016,759.38 2,561,759.38 3,578,518.76 February 15, 2026 983,928.13 983,928.13 August 15, 2026 1,750,000.00 983,928.13 2,733,928.13 3,717,856.26 February 15, 2027 945,646.88 945,646.88 August 15, 2027 1,975,000.00 945,646.88 2,920,646.88 3,866,293.76 February 15, 2028 901,209.38 901,209.38 August 15, 2028 2,220,000.00 901,209.38 3,121,209.38 4,022,418.76 February 15, 2029 851,259.38 851,259.38 August 15, 2029 2,485,000.00 851,259.38 3,336,259.38 4,187,518.76 February 15, 2030 793,793.75 793,793.75 August 15, 2030 2,760,000.00 793,793.75 3,558,793.75 4,352,587.50 February 15, 2031 728,125.00 728,125.00 August 15, 2031 $771,276.10 $2,298,723.90 $3,070,000.00 728,125.00 3,798,125.00 4,526,250.00 February 15, 2032 728,125.00 728,125.00 August 15, 2032 753,480.00 2,496,520.00 3,250,000.00 728,125.00 3,978,125.00 4,706,250.00 February 15, 2033 728,125.00 728,125.00 August 15, 2033 738,258.40 2,701,741.60 3,440,000.00 728,125.00 4,168,125.00 4,896,250.00 February 15, 2034 728,125.00 728,125.00 August 15, 2034 220,312.80 889,687.20 1,110,000.00 2,525,000.00 728,125.00 4,363,125.00 5,091,250.00 February 15, 2035 665,000.00 665,000.00 August 15, 2035 3,965,000.00 665,000.00 4,630,000.00 5,295,000.00 February 15, 2036 565,875.00 565,875.00 August 15, 2036 4,375,000.00 565,875.00 4,940,875.00 5,506,750.00 February 15, 2037 456,500.00 456,500.00 August 15, 2037 4,470,000.00 456,500.00 4,926,500.00 5,383,000.00 February 15, 2038 344,750.00 344,750.00 August 15, 2038 4,385,000.00 344,750.00 4,729,750.00 5,074,500.00 February 15, 2039 235,125.00 235,125.00 August 15, 2039 4,600,000.00 235,125.00 4,835,125.00 5,070,250.00 February 15, 2040 120,125.00 120,125.00 August 15, 2040 __________ ________ ________ ____ 4,805,000.00 120,125.00 4,925,125.00 5,045,250.00 Totals $2,483,327.30 $8,386,672.70 $10,870.000.00 $48,965,000.00 $53,376,206.86 $113,211,206.86 $113,211,206.86
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Book-Entry System
DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered certificates registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. See “APPENDIX I – BOOK-ENTRY-ONLY SYSTEM” herein.
The Authority and the Trustee cannot and do not give any assurances that DTC, DTC Participants or any other person will distribute payments of principal, interest or premium, if any, with respect to the Bonds paid to DTC or its nominee as the registered owner, or will distribute any prepayment notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The Authority and the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto.
SECURITY FOR THE BONDS
The principal of and interest on the Bonds are not a debt of the Authority or the District, nor a legal or equitable pledge, charge, lien or encumbrance, upon any of their respective property, or upon any of their income, receipts, or revenues except the Revenues (defined below) and other amounts pledged under the Trust Agreement.
This section provides summaries of the security for the Bonds and certain provisions of the Trust Agreement, the Lease Agreement, the Site Lease and the Pledge Agreement. See “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS” for a more complete summary of the Trust Agreement, the Lease Agreement, the Site Lease and the Pledge Agreement.
General
The Bonds are special obligations of the Authority secured by Revenues, primarily consisting of Lease Payments to be made by the District pursuant to the Lease Agreement, certain amounts on deposit under the Trust Agreement and certain investment earnings thereon.
The Authority, pursuant to the Assignment Agreement, will sell, assign and transfer to the Trustee for the benefit of the Owners substantially all of the Authority’s right, title and interest in and to the Site Lease and the Lease Agreement, including, without limitation, its right to receive Lease Payments and other rental to be paid by the District under the Lease Agreement and the right to exercise such rights and remedies as are conferred on the Authority by the Lease Agreement as may be necessary to enforce payment of the Lease Payments and other rental when due, or otherwise protect the Authority’s interests in the event of a default by the District under the Lease Agreement. The District will pay Lease Payments directly to the Trustee, as assignee of the Authority. See “Lease Payments” below.
Pledge of Revenues
Under the Trust Agreement, the Authority and the District, as their respective interests may appear, expressly grant to the Trustee for the benefit of the Owners a first lien on and a security interest in all “Revenues” held by the Trustee under the Trust Agreement (with the exception of the Construction Fund, Costs of Issuance Fund, and the Rebate Fund and any moneys to be deposited therein or interest earnings thereon), including, without limitation, the Bond Fund, the Lease Payment Fund, the Reserve Fund (including payments of Reserve Replenishment Rent), the Redemption Fund, and the Insurance and Condemnation Fund, and all such moneys shall be held by the Trustee in trust and applied to the respective purposes specified in the Trust Agreement and in the Lease Agreement.
“Revenues” are defined in the Trust Agreement as: (a) all revenues, issues, income, rents, royalties, profits and receipts derived or to be derived by the Authority from or attributable to the lease of the Site to the
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District, including revenues attributable to the lease of the Site or to the payment of the costs thereof received or to be received by the Authority under the Lease Agreement or any contractual arrangement with respect to the use of the Site, including the payment of the Lease Payments, Additional Rent and Reserve Replenishment Rent thereunder; (b) the proceeds of any insurance, including the proceeds of any self-insurance covering the loss relating to the Site; (c) all proceeds of rental interruption insurance policies, if any, carried with respect to the Site pursuant to the Lease Agreement; (d) all amounts on hand from time to time in the funds and accounts established under the Trust Agreement (other than the Construction Fund, Costs of Issuance Fund and the Rebate Fund); and (e) any additional property that may, from time to time, by delivery or by writing of any kind, be subjected to the lien of the Trust Agreement by the Authority or by anyone on the Authority’s behalf, subject only to the provisions of the Trust Agreement and the Lease Agreement.
THE OBLIGATION OF THE DISTRICT TO PAY THE LEASE PAYMENTS DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE DISTRICT, THE AUTHORITY, ANY MEMBERS OF THE AUTHORITY, THE DESIGNATED CFDS, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. THE OBLIGATION OF THE DISTRICT TO PAY THE LEASE PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION.
Lease Payment Fund
All Lease Payments received by the Trustee under the Lease Agreement shall be deposited into the Lease Payment Fund established pursuant to the Trust Agreement. The Trustee shall transfer on each Payment Date from the Lease Payment Fund to the Interest Account of the Bond Fund an amount which, together with any amount on deposit therein, equals the interest then due on such Payment Date on the Bonds. The Trustee shall transfer on each maturity date for the Bonds from the Lease Payment Fund to the Sinking Fund Redemption Account of the Redemption Fund, or the Principal Account of the Bond Fund, as applicable, an amount which, together with any amount on deposit therein, equals the principal then due on such maturity date with respect to the Bonds in accordance with the terms of the Trust Agreement.
All delinquent Lease Payments received by the Trustee pursuant to the Lease Agreement and the proceeds of rental interruption insurance with respect to the Site, if any, received by the Trustee shall be deposited into the Lease Payment Fund. All proceeds of rental interruption insurance and delinquent Lease Payments so received shall be applied first to the payment of overdue installments of interest on the Bonds, then to the payment of any overdue installments of principal of the Bonds and then to make up any deficiency in the Reserve Fund. Any amounts remaining in the Lease Payment Fund on each Payment Date or maturity date which are not required for the payment of principal or interest on the next succeeding Payment Date or maturity date shall be first transferred to the Reserve Fund to the extent necessary to make the amount on deposit therein equal to the Reserve Requirement and, second, applied as a credit against the next following Lease Payment, including any remaining money representing delinquent Lease Payments and any proceeds of rental interruption insurance, which shall remain on deposit in the Lease Payment Fund.
Bond Fund
The Trustee shall establish the Bond Fund pursuant to the Trust Agreement and, within the Bond Fund, the Trustee shall establish the Interest Account, the Capitalized Interest Account and the Principal Account. Moneys transferred to the Interest Account, the Capitalized Interest Account and the Principal Account shall be applied by the Trustee to the payment of interest and principal due and payable on the Bonds. See “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS.”
Reserve Fund
Application of Moneys in the Reserve Fund or Reserve Facility. If, on any Payment Date, the amount on deposit in the Lease Payment Fund is insufficient to pay the principal and interest accrued or
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accreted on the Bonds on such Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Lease Payment Fund an amount sufficient to make up such deficiency. If a Reserve Facility (defined below) is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement (defined below), the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Lease Payment Fund. See “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Trust Agreement.”
Reserve Requirement. The “Reserve Requirement” is defined in the Trust Agreement, as of the date of calculation, as an amount equal to the least of:
(i) 125% of the average annual aggregate Lease Payments over the remaining term of the Lease Agreement;
(ii) the maximum aggregate annual Lease Payments over the remaining term of the Lease Agreement; or
(iii) ten percent (10%) of the net proceeds of the Bonds.
The Reserve Requirement on the Delivery Date of the Bonds shall be satisfied by a cash deposit from the Bond proceeds in the amount of $2,394,097.77 and the delivery to the Trustee of a Reserve Facility in the form of the Debt Service Reserve Insurance Policy to be issued by the Insurer in the coverage amount of $2,300,000.
Reserve Facility. The Authority may substitute a line of credit, letter of credit, insurance policy, surety bond or other credit source deposited with the Trustee pursuant to the provisions of the Trust Agreement (“Reserve Facility”) for all or part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement; provided, however, that prior to any such substitution, the Trustee shall have received written confirmation from the Rating Agencies (defined below) that such substitution would not cause such Rating Agencies to lower or withdraw its rating then in effect with respect to the Bonds. “Rating Agencies” is defined in the Trust Agreement to mean Moody’s (defined below), or any national rating agency then rating the Bonds at the request of the Authority. “Moody’s” is defined in the Trust Agreement to mean Moody’s Investors Service, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Authority. “S&P” is defined in the Trust Agreement to mean Standard and Poor’s Ratings Services, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “S&P” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Authority. The Authority shall not substitute any Reserve Facility in lieu of all or any portion of moneys on deposit in the Reserve Fund without the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy).
Moneys for which a Reserve Facility has been substituted as provided in the Trust Agreement shall be transferred, at the election of the Authority, to the Lease Payment Fund, or upon receipt of a written opinion of counsel of recognized standing in the field of law relating to municipal bonds, appointed and paid by the Authority, to the effect that such transfer, in and of itself, will not adversely affect the exclusion of principal and interest accrued or accreted due on the Bonds from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the Authority, as directed in a Written Request of the Authority (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – DEFINITIONS).
Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund.
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Allocation if Cash and a Reserve Facility Are on Deposit. Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility, the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that, more than one Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder, and repayment of expenses with respect thereto, shall be made on a pro rata basis (calculated by reference to the policy limits available thereunder).
Replenishment of the Reserve Fund. If there are no amounts currently due under any Reserve Facility and the sum of the amount on deposit in the Reserve Fund, plus the amount available under any Reserve Facilities, shall be reduced below the Reserve Requirement, the first of Lease Payments thereafter received from the District under the Lease Agreement and not needed to pay the principal and interest accrued or accreted on the Bonds on the next Payment Date, shall be used, first, to reinstate the amounts available under the Reserve Facilities that have been drawn upon and, second, to increase the amount on deposit in the Reserve Fund, so that the amount available under the Reserve Facilities, when added to the amount on deposit in the Reserve Fund, shall equal the Reserve Requirement.
For purposes of determining the amount on deposit at any time in the Reserve Fund, the Trustee shall quarterly review all Permitted Investments (as defined in the Trust Agreement) in which funds on deposit in the Reserve Fund are invested and on or before each Due Date, determine the market value of such Permitted Investments (exclusive of accrued or accreted interest but inclusive of any commissions). To the extent the Trustee is required to make any valuations of investments under the Trust Agreement, the Trustee may utilize any computerized pricing services as may be available to it, including those on its regular accounting system and conclusively rely thereon.
Reserve Replenishment Rent. All moneys paid to the Trustee as Reserve Replenishment Rent pursuant to the Lease Agreement shall be deposited into the Reserve Fund. See “SECURITY FOR THE BONDS – Lease Payments – Reserve Replenishment Rent” herein.
Transfers of Excess Moneys. If, as a result of the payment of principal and interest accrued or accreted on the Bonds or otherwise, the Reserve Requirement is reduced, the Trustee shall transfer, on or before each Due Date, the amounts on deposit in the Reserve Fund in excess of such reduced Reserve Requirement to the Construction Fund until the substantial completion of the acquisition, construction, delivery and installation of the Project (the “Completion Date”) and thereafter to the Lease Payment Fund.
Interest earned on moneys on deposit in the Reserve Fund, including interest earned on a Reserve Facility, shall be retained in such fund, except that any such earnings that cause the balance in the Reserve Fund to exceed the Reserve Requirement shall be transferred, on or before each Payment Date, to the Construction Fund until the Completion Date and thereafter to the Lease Payment Fund.
Application Toward Final Lease Payments. If on any Lease Payment Date the moneys on deposit in the Reserve Fund and the Lease Payment Fund (excluding amounts required for past due principal and interest with respect to the Bonds not presented for payment) are equal to all Lease Payments due by the District during the entire remainder of the term of the Lease Agreement, the Trustee shall transfer all amounts then on hand in the Reserve Fund to the Lease Payment Fund to be applied to the payment of such Lease Payments as they become due on behalf of the District, and the District shall be deemed to have paid all Lease Payments due under the Lease Agreement.
Lease Payments
Base Rental. The District is required to pay to the Trustee, as the assignee of the Authority, as “Base Rental” for the use and possession of the Site, the Lease Payments specified in the Lease Agreement at least 15 days prior to each Payment Date (each, a “Due Date”) commencing with the August 15, 2010, Payment Date.
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Reserve Replenishment Rent. If (a) funds have been withdrawn from the Reserve Fund in order to pay principal of or interest on the Bonds or as the result of investment losses and the amount remaining on deposit in the Reserve Fund is less than the Reserve Requirement and/or if there has been a draw on a Reserve Facility under the Trust Agreement, as a result of a deficiency in the District’s payment of Lease Payments, and (b) Lease Payments are not in abatement pursuant to the Lease Agreement, then the District shall pay, over a one year period, in substantially equal semiannual payments, from its first available moneys after payment of Lease Payments, to the Trustee, “Reserve Replenishment Rent” in an amount sufficient to (i) restore the Reserve Fund to the Reserve Requirement, and/or (ii) repay the Reserve Facility provider pursuant the Trust Agreement.
Additional Rent. Under the Lease Agreement, the District is also required to pay Additional Rent equal to the following:
(1) all taxes and assessments of any nature whatsoever, including, but not limited to, excise taxes, ad valorem taxes, ad valorem and specific lien special assessments and gross receipts taxes, if any, levied upon the Site, or upon any interest of the Authority, the Trustee or the Owners therein or in the Lease Agreement;
(2) all fees and expenses (not otherwise paid or provided for out of the proceeds of the sale of the Bonds) of the Trustee in connection with the performance of its duties under the Lease Agreement and under the Trust Agreement and all amounts due to the Insurer under the terms of the Lease Agreement or under the Trust Agreement that do not otherwise constitute Lease Payments or payments of Reserve Replenishment Rent;
(3) insurance premiums, if any, on all insurance required under the provisions of the Lease Agreement;
(4) all administrative costs of the Authority related to the Project or the Site, including, without limiting the generality of the foregoing, fees and charges of auditors, accountants and attorneys, any amounts payable under the Lease Agreement, and all other necessary administrative costs of the Authority or charges required to be paid by the Authority in order to comply with the terms of the Bonds or the Trust Agreement and to defend and indemnify the Authority and its members, officers and directors; and
(5) all other payments required to be made by the District under the provisions of the Lease Agreement or of the Trust Agreement, including amounts payable to the Insurer.
Covenant to Budget and Appropriate
The District will covenant in the Lease Agreement to take such action as may be necessary to include all Rental Payments in its annual budget.
The District will certify to the Trustee, no later than 20 days following adoption of the District’s budget for that Fiscal Year, that the Rental Payments due in that Fiscal Year have been included in the budget approved by the Governing Board of the District (the “Board”) for such Fiscal Year; or if no budget has been approved by September 15th of any year, the District shall certify to the Trustee no later than September 30th of such year, that the Rental Payments due in that Fiscal Year have been appropriated by a resolution duly adopted by the Board.
Covenant Regarding Application of Redevelopment Payments
The Lease Agreement provides that, subject only to the provisions of the Lease Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein, to the extent permitted by law, all of the Redevelopment Payments (as defined below) are pledged to secure the payment of the Lease Payments in accordance with the provisions of the Lease Agreement; provided, however, that,
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notwithstanding the foregoing, the Lease Agreement provides that the Redevelopment Payments are pledged to secure only that portion of the Lease Payments attributable to the financing of educational or other capital facilities of the District to which such Redevelopment Payments may contractually or statutorily be applied. The Lease Agreement provides that said pledge constitutes a first pledge and lien on the Redevelopment Payments.
Pursuant to the Lease Agreement, the District agrees and covenants that all Redevelopment Payments received by the District in each Fiscal Year, commencing Fiscal Year 2010-11, in the lesser of (i) $6,000,000 or (ii) the amount actually received, will be applied by the District to the payment of the portion of the Lease Payments coming due during such Fiscal Year attributable to the financing of educational or other capital facilities of the District to which such Redevelopment Payments may be contractually or statutorily be applied; provided, however, that, after the payment of such portion of the Lease Payments or the setting aside from the Redevelopment Payments or any other available funds of the District of an amount sufficient to pay such portion of the Lease Payments, all remaining Redevelopment Payments in such Fiscal Year may be used for any purpose for which Redevelopment Payments may be legally applied. See “APPENDIX C –REDEVELOPMENT PAYMENTS” and “APPENDIX D – FISCAL CONSULTANT’S REPORT 2009/10.”
“Redevelopment Payments” is defined in the Lease Agreement to mean the lesser of $6,000,000 or the amount actually received, in each Fiscal Year, commencing in Fiscal Year 2010-11, that is contractually or statutorily required to be made to the District from tax increment revenues pursuant to the Pass-Through Agreement (defined below), and are specifically limited to those tax increment revenues received from the Redevelopment Agency of the City (the “Agency) for Project Area No. 3, and which payments are available for use by the District for certain educational facilities or other capital projects of the District. “Pass-Through Agreement” is defined in the Lease Agreement to mean collectively that “Agreement for Cooperation between San Marcos Unified School District and City of San Marcos and Redevelopment Agency of the City of San Marcos Project Area No. 3,” entered into June 13, 1989 (the “Original Pass-Through Agreement”), as clarified by the “Agreement for Cooperation Between the City of San Marcos, the Redevelopment Agency of the City of San Marcos and the San Marcos Unified School District Relating to School Facilities Financing (San Elijo Hills) and Reaffirming and/or Modifying Certain Aspects of Agreements for Cooperation for Redevelopment Project Areas No. 1, No. 2 and No. 3,” dated as of March 14, 2000 (the “Second Pass-Through Agreement”), by and among the City, the District and the Agency (the Original Pass-Through Agreement as clarified by the Second Pass-Through Agreement shall be referred to collectively as the “Pass-Through Agreement”). See “APPENDIX C - REDEVELOPMENT PAYMENTS” herein.
The Redevelopment Payments will be available to be applied to the payment of the Lease Payments due under the Lease Agreement only if and to the extent that such Lease Payments are due and payable. Thus, for example, if the obligation of the District to pay the Lease Payments has been abated by reason of material damage to, or destruction or condemnation of, the Site, Redevelopment Payments will not be available to pay such Lease Payments. Furthermore, the District cannot estimate whether, or to what extent, Redevelopment Payments will increase or decrease in any future fiscal year, or the extent to which such Redevelopment Payments will be available to make the Lease Payments due under the Lease Agreement. The District has no control over economic and political factors which may affect the amount of Redevelopment Payments, including any revisions in applicable California law which may have the effect of reducing the amount of Redevelopment Payments payable to the District. Investors should not assume that the District will receive Redevelopment Payments sufficient to enable it to pay the Lease Payments due under the Lease Agreement in whole or in part during the term of the Bonds. The Redevelopment Payments subject to such pledge are limited to the lesser of $6,000,000 or the amount actually received in each Fiscal Year, commencing with Fiscal Year 2010-11. Currently the District receives approximately $1,069,055 per Fiscal Year after payment of all existing Agency indebtedness which is paid for from tax increment revenues payable to the District and the amounts received by the District are estimated to increase to $5,593,025 annually during the term of the Bonds. See “APPENDIX D – FISCAL CONSULTANT’S REPORT 2009/10” and “APPENDIX F – ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES.”
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Pledge Agreement
Purpose. The District has also covenanted in the Pledge Agreement (defined below) to apply towards the payment of the Lease Payments all Surplus Net Special Taxes (defined below) to be made available for such purpose pursuant to that certain Pledge Agreement, dated as of June 1, 2010 (the “Pledge Agreement”), among the District, the Authority and five of the six community facilities districts established by the District to date pursuant to the Mello-Roos Community Facilities Act of 1982 (California Government Code Section 53311 and following) (the “Mello-Roos Act”) (these community facilities districts are referred to collectively as the “Designated CFDs”). “Designated CFDs” include the following community facilities districts:
• Community Facilities District No. 1 of the San Marcos Unified School District (“CFD No. 1”);
• Community Facilities District No. 2 of the San Marcos Unified School District (“CFD No. 2”);
• Community Facilities District No. 4 of the San Marcos Unified School District (“CFD No. 4”);
• Community Facilities District No. 5 of the San Marcos Unified School District (“CFD No. 5”); and
• Community Facilities District No. 6 of the San Marcos Unified School District (“CFD No. 6”).
No revenues of Community Facilities District No. 3 of the San Marcos Unified School District are pledged to the payment of Lease Payments. See “APPENDIX E - SURPLUS NET SPECIAL TAXES – The Designated CFDs” herein.
The Authority, the District and the Designated CFDs entered into the Pledge Agreement for the purpose of establishing (1) the District’s pledge, on behalf of itself and each of the Designated CFDs, to transfer Surplus Net Special Taxes either to the District, the Authority or the Trustee to make required Rental Payments or for such other purposes permitted under the Pledge Agreement and related implementing covenants and agreements, including, but not limited to, the Lease Agreement, (2) the Authority’s respective covenants to transfer such corresponding funds after the close of each corresponding Bond Year to the District, the Authority or the Trustee in order to make Rental Payments due under the Lease Agreement and for such other purposes permitted under the Pledge Agreement and related implementing covenants, (3) the pledge of the Designated CFDs that each Designated CFD will transfer, or arrange to transfer, the Surplus Net Special Taxes to the District, the Authority or the Trustee in order to make Rental Payments due under the Lease Agreement and for such other purposes permitted by the terms of the Pledge Agreement and related implementing covenants, and (4) the District’s pledge to use the Surplus Net Special Taxes, upon receipt, for the payment of the Rental Payments and for such other purposes permitted under the Pledge Agreement and related implementing covenants. “Rental Payments” is defined in the Pledge Agreement to mean, collectively, Lease Payments, Additional Rent and Reserve Replenishment Rent.
Surplus Net Special Taxes. “Surplus Net Special Taxes” include the special taxes of each Designated CFD (the “Special Taxes”) remaining after payment of all Administrative Expenses and Outstanding Debt Service on September 1 of each calendar year, including, but not limited to, costs to conduct foreclosure proceedings, replenishment of reserve funds or accounts, and any other requirements or obligations under the applicable Rate and Method, the CFD Formation Documents and the Outstanding Securities Agreements and, in the case of CFD No. 6, the terms of the Pledge Agreement, as applicable.
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The Pledge Agreement defines the following terms integral to the definition of the Surplus Net Special Taxes:
• “Administrative Expenses” include the administrative costs with respect to the calculation and collection of the Special Taxes, and costs otherwise incurred to carry out the authorized purposes of the Designated CFDs and the Authority, and to administer the Outstanding Securities, and as such term is further defined in the applicable CFD Formation Documents, the Rate and Methods and the Outstanding Securities Agreements.
• “CFD Formation Documents” means those prior resolutions, documents, affidavits, ordinances, notices, contracts and agreements, including, but not limited to, joint community facilities agreements, mitigation agreements and SB-50 agreements, as applicable, relating to the formation of the Designated CFDs and the approval of the Special Taxes, that may include provisions or covenants concerning the use of Special Taxes, issuance of Outstanding Securities, and any amendments to the foregoing existing as of the date of the Pledge Agreement, or thereafter.
• “Outstanding Debt Service” means any principal, interest, or premium, if applicable, payable with respect to the Outstanding Securities.
• “Outstanding Securities” means those securities that are currently outstanding and were issued prior to the issuance and sale of the Bonds, including, but not limited to, special tax bonds and revenue bonds, and which, by their terms, have a prior lien on the Special Taxes.
• “Outstanding Securities Agreement(s)” means any fiscal agent agreement, resolution, resolution supplement, indenture, lease agreement, or other document that provides for the issuance and terms and conditions of the Outstanding Securities.
• “Rate and Method(s)” means the respective Rate and Method of Apportionment of Special Tax for each of the Designated CFDs.
The Authority Pledge and Covenants. So long as any of the Bonds are Outstanding (as such term is defined in the Trust Agreement) under the terms of the Trust Agreement and subject only to the provisions of the Pledge Agreement permitting the application of the Surplus Net Special Taxes for the purposes and on the terms and conditions set forth in the Pledge Agreement, the Authority irrevocably pledges all the Surplus Net Special Taxes received pursuant to directives of the District on behalf of each of the Designated CFDs, as applicable, for use in accordance with the terms of the Pledge and such pledge shall constitute a first lien on such assets. The Authority further agrees and covenants to take no action which would impair or impede the transfer of the Surplus Net Special Taxes to the District as specified in the Pledge Agreement.
The Designated CFDs Pledges and Covenants. So long as any of the Bonds are Outstanding under the terms of the Trust Agreement and subject only to the provisions of the Pledge Agreement permitting the application of the Surplus Net Special Taxes for the purposes and on the terms and conditions set forth in the Pledge Agreement, each of the Designated CFDs irrevocably pledges all its corresponding Surplus Net Special Taxes for deposit to the District, the Authority or the Trustee in order to make Rental Payments due under the Lease Agreement and for such other purposes permitted under the Pledge Agreement and related implementing covenants in accordance with the terms of the Pledge Agreement, and each such pledge shall constitute a first lien on such corresponding assets.
Pursuant to the Pledge Agreement and consistent with the Outstanding Securities Agreement(s), CFD Formation Documents and the Rate and Methods, each Designated CFD agrees and covenants to transfer the corresponding Surplus Net Special Taxes upon receipt and/or availability thereof to, or at the direction of, the District for the purposes permitted under the Pledge Agreement. Each Designated CFD further agrees and covenants to take no action(s) which would impair or impede the ability of each CFD to collect and transfer the Surplus Net Special Taxes as specified in the Pledge Agreement.
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As of the Bond Year commencing August 16, 2010, CFD Nos. 1 and 2 and the Bond Year commencing August 16, 2009, CFD Nos. 4 and 5, respectively, shall, on or immediately after the immediately following September 2, transfer the Surplus Net Special Taxes to, or at the direction of, the District within five (5) business days of the actual receipt and/or availability of such Surplus Net Special Taxes. All Surplus Net Special Taxes of CFD No. 6 for the immediately prior Bond Year (commencing with the Bond Year beginning on August 16, 2009), shall on or immediately after September 2 of each calendar year immediately following the completion of the prior Bond Year (commencing on September 2, 2010) become subject to the Pledge (defined below) and shall on, or immediately following, such date be subject to transfer to the District, the Authority or the Trustee.
District Pledge and Covenants. So long as any of the Bonds are Outstanding under the terms of the Trust Agreement, the District pledges, agrees and covenants to receive all Surplus Net Special Taxes from the Designated CFDs and, subject only to the provisions of the Pledge Agreement permitting the application of the Surplus Net Special Taxes for the purposes and on the terms and conditions set forth in the Pledge Agreement, the District irrevocably pledges all the Surplus Net Special Taxes to secure payment of Lease Payments, Reserve Replenishment Rent or Additional Rent pursuant to the terms of the Lease Agreement or the prepayment of the Bonds in accordance with the terms of the Trust Agreement (the “Pledge”). The District further agrees and covenants to, as and when due, apply all such funds for either of such purposes subject to the provisions of the Pledge Agreement. The Pledge constitutes a first lien on the Surplus Net Special Taxes, subject to the permitted use described below, provided any such use of the Surplus Net Special Taxes shall generally conform to the schedule affixed to the Pledge Agreement. Any amounts owning to the Insurer under the Insurance Policy are secured on a parity with the Bonds, which security shall include the Surplus Net Special Taxes.
Notwithstanding the Pledge, the District, with the consent of the Insurer, may use the Surplus Net Special Taxes of CFD Nos. 4, 5 and 6 to fund school facilities costs, provided any such use of the Surplus Net Special Taxes shall be in proportion to the school facilities costs for which such Surplus Net Special Taxes may be applied, and related financing costs, if applicable, and as permitted under the applicable CFD Formation Documents and Rate and Method, either directly, or indirectly through the issuance or execution and delivery of Additional Securities by the District, the applicable CFDs, or the Authority, either individually or in any combination. See “APPENDIX E – SURPLUS NET SPECIAL TAXES – The Designated CFDs – Formation and Bonded Indebtedness” for information regarding the remaining bond authorization, if any, of the Designated CFDs.
Pledge Limitation. The Surplus Net Special Taxes subject to the Pledge will be available for payment for the purposes authorized pursuant to the Pledge in the Bond Year in which such funds are received by the District.
If on August 20 of any calendar year (each, a “Release Date”), (i) all required payments of Rental Payments for the prior Bond Year have been fully and completely satisfied, (ii) all payments of principal and interest due on the Bonds on the immediately preceding August 15 have been made, and (iii) the Reserve Fund for the Bonds is funded to at least the applicable Reserve Requirement, then, without further action by any of the parties to the Pledge Agreement, all Surplus Net Special Taxes of CFD Nos. 4 and 5 held by the District for the immediately preceding Bond Year shall be released from the Pledge and other conditions of the Pledge Agreement and may be freely applied by the District to fund school facilities costs, provided any such use of the Surplus Net Special Taxes shall be in proportion to the school facilities costs for which such Surplus Net Special Taxes may be applied, and related financing costs, if applicable, and as permitted under the applicable CFD Formation Documents and Rate and Method, either directly, or indirectly through the issuance or execution and delivery of Additional Securities (defined below) by the District, the applicable CFDs, or the Authority, either individually or in any combination. The Pledge Agreement defines “Additional Securities” to mean securities, bonds, leases, or any other obligations issued or executed and delivered subsequent to the Delivery Date of the Bonds, payable from and secured by, in whole or in part, the Surplus Net Special Taxes.
If on the Release Date (commencing on August 20, 2011) (i) all required payments of Lease Payments, Reserve Replenishment Rent and Additional Rent for the prior Bond Year have been fully and completely satisfied, (ii) all payments of principal and interest due on the Bonds on the immediately preceding
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August 15 (commencing August 15, 2011) have been made, and (iii) the Reserve Fund for the Bonds is funded to at least the applicable Reserve Requirement, then, without further action by any of the parties to the Pledge Agreement, all Surplus Net Special Taxes of CFD No. 6 held by the District during the immediately preceding Bond Year shall be released from the Pledge and other conditions of the Pledge Agreement and may be freely applied by the District to fund school facilities costs, provided any such use of the Surplus Net Special Taxes shall be in proportion to the school facilities costs for which such Surplus Net Special Taxes may be applied, and related financing costs, if applicable, and as permitted under the CFD Formation Documents and Rate and Method applicable to CFD No. 6, either directly, or indirectly through the issuance or execution and delivery of Additional Securities by the District, CFD No. 6, or the Authority, either individually or in any combination.
Limitation of Debt of CFD No. 6. CFD No. 6 has covenanted pursuant to the Pledge Agreement that it shall not issue, or cause to be issued, special tax bonds, or other securities to which the Special Taxes of CFD No. 6 may be pledged, unless the Special Taxes levied and collected on the taxable property within CFD No. 6 shall not be less than 110% of (i) the Special Taxes of CFD No. 6 pledged under the terms of the Pledge Agreement and (ii) the debt service payable on such special tax bonds or such other securities.
See APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Pledge Agreement.
Estimated Debt Service Coverage on the Bonds from Redevelopment Payments and Surplus Net Special Taxes
See APPENDIX F – ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES for a table which shows the estimated Surplus Net Special Taxes of the Designated CFDs, the estimated Redevelopment Payments, the estimated total revenues, the net debt service on the Bonds and the estimated debt service coverage from the Surplus Net Special Taxes and the Redevelopment Payments resulting from dividing the debt service on the Bonds into the estimated total revenues.
Limited Obligation
THE OBLIGATION OF THE DISTRICT TO PAY THE LEASE PAYMENTS DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE DISTRICT, THE AUTHORITY, ANY MEMBERS OF THE AUTHORITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. THE OBLIGATION OF THE DISTRICT TO PAY THE LEASE PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION.
Abatement
General. During any period in which, by reason of material damage to, or destruction or condemnation of, the Site, there is substantial interference with the District’s right to use and occupy any portion of the Site, Rental Payments shall be abated proportionately, and the District waives the benefits of California Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement shall continue in full force and effect. The amount of such abatement shall be agreed upon by the District and Authority; provided, however, that the Rental Payments due for any Rental Period shall not exceed the fair rental value of that portion of the Site available for use and occupancy by the District during such Rental Period. The District and the Authority shall calculate such abatement and shall provide the Trustee and the Insurer with a certificate setting forth such calculation and the basis therefor. Such abatement shall continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Site, ending with the substantial completion of the work of repair or replacement of the Site, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement shall be extended as
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provided for therein, except that the term of the Lease Agreement shall in no event be extended more than ten years beyond August 15, 2040.
Notwithstanding the foregoing, to the extent moneys are available for the payment of Rental Payments in any of the funds and accounts established under the Trust Agreement, Rental Payments shall not be abated as provided above, but rather, shall be payable by the District as a special obligation payable solely from said funds and accounts.
See “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE LEASE AGREEMENT.”
Rental Interruption Insurance. During any period of abatement the Net Proceeds of the rental interruption insurance required to be maintained by the District during the term of the Lease Agreement shall be paid to the Trustee for deposit in the Lease Payment Fund to be credited towards the payment of the Lease Payments in the order in which such Lease Payments become due and payable.
Action on Default
Should the District default under the Lease Agreement, the Trustee, as assignee of the Authority under the Lease Agreement, may (with the consent of the Insurer, provided that the Insurer is not then in default of its payment obligations) exercise any and all remedies available pursuant to law. However, the Trustee may not accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable or terminate the Lease Agreement. The District expressly agrees that in the event of any default it will remain liable for the payment of all Lease Payments and the performance of all conditions contained in the Lease Agreement and will reimburse the Authority for any deficiency arising out of the re-leasing of the Site or, in the event the Authority is unable to re-lease the Site, then for the full amount of all Lease Payments to the end of the term of the Lease Agreement. See “RISK FACTORS” herein. Notwithstanding anything to the contrary contained in the Lease Agreement, so long as the Insurer is not in default in its payment obligations under the Insurance Policy, no remedy shall be exercised under the Lease Agreement without the prior written consent of the Insurer and the Insurer shall have the right to direct the exercise of any remedy under the Lease Agreement.
For a description of the events of default and permitted remedies of the Trustee (as assignee of the Authority) contained in the Lease Agreement and the Trust Agreement, see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE LEASE AGREEMENT - Events of Default - Remedies on Default” and “- THE INDENTURE - Events of Default and Remedies.”
Insurance
The District shall maintain or cause to be maintained insurance, throughout the Term of the Lease Agreement, for and commencing on the periods set forth below with insurers rated “A” or better by A.M. Best’s Credit Ratings (unless the Insurer approves an insurer with a lower rating) or through insurance provided through a joint powers authority (a “JPA” or “JPA Program”) except for title insurance.
Such insurance shall consist of:
(a) a standard comprehensive general insurance policy or policies in protection of the Authority, its successors and assigns, and the District, and their members, directors, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of construction on, or operation of, the Site. Such policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $150,000 (subject to a deductible clause of not to exceed $50,000) for damage to property resulting from each accident or event. Such public liability
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and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks.
(b) insurance against loss or damage to the Site by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Such extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke, sprinkler damage, boiler explosion and such other hazards as are normally covered by such insurance (but excluding earthquake and flood). Such insurance shall be in an amount equal to the full insurable value (without deduction for depreciation) of all structures constituting any part of the Site (except that such insurance may be subject to a deductible clause of not to exceed $100,000); provided, however, that in no event shall such insurance be maintained in an aggregate amount (together with moneys in the Reserve Fund) less than the aggregate principal amount of Bonds outstanding at the time.
(c) rental interruption insurance to cover loss, total or partial, of the use of the Site as the result of any of the hazards covered in the insurance described in (b) above, in an amount sufficient to pay the total Lease Payments hereunder for a period of 24 months (using the two highest annual Lease Payments during the Term). In the event that the District determines, based on a certification from an Insurance Consultant (defined in the Lease Agreement), that such insurance is not commercially available, the District may under such circumstances provide for a cash deposit (held by the Trustee), equal to the 24 months of Lease Payments (using the two highest annual Lease Payments during the Term) to satisfy the foregoing requirements.
(d) a Title Insurance Policy (as defined in APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – DEFINITIONS) insuring (1) the District’s fee interest in the Site; (2) the Authority’s leasehold interest in the Site under the Site Lease; and (3) the District’s leasehold estate in the Site under the Lease Agreement, subject only to Permitted Encumbrances (as defined in the Lease Agreement) (any of which estates may be insured through an endorsement to such policy). The Title Insurance Policy shall be in an amount equal to the entire unpaid principal amount of the Bonds, and be issued by a company of recognized standing, duly authorized to issue the same, subject only to Permitted Encumbrances, payable to the Insurer and the Trustee for the benefit of the Owners.
(e) workers’ compensation insurance for not less than the amounts required by applicable law, to insure District employees against liability for compensation under the Workers’ Compensation Insurance and Safety Act now in force in the State, or any act hereafter enacted as an amendment or supplement thereto or in lieu thereof.
Proceeds of any Title Insurance Policy received by the Trustee in respect of the Site pursuant to the terms of the Lease Agreement shall be applied and disbursed by the Trustee as follows: (a) if the District determines that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Site and will not result in an abatement of Lease Payments payable by the District under the Lease Agreement, such proceeds shall, with the written approval of the Insurer, be remitted to the District and used for any lawful purpose thereof; or (b) if the District determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Site and would result in an abatement in whole or in part of Lease Payments payable by the District under the Lease, then the District shall direct the Trustee to, and the Trustee shall, immediately deposit such proceeds in the Redemption Fund and such proceeds shall, with the written approval of the Insurer, be applied to the redemption of the Bonds in the manner provided in the Trust Agreement.
For insurance provided through a JPA, the District shall provide, or arrange to provide a certificate or certification(s) as required pursuant to the Lease Agreement. See APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – THE LEASE AGREEMENT – Insurance.
Additional Bonds
As an additional covenant under the Trust Agreement, and during the term thereof, the District covenants that it will not execute and deliver lease revenue bonds or obligations, certificates of participation,
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or similar obligations secured by the Site (“Additional Bonds”) unless all of the following conditions and limitations contained in the Trust Agreement have been complied with:
(a) The Authority or the District, as applicable, shall provide to the Trustee written certification as to the current valuation of the Site, as improved (which certification shall include, incorporate, or reference a reasonably current appraised value, insured replacement value, state valuation information or costs of construction or reconstruction undertaken for the Site (which construction or reconstruction shall have occurred within the prior five (5) calendar years));
(b) The Authority or the District, as applicable, shall provide to the Trustee written certification that the principal amount of Lease Payments due under the Lease Agreement when added to the principal amount of lease payments and/or other rental payments due under the documents providing for the issuance and sale of the Additional Bonds shall be not greater than the current valuation of the Site as stated in (a), above;
(c) The Authority or the District, as applicable, shall provide to the Trustee written certification that the amount of Lease Payments due under the terms of the Lease Agreement and the lease payments and/or other rental payments due under the documents providing for the issuance and sale of the Additional Bonds shall not, at any time, exceed the fair rental value of the Site, as then improved; and
(d) The Trustee shall have received a certification of the District or the Authority, as applicable, that (i) there exists no Event of Default (as defined under the Trust Agreement), or any event which, once all notice or grace periods have passed will constitute an Event of Default, (ii) the Site has not been impaired or damaged so as to impair the valuation stated in (a) above, and (iii) the Lease Payments due under the terms and conditions of the Lease Agreement shall not then be in abatement. See APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS.
Any such Additional Bonds may be issued and sold on a parity basis with the Bonds and shall be subject to the prior written consent of the Insurer. Such covenant does not apply to, or limit the ability of the Authority or the District to issue and sell other lease revenue bonds, or other securities, which are unrelated to, or not secured by or through, the Site.
BOND INSURANCE
Set forth below is a brief summary of certain information concerning the Insurer and the terms of the Insurance Policy and the Debt Service Reserve Insurance Policy. The information relating to the Insurer, the Insurance Policy and the Debt Service Reserve Insurance Policy has been supplied to the District by the Insurer. No representation is made by the District as to the accuracy, completeness or adequacy of such information or as to the absence of material adverse changes in the condition of the Insurer subsequent to the date of this Official Statement.
The Insurance Policy
Concurrently with the issuance of the Bonds, Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.) (“AGM”) will issue its Municipal Bond Insurance Policy for the Bonds (the “Insurance Policy”). The Insurance Policy guarantees the scheduled payment of principal of (or, in the case of Capital Appreciation Bonds, the Accreted Value) and interest on the Bonds when due as set forth in the form of the Policy included as an exhibit to this Official Statement.
The Insurance Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law.
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Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.)
AGM is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. (“Holdings”). Holdings is an indirect subsidiary of Assured Guaranty Ltd. (“AGL”), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol “AGO”. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. No shareholder of AGL, Holdings or AGM is liable for the obligations of AGM.
On July 1, 2009, AGL acquired the financial guaranty operations of Holdings from Dexia SA (“Dexia”). In connection with such acquisition, Holdings’ financial products operations were separated from its financial guaranty operations and retained by Dexia. For more information regarding the acquisition by AGL of the financial guaranty operations of Holdings, see Item 1.01 of the Current Report on Form 8-K filed by AGL with the Securities and Exchange Commission (the “SEC”) on July 8, 2009.
Effective November 9, 2009, Financial Security Assurance Inc. changed its name to Assured Guaranty Municipal Corp.
AGM’s financial strength is rated “AAA” (negative outlook) by Standard and Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”) and “Aa3” (negative outlook) by Moody’s Investors Service, Inc. (“Moody’s”). On February 24, 2010, Fitch, Inc. (“Fitch”), at the request of AGL, withdrew its “AA” (negative outlook) insurer financial strength rating of AGM at the then current rating level. Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by AGM. AGM does not guarantee the market price of the securities it insures nor does it guarantee that the ratings on such securities will not be revised or withdrawn.
Recent Developments
Ratings
On May 17, 2010, S&P published a Research Update in which it affirmed its “AAA” counterparty credit and financial strength ratings on AGM. At the same time, S&P continued its negative outlook on AGM. Reference is made to the Research Update, a copy of which is available at www.standardandpoors.com, for the complete text of S&P’s comments.
In a press release, dated February 24, 2010, Fitch announced that, at the request of AGL, it had withdrawn the “AA” (negative outlook) insurer financial strength rating of AGM at the then current rating level. Reference is made to the press release, a copy of which is available at www.fitchratings.com, for the complete text of Fitch’s comments.
On December 18, 2009, Moody’s issued a press release stating that it had affirmed the “Aa3” insurance financial strength rating of AGM, with a negative outlook. Reference is made to the press release, a copy of which is available at www.moodys.com, for the complete text of Moody’s comments.
There can be no assurance as to any further ratings action that Moody’s or S&P may take with respect to AGM.
For more information regarding AGM’s financial strength ratings and the risks relating thereto, see AGL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed by AGL with the SEC on March 1, 2010 and AGL’s Quarterly Report on Form 10-Q, for the quarterly period ended
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March 31, 2010, which was filed by AGL with the SEC on May 10, 2010. Effective July 31, 2009, Holdings is no longer subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).
Capitalization of AGM
At March 31, 2010, AGM's consolidated policyholders' surplus and contingency reserves were approximately $2,220,015,145 and its total net unearned premium reserve was approximately $2,228,912,193 in accordance with statutory accounting principles.
Incorporation of Certain Documents by Reference
Portions of the following documents filed by AGL with the SEC that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof:
(i) The Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (which was filed by AGL with the SEC on March 1, 2010); and
(ii) The Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 (which was filed by AGL with the SEC on May 10, 2010).
All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the filing of the last document referred to above and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC’s website at http://www.sec.gov, at AGL’s website at http://www.assuredguaranty.com or will be provided upon request to Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.): 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) 826-0100).
Any information regarding AGM included herein under the caption “BOND INSURANCE – Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.)” or included in a document incorporated by reference herein (collectively, the “AGM Information”) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded.
AGM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, AGM has not independently verified, makes no representation regarding and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading “BOND INSURANCE”.
THE AUTHORITY
The Authority was established pursuant to a Joint Exercise of Powers Agreement, dated January 16, 2001, by and between the District and CFD No. 2 in accordance with the provisions of Articles 1 through 4 of Chapter 5 of Division 7 of Title 1 of the California Government Code (the “JPA Law”). The Authority was created for the purpose of assisting in financing public capital improvements of the District through the acquisition by the Authority of such public capital improvements and/or the purchase by the Authority of local obligations within the meaning of the JPA Law. Under the JPA Law, the Authority has the power to issue bonds to pay the costs of any public capital improvement of the District. The Authority is governed by a five-member Board of Directors that consists of all members of the Board of the District.
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THE DISTRICT
Introduction
Unless otherwise indicated, the following financial, statistical and demographic data has been provided by the District. Additional information concerning the District and copies of the most recent and subsequent audited financial reports for the District may be obtained by contacting: San Marcos Unified School District, 255 Pico Avenue, San Marcos, California 92069, Attention: Assistant Superintendent, Business Services.
General Information
The District was established in 1976 and comprises approximately 49 square miles of territory in the northern portion of San Diego County. The District includes the City and portions of the incorporated cities of Vista, Escondido and Carlsbad and also includes portions of unincorporated territory in the County. Approximately 60% of the territory of the District is within the territorial limits and sphere of influence of the City.
The District operates eleven elementary schools, three middle schools, two comprehensive high schools, one continuation high school, an independent study high school, and an adult school.
Administration
The District is governed by a five-member Board, each of which is elected to a four-year term. Elections for positions to the Board are held every two years, alternating between two and three available positions. If a vacancy arises during any term, the vacancy is filled by an appointment by a majority vote of the remaining Board members and, if there is no majority, by a special election. Current members of the Board, together with their office and the date their current term expires, are listed below:
Board Member Office Current Term Expiration Date
Beckie Garrett President December 2010
Jay Petrek Vice President December 2012
Randy Walton Clerk December 2012
David Horacek Member December 2012
Sharon Jenkins Member December 2010
Key Personnel
The following is a listing of key administrative personnel of the District:
Name Title
Kevin Holt, Ed.D. Superintendent
Gary Hamels Assistant Superintendent, Business Services
Len Judd Assistant Superintendent, Human Resources and Development
Kathy Tanner Executive Director of Facilities and Services
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Employee Relations
The teachers of the District (certificated personnel) are represented by San Marcos Education Association Certificated. They are currently under a contract that will expire on June 30, 2011. As of December 15, 2009, the District employed 906 certificated employees.
The non-teaching personnel of the District (classified) are represented by California School Employees Association. They are currently under a contract that will expire on June 30, 2011. As of December 15, 2009, the District employed 999 classified employees.
In addition to its certified and classified employees, as of December 15, 2009 the District employed 72 management employees that are not represented.
Retirement Systems
The District participates in the State of California Teacher’s Retirement System (“STRS”). This plan covers basically all full-time certificated employees. Contributions to STRS, which operates on a partial reserve funding basis, are made by employee members, their employers and the State. The District’s contribution to STRS was $4,822,904 in the Fiscal Year ending June 30, 2007, $5,297,052 in the Fiscal Year ending June 30, 2008 and $5,352,120 in the Fiscal Year ending June 30, 2009, and is budgeted at $5,509,600 for the Fiscal Year ending June 30, 2010.
The District also participates in the State of California Public Employees’ Retirement System (“PERS”). This plan covers all full-time classified personnel. The District’s contribution to PERS was $1,547,508 in the Fiscal Year ending June 30, 2007, $1,726,813 in the Fiscal Year ending June 30, 2008 and $1,726,501 in the Fiscal Year ending June 30, 2009, and is budgeted at $1,833,300 for the Fiscal Year ending June 30, 2010.
Other Post Employment Benefits (“OPEB”)
Description of Benefits. The District administers a single-employer healthcare plan (the “Plan”) for its employees. Total membership of the Plan consists of approximately 1,074 eligible active employees and approximately 266 eligible retirees who are in receipt of health benefits. The benefits provided under the Plan are summarized as follows:
Classified Employees. Classified employees, including management hired prior to July 1, 2007, who retire at age 55 or older with at least ten consecutive years of District benefit eligible service and who are covered under District health benefits at retirement, are eligible to receive District-paid retiree medical benefits. Retiree’s medical benefits cease at age 65 except for employees hired prior to July 1, 1997, with at least twenty years of benefit eligible service at retirement. Such employees are eligible to receive post-65 medical coverage including Medicare Part B reimbursement for the retiree only. Spouses of retirees also receive District-paid medical benefits up to the spouse’s attainment of age 65, if the retiree is also receiving medical benefits. Effective June 30, 2012, spouse coverage will cease when the retiree attains age 65. For eligible retirees who retired prior to July 1, 2007, the District contributes a portion of the retiree’s medical costs based on a sliding scale from 50% to 100% (50% for employees with at least ten years of benefit eligible service plus 5% per additional year of benefit eligible service up to 100%).
For eligible employees who retired on or after July 1, 2007, the District pays 100% of the cost for medical coverage up to an annual maximum of $11,625 for pre-65 coverage and $11,625 for post-65 coverage including the Medicare Part B reimbursement. Effective January 1, 2009, for eligible employees who retired prior to July 1, 2007, the District’s contribution for pre-65 coverage will be limited to the composite rate in effect for the PacifiCare HMO or another reasonably equivalent plan designated by the District. Classified employees hired on or after July 1, 2007 receive no retiree health benefits.
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Certificated Employees. Certificated employees, including management hired prior to July 1, 1996, who retired at age 55 or older with at least ten consecutive years of District benefit eligible service and who are covered under District health benefits at retirement are eligible to receive District-paid retiree medical benefits for life. Certificated employees hired on or after July 1, 1996, who retire at age 55 or older with at least ten consecutive years of District benefit eligible service are eligible to receive District-paid retiree medical benefits to the retiree’s attainment of age 65. Spouses of retirees also receive District-paid medical benefits up to the spouse’s attainment of age 65, if the retiree is also receiving benefits.
For eligible employees who retired on or after July 1, 2007, the District’s contribution will be limited to an annual maximum of $11,265 for pre-65 coverage and $11,265 for post-65 coverage including the Medicare Part B reimbursement. Effective January 1, 2009, for eligible employees who retired prior to July 1, 2007, the District’s contribution for pre-65 coverage will be limited to the composite rate in effect for the PacifiCare HMO or another reasonably equivalent plan designated by the District. Certificated employees hired on or after July 1, 2007, receive no retiree health benefits.
Confidential Employees. Confidential employees receive the same District-paid benefits under the same provisions and eligibility requirements as classified employees.
Contributions to the Plan. The contribution requirements of Plan members and the District are established and amended by the District and the Teachers Association (CEA) as to the certificated employees and the California Service Employees Association (CSEA) as to the classified employees. The required contribution is based on projected pay-as-you-go financing requirements. For Fiscal Year 2008-09, the District contributed $2,334,072 to the Plan, all of which was used for current premiums.
Annual OPEB Cost and Net OPEB Obligation
See “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2009” for the calculation of the District’s annual OPEB cost for the Fiscal Year ending June 30, 2009, and the net OPEB obligation
Insurance
The District maintains insurance or insurance through a joint exercise of powers authority in such amounts and with such retentions and other terms providing coverages for property damage, fire and theft, general public liability and workers’ compensation, as are adequate, customary and comparable with such insurance maintained by similarly situated school districts. In addition, based upon prior claims experience, the District believes that the recorded liabilities for self-insured claims are adequate.
DISTRICT FINANCIAL INFORMATION
Significant Accounting Policies and Audited Financial Reports
The California State Department of Education imposes by law uniform financial reporting and budgeting requirements for K-12 school districts. Financial transactions are accounted for in accordance with the California School Accounting Manual. Wilkinson Hadley King & Co. LLP, CPAs and Advisors, El Cajon, California, serve as independent auditors to the District and excerpts of their report for the Fiscal Year ended June 30, 2009, are attached hereto as APPENDIX B. The District’s auditors have not specifically approved the inclusion of such excerpts herewith.
The School District’s expenditures are accrued at the end of the Fiscal Year to reflect the receipt of goods and services in that year. Revenues generally are recorded on a cash basis, except for items that are susceptible to accrual (measurable and/or available to finance operations). Current taxes are considered susceptible to accrual. Delinquent taxes not received after the Fiscal Year end are not recorded as revenue until received. Revenues from specific State and federally funded projects are recognized when qualified expenditures have been incurred. State block grant apportionments are accrued to the extent that they are
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measurable and predictable. The State Department of Education sends the School District updated information from time to time explaining the acceptable accounting treatment of revenue and expenditure categories.
The School District’s accounting is organized on the basis of fund groups, with each group consisting of a separate set of self-balancing accounts containing assets, liabilities, fund balances, revenues and expenditures. The major fund classification is the General Fund which accounts for all financial resources not requiring a special type of fund. The School District’s Fiscal Year begins on July 1 and ends on June 30.
Independently audited financial reports are prepared annually in conformity with generally accepted accounting principles for educational institutions. The annual audit report is generally available about six months after the June 30 close of each Fiscal Year. For the District’s most recent available audited financial statements, see “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2009.”
The District has not requested its auditor to provide any review or update of such financial statements in connection with their inclusion in this Official Statement. Certain information from the District’s financial statements follows. The District’s audited financial statements for Fiscal Year 2008-09 is attached hereto as “APPENDIX B - AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2009.” The District has not requested, and its auditors have not provided, any review or update to such audited financial statements.
The table on the following page contains accounting data extracted from financial statements prepared by the District’s independent auditors for Fiscal Years 2005-06, 2006-07 and 2007-08. The table on the next succeeding page contains accounting data extracted from the financial statement prepared by the District’s independent financial auditors for Fiscal Year 2008-09 (the “Fiscal Year 2008-09 Financial Statement”). The information for Fiscal Year 2008-09 is not shown on the table on the following page because the independent financial auditor that prepared the Fiscal Year 2008-09 Financial Statement modified the format of the presentation of such information. The financial statements should be read in their entirety. The information contained herein does not purport to be a summary of the District’s financial statements.
[Remainder of this page intentionally left blank.]
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Table 2
STATEMENT OF GENERAL FUND REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES – GOVERNMENTAL FUNDS
Fiscal Years 2005-06, 2006-07 and 2007-08 San Marcos Unified School District
Audited 2005-06
Audited 2006-07
Audited 2007-08
SOURCES General Revenues:
Property Taxes $35,966,807 $37,629,270 $49,212,728 Federal and State Aid Not Restricted to
Program Revenues Charges for Services 3,515,007 3,998,826 4,894,641 Operating Grants and Contributions 22,169,548 28,125,945 25,929,011 Capital Gains and Contributions 9,114,452 955,692 12,241,133
Total Revenues $156,406,598 $148,463,829 $170,889,148 EXPENDITURES Instruction 468,880,895 78,714,512 86,943,836 Instruction – Related Services
Supervision of Instruction 4,050,013 4,617,498 4,721,952 Instructional Library, media and tech 969,284 1,253,551 1,114,976 School site administration 7,106,258 7,970,174 8,796,102
Pupil Services Home-to-School Transportation 3,307,669 3,922,701 3,979,428 Food Services 4,339,915 4,608,791 4,912,533 All other pupil services 4,800,571 5,661,820 6,571,742
General Administrative Services Data Processing Services 364,157 353,672 546,850 Other General Administration 4,042,935 5,259,291 5,747,286
Plant Services 12,942,278 15,386,512 13,677,197 Facility Acquisition and Construction 37,585,943 9,135,582 20,628,449 Ancillary Services 1,011,715 1,181,965 1,334,727 Community Services 2,379,554 2,708,310 3,674,430 Enterprise Activities - 44,541 - Other Outgo
Transfers between Agencies 511,315 1,448,536 4,252,284 Debt Service – Principal 3,019,679 3,326,281 2,021,262 Debt Service – Interest 3,116,489 3,422,245 1,042,057 Debt Service – Insurance Costs and
Discounts
2,827
325,199
- Total Expenditures $158,441,497 $149,341,181 $169,965,111
Excess (Deficiency) of Revenues Over (Under) Expenditures
(2,034,899)
(877,352)
924,037
Other Financing Sources (Uses)
Proceeds from Long Term Debt 7,000,000 11,025,000 - Interfund Transfers In 3,910,263 4,343,274 4,916,868 Interfund Transfers Out (3,950,263) (4,383,274) (4,916,868) Other Financing Sources - 22,914 387,943
Total Other Financing Sources and Uses $6,960,000 $11,007,914 $387,943
Net Change in Fund Balance 4,925,101 10,130,562 1,274,442 Fund Balance, July 1 71,606,083 76,531,184 86,661,746 Fund Balance, June 30 $76,531,184 $86,661,746 $87,936,188
Source: District Financial Statements.
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Table 3
STATEMENT OF GENERAL FUND REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES – GOVERNMENTAL FUNDS
Fiscal Year 2008-09 San Marcos Unified School District
Audited
2008-09 SOURCES Revenue Limit Sources:
State Apportionments $63,229,184 Local Sources 33,191,724
Federal Revenue 15,989,527 Other State Revenue 15,287,523 Other Local Revenue 44,438,761
Total Revenues $172,136,719
EXPENDITURES Instruction 88,948,402 Instruction – Related Services 14,529,178 Pupil Services 14,683,258 Ancillary Services 1,218,945 Community Services 4,048,604 Enterprise 37,193 General Administration 5,529,226 Plant Services 31,599,875 Other Outgo 91,278 Debt Service:
Principal 4,991,496 Interest 6,000,859
Total Expenditures $171,678,314
Excess (Deficiency) of Revenues Over (Under) Expenditures
458,405
Other Financing Sources (Uses) Transfers In 4,202,253 Transfers Out (4,242,253) Other Sources 15,853
Total Other Financing Sources $(24,147)
Net Change in Fund Balance 434,258
Fund Balance, July 1 $87,936,188 Fund Balance, June 30 $88,370,446
Source: District Fiscal Year 2008-09 Financial Statements.
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Budget Process
Adoption of Balanced Budget. The School 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 Assembly Bill 1200 (“AB 1200”), which became State law on October 14, 1991. Portions of AB 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 of schools (as described in AB 1200) within five days of adoption or by July 1, whichever occurs first. A school district may be on either a dual or single budget cycle. The dual budget option requires a revised and readopted budget by September 1 that is subject to State-mandated standards and criteria. The revised budget must reflect changes in projected income and expenses subsequent to July 1. The single budget is only readopted if it is disapproved by the county office of education, or as needed.
Approval of Budget by County Superintendent of Schools. For both dual and single budgets submitted on July 1, the county superintendent will (i) 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, (ii) determine if the budget allows the school district to meet its current obligations and (iii) determine if the budget is consistent with a financial plan that will enable the school district to meet its multi-year financial commitments. On or before November 1, 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 school 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 school district for public inspection. The law does not provide for conditional approvals; budgets must be either approved or disapproved. No later than September 22, the county superintendent must notify the State Superintendent of Public Instruction of all school districts whose budgets have been disapproved. The Superintendent of Schools of the San Diego County Office of Education (the “County Superintendent”) has approved the District’s Fiscal Year 2009-10 budget.
Each dual budget option district and each single budget option district whose budget has been disapproved must revise and readopt its budget by September 8, reflecting changes in projected income and expense since July 1, 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 Section 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.
Filing of Interim Certifications. Under the provisions of AB 1200, the superintendent of each school district is required to submit two reports to the governing board of the school district during each fiscal year. The first report covers the financial and budgetary status of the school district for the period ending October 31 and the second report covers such status for the period ending January 31. Each report is required to be approved by the governing board no later than 45 days after the close of the period being reported. Within such 45-day period, the governing board of each school district is required to certify whether the school district is able to meet its financial obligations for the remainder of the fiscal year and, based upon current forecasts, for the subsequent two fiscal years. These certifications, commonly referred to as the first and second interim certifications, must be based upon the governing board’s assessment, on the basis of standards and criteria for fiscal stability, adopted by the State Board of Education, of the school district’s budget, as revised to reflect
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then current information regarding the State budget, school district property tax revenues, and ending balances of the preceding fiscal year.
Under the provisions of AB 1200, each school district is required to file interim certifications with the county office of education (on December 15, for the period ended October 31, and by mid-March for the period ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current Fiscal Year and, based on current forecasts, for the subsequent two Fiscal Years. The county office of education reviews the certification and issues either a positive, negative or qualified certification. The certification must be classified as “positive,” “qualified” or “negative.” A “positive” certification must be assigned to any school district that, based upon current projections, will meet its financial obligations for the current and two subsequent fiscal years. A “qualified certification” must be assigned to any school district that, based upon such projections, may not meet its current financial obligations for the current or two subsequent fiscal years. A “negative” certification must be assigned to any school district that, based upon current projections, will be unable to meet its financial obligations for the remainder of the fiscal year or the subsequent fiscal year. A school district that receives a qualified or a negative certification may not issue tax and revenue anticipation notes or certificates of participation without the approval of the county superintendent of schools.
A copy of each report and each certification is required to be filed with the county superintendent of schools. If the county superintendent of schools receives a positive certification when he or she determines that a qualified or a negative certification should have been filed, the county superintendent of schools shall change the certification to negative or qualified, as appropriate, and, no later than 75 days after the close of the period being reported, shall provide notice of such action to the governing board of the school district and the State Superintendent of Public Instruction.
The District’s Second Interim Financial Report for Fiscal Year 2008-09 (the “2008-09 2nd Interim Report”) received a “qualified” certification pursuant to AB 1200. Two weeks prior to this report, the State passed both a revised budget for Fiscal Year 2008-09 and an early budget for Fiscal Year 2009-10. These budgets both reduced funding for the District and gave unprecedented flexibility of the use of Grant Program dollars to help mitigate the effects of the funding reductions. Staff used the updated budget information to adjust budget projections for the current and two subsequent years. The results for the two subsequent years were not positive. Staff did not have time prior to the deadline for the 2008-09 Second Interim Report to work with the Board on implementing the use of flexibility options or potential expenditure reductions to incorporate in the multi-year projects. Over the next six weeks, the Board approved of the financial changes which allowed staff to file a Third Interim Financial Report with a positive certification for the current and two subsequent years.
The District subsequently implemented budget adjustments in both the Fiscal Year 2008-09 and Fiscal Year 2009-10 budgets that enabled the District’s First Interim Financial Report and Second Interim Financial Report for Fiscal Year 2009-10 to receive “positive” certifications.
Determination of County Superintendent Regarding the Repayment of the Bonds. California Education Code Section 42133(a) provides that a school district that has a qualified certification in any fiscal year may not issue, in that fiscal year or in the next succeeding fiscal year, certificates of participation, tax anticipation notes, revenue bonds or any other debt instruments that do not require the approval of the voters of such school district unless the county superintendent of schools determines pursuant to criteria established by the State Superintendent of Public Instruction that such school district’s repayment of such indebtedness is probable. The District requested that the County Superintendent review the proposed issuance of the Bonds as required pursuant to Section 42133(a) to determine if the District’s repayment of the Bonds is probable. By letter to the District Superintendent, dated February 24, 2010, from the Executive Director of District Financial Services of the San Diego County Office of Education (“SDCOE”), the SDCOE concluded as follows:
“The proposed debt would be backed by the special tax revenues generated by several Community Facilities Districts (CFDs) as well as revenue from Redevelopment Project Area III. To determine whether it is probable that the district will be able to repay the Lease Revenue Bonds, we have reviewed the district’s outstanding debt being funded by the CFDs
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and the redevelopment funds, as well as revenue estimates for the CFDs and redevelopment funds. Based on this analysis, we have concluded that it is probable that the district will be able to prepay the Lease Revenue Bonds.”
[Remainder of this page intentionally left blank.]
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The following table summarizes the District’s Fiscal Year 2007-08, Fiscal Year 2008-09 and Fiscal Year 2009-10 adopted general fund budgets:
Table 4
SAN MARCOS UNIFIED SCHOOL DISTRICT General Fund Budgets
Fiscal Years 2007-08, 2008-09 and 2009-10
Description
Fiscal Year 2007-08(1)
Fiscal Year 2008-09(1)
Fiscal Year 2009-10(2)
Revenues
Revenue Limit Sources $95,685,140
$96,420,909
$86,373,028
Federal 6,041,012 12,364,077 11,969,011 Other State 17,586,557 16,559,799 16,203,488
Other Local
13,295,446 13,127,013 12,859,373 Other Financing Sources 387,943 15,853 -
Total Revenues $132,996,098 $138,487,651 $127,404,900 Expenditures
Certified Salaries $64,607,295 $65,151,129 $66,296,719 Classified Salaries 22,701,014 22,731,504 23,695,662 Employee Benefits 29,357,345 29,895,526 30,114,551 Books and Supplies 6,979,584 6,192,229 8,112,351 Services and Other Operating Expenditures
9,967,649
10,442,124
12,419,686
Capital Outlay 755,608 437,536 147,676 Other Outgo 608,775 30,412 (8,685)
Total Expenditures $134,977,269 $134,860,460 $140,777,960 TOTAL REVENUES $132,996,098 $138,487,651 $127,404,900 TOTAL EXPENDITURES $134,977,269 $134,860,460 $140,777,960
Excess (Deficiency) of Revenues over (Under) Expenditures
$(1,981,171)
$3,627,191
$(13,373,060) Other Financing Sources/Uses
Interfund Transfers Out Contributions
(1,556,639)
865,736 Total Other Financing Sources/ Uses
(690,903) Net Increase (Decrease) in Fund Balance
(1,981,171)
3,627,191
(13,373,060)
Fund Balances, July 1 25,530,681 23,549,510 27,176,701 Fund Balances, June 30 $23,549,510 $27,176,701 $13,112,738
(1) Actuals. (2) Represents current projections based upon the District’s Second Interim Financial Report for Fiscal Year 2009-10. Source: The District.
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State Funding of Education
As described below in “Revenue Sources - Revenue Limit Sources,” the District’s operating income consists primarily of two components: a State portion funded from the State’s general fund and a local portion derived from the District’s share of the countywide property tax. In addition, school districts may be eligible for other special categorical funding from State and federal government programs. The District receives approximately 86.7% of its general fund revenues from State funds, budgeted in the District’s Second Interim Financial Report for Fiscal Year 2009-10 at approximately $111 million in Fiscal Year 2009-10. As a result, decreases in State revenues, or in State legislative appropriations made to fund education, may significantly affect District operations.
Annual State apportionments of basic financial aid to school districts are computed based on a revenue allocation per unit of average daily attendance (“A.D.A.”). Effective in Fiscal Year 1998-99, only actual in school attendance is counted in the calculation of A.D.A. School districts which can improve their actual attendance rate will receive additional funding.
The following table shows the District’s A.D.A. and the District revenue limit per A.D.A. for the most recent five years. Enrollment can fluctuate due to factors such as population growth or decline, competition from private, parochial, and public charter schools, inter-district transfers in or out, and other causes. Losses in enrollment will cause a school district to lose operating revenues, without necessarily permitting such district to make adjustments in fixed operating costs.
Table 5
SAN MARCOS UNIFIED SCHOOL DISTRICT Average Daily Attendance and Revenue Limit
Source: California Department of Education and District.
Revenue limit calculations are adjusted annually in accordance with a number of factors designed
primarily to provide cost of living increases and to equalize revenues among California school districts. To the extent local tax revenues increase due to growth in local property assessed valuation, the additional revenue is offset by a decline in the State’s contribution.
Revenue Sources
The District categorizes its General Fund revenues into four sources: (1) revenue limit sources (consisting of a mix of State and local revenues), (2) federal revenues, (3) other State revenues (special grants and programs) and (4) other local revenues. Each of these revenue sources is described below.
Revenue Limit Sources. Since Fiscal Year 1973-74, California school districts have operated under general purpose revenue limits established by the State Legislature. In general, revenue limits are calculated for each school district by multiplying the A.D.A. for such district by a base revenue limit per unit of A.D.A. The revenue limit calculations are adjusted annually in accordance with a number of factors designated primarily to provide cost of living increases and to equalize revenues among all California school districts of the same type.
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Funding of the District’s revenue limit is provided by a mix of local property taxes and State apportionments of basic and equalization aid. Generally, the State apportionments will amount to the difference between the District’s revenue limit and its local property tax revenues. Because education funding constitutes such a large part of the State’s general fund expenditures, it is generally at the center of annual budget negotiations and adjustments. To the extent local tax revenues increase due to growth in local property assessed valuation, the additional revenue is offset by a decline in the State’s contribution.
The District is not a “basic aid district.” Local property tax revenues account for approximately 38.9% of the District’s aggregate revenue limit income, and are budgeted to be $33.58 million, or 26.18% of total general fund revenue in Fiscal Year 2009-10. The County is a “Teeter Plan” county, which means that the District is made whole for any delinquencies in payment of property taxes by local property owners within the District. For a discussion of legal limitations on the ability of the District to raise revenues through local property taxes, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES” below.
Beginning in 1978-79, Proposition 13 and its implementing legislation provided for each county to levy (except for levies to support prior voter-approved indebtedness) and collect all property taxes, and prescribed how levies on countywide property values are to be shared with local taxing entities within each county.
Federal Revenues. The federal government provides funding for several District programs, including special education programs, programs under the Educational Consolidation and Improvement Act, and specialized programs such as Drug Free Schools, Education for Economic Security, and the free and reduced lunch program. The federal revenues, most of which are restricted, comprised approximately 8.9% of General Fund revenues in Fiscal Year 2008-09 and are budgeted to equal approximately 11.3% of such revenues in 2009-10. The American Recovery and Reinvestment Act, signed into law February 17, 2009, provided approximately $10,542,500 in additional Federal Revenues for Fiscal Year 2009-10. These one-time funds are to be used primarily for saving and creating jobs. The funds can also be used for any activity authorized under the Elementary and Secondary Education Act (ESEA), the Individuals with Disabilities Education Act (IDEA), Adult Education or the Carl Perkins Act.
Other State Revenues. As discussed above, the District receives State apportionment of basic aid in an amount equal to the difference between the District’s revenue limit and its property tax revenues. In addition to such apportionment revenue, the District receives other substantial State revenues. State law also provides for State support of specific school-related programs including summer school, gifted and talented education, pupil transportation, bilingual education, and various other categorical aids. In Fiscal Year 2008-09, State funds paid to the District totaled $16,559,799, or 12.0% of total General Fund revenues.
On February 20, 2009, Governor Schwarzenegger signed a 17-month budget that included categorical flexibility provisions that allowed sweeping of categorical ending fund balances to the unrestricted general fund to be used for any education purpose. Additionally, Senate Bill X3 (SBX3) authorized the reclassification of thirty-nine previously restricted categorical programs to unrestricted funds. Since the funds are unrestricted, program or funding requirements, as otherwise provided in statute, regulation, or budget act provisional language associated with the funding, are not in effect; therefore, the District may choose to use these funds for any educational purpose. These flexibility provisions are in effect for five years, Fiscal Years 2008-09 through 2012-13 by Education Code Section 42605.
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The following table provides a history of State funds paid to the District.
STATE REVENUES (Fiscal Years 2005-06 through 2009-10)
State Lottery. In the November 1984 general election, the voters of the State approved a constitutional amendment establishing a State lottery (the “State Lottery”), the net revenues of which are used to supplement money allocated to public education. This amendment prohibited the use of funds derived from the State Lottery for non-instructional purposes, such as the acquisition of real property, the construction of facilities or the financing of research. State Lottery net revenues – gross revenues less prizes and administration expenses – are allocated by computing an amount per A.D.A., which is derived by dividing the total net revenues by the total A.D.A. for grades K-12, community colleges, the University of California system and other participating educational institutions. Each school district receives an amount equal to its total A.D.A. multiplied by the per A.D.A. figure. The District received $2,310,739 and $2,170,292 as its Fiscal Year 2007-08 and Fiscal Year 2008-09 State Lottery allocations, respectively, and has projected in its Second Interim Financial Report for Fiscal Year 2009-10 the District to receive $2,262,785 as its Fiscal Year 2009-10 allocation.
Other Local Revenues. In addition to property taxes, the District receives additional local revenues from items such as leases and rentals, interest earnings, transportation fees, interagency services, and other local sources. Other local revenues comprised approximately 9.5% of General Fund revenues in Fiscal Year 2008-09 and are budgeted to equal approximately 9.2% of General Fund revenues in Fiscal Year 2009-10. Local revenues include some State revenues received from the County Office of Education as local income.
Developer Fees
The District collects developer fees to finance essential school facilities within the District. The following table of developer fee revenues reflects the collection of fees from Fiscal Year 2005-06 through Fiscal Year 2009-10, together with the interest earned on the investment of all development fee revenues then on deposit with the District. These revenues are not recorded in the General Fund.
(1) Through February 2010. (2) Reflects only the total developer fee revenues received during the applicable Fiscal Year and the interest earned on the investment of all development fee revenues on deposit with the District during such Fiscal Year. Source: District.
Expenditures of developer fee revenues are primarily for growth-related purposes as prescribed by State law. The expenditures of developer fee revenues from Fiscal Year 2005-06 through Fiscal Year 2009-10 amounted to $14,869,200.
Outstanding Debt; Other Financial Obligations
The schedule of the District’s changes in long-term debt/obligations for the Fiscal Year ended June 30, 2009, is shown below:
(1) Represents Community Facilities Bonds. (2) Represents Redevelopment Agency debt. During the year ended June 30, 2009 the District discovered that $55,590,000 SMPFA 2006 Bonds (defined in Appendix C) had not been recorded as long term debt based on the assumption that the debt was reflected on the financial statements of the Redevelopment Agency of the City of San Marcos. See the following paragraph and Appendix C for additional information regarding the SMPFA 2006 Bonds. Source: District Fiscal Year 2008-09 Financial Statements.
Community Facilities District (“CFD”) debt is a limited obligation payable from special tax revenues of the Community Facilities Districts and not a general obligation of the District. The redevelopment agency debt refers to the SMPFA 2006 Bonds (as defined in APPENDIX C) which are special obligations of the San Marcos Public Facilities Authority (“SMPFA”) and are secured primarily by District Pass-Through Revenue and are not a general obligation of the District. See “APPENDIX C - REDEVELOPMENT PAYMENTS – Tax Allocation Financing” and “– The SMPFA 2006 Bonds.”
Repayment schedules for certain of the debts/obligations are contained in “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2009” hereto.
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Capital Leases. The District leases equipment and portables under agreements which provide for title to pass upon expiration of the lease period. As of June 30, 2009, future minimum lease payments were as follows:
Year ended June 30 Lease Payments 2010 $ 1,277,789 2011 1,277,789 2012 1,277,789 2013 1,230,126 2014 1,183,469
Total minimum rentals 12,064,431 Less amount representing interest (2,757,929) Present value of net minimum interest payments
$ 9,306,502
Source: District Fiscal Year 2008-09 Financial Statements.
Tax and Revenue Anticipation Notes. The District has no Tax and Revenue Anticipation Notes (“TRAN”) outstanding.
Lease Purchase Agreement
The District has entered into an agreement dated April 1, 2004, between the School District as the “Lessee” and the Authority as the “Lessor” or “Authority,” relating to the construction of its portion of the North County Regional Education Center. The District relocated the District offices to this location in the spring of 2006 upon completion of the construction of the project.
The Authority’s funds for acquiring its share of the costs of construction of the North County Regional Education Center were generated by the execution and delivery of $6,465,000 of San Marcos Schools Financing Authority 2004 Lease Revenue Bonds (North County Regional Education Center) (the “2004 Authority Bonds”). Lease payments are required to be made by the School District under the lease agreement on each May 1 and November 1 for the period commencing November 1, 2004, and terminating November 1, 2024. Interest rates range from 2.00% to 5.00% for the length of the issuance.
The lease requires that lease payments be deposited in the lease payment fund maintained by the trustee for the 2004 Authority Bonds. Any amount held in the lease payment fund will be credited towards the lease payment due and payable. The trustee will pay from the lease payment fund the required principal and interest payments as follows:
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San Marcos Schools Financing Authority 2005 Lease Revenue Bonds (North County Education Center)
Lease Payments
Year Ending November 1
Principal
Interest
Total Lease Payments
2010 $260,000 $193,991.26 $453,991.26
2011 265,000 187,491.26 452,491.26
2012 270,000 179,541.26 449,541.26
2013 280,000 171,441.26 451,441.26
2014 290,000 162,341.26 452,341.26
2015 300,000 152,916.26 452,916.26
2016 310,000 142,416.26 452,416.26
2017 320,000 130,791.26 450,791.26
2018 335,000 118,791.26 453,791.26
2019 345,000 105,810.00 450,810.00
2020 360,000 92,010.00 452,010.00
2021 375,000 77,250.00 452,250.00
2022 390,000 61,500.00 451,500.00
2023 410,000 42,000.00 452,000.00
2024 430,000 21,500.00 451,500.00
Total: $4,940,000 $1,839,791.34 $6,799,791.34
Assessed Valuations
The assessed valuation of property in the School District is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the “full value” of the property, as defined in Article XIIIA of the California Constitution. Prior to 1981-82, assessed valuations were reported at 25% of the full value of property. For a discussion of how properties currently are assessed, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES.”
Certain classes of property, such as churches, colleges, not-for-profit hospitals, and charitable institutions, are exempt from property taxation and do not appear on the tax rolls. No reimbursement is made by the State for such exemptions.
Property within the School District had a total assessed valuation before deducting redevelopment increment for Fiscal Year 2009-10 of $14,977,026,337 (unequalized). Shown in the following table are the assessed valuations for the School District.
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Table 6
SAN MARCOS UNIFIED SCHOOL DISTRICT ASSESSED VALUATIONS
The twenty largest local secured taxpayers in the District with the largest ad valorem property tax assessments for Fiscal Year 2009-10 are shown in the following table.
Table 7
SAN MARCOS UNIFIED SCHOOL DISTRICT 20 LARGEST LOCAL SECURED TAXPAYERS FISCAL YEAR 2009-10
Rank
Property Owner
Primary Land Use
FY 2009-2010 Local Secured Assessed
Value
% of
Total AV
1 Prominence Willmark Communities Inc. Apartments $85,749,385 0.60% 2 Camden USA Inc. Apartments 84,075,575 0.58% 3 Grand Plaza LLC Shopping Center 56,430,314 0.39% 4 Hunter Industries Inc. Industrial 53,452,818 0.37% 5 Denso Wireless Systems America Inc. Industrial 53,445,355 0.37% 6 Bixby Land Co. Industrial 46,716,000 0.32% 7 San Elijo Hills Development Co. LLC Residential 45,261,781 0.31% 8 Ralph’s Grocery Co. MCW-RC California Shopping Center 35,817,449 0.25% 9 Walton CWCA Vista Tech 75 LLC Industrial 33,802,800 0.23% 10 Woodland Parkway Development LLC Convalescent Home 32,509,187 0.23% 11 Lo Land Assets LP Residential 30,000,000 0.21% 12 First Avenue Venture LP Apartments 29,624,360 0.21% 13 BLC of California-San Marcos LP Convalescent Home 28,482,822 0.20% 14 Golden Door Owner LLC Hotel 26,993,681 0.19% 15 Hotko Kinoko Co. Growing House 26,920,000 0.19% 16 Scripps Health Commercial Land 24,001,337 0.17% 17 Lost Continent LP Commercial 23,369,348 0.16% 18 Leafs Invs LP Industrial 22,850,000 0.16% 19 LBA/Met Partners I-Company VI LLC Industrial 22,449,940 0.16% 20 Realty Associates Fund VIII LP Industrial 22,300,000 0.15%
Total $784,252,152 5.45% 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 for debt issued as of February 1, 2010. 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.
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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 percentage of the assessed valuation of the overlapping public agency identified in column 1 which is represented by property located within the District; and (3) the third column is an apportionment 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.
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Table 8
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT
2009-10 Assessed Valuation: $14,977,026,337 Redevelopment Incremental Valuation: 6,673,569,879 Adjusted Assessed Valuation: $ 8,303,456,458 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 2/1/10 Metropolitan Water District 0.474% $ 1,416,928 Palomar Community College District 10.203 15,483,053 San Marcos Unified School District School Facilities Improvement District No. 1 100. 13,498,019 San Marcos Unified School District Community Facilities Districts 100. 52,270,000 City of Escondido 4.998 4,016,393 Palomar Pomerado Healthcare District 11.996 50,098,093 City of San Marcos Community Facilities Districts 100. 130,492,500 City and Special District 1915 Act Bonds 0.030-100. 21,704,036 City of Carlsbad Community Facilities District No. 3, Improvement Area No. 1 15.879 1,737,957 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $290,716,979 DIRECT AND OVERLAPPING DEBT: San Diego County General Fund Obligations 2.454% $10,346,309 San Diego County Pension Obligations 2.454 20,945,252 San Diego County Superintendent of Schools General Fund Obligations 2.454 519,941 Mira Costa Community College District General Fund Obligations 0.621 22,822 Palomar Community College District Certificates of Participation 10.203 710,129 San Marcos Unified School District General Fund Obligations 100. 4,940,000 City of Escondido General Fund Obligations 4.998 3,387,999 City of San Marcos General Fund Obligations 99.717 51,249,552 City of Vista Certificates of Participation 5.363 6,259,157 TOTAL DIRECT AND OVERLAPPING DEBT $98,381,161 COMBINED TOTAL DEBT $389,098,140 (2) (1) Based on 2008-09 ratios. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-
bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt ($13,498,019) ........................................................0.09% Total Direct and Overlapping Tax and Assessment Debt............1.94% Ratios to Adjusted Assessed Valuation: Combined Direct Debt ($18,438,019)......................................0.22% Combined Total Debt ..................................................................4.69% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Statistics, Inc.
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IMPACT OF STATE BUDGET ON DISTRICT REVENUES
The following information concerning the State of California’s budgets has been obtained from publicly available information which the District believes to be reliable; however, the District has not independently verified such information and does not guaranty its accuracy. On March 13, 2009, the Legislative Analyst’s Office (the “LAO”) released a report analyzing the provisions of the 2009 Budget Act (the “2009 Budget Act Report”) and in November 2009 released its report “The 2010-11 Budget: California’s Fiscal Outlook” (the “Fiscal Outlook Report”). On January 8, 2010, the Governor’s budget for 2010-11 was submitted to the State Legislature (the “Governor’s Proposed 2010-2011 State Budget”). On January 12, 2010, the LAO released a report providing an overview of the Governor’s Proposed 2010-2011 State Budget (the “LAO Overview”). On February 25, 2010, the LOA released a report on the Governor’s 2010-2011 Proposed State Budget and its impact on K-12 education (the “LAO Proposition 98 and K-12 Education Report”). On May 14, 2010, the Governor released the May Revision 2010-2011 to the Governor’s Proposed 2010-2011 State Budget (the “Fiscal Year 2010-11 May Revision”). The following information has been adapted from information provided by the State in connection with its issuance of certain of its bonds, by the LAO in the Fiscal Outlook Report, by the Governor’s Proposed 2010-2011 State Budget, the LAO Overview and the LAO Proposition 98 and K-12 Education Report and the Fiscal Year 2010-11 May Revision.
The State has not entered into any contractual commitment with the Authority, the District, the Underwriter or the Owners of the Bonds to provide State budget information to the Authority, the District or the Owners of the Bonds. Although the State sources of information listed above are believed to be reliable, neither the Authority, the District nor the Underwriter assumes any responsibility for the accuracy of the State budget information set forth or referred to therein.
State Funding of Education; State Budget Process
General. As is true for all school districts in California, the District’s operating income consists primarily of two components: a State portion funded from the State’s General Fund and a local portion derived from the District’s share of the countywide property tax. In addition, school districts may be eligible for other special categorical funding from State and federal government programs. The District receives approximately 86.7% of its general fund revenues from State funds, budgeted at approximately $111 million in Fiscal Year 2009-10. As a result, decreases in State revenues, or in State legislative appropriations made to fund education, may significantly affect District operations.
Under Proposition 98, a constitutional and statutory amendment adopted by the State’s voters in 1988 and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution), a minimum level of funding is guaranteed to school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs. Recent years have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporate taxes, making it increasingly difficult for the State to meet its Proposition 98 funding mandate, which normally commands about 45% of all State General Fund revenues, while providing for other fixed State costs and priority programs and services. Because education funding constitutes such a large part of the State’s general fund expenditures, it is generally at the center of annual budget negotiations and adjustments.
Adoption of Annual State Budget. According to the State Constitution, the Governor must propose a budget to the State Legislature no later than January 10 of each year, and a final budget must be adopted by a two-thirds vote of each house of the Legislature no later than June 15, although this deadline is routinely breached. The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget. The Governor signed the amended 2009-10 Budget Act on July 29, 2009.
When the State budget is not adopted on time, basic appropriations and the categorical funding portion of each school district’s State funding are affected differently. Under the rule of White v. Davis (also referred
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to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is no constitutional mandate for appropriations to school districts without an adopted budget or emergency appropriation, and funds for State programs cannot be disbursed by the State Controller until that time, unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. Should the Legislature fail to pass a budget or emergency appropriation before the start of any fiscal year, the District might experience delays in receiving certain expected revenues. The District is authorized to borrow temporary funds to cover its annual cash flow deficits, and as a result of the White v. Davis decision, the District might find it necessary to increase the size or frequency of its cash flow borrowings, or to borrow earlier in the fiscal year. The District does not expect the White v. Davis decision to have any long-term effect on its operating budgets.
Aggregate State Education Funding. The Proposition 98 guaranteed amount for education is based on prior-year funding, as adjusted through various formulas and tests that take into account State proceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and other factors. The State’s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given fiscal year’s budget, from the Governor’s initial budget proposal to actual expenditures to post-year-end revisions, as better information regarding the various factors becomes available. Over the long run, the guaranteed amount will increase as enrollment and per capita personal income grow.
If, at year-end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as “settle-up.” If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster than personal income (or sooner, as the Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as “maintenance factor.”
In recent years, the State’s response to fiscal difficulties has had a significant impact on Proposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-up amounts when funding has lagged the guaranteed amount. In response, teachers’ unions, the State Superintendent and others sued the State or Governor in 1995, 2005 and 2009 to force them to fund schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted in over $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down the obligations through additional education funding over time, including the Quality Education Investment Act of 2006 (QEIA), have also become part of annual budget negotiations, resulting in repeated adjustments and deferrals of the settle-up amounts. The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years’ Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds one fiscal year to the next, by permanently deferring the year end apportionment from June 30 to July 2; by suspending Proposition 98, as the State did in 2004-05; and by proposing to amend the Constitution’s definition of the guaranteed amount and settle-up requirement under certain circumstances.
Proposition 1A. Beginning in 1992-93, the State has satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund (ERAF) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the Legislature proposed an amendment to the State Constitution, which the State’s voters approved as Proposition 1A at the November 2004 election.
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Proposition 1A is intended to, among other things, stabilize local government revenue sources by restricting the State’s control over local property taxes. Proposition 1A allows the State to divert up to 8% of local property tax revenues for State purposes (including, but not limited to, funding K-12 education) only if: (i) the Governor declares such action to be necessary due to a State fiscal emergency; (ii) two-thirds of both houses of the Legislature approve the action; (iii) the amount diverted is required by statute to be repaid within three years; (iv) the State does not owe any repayment to local agencies for past property tax or Vehicle License Fee diversions to local agencies; and (v) such property tax diversions do not occur in more than two of any ten consecutive fiscal years. Because ERAF shifts will be capped and limited in frequency, school and college districts that receive Proposition 98 funding from the State will be more directly dependent upon the State’s general fund.
See “State Current Financial Stress” and “Adoption of Amended 2009 Budget Act” for a description of Proposition 1A diversions of local property tax revenues from cities, counties and special districts to the State to offset State General Fund spending for education and other programs. Fiscal Year 2009-10 diverted revenues must be repaid, with interest, no later than June 30, 2013 and in the case of diversion of local property tax revenues from local redevelopment agencies, which is not covered by Proposition 1A. the California Redevelopment Association and two redevelopment agencies in one action and seven counties in a separate action filed lawsuits challenging the constitutionality of the diversion. On May 4, 2010, the trial court in such lawsuits determined that the contentions of the petitioners in both lawsuits lacked merit and the trial court denied the petitioners’ request for a stay of a transfer of funds on May 10, 2010.
State Current Financial Stress. Since the start of 2008, the State has been experiencing the most significant economic downturn and financial pressure since the Great Depression of the 1930s. As a result of continuing weakness in the State economy, State tax revenues have declined precipitously, resulting in large budget gaps and cash shortfalls. The State Legislature and the Governor have had to adopt three major budget plans, covering both Fiscal Year 2008-09 and Fiscal Year 2009-10, in less than 11 months, in response to continuing deterioration in the State’s fiscal condition. In the course of these three budget plans, the State Legislature enacted some $60 billion in budget revisions, including some revenue increases and borrowing, but consisting primarily of expenditure reductions which have affected almost all State government, education, social services and other programs funded by the State. The State’s financial plan continues to be based on a number of assumptions which may not be realized, and further budgetary actions may be needed to maintain a positive balance for the State’s General Fund at the end of Fiscal Year 2009-10. See the caption “State Budget Risks for Remainder of Fiscal Year 2009-10” below.
The initial “2008 Budget Act,” adopted in September 2008, estimated State General Fund revenues and transfers for Fiscal Year 2008-09 of approximately $102 billion with expenditures of $103.4 billion. By the time of the adoption of the amended State budget for 2009 (the “Amended 2009 Budget Act”) in July 2009, State General Fund revenues (even including certain new revenues) for Fiscal Year 2009-10 were estimated at only $89.5 billion and expenditures at $84.6 billion. The Amended 2009 Budget Act only provides for a $500 million reserve at June 30, 2010, an amount which may already be depleted because some of the budgetary assumptions currently being used by the State are not being fully realized.
The sharp drop in revenues over the last two Fiscal Years has also resulted in a significant depletion of cash resources to pay the State’s obligations. For a period of one month, in February 2009, the State deferred making certain payments from the State General Fund in order to conserve cash resources for high priority obligations, such as education and debt service. Full payments resumed in March 2009, and the State was able to pay all its obligations through June 30, 2009, including repayment of $5.5 billion of Fiscal Year 2008-09 revenue anticipation notes. However, by July 2009, as new budget gaps were identified and with the failure to adopt corrective actions, the State’s cash resources had dwindled so far that, commencing July 2, 2009, the State Controller began to issue registered warrants (or “IOUs”) for certain lower priority obligations in lieu of warrants (checks) which could be immediately cashed. The registered warrants, the issuance of which did not require the consent of the recipients thereof, bore interest. With enactment of the Amended 2009 Budget Act in late July 2009, and the ability to issue $1.5 billion of interim 2009-10 revenue anticipation notes, the State was able to call all its outstanding registered warrants for redemption on September 4, 2009. The issuance of State registered warrants in 2009 was only the second time the State has issued State registered warrants to such types of State creditors since the 1930s.
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There can be no assurances that the fiscal stress and cash pressures currently facing the State will not continue or become more difficult, or that continuing declines in State tax receipts or other impacts of the current economic recession will not further materially adversely affect the financial condition of the State. The Department of Finance has projected that multi-billion dollar budget gaps will occur annually through at least Fiscal Year 2012-13 without further corrective actions.
Enactment of State Budget for 2009-10. The State’s budget for Fiscal Year 2009-10 was enacted in an unusual sequence. The 2008 Budget Act was one of the latest ever enacted, having been delayed until mid-September 2008 as a result of the difficulty of balancing the budget with reduced revenues, as declining economic conditions were already evident. The 2008 Budget Act, however, was based on revenue assumptions made in the spring of 2008, which proved to be greatly overstated by the time actual revenue results for September and October 2008 were received. With the financial market meltdown starting in September 2008, which resulted in massive federal assistance and caused large drops in stock market and other asset values and reductions in consumer spending, projections of tax revenues, which are heavily dependent on capital gains taxes and sales taxes, had to be dramatically reduced. In November 2008, the Governor announced that the 2008 Budget Act would be billions of dollars out of balance, and called several special sessions of the State Legislature to enact corrective actions.
Initial 2009 Budget Act. The “Initial 2009 Budget Act” was adopted by the State Legislature on February 19, 2009, along with a number of implementing measures, and signed by the Governor on February 20, 2009. In February, the State enacted $36 billion in revisions to what was then estimated to be a $42 billion State General Fund budget gap for the combined 2008-09 and 2009-10 Fiscal Years. It also provided for five budget-related ballot measures that would have provided an estimated $6 billion in additional budget revisions, to be placed before the voters on May 19, 2009. These measures were all rejected by the voters.
Under the Initial 2009 Budget Act, based on then-current assumptions about the State’s financial circumstances, and assuming receipt of approximately $8.0 billion of federal stimulus funds to offset State General Fund costs and voter approval of various ballot measures, State General Fund revenues and transfers were projected to increase 9.3 percent, from $89.4 billion in Fiscal Year 2008-09 to $97.7 billion in Fiscal Year 2009-10. The Initial 2009 Budget Act contained State General Fund appropriations of $92.2 billion, compared to $94.1 billion in Fiscal Year 2008-09, a 2.0 percent decrease. The June 30, 2010, total reserve was projected to be $2.1 billion, an increase of $5.5 billion compared to the estimated June 30, 2009, total reserve deficit of negative $3.4 billion.
After adoption of the Initial 2009 Budget Act, the State continued to experience significant declines in revenues and other financial pressures. On May 14, 2009, the Governor released the Fiscal Year 2009-10 May Revision. Together with subsequent revisions, the Fiscal Year 2009-10 May Revision identified a further budget shortfall through Fiscal Year 2009-10 of approximately $24 billion.
Adoption of Amended 2009 Budget Act. On July 24, 2009, the State Legislature approved the amendments to the Initial 2009 Budget Act and the Governor signed the Amended 2009 Budget Act on July 28, 2009. The Amended 2009 Budget Act includes another $24 billion in revisions to address the further deterioration of the State’s fiscal situation identified in the Fiscal Year 2009-10 May Revision.
Under the Amended 2009 Budget Act, State General Fund revenues and transfers are projected to increase 6.4 percent, from a revised $84.1 billion in Fiscal Year 2008-09 to $89.5 billion in Fiscal Year 2009-10. The Amended 2009 Budget Act contains State General Fund appropriations of $84.6 billion in 2009-10, compared to $91.5 billion in Fiscal Year 2008-09, a 7.5 percent decrease. The June 30, 2010, total reserve is projected to be $500 million as compared to the revised June 30, 2009, reserve of negative $4.5 billion.
The Amended 2009 Budget Act contains the following major State General Fund components:
• Addressing the Deficit. The $60 billion in budget revisions adopted for the combined Fiscal Years 2008-09 and 2009-10 ($36 billion in revisions were adopted in February 2009 and $24 billion in July 2009) are wide-ranging and touch all three of the State’s major revenue sources (personal income taxes, corporation taxes and sales and use taxes). Spending cuts are
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implemented in virtually every State program that receives State General Fund support. The budget revisions include spending reductions of $31.0 billion (52 percent of total revisions). The spending reductions consist primarily of reductions in education spending under Proposition 98 ($14.9 billion reduction), higher education ($3.3 billion reduction), employee compensation ($2.0 billion reduction), and reductions in other spending due to the use of redevelopment agency revenues and fund balances to pay costs that would otherwise be payable from the State General Fund ($1.7 billion reduction). The ability, however, to utilize such redevelopment agency revenues for such purposes has been judicially challenged. See “-Redevelopment Agency Borrowing” below. The budget revisions also include an estimated receipt of $8.0 billion (13 percent of total revisions) of federal stimulus funds which will be used to offset State General Fund expenditures. Additional revisions include $12.5 billion of tax increases (21 percent of total revisions) and $8.4 billion of other revisions (14 percent of total revisions). Significant elements of the other budget revisions include:
Proposition 1A of 2004 Borrowing from Local Governments − The Amended 2009 Budget Act authorizes the State to exercise its borrowing authority under Proposition 1A of 2004 to borrow from local agencies up to 8 percent of their Fiscal Year 2008-09 property tax revenues. This borrowing is estimated to generate $1.935 billion that will be used to offset State General Fund costs for a variety of court, health, corrections, and K-12 programs. The enabling legislation specifies the borrowed sums will be repaid by the State, with interest, no later than the end of June 2013.
Redevelopment Agency Borrowing − The Amended 2009 Budget Act also contains a shift of $1.7 billion in local redevelopment agency funds to the State from current revenues and reserves in Fiscal Year 2009-10 and $350 million in Fiscal Year 2010-11 into a Supplemental Education Revenue Augmentation Fund. Under the Amended 2009 Budget Act these revenues are ultimately shifted to schools that serve the redevelopment areas. An association of redevelopment agencies has sued to block this transfer which if successful could adversely affect the State’s financial condition. (The failure of the State Legislature, during the regular session ended on September 11, 2009, to pass clean-up legislation clearly authorizing redevelopment agencies to borrow from low and moderate income housing accounts may jeopardize the ability of some agencies to make their full payment to the Supplemental Education Revenue Augmentation Fund in Fiscal Year 2009-10, thus some portion of the $1.7 billion budget revision may not be achieved in Fiscal Year 2009-10 as planned. It is likely that these funds could be paid in later years as agencies receive new revenues with which to make the payments.)
Payroll Shift − One-time savings of $1.618 billion ($937.6 million State General Fund) from shifting the June payments for employee payroll and active and retiree health to July each year beginning with the pay period ending June 30, 2010. This payment shift excludes the University of California, California State University, Community Colleges, the State Legislature, the California Exposition and State Fair, and local trial courts.
State Compensation Insurance Fund Sale − One-time revenues of $1 billion from the sale of certain assets of the State Compensation Insurance Fund (“SCIF”).
• Federal Stimulus − The Amended 2009 Budget Act assumed the receipt of at least $8 billion from the American Recovery and Reinvestment Act of 2009 to offset State General Fund expenditures in Fiscal Years 2008-09 and 2009-10. Final estimates put this amount at about $8.1 billion. As of the end of August 2009, approximately $5 billion has been received by the State.
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• Cash Flow Management − The deterioration of revenues resulted in a cash shortage in Fiscal Years 2008-09 and 2009-10. In order to manage cash flow and provide for timely payments of the State’s obligations, the Amended 2009 Budget Act includes a number of cash revisions to better balance timing of receipts and disbursements.
• Proposition 98 − The Proposition 98 Guarantee for 2009-10 is projected to be $50.4 billion, of which $35.0 billion is the State General Fund portion. See “ – Proposition 98 Funding for Fiscal Year 2009-10” below.
• K-12 Education − The Amended 2009 Budget Act includes $66.7 billion for K-12 education programs for Fiscal Year 2009-10 of which $35.0 billion is funded from the State General Fund. This reflects a decrease of $1.8 billion or 2.6 percent below the revised Fiscal Year 2008-09 budget. Total per-pupil expenditures are projected to decrease by $262 to $11,259 in Fiscal Year 2009-10.
• Higher Education − The Amended 2009 Budget Act reflects a total funding of $20.9 billion, including $12.5 billion State General Fund and Proposition 98 sources for all major segments of Higher Education (excluding infrastructure and stem cell research). This reflects an increase of $1.416 billion (including $248.6 million State General Fund and Proposition 98 sources) above the revised Fiscal Year 2008-09 estimate.
• Health and Human Services − The Amended 2009 Budget Act includes $24.8 billion in non-Proposition 98 State General Fund expenditures for Health and Human Service Programs for Fiscal Year 2009-10, which is a decrease of $3.9 billion or 13.5 percent from the revised Fiscal Year 2008-09 estimate. Due to the State’s severe fiscal shortfall, the Initial 2009 Budget Act included $2.4 billion in proposed State General Fund expenditure reductions in Health and Human Services programs in Fiscal Year 2009-10, and the amendments to the Initial 2009 Budget Act include an additional $3.4 billion in Fiscal Year 2009-10 State General Fund expenditure reductions in these programs. Unlike the budget enacted by the State Legislature in February, 2009, the Amended 2009 Budget Act reflects significant State General Fund relief for Health and Human Services programs resulting from the American Recovery and Reinvestment Act of 2009.
• Transportation Funding − The Amended 2009 Budget Act includes $1.441 billion of State General Fund expenditures to fully fund local transportation programs under Proposition 42 in Fiscal Year 2009-10. Proposition 1B was also passed in November 2006, providing $19.9 billion in bonding authority for a total of 16 programs intended to address a broad range of transportation priorities including rehabilitation and expansion of highways, transit and transit security, port security, and air quality. The authority for the use of any bond funds must be provided for in a budget act. The Amended 2009 Budget Act appropriates $4.2 billion of funds from the Proposition 1B bond authorization. Additionally, the Amended 2009 Budget Act directs $953 million of funds from sales tax on fuels to offset costs of programs otherwise likely to be funded from the State General Fund such as debt service on transit bonds and other transportation programs. Of this amount, approximately $816 million is for uses substantially similar to those that are the subject of litigation related to the 2008 Budget Act. On September 30, 2009, the United States Supreme Court denied review of an adverse Court of Appeal decision in this case.
• Budget Stabilization Account (“BSA”) − Under normal circumstances, the State would set aside a specified portion of estimated annual State General Fund revenues for Fiscal Year 2009-10 in the BSA for reserves that may be used to offset future shortfalls in the State General Fund. Given the magnitude and urgency of the State’s ongoing financial stress, the Amended 2009 Budget Act continues to suspend the transfer to the BSA for Fiscal Year 2009-10.
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• Prison Funding − The Amended 2009 Budget Act includes $7.9 billion in State General Fund expenditures for the California Department of Corrections and Rehabilitation (“CDCR”). In arriving at this figure, a total of $1.2 billion of savings for CDCR operations was assumed. Approximately $600 million of these savings require further legislative approval to implement and will be achieved through, among other things, prison and parole reforms. (Legislative action on September 11, 2009, resulted in fewer reforms than assumed in the Amended 2009 Budget Act, and will therefore generate less savings. The savings loss is estimated at $233.4 million.)
New Revenues. The Amended 2009 Budget Act includes several major changes in State General Fund revenues described below. The Amended 2009 Budget Act did not include any additional tax increases over those provided for pursuant to the Initial 2009 Budget Act, though it does include certain tax law changes intended to increase tax compliance and accelerate some revenues that were not in the Initial 2009 Budget Act.
As part of the Amended 2009 Budget Act, the Department of Finance assumed that revenues in Fiscal Year 2009-10 would be $3.0 billion lower than the level assumed in the Fiscal Year 2009-10 May Revision forecast. The Department of Finance also revised revenues prior to Fiscal Year 2008-09 upward by an increase of $1.3 billion to account for a prior-year adjustment that affected the beginning balance, and reduced Fiscal Year 2008-09 revenues by $1.8 billion, for an aggregate reduction over all fiscal years of $3.5 billion. The change for years prior to Fiscal Year 2008-09 is related to the 2008 Budget Act provision that imposed a 20 percent penalty for corporations that understate their tax liability by $1 million or more. The penalty revenues, which were received in Fiscal Year 2008-09 but attributable to prior years, resulted in a positive $1.3 billion prior-year adjustment to corporation tax revenues for years prior to Fiscal Year 2008-09. The Department of Finance assumed a $1.8 billion reduction to revenues in Fiscal Year 2008-09 from the Fiscal Year 2009-10 May Revision forecast based on the trends seen in May and June tax collections. For Fiscal Year 2008-09 and Fiscal Year 2009-10, the revenue reductions were not allocated to any specific revenue source.
In the following paragraphs, the additional amounts expected to be generated from the respective tax law changes were derived from the Fiscal Year 2009-10 May Revision, and do not take into account the $3.0 billion reduction for Fiscal Year 2009-10 described above.
• Temporary Sales Tax Increase: Effective April 1, 2009, the State General Fund sales and use tax rate was temporarily increased by 1 cent, from 5 percent to 6 percent. This tax increase will be in effect through June 30, 2011. At the time of adoption, this tax law change was expected to generate additional sales tax revenues of $1.203 billion in Fiscal Year 2008-09 and $4.533 billion (net of $213 million transferred to the Transportation Investment Fund under Proposition 42) in Fiscal Year 2009-10 for the State General Fund.
• Vehicle License Fees: Effective May 19, 2009, vehicle license fees were temporarily increased from 0.65 percent to 1.15 percent with 0.35 percent going to the State General Fund and 0.15 percent going to the Local Safety and Protection Account for local law enforcement grant programs previously funded from the State General Fund. Vehicle license fees apply to the value of the vehicle (initially its market value and then subject to a standard depreciation schedule). This increase is scheduled to remain in effect through June 30, 2011. At the time of adoption, this law change was expected to generate additional revenues of approximately $360 million in Fiscal Year 2008-09 and $1.6 billion in Fiscal Year 2009-10.
• Personal Income Tax Surcharge: The Amended 2009 Budget Act provides for a temporary addition of 0.25 percent to each personal income tax rate for tax years 2009 and 2010. At the time of adoption, this change was expected to generate approximately $2.8 billion of additional State General Fund revenues in Fiscal Year 2009-10.
• Dependent Exemption Credit Reduction: The Amended 2009 Budget Act includes a temporary reduction in the Personal Income Tax exemption credit for dependents to the
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amount provided for the personal credit for tax years 2009 and 2010 from $309 to $99 (tax year 2008 values). At the time of adoption, this change was expected to generate approximately $1.4 billion of additional State General Fund revenues in Fiscal Year 2009-10.
The Amended 2009 Budget Act includes tax law changes affecting the State General Fund as described below.
• Non-Retailer Registration for Use Tax: Under current law, non-retailers - those who do not sell tangible personal property - are not required to register with the Board of Equalization (“BOE”). This law change will require non-retailers that hold a business license and have at least $100,000 in gross receipts to register with the BOE and submit a return that details purchases made during the year that were subject to the use tax yet for which no use tax was paid. This law change is expected to increase State General Fund sales and use tax revenue by $26 million in Fiscal Year 2009-10 and $123 million in 2010-11, with increasing amounts thereafter.
• Accelerate Estimated Tax Payments: Under current law, individuals and corporations are required to pay 30 percent each with the first two estimated payments, and 20 percent each for the last two estimated payments. Under this law change, beginning with the 2010 tax year, the first quarter estimated payment percentage will remain at 30 percent, the second quarter will increase to 40 percent, the third estimated payment will be eliminated, and the fourth quarter estimated payment will increase from 20 percent to 30 percent. This law change is expected to accelerate $610 million into Fiscal Year 2009-10 ($250 million in personal income tax receipts and $360 million in corporate tax receipts).
• Accelerate Wage Withholding: This tax law change will increase current wage withholding rates by 10 percent and is expected to accelerate $1.7 billion of personal income tax receipts into Fiscal Year 2009-10.
• Require Backup Withholding: Under current federal law, gambling winnings reported on Internal Revenue Service (“IRS”) Form W2G and payments made by banks and businesses reported on various IRS 1099 forms may be subject to backup withholding on those payments. Payments reported on IRS 1099 forms include payments to independent contractors, rents, commissions, and royalty payments. This law change will conform State law to federal law by requiring a withholding rate of 7 percent for State purposes whenever it is required for federal purposes. This law change is expected to increase personal income tax revenues by $32 million in Fiscal Year 2009-10.
State Budget Risks for Remainder of Fiscal Year 2009-10. The Amended 2009 Budget Act and the State’s cash management plan are based on a variety of assumptions. In the event actual circumstances or conditions differ from those assumptions, the State’s financial condition could be materially adversely impacted. The Amended 2009 Budget Act provides for a reserve of $500 million. The potential financial implications of one or more of the following risks exceed such reserve.
There can be no assurances that the financial condition of the State will not be further materially and adversely affected by actual conditions or circumstances, including but not limited to those described below.
Budget risks identified by the State include, but are not limited to, the following:
• The underlying economic forecast and revenue projections on which the Amended 2009 Budget Act was based were prepared in April 2009 for the Fiscal Year 2009-10 May Revision. (Since the release of the Fiscal Year 2009-10 May Revision, certain economic indicators have shown a lower level of activity than forecast.) The Amended 2009 Budget Act
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assumed decreased revenues of $3.0 billion for Fiscal Year 2009-10 (as compared to the Fiscal Year 2009-10 May Revision). However, there can be no assurances that revenues will not be significantly less than projected in the Amended 2009 Budget Act.
• Potential revenue loss resulting from employee furloughs in the Franchise Tax Board and the BOE was not included in the revenue assumptions contained in the Amended 2009 Budget Act. The Amended 2009 Budget Act assumes these entities could manage the furlough to prevent revenue loss. However, recent indications show that this assumption is not realistic. The State currently estimates that furloughs, on an accrual basis, will result in a State General Fund budgetary revenue loss of $367 million in Fiscal Year 2009-10 and $420 million in 2010-11. This estimate assumes the BOE will implement approximately 600 layoffs in lieu of furloughs, in accordance with public statements by the elected BOE members.
• Delays in or inability of the State to implement budget revisions, or increased costs, as a result of current or future litigation, including litigation related to:
the use of vehicle fuel tax revenue (up to $1 billion potential State General Fund impact); on September 30, 2009 the United States Supreme Court denied the State’s petition for review of an adverse Court of Appeals decision in this case;
the Governor’s furlough of State employees ($1.3 billion potential State General Fund impact); and
certain vetoes made by the Governor in connection with the Amended 2009 Budget Act ($489 million potential State General Fund impact).
• An adverse decision in the litigation relating to the State’s shifting of $1.7 billion of redevelopment agency funds to pay costs otherwise payable from the State General Fund.
• Requirements that the State expend moneys for prison healthcare improvements, under orders of a federal court, in amounts in excess of that set forth in the Amended 2009 Budget Act.
• Delay in sale and/or lower sale price than the $1 billion estimated in the Amended 2009 Budget Act for the sale of State Compensation Insurance Fund assets. The Insurance Commissioner has filed suit to prevent this sale from occurring.
• Inability to obtain the entire $1 billion for Medi-Cal “federal flexibility and stabilization” that is included in the Amended 2009 Budget Act. The State is currently working with the federal government to attain $1 billion in federal flexibility that could be in the form of new money or flexibility from federal restrictions on formulas or administrative requirements in law.
• Inability to obtain legislative approval for $600 million in revisions for CDCR that will result in savings to the State General Fund. These savings are intended to be achieved through, among other things, prison and parole reforms. (Legislative action on September 11, 2009, resulted in fewer reforms than assumed in the Amended 2009 Budget Act, and will therefore generate less savings. The savings loss is estimated at $233.4 million.)
Projected Future Deficits. Since many of the actions taken to balance the State’s Amended 2009 Budget Act were either one-time actions, or involve loans which have to be repaid, or are based on temporary revenue increases or the limited receipt of federal stimulus funds, budget gaps of several billions of dollars a year are expected to recur in Fiscal Year 2010-11 and subsequent years. The Department of Finance has projected that, using expenditure obligations under existing law and various assumptions concerning revenues in future years, the State would, in the absence of taking additional steps to balance its budget, face an “operating deficit” (expenditures exceeding revenues in the same Fiscal Year) of $7.4 billion in Fiscal Year 2010-11, $15.5 billion in Fiscal Year 2011-12 and $15.1 billion in Fiscal Year 2012-13. These projections
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assume, for instance, that transfers to the BSA will be suspended in each of these coming years, and that the State will ultimately prevail in the pending and threatened litigation described above concerning budget actions.
The Fiscal Outlook Report updates expenditure and revenue projections for Fiscal Year 2009-10 and later fiscal years.
The Fiscal Outlook Report concludes that although the 2009 Budget Amendments had projected the State would end Fiscal Year 2009-10 with a $500 million reserve, the LAO now projects a Fiscal Year 2009-10 budget deficit of $6.3 billion based on the failure of certain assumptions in the Amended 2009 Budget Act and 2009 Budget Amendments to materialize. The Fiscal Outlook Report attributes this budget deficit to increases in spending obligations and lower than expected revenues. The Fiscal Outlook Report projects that General Fund spending obligations will be $4.9 billion higher than budgeted as of the time of the 2009 Budget Amendments. This projected increase is, in part attributable to $1.4 billion higher-than-budgeted spending in the CDCR, approximately $1 billion increase in Proposition 98 minimum funding guarantee in Fiscal Year 2009-10, approximately $900 million of higher-than-budgeted spending for the Medi-Cal Program and over $800 million of higher General Fund spending related to a court decision which limits the State’s ability to use “spill-over” gasoline tax and Public Transportation Account funds to reduce General Fund Spending. The Fiscal Outlook Report projects that General Fund revenues will be $83.6 billion in Fiscal Year 2008-09 ($496 million less than budgeted) and $88.1 billion in Fiscal Year 2009-10 ($1.5 billion less than budgeted). The Fiscal Outlook Report projects an additional $14.4 billion budget shortfall in Fiscal Year 2010-11 if no corrective actions are taken and ongoing budget shortfalls of at least $20 billion in each Fiscal Year through 2013-14.
The financial condition of the State is subject to a number of other risks in the future, including particularly potential significant increases in required State contributions to the Public Employees’ Retirement System, increased financial obligations related to Other Post-Employment Benefits, and increased debt service.
Proposition 98 Funding for Fiscal Year 2009-10. The 2009 Budget Amendments reduce Proposition 98 funding to $49.1 billion in Fiscal Year 2008-09, a change of $1.6 billion from the levels set by the Amended 2009 Budget Act. This reduction is achieved primarily by reverting unallocated categorical programs funding that had not been distributed at the end of Fiscal Year to the State General Fund. The 2009 Budget Amendments also create a future funding obligation, or “maintenance factor,” of $11.2 billion as a result of the reductions in Proposition 98 funding for Fiscal Year 2008-09. Payments with respect to this funding obligation will be required in future Fiscal Years until repaid in full.
For Fiscal Year 2009-10, the Amended Budget Act reduces Proposition 98 funding to $50.4 billion, a change of $4.5 billion from the funding levels set by the Amended 2009 Budget Act. This figure reflects a total reduction in Proposition 98 funding of $5.3 billion, which is offset by $850 million in redevelopment revenues shifted from certain State agencies, as discussed above. The bulk of this reduction consists primarily of (i) $2.1 billion in reductions to school district and county office of education revenue limit payments, (ii) $80 million in reductions to basic aid school district categorical programs, (iii) $580 million in reductions to ongoing California Community College funding, and (iv) a deferral of $1.7 billion in school district revenue limit payments and $115 million community college apportionments from Fiscal Year 2009-10 to August of Fiscal Year 2010-11. As a cash management measure, the 2009 Budget Amendments also defer approximately $2 billion in K-12 apportionments from the first few months of Fiscal Year 2009-10 to December 2009 and January 2010.
Governor’s Proposed 2010-2011 State Budget; May 2010 Revision
Governor’s Proposed 2010-2011 State Budget. On January 8, 2010, Governor Schwarzenegger released his proposed budget for Fiscal Year 2010-2011 (the “Governor’s Proposed 2010-2011 State Budget”), which includes cuts to education, health care, social services and transit in order to address a projected $19.9 billion in budget shortfalls (which is comprised of a current year shortfall of $6.6 billion, a budget year shortfall of $12.3 billion and a reserve of $1 billion). The Governor’s Proposed 2010-2011 State Budget does not include any broad based tax increases, but does include a heavy reliance on the increase of the influx of
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federal funds. The following paragraphs set forth the Governor’s proposals for K-12 education reflected in the Governor’s Proposed 2010-2011 State Budget as of the date of its release. It should be noted, however, that on May 14, 2010, the Governor released the Fiscal Year 2010-11 May Revision which identified further budget revisions reflecting changes in revenue and expenditures assumptions. See “Fiscal Year 2010-11 May Revision” below.
Based on certain assumptions discussed below, the Governor’s Proposed 2010-2011 State Budget includes the full funding of the Proposition 98 guarantee. However, the Governor’s Proposed 2010-11 State Budget originally proposed a reduction of approximately 10% in funding for administration, overhead and other non-instruction related spending by school districts, which is equal to approximately $1.2 billion in cuts for school districts and approximately $45 million in cuts for county offices of education. Total Proposition 98 expenditures are projected in the Governor’s Proposed 2010-2011 State Budget to be lower than the $50.4 billion amount assumed in the amended 2009-10 State Budget to $49.9 billion in Fiscal Year 2009-10 reflecting a minimum guarantee that is $567.5 million (or 1.2%) lower. The State General Fund share of the Fiscal Year 2009-10 Proposition 98 guarantee is also projected to decrease from $35 billion to $34.7 billion. The Governor’s Proposed 2010-2011 State Budget calls for the funding of the minimum required Proposition 98 guarantee in Fiscal Year 2010-11 at $50 billion, reflecting an increase of $103 million (or 0.2%) over the revised Fiscal Year 2009-10 minimum guarantee. The State General Fund share of the Fiscal Year 2010-11 Proposition 98 guarantee is projected at $36.1 billion in the Governor’s Proposed 2010-2011 State Budget.
As part of a compromise to the amended 2009-10 State Budget, the Proposition 98 funding level for Fiscal Year 2008-09 was certified through legislation at $49.1 billion. The amended 2009-10 State Budget also established a future funding obligation of $11.2 billion (the “in lieu” maintenance factor) even if it were to be determined that no maintenance factor was created in Fiscal Year 2008-09. The amended 2009-10 State Budget established a repayment schedule for the “in lieu” maintenance factor beginning in Fiscal Year 2010-11. However, revenues in Fiscal Year 2008-09 were subsequently determined to be significantly lower than was estimated at the time the Proposition 98 funding level was certified, resulting in no maintenance factor and dropping the Proposition 98 guarantee to $46.8 billion. Absent corrective action, the $2.3 billion overappropriation of the Proposition 98 guarantee in Fiscal Year 2008-09 and required repayments of the “in lieu” maintenance factor beginning in Fiscal Year 2010-11, would substantially increase the Proposition 98 guarantee in Fiscal Years 2009-10 and 2010-11. In the Governor’s Proposed 2010-2011 State Budget, the Governor proposes to bring the level of appropriations down to the actual level of expenditures for Fiscal Year 2008-09 (reducing the overappropriation to $2.2 billion) and to use a portion of the $2.2 billion overappropriation toward satisfying the outstanding maintenance factor, resulting in a reduction in the minimum Proposition 98 guarantee for Fiscal Years 2009-10 and 2010-11. The “in lieu” maintenance factor payments adopted as part of the amended 2009-10 State Budget were to begin in Fiscal Year 2010-11. However, the Governor proposed to delay the start date of these payments to Fiscal Year 2012-13. These proposals and various tax reductions and shifts in the Governor’s Proposed 2010-2011 State Budget are projected to result in State budget reductions of $892.6 in Fiscal Year 2009-10 and $1.5 billion in Fiscal Year 2010-11.
A few areas of flexibility for schools that have been enacted in past budgets are proposed to be continued in the Governor’s Proposed 2010-2011 State Budget, including categorical flexibility through 2012-13, the ability to reduce the school year by five days and relaxed penalties on K-3 Class Size Reduction.
Certain changes to current State law (intended to provide additional flexibility to school districts and allow school districts to protect classroom spending) are a part of the Governor’s Proposed 2010-2011 State Budget. One such change would be to give local school districts the flexibility to layoff, assign, reassign, transfer and rehire teachers based on skill and subject matter needs without regard to seniority. Another such change would be to change the teacher layoff notice to 60 days after the State budget is adopted or amended. Current law requires that school districts notify teachers by March 15 of the year before the layoff, well before the State typically adopts its budget and school districts know how much funding they will receive. A third proposed change would eliminate provisions in State law that require teachers who have been laid off to receive first priority for substitute assignments and that theses substitutes be paid at the rate they received before they were laid off if certain criteria is met.
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Fiscal Year 2010-11 May Revision. On May 14, 2010, the Governor released the Fiscal Year 2010-11 May Revision to the Governor’s Proposed 2010-11 State Budget. The May Revision projects a budget gap of $19.1 billion, representing $7.7 billion shortfall for Fiscal Year 2009-10, a $10.2 billion shortfall for Fiscal Year 2010-11 and a reserve of $1.2 billion. The Fiscal Year 2010-11 May Revision proposes to address these deficits through various fund shifts and other revenues (approximately $2.113 billion) and alternative funding (approximately $1.278 billion) accounting for $3.4 billion, federal funds accounting for $3.4 billion and spending reductions of $12.4 billion. The spending reductions are proposed to be achieved through reductions in or the elimination of various programs.
The Fiscal Year 2010-11 May Revision estimates Fiscal Year 2009-10 revenues and transfers of $86.521 billion, total expenditures and transfers of $86.465 billion and a year-end deficit of $5.305 billion, which includes a negative $5.361 billion prior-year State General Fund balance and an allocation of $1.537 billion reserve for liquidation of encumbrances. The Fiscal Year 2010-11 May Revision projects Fiscal Year 2010-11 revenues and transfers of $91.451 billion, total expenditures of $83.404 billion and a year-end surplus of $2.742 billion (net of the $5.305 billion Fiscal Year 2009-10 deficit), of which $1.537 billion will be reserved for liquidations of encumbrances and $1.205 billion will be deposited in a reserve for economic uncertainties.
The Fiscal Year 2010-11 May Revision forecasts that the longest and deepest recession in the post-Depression era is most likely over, that both the state and national economies appear poised to make modest comebacks, that the recovery will probably be moderate and prolonged by historical standards, that the outlook for the near term is positive but sober and that the outlook for the California economy largely mirrors the national outlook, but with slightly less growth.
The Fiscal Year 2010-11 May Revision features which apply to school districts include the following:
• Proposes the Proposition 98 funding level for Fiscal Year 2009-10 at $49.9 billion which is $52.4 million higher than the level included in the Governor’s 2010-2011 Proposed State Budget but is less than the $50.4 assumed in the Amended Budget Act for Fiscal Year 2009-10.
• Proposes the Proposition 98 funding level for Fiscal Year 2010-11 at $48.4 billion, a level that reflects the proposed elimination of State funding for child care only and does not reduce funding for K-14 education. As a result of the elimination of the child care program, the Proposition 98 guarantee is rebenched downward by $1.4 billion.
• Withdraws the proposal to specifically dictate the level of reductions from school district and county office of education administration contained in the Governor’s Proposed 2010-2011 State Budget and alternatively proposes to provide school district administrators and school boards maximum flexibility to manage the level of funding provided by the May Revision.
• Proposes to eliminate the remainder of State funding for need-based, subsidized child care totaling almost $1.2 billion.
• Continues to propose using a portion of the $2 billion overappropriation for the Fiscal Year 2008-09 Proposition 98 funding toward satisfying the outstanding “in lieu” maintenance factor which is approximately $11.2 billion, however, continues to propose a temporary delay in the repayment schedule from Fiscal Year 2010-11 to Fiscal Year 2011-12.
The District cannot predict which proposals, if any, contained in the Governor’s Proposed 2010-2011 State Budget or the Fiscal Year 2010-11 May Revision will be adopted by the Legislature and signed by the Governor as part of the final Fiscal Year 2010-11 State Budget. Additionally, the District cannot predict if any other proposals affecting education funding will be proposed before the final Fiscal Year 2010-11 State Budget is adopted by the Legislature and signed by the Governor. The complete Governor’s Proposed 2010-2011 State Budget and the Fiscal Year 2010-11 May Revision is available from the California Department of Finance website at www.dof.ca.gov.
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Future Budgets and Actions
The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address the current State budget deficit, 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. Continued State budget shortfalls in future Fiscal Years could have an adverse financial impact on the State General Fund budget. Consequently, the District cannot predict how State income or State education funding will vary over the term to maturity of the Bonds, and the District takes no responsibility for informing owners of the Bonds as to actions the State Legislature or Governor may take affecting the current year's budget after its adoption. Information about the State budget and State spending for education is regularly available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance, www.dof.ca.gov, under the heading “California Budget.” The LAO Overview and the LAO Proposition 98 and K-12 Education Report are posted by the LAO at www.lao.ca.gov. In addition, various State of California official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on school districts in the State, may be found at the website of the State Treasurer, www.treasurer.ca.gov. The information referred to is prepared by the respective State agency maintaining each website and not by the District, and the District can take no responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references.
CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES
Article XIIIA of the California Constitution
On June 6, 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added “Article XIIIA” to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean “the county assessor’s valuation of real property as shown on the 1975/76 tax bill under “full cash value,” or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to 1% of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition.
Legislation enacted by the State Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for voter-approved bonded indebtedness and pension liability are also applied to 100% of assessed value.
Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) 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 school districts will share the growth of “base” revenue from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation the following year. The District is unable to predict the nature or magnitude of future revenue sources that may be provided by the State to replace lost property tax revenues. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above.
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Article XIIIB of the State Constitution
On November 6, 1979, California voters approved Proposition 4, the so-called Gann Initiative, which added “Article XIIIB” to the California Constitution. In June 1990, Article XIIIB was amended by the voters through their approval of Proposition 111. Article XIIIB of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services rendered by the governmental entity. The “base year” for establishing such appropriation limit is Fiscal Year 1978-79. Increases in appropriations by a governmental entity are also permitted (a) if financial responsibility for providing services is transferred to the governmental entity or (b) for emergencies so long as the appropriations limits for the three years following the emergency are reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity.
Appropriations subject to Article XIIIB include generally any authorization to expend during the Fiscal Year the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979, on bonded indebtedness thereafter approved according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified outlay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to any entity of government from (a) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (b) the investment of tax revenues and (c) certain State subventions received by local governments. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two fiscal years.
As amended in June 1990, the appropriations limit for local governments in each year is based on the limit for the prior year, adjusted annually for changes in the costs of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the local government’s option, either (i) the percentage change in California per capita personal income or (ii) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college (“K-14”) districts.
As amended by Proposition 111, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate proceeds of taxes received by the District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. Any proceeds of taxes received by the District in excess of the appropriations limit are absorbed into the State’s allowable limit. The District does not currently have and does not anticipate having proceeds of taxes in excess of its appropriations limit.
Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved change can only be effective for a maximum of four years. Pursuant to statute, if a school district receives any proceeds of taxes in excess of its appropriations limit, it may, by resolution of the governing board, increase its appropriations limit to equal the amount received, provided that the State has sufficient excess appropriations limit in that fiscal year.
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Articles XIIIC and XIIID of the State 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, 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 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 Articles 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 one percent 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”). The Accountability Act changed State funding of public education below the university level, and the operation of the State’s appropriations limit. The Accountability Act guarantees State funding for K through 12 school districts and community college districts (collectively, “K-14 districts”) at a level equal to the greater of (a) the same percentage of General Fund revenues as the percentage appropriated to such districts in 1986-87, which percentage is equal to 40.9% or (b) the amount actually appropriated to such districts from the General Fund in the previous fiscal year, adjusted for growth in enrollment and inflation.
Since the Accountability Act is unclear in some details, there can be no assurance that the State Legislature or a court might not interpret the Accountability Act to require a different percentage of General Fund revenues to be allocated to K-14 districts than the 40.9%, or to apply the relevant percentage to the State’s budgets in a different way than is proposed in the Governor’s Budget. In any event, the Governor and other fiscal observers expect the Accountability Act to place increasing pressure on the State’s budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State’s ability to fund such other programs by raising taxes.
The Accountability Act also changes how tax revenues in excess of the State appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 districts. Such transfer would be excluded from the appropriations limit for K-14 districts and the K-14 school appropriations limits for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 districts for subsequent years, creating further pressure on other portions of the State budget, particularly if
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revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to schools is four percent of the minimum State spending for education mandated by the Accountability Act, as described above.
On June 5, 1990, California voters approved “Proposition 111” (Senate Constitutional Amendment 1), which further modified the State Constitution to alter the spending limit and education funding provisions of Proposition 98. Most significantly, Proposition 111 (i) liberalized the annual adjustments to the spending limit by measuring the “change in the cost of living” by the change in State per capita personal income rather than the Consumer Price Index, and specified that a portion of the State’s spending limit would be adjusted to reflect changes in school attendance; (ii) provided that 50% of the “excess” tax revenues, determined based on a two-year cycle, would be transferred to K-14 school districts with the balance returned to taxpayers (rather than the previous 100% but only up to a cap of four percent of the districts’ minimum funding level), and that any such transfer to K-14 school districts would not be built into the school districts’ base expenditures for calculating their entitlement for State aid in the following year and would not increase the State’s appropriations limit; (iii) excluded from the calculation of appropriations that are subject to the limit appropriations for certain “qualified capital outlay projects” and certain increases in gasoline taxes, sales and use taxes, and receipts from vehicle weight fees; (iv) provided that the appropriations limit for each unit of government, including the State, would be recalculated beginning in the 1990-91 Fiscal Year, based on the actual limit for Fiscal Year 1986-87, adjusted forward to 1990-91 as if Senate Constitutional Amendment 1 had been in effect; and (v) adjusted the Proposition 98 formula that guarantees K-14 school districts a certain amount of General Fund revenues, as described below.
Under prior law, K-14 school districts were guaranteed the greater of (a) 40.9% of General Fund revenues (the “first test”) or (b) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the “second test”). Under Proposition 111, school districts would receive the greater of (a) the first test, (b) the second test or (c) a third test, which would replace the second test in any year when growth in per capita General Fund revenues from the prior year was less than the annual growth in State per capita personal income. Under the third test, school districts would receive the amount appropriated in the prior year adjusted for change in enrollment and per capita General Fund revenues, plus an additional small adjustment factor. If the third test were used in any year, the difference between the third test and the second test would become a “credit” to be paid in future years when General Fund revenue growth exceeds personal income growth.
Jarvis v. Connell
On May 29, 2002, the California Court of Appeal for the Second District decided the case of Howard Jarvis Taxpayers Association, et al. v. Kathleen Connell (as Controller of the State of California). The Court of Appeal held that either a final budget bill, an emergency appropriation, a self-executing authorization pursuant to State statutes (such as continuing appropriations) or the California Constitution or a federal mandate is necessary for the State Controller to disburse funds. The foregoing requirement could apply to amounts budgeted by the District as being received from the State. To the extent the holding in such case would apply to State payments reflected in the District’s budget, the requirement that there be either a final budget bill or an emergency appropriation may result in the delay of such payments to the District if such required legislative action is delayed, unless the payments are self-executing authorizations or are subject to a federal mandate. On May 1, 2003, the California Supreme Court upheld the holding of the Court of Appeal, stating that the Controller is not authorized under State law to disburse funds prior to the enactment of a budget or other proper appropriation, but under federal law, the Controller is required, notwithstanding a budget impasse and the limitations imposed by State law, to timely pay those State employees who are subject to the minimum wage and overtime compensation provisions of the federal Fair Labor Standards Act.
Proposition 1A
On November 2, 2004, California voters approved Proposition 1A, which amended the State Constitution to reduce significantly the State’s authority over major local government revenue sources. Under Proposition 1A, the State may not (i) reduce local sales tax rates or alter the method of allocating the revenue
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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 Fees revenues without providing local governments with equal replacement funding. Beginning in Fiscal Year 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 (a) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State and (b) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also 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 and Legislation
Articles XIIIA, XIIIB, XIIIC, XIIID and Propositions 98, 111 and 1A were each adopted as measures that qualified for the ballot through California’s initiative process. From time to time other initiative measures or State legislation could be adopted, further affecting the District’s revenues.
There can be no assurance that the California electorate will not at some future time adopt other initiatives or that the State Legislature will not enact legislation that will amend the laws or the Constitution of the State of California resulting in a reduction of amounts legally available to the District.
In the event the District’s revenue sources are less than its total obligations, the District could choose to fund other school services before making Lease Payments and other payments due under the Lease Agreement, except from amounts on deposit in the Lease Payment Fund. The District’s ability to collect, budget and appropriate various revenues is subject to current and future State laws and constitutional provisions, and it is possible that the interpretation and application of these provisions could result in an inability of the District to pay Lease Payments when due (see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES” herein).
RISK FACTORS
The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating purchase of the Bonds. However, such factors do not purport to be an exhaustive discussion of risks and other considerations which may be relevant to an investment in the Bonds. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks.
No Tax Pledge
The obligation of the District to pay the Lease Payments does not constitute an obligation of the District or the State for which the District or the State has levied or pledged any form of taxation. The obligation of the District to pay Lease Payments does not constitute a debt or indebtedness of the District, the State or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction.
Appropriation
Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the District, the District is obligated under the Lease Agreement, so long as the Site is available for its use and possession, to pay Rental Payments from any source of legally available funds (subject to certain exceptions)
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and has covenanted in the Lease Agreement that, for so long as the Site is available for its use, it will make the necessary annual appropriations within its budget for all Rental Payments.
However, the District may incur obligations payable from general revenues which have a priority over the Rental Payments, and the Lease Agreement does not prohibit the District from incurring additional obligations payable from general revenues on a parity with the Rental Payments. See financial statements included in APPENDIX B hereto.
In the event the District’s revenue sources are less than its total obligations, the District could choose to fund other municipal services before making Rental Payments and other payments due under the Lease Agreement, except from amounts on deposit in the Lease Payment Fund. The District’s ability to collect, budget and appropriate various revenues is subject to current and future State laws and constitutional provisions, and it is possible that the interpretation and application of these provisions could result in an inability of the District to pay Lease Payments when due (see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES” herein).
Abatement
During any period in which, by reason of material damage to, or destruction or condemnation of, the Site, there is substantial interference with the District’s right to use and occupy any portion of the Site, Rental Payments shall be abated proportionately, and the District waives the benefits of California Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement shall continue in full force and effect. The amount of such abatement shall be agreed upon by the District and Authority; provided, however, that the Rental Payments due for any Rental Period shall not exceed the fair rental value of that portion of the Site available for use and occupancy by the District during such Rental Period. The District and the Authority shall calculate such abatement and shall provide the Trustee with a certificate setting forth such calculation and the basis therefor. Such abatement shall continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Site, ending with the substantial completion of the work of repair or replacement of the Site, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement shall be extended as provided in the Lease Agreement, except that the term of the Lease Agreement shall in no event be extended more than ten years beyond August 15, 2040.
Notwithstanding the foregoing paragraph, to the extent that moneys are available for the payment of Rental Payments in any of the funds and accounts established under the Trust Agreement, Rental Payments shall not be abated as provided above, but rather, shall be payable by the District as a special obligation payable solely from such funds and accounts. The District will also maintain or cause to be maintained, from the date of delivery of the Bonds, rental interruption insurance to cover loss, total or partial, of the use of the Site as a result of any of the hazards covered in the insurance required by the Lease Agreement, in an amount sufficient to pay the total Lease Payments under the Lease Agreement for a period of 24 months (using the two highest annual Lease Payments during the Term).
Notwithstanding the foregoing, the resulting payments made under the Lease Agreement may not be sufficient to pay the remaining principal and interest with respect to the Bonds.
Limitation on Enforcement of Remedies; No Acceleration
The enforcement of any remedies provided in the Lease Agreement and the Trust Agreement could prove both expensive and time consuming. Although the Lease Agreement provides that the Trustee may take possession of the Site and lease it if there is a default by the District, and the Lease Agreement provides that the Trustee may have such rights of access to the Site as may be necessary to exercise any remedies, portions of such Site may not be easily recoverable and could be of little value to others. Furthermore, depending upon whether the Site is considered to serve an essential governmental function, it is not certain whether a court would permit the exercise of the remedies of repossession and leasing with respect thereto. Moreover, there
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can be no assurance that such repossession and leasing would not adversely affect the exclusion of any interest on the Bonds from federal or State income taxation.
IN THE EVENT OF A DEFAULT UNDER THE LEASE AGREEMENT, THERE IS NO AVAILABLE REMEDY OF ACCELERATION OF THE TOTAL LEASE PAYMENTS DUE OVER THE TERM OF THE LEASE AGREEMENT. THE DISTRICT WILL ONLY BE LIABLE FOR LEASE PAYMENTS ON AN ANNUAL BASIS AS THEY COME DUE, AND THE TRUSTEE WOULD BE REQUIRED TO SEEK SEPARATE JUDGMENTS FOR THE LEASE PAYMENTS AS THEY COME DUE. IN ADDITION, ANY SUCH SUIT FOR MONEY DAMAGES COULD BE SUBJECT TO LIMITATIONS ON LEGAL REMEDIES AGAINST PUBLIC AGENCIES IN CALIFORNIA, INCLUDING A LIMITATION ON ENFORCEMENT OF JUDGMENTS AGAINST FUNDS NEEDED TO SERVE THE PUBLIC WELFARE AND INTEREST AND A LIMITATION ON ENFORCEMENT OF JUDGMENTS AGAINST FUNDS OF A FISCAL YEAR OTHER THAN THE FISCAL YEAR IN WHICH THE LEASE PAYMENTS WERE DUE.
Constitutional School Funding Guarantee; State of California Finances
The K-12 school funding guarantee provided under Proposition 98 (see discussion under “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES”) is subject to suspension by the State Legislature, with the Governor’s concurrence, for a one-year period, and any corresponding reduction for that year will not be paid in subsequent years. Also, under the “third test” of Proposition 111, amending Proposition 98, cost of living adjustments may be limited in times of economic downturn.
Application of Constitutional and Statutory Provisions
The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. One major reason is that the Proposition 98 minimums described in “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES” are dependent on State General Fund revenues. In the early 1990s, the State made actual allocations to K-12 districts based on an assumption of State General Fund revenues at a level above that which was ultimately realized. In those years, the State considered the amounts appropriated above the minimum as a loan to K-12 districts, and deducted the value of these loans from the next year’s estimated Proposition 98 minimums.
In addition, a substantial portion of each annual budget of the District is composed of moneys apportioned to the District by the State. Currently, there have been a number of adverse effects on the budgets of school and community college districts caused by the general economic downturns in the State and the State’s own budget difficulties. Continued adverse economic conditions and reduced revenues at the State level could have future, unpredictable, negative effects upon the amount by which, and the way in which, the District receives money from the State.
Geologic, Topographic and Climatic Conditions
The value of the Site, and the financial stability of the District, can be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions (such as earthquakes), topographic conditions (such as earth movements and floods), climatic conditions (such as droughts) and fires.
The area encompassed by the District, like that in much of California, may be subject to unpredictable seismic activity. The District is located within an alluvial plain and liquefaction area. There are no special study zones within the District. Although the District believes that no active or inactive fault lines pass through the District, if there were to be an occurrence of severe seismic activity in the District, there could be
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an abatement or adverse impact on the District’s ability to pay the Lease Payments. The District is not obligated to maintain earthquake or flood insurance with respect to the Site.
Such geologic, topographic and climate conditions and fire may also adversely affect the assessed values of the properties within Project Area No. 3 and the Designated CFDs. Reductions in the assessed values resulting from such conditions will cause a reduction in tax increment generated within Project Area No. 3 and a corresponding reduction in Redevelopment Payments received by the District. The impact of such conditions on properties within the Designated CFDs may affect the ability or the willingness of the owners to properties subject to the levy of Special Taxes to pay such taxes when due.
Economic Conditions in California
In the early 1990s, an economic recession and a State budget imbalance resulted in K-12 school districts receiving no increase in per-student funding from the State. Per-student spending was essentially frozen during this period, with no cost-of-living adjustments. In the late 1990s and early 2000s, increasing State revenues improved the funding for K-12 school districts. However, the economy in the State has slowed and the State is experiencing severe budget shortfalls. Decreases in State revenues and budget shortfalls may significantly affect appropriations made by the State to school districts, and the timing of payment to school districts by the State may depend upon the ability of the State to access the credit markets with respect to its own cash flow borrowings. In the event that State moneys are not available to meet obligations in a timely manner, school funding along with certain other services, are given priority under the State Constitution. See “IMPACT OF STATE BUDGET ON DISTRICT REVENUES” and “RISK FACTORS - Application of Constitutional and Statutory Provisions” and “- Future State Budgets.”
Future State Budgets
Historically, approximately 90% of the District’s annual general fund revenues have consisted of payments from the State. While the California Constitution contains certain minimum funding requirements for public education (“Proposition 98”), State funding can be affected by a number of factors including poor performance of the California economy.
The State has in past years experienced budgetary difficulties and has balanced its budget by requiring local political subdivisions to fund certain costs theretofore borne by the State. The State budget for Fiscal Year 2009-10 was once again adopted after the June 30 deadline. No prediction can be made as to whether the State will take further measures during Fiscal Year 2009-10 which would, in turn, adversely affect the cash flows for the District that have been projected for that fiscal year. Further State budgetary actions could have the effect of reducing K-12 support indirectly, and the District is unable to predict the nature, extent or effect of such reductions.
In addition, the District cannot predict the effect that the general economic conditions within the State and the State’s budgetary problems may have in the future on the District budget or operations or on its ability to make payments of principal and interest with respect to the Bonds.
Investment of District’s General Fund
While Bond proceeds, Lease Payments and any Additional Payments paid to the Trustee pursuant to the Lease will be entirely held in trust by the Trustee pursuant to the Trust Agreement, the District’s general operating fund is held and invested by the Treasurer and Tax Collector of the County. See “APPENDIX J - THE SAN DIEGO COUNTY INVESTMENT POOL.”
No Liability by the Authority to the Owners
Except as expressly provided in the Trust Agreement, the Authority shall not have any obligation or liability to the Owners of the Bonds with respect to the payment when due of the Lease Payments by the
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District, or with respect to the performance by the District of other agreements and covenants required to be performed by it contained in the Lease Agreement or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement.
Hazardous Substances
Discovery of hazardous substances on parcels within the District could impact the District’s ability to pay debt service with respect to the Bonds.
In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act” is the most well-known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner or operator has any thing to do with creating or handling the hazardous substance.
The effect, therefore, should the Site or any substantial amount of property within the District be affected by a hazardous substance, would be to reduce the marketability and value of the property by the costs of, and any liability incurred by, remedying the condition, since the purchaser, upon becoming an owner, will become obligated to remedy the condition just as is the seller. Such reduction in the value of the Site could adversely impact the fair rental value of the Site and potentially result in abatement of the Lease Payments. In addition, reduction in the value of property in the District as a whole could reduce property tax revenues received by the District and deposited in the general fund, which could significantly and adversely affect the ability of the District to make Lease Payments.
Limitations on Remedies Available; Bankruptcy
The enforceability of the rights and remedies of the Owners and the obligations of the District under the Lease Agreement, Trust Agreement, Pledge Agreement and related documents may become subject to the following: (i) the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors’ rights generally, now or hereafter in effect; (ii) usual equitable principles which may limit the specific enforcement under State law of certain remedies; (iii) the exercise by the United States of America of the powers delegated to it by the Federal Constitution; and (iv) the reasonable and necessary exercise, in certain exceptional situations, of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of servicing a significant and legitimate public purpose.
The opinions of counsel, including Bond Counsel, delivered in connection with the execution and delivery of the Bonds will be so qualified. Bankruptcy proceedings, or the exercising of powers by the federal or State government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights.
In addition, failure by large property owners to pay property taxes when due may have an adverse impact on revenues available to pay Lease Payments.
State Law Limitations on Appropriations
Article XIIIB of the California Constitution limits the amount that local governments can appropriate annually. The ability of the District to make Lease Payments may be affected if the District should exceed its appropriations limit. State aid to a local agency counts against the appropriation limit of cities in the State. The District has an established appropriations limit for Fiscal Year 2009-10 of $79,936,920. The District does not anticipate exceeding its appropriations limit. See “CONSTITUTIONAL AND STATUTORY
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LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES - Article XIIIB of the State Constitution” herein.
Change in Law
No assurance can be given that the State or the District electorate will not at some future time adopt initiatives, or that the State Legislature will not enact legislation that will amend the laws of the State, in a manner that could result in a reduction of the District’s revenues and therefore a reduction of the funds legally available to the District to make Lease Payments. See, for example, “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES – Articles XIIIC and XIIID of the State Constitution.”
Loss of Tax Exemption
As discussed under the heading “TAX MATTERS,” the interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Bonds, as a result of acts or omissions of the Authority or the District in violation of their covenants in the Trust Agreement and the Lease Agreement. Should such an event of taxability occur, the Bonds would not be subject to a special redemption and would remain outstanding until maturity or until prepaid under the redemption provisions contained in the Trust Agreement.
Seismic Considerations
The areas in and surrounding the District, like most areas of California, may be subject to unpredictable seismic activity. An occurrence of severe seismic activity in the area of the District could result in substantial damage to and interference with the District’s right to use and occupy all or a portion of the Site, which could result in Lease Payments being subject to abatement. See “Abatement” above. The District does not carry earthquake insurance on the Site and does not contemplate acquiring such coverage.
The Elsinore-Whittier Fault system crosses portions of the District and an Alquist-Priolo Special Studies Zone has been designated along this fault system.
Substitution of Property
The Lease Agreement provides that, upon the satisfaction of the other conditions specified therein, the District may substitute other public facilities or real property for all or any portion of the Site. The Lease Agreement requires that any project which will comprise the Site after such a substitution must have a useful life and fair rental value at least equal to the useful life and fair rental value of the Site at the time of substitution. Such a replacement could have an adverse impact on the security for the Bonds, particularly if an event requiring abatement of Lease Payments were to occur subsequent to such substitution.
Special Risk Factors Related to the Redevelopment Payments
Receipt of Redevelopment Payments are Subordinate to Debt Service on SMPFA 2006 Bonds and Related Expenses. The District Pass-Through Revenue, comprised of District pass-through tax increment allocated to the District pursuant to the Pass-Through Agreement, is pledged on a first lien basis to the payment on the Loan pursuant to the Agency’s Loan Agreement that secures the payment of debt service on the SMPFA 2006 Bonds. Additionally, the Annual Agency Fee and Program Costs are payable from the District Pass-Through Revenues before any remaining District Pass-Through Revenues may be transferred to the District.
Reduction in Assessed Valuation. The pass-through tax increment allocated to the District is dependent upon the amount of incremental assessed valuation in Project Area No. 3 and the current rate or rates at which property in Project Area No. 3 is taxed. The reduction of assessed valuations of property in Project Area No. 3 caused by economic factors, such as a relocation out of Project Area No. 3 by one or more
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major property owners, successful appeals by property owners for a reduction in property’s assessed value, blanket reductions in assessed value due to general reductions in property values or the complete or partial destruction of such property caused by, among other eventualities, an earthquake or other natural disaster, could cause a reduction in District pass-through tax increment and a corresponding reduction in Redevelopment Payments. These risks and risks of delinquent payments may generally be exacerbated by the relatively high concentration of ownership in Project Area No. 3. See “Concentration of Ownership,” below. Such reduction of Redevelopment Payments could have an adverse effect on the District’s ability to make timely payments of Lease Payments.
Reduction in Inflationary Rate and Changes in Legislation; Further Initiatives. As described in greater detail above (see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON DISTRICT REVENUES AND EXPENDITURES”), Article XIIIA of the California Constitution provides that the full-cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a two percent increase for any given year, or may be reduced to reflect a reduction in the consumer price index or comparable local data. Such measure is computed on a calendar year basis. Such a reduction could lower the gross tax increment revenues and ultimately result in a reduction of District pass-through tax increment and Redevelopment Payments available to the Authority for the payment of the Bonds.
Article XIIIA of the California Constitution, which significantly affected the rate of property taxation, was adopted pursuant to California’s constitutional initiative process. From time to time, other initiative measures could be adopted by California voters. The adoption of any such initiative might alter the calculation of tax increment revenues, reduce the property tax rate, or broaden property tax exemptions. Future legislative reallocation of the 1% basic levy among the affected taxing entities could increase the taxes retained by certain taxing entities with a corresponding reduction in tax increment revenues.
Concentration of Ownership. The top twenty largest property taxpayers in Project Area No. 3 represent approximately $315,644,535 or 9.11%, of the secured value of the Project Area and 37.56% of the incremental value. See “APPENDIX C - REDEVELOPMENT PAYMENTS – Secured Taxpayers” herein.
The SMSFA 2006 Bonds are payable before amounts pledged under the Lease Agreement and concentration of ownership presents a risk in that if one or more of the largest property owners were to default on their taxes, or were to successfully appeal the tax assessments on property within Project Area No. 3, a substantial decline in gross tax increment revenues, and hence Redevelopment Payments, could result.
Unsecured Property. Currently, approximately 2.39% of the net assessed property value in Project Area No. 3 is unsecured property. Unsecured property in Project Area No. 3 is comprised largely of fixture and equipment value for commercial/industrial uses. Such property is a transitory component of total assessed value and may be removed from Project Area No. 3 at any point in time, and accordingly, must be viewed as a volatile component of assessed value in Project Area No. 3. The removal of such unsecured fixtures and equipment from Project Area No. 3, however, could have an impact on Redevelopment Payments.
Development Risk. The general economy of Project Area No. 3 will be subject, in part, to the development risks generally associated with real estate development projects. Projected development within Project Area No. 3 may be subject to unexpected delays, disruptions and changes. For example, real estate development operations may be adversely affected by changes in general economic conditions, fluctuations in the real estate market, fluctuations in interest rates, unexpected increases in development costs and by other factors. Further, real estate development operations within Project Area No. 3 could be adversely affected by future governmental policies, including governmental policies to restrict or control development. If projected development in Project Area No. 3 is delayed or halted, the economy of Project Area No. 3 could be adversely affected, causing a reduction of the Redevelopment Payments available to pay debt service on the Bonds.
Assessment Appeals. Assessed valuations may be reduced as a result of a successful appeal of the assessed valuation determined by the County Assessor. An appeal may result in a reduction to the County Assessor’s original assessed valuation and a tax refund to the applicant property owner. A reduction in assessed valuations within Project Area No. 3 and the refund of taxes which may arise out of successful
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appeals by property owners will affect the amount of tax increment revenues. In California, there are two types of appeals: a Proposition 8 appeal and a base year appeal. A Proposition 8 appeal is based on Section 51 of the Revenue and Taxation Code and allows for temporary reductions in the taxes paid on properties because the assessed value of a property somehow becomes higher than its actual market value. This can be the result of the damage or removal of property, or general reductions in real estate values. Once the property damage is restored, or the real estate market improves, an assessment subject to Proposition 8 reduction can be returned to its pre-appeal value. The second type of appeal is a base year assessment appeal where owners challenge the original, or base year, valuation assigned by the County Assessor. Any reduction resulting from a base year assessment appeal is permanent and can only increase above the allowable inflationary adjustment if the property is sold or experiences new construction. There are also two methods for achieving a reduction in the valuation of property. One way is for the applicant to file an assessment appeal application; the other way is for the County Assessor's office to process an “automatic” assessment reduction. Any automatic reduction would almost always be a Proposition 8 appeal, although filed appeals can be either Proposition 8 or base year appeals. The Agency has in the past experienced reductions in the growth of its tax increment revenues as a result of assessment appeals. The actual impact to tax increment is dependent upon the actual revised value of assessments resulting from values determined by the County Assessment Appeals Board or through litigation and the ultimate timing of successful appeals. See “APPENDIX C - REDEVELOPMENT PAYMENTS – Assessment Appeals” and “APPENDIX D – FISCAL CONSULTANT’S REPORT 2009/10.”
Special Risk Factors Related to Surplus Net Special Taxes
Risks of Real Estate Secured Investments Generally. The owners of the Bonds will be subject to the risks generally incident to an investment secured by real estate, including, without limitation, (i) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the Designated CFDs, the supply of or demand for competitive properties in such area, and the market value of property in the event of sale or foreclosure; (ii) changes in real estate tax rate and other operating expenses, governmental rules (including, without limitation, zoning laws and laws relating to endangered species and hazardous materials) and fiscal policies; and (iii) natural disasters (including, without limitation, earthquakes, fire and floods), which may result in uninsured losses.
No assurance can be given that the individual homeowners will pay Special Taxes in the future or that they will be able to pay such Special Taxes on a timely basis. See “— Bankruptcy and Foreclosure Delay” below, for a discussion of certain limitations on the ability of the Designated CFD s to pursue judicial proceedings with respect to delinquent parcels.
Risks Related to Current Real Estate Market Conditions. The housing market in southern California experienced significant price appreciation and accelerating demand from approximately 2002 to 2006, but subsequently the housing market weakened substantially, with changes from the prior pattern of price appreciation and a slowdown in demand for new housing. Since 2006, home developers, appraisers and market absorption consultants have reported weakening new home market conditions due to factors, including, but not limited to: (i) lower demand for new homes, (ii) significant increase in cancellation rates for homes under contract, (iii) the exit of speculators from the new home market, (iv) increasing mortgage defaults and foreclosures, (v) a growing supply of new and existing homes available for purchase, (vi) increase in competition for new homes orders, (vii) prospective home buyers having a more difficult time selling their existing homes in the more competitive environment, (viii) reduced sales prices and/or higher incentives required to stimulate new home orders or to induce home buyers not to cancel purchase contracts, (ix) more stringent credit qualification requirements by home loan providers and (x) increased unemployment levels.
Any of the above factors may affect the willingness or ability of taxpayers to pay mortgage payments, as well as ad valorem taxes and Special Taxes, when due. Under such circumstances, bankruptcies are likely to increase. Bankruptcy by homeowners with delinquent Special Taxes would delay the commencement and completion of foreclosure proceedings to collect delinquent Special Taxes. See “Special Taxes are not Personal Obligations,” “Special Tax Delinquencies” and “Bankruptcy and Foreclosure Delay,” below.
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Special Taxes are Not Personal Obligations. The current and future owners of land within the Designated CFDs are not personally liable for the payment of the Special Taxes. Rather, the Special Tax is an obligation only of the land within each Designated CFD. If the value of the land within a Designated CFD is not sufficient to fully secure the Special Tax, then the Designated CFD has no recourse against the owner under the laws by which the Special Tax has been levied.
Assessed Value. Prospective purchasers of the Bonds should not assume that the land within a Designated CFD could be sold for the assessed value described in this Official Statement at a foreclosure sale for delinquent Special Taxes. The assessed value summarized herein estimates the fee simple interest assessed value of the property within each Designated CFD. This value is merely the amount of the assessed value in the records maintained by the County Assessor. The Authority and the District have not sought the present opinion of any appraiser of the value of the property within the Designated CFDs subject to the levy of Special Taxes.
The assessed value relates to sale by a willing seller to a willing buyer, as adjusted by State law. Consequently, the opinion is of limited use in predicting the selling price at a foreclosure sale, because the sale is forced and the buyer may not have the benefit of full information.
No assurance can be given that if any of the property in a Designated CFD should become delinquent in the payment of Special Taxes, and be foreclosed upon, that such property could be sold for the assessed value. See “APPENDIX E - SURPLUS NET SPECIAL TAXES – Estimated Assessed Value-to-Lien Ratios.”
Assessed Value-to-lien Ratios. Value-to-lien ratios have traditionally been used in land-secured bond issues as a measure of the "collateral" supporting the willingness of property owners to pay their special taxes and assessments (and, in effect, their general property taxes, as well). The value-to-lien ratio is mathematically a fraction, the numerator of which is the value of the property (usually either the assessed value or a market value as determined by an appraiser) and the denominator of which is the “lien” of the assessments or special taxes. A value-to-lien ratio should not, however, be viewed as a guarantee of credit-worthiness. Land values are especially sensitive to economic cycles. A downturn of the economy may depress land values and hence the value-to-lien ratios. Further, the value-to-lien ratio is an average. Individual parcels in a Designated CFD may fall above or below the average, sometimes even below a 1:1 ratio. (With a 1:1 ratio, the land is worth less than the debt on it.) Although judicial foreclosure proceedings can be initiated rapidly, the process can take several years to complete, and the bankruptcy courts may impede the foreclosure action. Finally, local agencies may form overlapping community facilities districts or assessment districts. They typically do not coordinate their bond issuances. Debt issuance by another entity can dilute value-to-lien ratios.
Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property. While the Special Taxes are secured by the property subject to the levy of such Special Taxes, the security only extends to the value of such property that is not subject to priority and parity liens and similar claims.
Other governmental obligations may be authorized and undertaken or issued in the future, the tax, assessment or charge for which may become an obligation of one or more of the parcels of property subject to the levy of Special Taxes and may be secured by a lien on a parity with the lien of the Special Taxes.
In general, as long as the Special Taxes are collected on the County tax roll, the Special Taxes and all other taxes, assessments and charges also collected on the tax roll are on a parity, that is, are of equal priority. Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency of Special Taxes, the Special Taxes will be subordinate only to existing prior governmental liens, if any. Otherwise, in the event of such foreclosure proceedings, the Special Taxes will generally be on a parity with the other taxes, assessments and charges, and will share the proceeds of such foreclosure proceedings on a pro-rata basis. Although the Special Taxes will generally have priority over non-governmental liens on a parcel of property subject to the levy of Special Taxes, regardless of whether the non-governmental liens were in existence at the time of the levy of the Special Taxes or not, this result may not apply in the case of bankruptcy.
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Neither the Authority, the District nor the Designated CFDs have control over the ability of other entities and districts to issue indebtedness secured by special taxes, ad valorem taxes or assessments payable from all or a portion of the property within the Designated CFDs. In addition, the landowners within the Designated CFDs may, without the consent or knowledge of the District, petition other public agencies to issue public indebtedness secured by special taxes and ad valorem taxes or assessments. Any such special taxes or assessments may have a lien on such property on a parity with the Special Taxes and could reduce the estimated assessed value-to-lien ratios for the property within the affected Designated CFD.
While governmental taxes, assessments and charges are a common claim against the value of a parcel of property subject to the levy of Special Taxes, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized to pay the Special Taxes is a claim with regard to a hazardous substance. See “Hazardous Substances within Designated CFDs” below.
Disclosure to Future Purchasers. A Notice of the Special Tax Lien for the territory included in each Designated CFD was recorded in the Office of the County Recorder of the County as described in “APPENDIX E - SURPLUS NET SPECIAL TAXES - The Designated CFDs – Formation and Authorized and Existing Bonded Indebtedness.” While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such Special Tax obligation in the purchase of a commercial facility or residential units or the lending of money thereon. The Mello-Roos Act requires the subdivider (or its agent or representative) of a subdivision to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit subject to a special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code Section 1102.6b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with the above requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Taxes when due.
Special Tax Delinquencies. In order to generate Surplus Net Special Taxes, it is necessary that the Special Taxes within each Designated CFD be paid in a timely manner. Under provisions of the Mello-Roos Act, the Special Taxes are customarily billed to the properties within the Designated CFDs on the regular ad valorem property tax bills sent to owners of such properties. Such Special Tax installments are due and payable, and bear the same penalties and interest for non payment, as do regular ad valorem property tax installments. The unwillingness or inability of a property owner to pay ad valorem property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and Special Tax installment payments in the future. If a substantial number of homeowners fail to pay the Special Taxes when due there could be significant special tax delinquencies.
In the event that sales or foreclosures of property are necessary, there could be a delay in the generation of Surplus Net Special Taxes pending such sales or the prosecution of foreclosure proceedings and receipt by the District of the proceeds of sale. Such a delay could adversely affect the Authority's ability to pay principal of or interest on the Bonds.
See “APPENDIX E - SURPLUS NET SPECIAL TAXES - Covenant for Superior Court Foreclosure," for a discussion of the provisions which apply, and procedures which the Designated CFDs are obligated to follow, in the event of delinquencies in the payment of Special Taxes. See “Bankruptcy and Foreclosure Delay” below, for a discussion of limitations on each Designated CFD’s ability to foreclosure on the lien of the Special Taxes in certain circumstances.
Hazardous Substances within Designated CFDs. The presence of hazardous substances on a parcel subject to the levy of Special Taxes may result in a reduction in the value of such a parcel. In general, the owners and operators of a parcel may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. See “Hazardous Substances” herein above.
The assessed value of the properties within the Designated CFDs, as set forth in the various tables herein, does not reflect the presence of any hazardous substance or the possible liability of the owner (or
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operator) for the remedy of a hazardous substance condition of the property. The District has not independently verified, but is not aware, that any owner (or operator) of any of the parcels within the Designated CFDs has such a current liability with respect to any such parcel. However, it is possible that such liabilities do currently exist and that the District is not aware of them.
Further, it is possible that liabilities may arise in the future with respect to any of the parcels resulting from the existence, currently, on a parcel of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently on a parcel of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the value of a parcel and the willingness or ability of the owner of any parcel to pay the Special Tax installments.
FDIC/Federal Government Interests in Properties. The ability of a Designated CFD to foreclose the lien of delinquent unpaid Special Tax installments may be limited with regard to properties in which the Federal Deposit Insurance Corporation (the “FDIC”), the Drug Enforcement Agency, the Internal Revenue Service, or other federal agency has or obtains an interest. In the event that any financial institution making any loan which is secured by real property within a Designated CFD is taken over by the FDIC, and prior thereto or thereafter the loan or loans go into default, then the ability of the Designated CFD to collect interest and penalties specified by State law and to foreclose the lien of delinquent unpaid Special Taxes may be limited.
Specifically with respect to the FDIC, the FDIC’s policy statement regarding the payment of state and local real property taxes (the “Policy Statement”) provides that property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property’s value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution’s affairs, unless abandonment of the FDIC’s interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC’s consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC’s consent.
The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Special taxes imposed under the Mello-Roos Act and a special tax formula which determines the special tax due each year are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC’s federal immunity.
The Authority and the District are unable to predict what effect the application of the Policy Statement would have in the event of a delinquency in the payment of Special Taxes on a parcel within a Designated CFD in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale could reduce or eliminate the number of persons willing to purchase a parcel at a foreclosure sale. Such an outcome could cause a delay in the receipt of or reduction in the amount of Surplus Net Special Taxes available to pay Lease Payments pursuant to the Pledge Agreement.
Bankruptcy and Foreclosure Delay. The payment of Special Taxes and the ability of a Designated CFD to foreclose the lien of delinquent Special Taxes may be limited by bankruptcy, insolvency, or other laws generally affecting creditors’ rights or by the laws of the State relating to judicial foreclosure. In addition, the
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prosecution of a judicial foreclosure may be delayed due to congested local court calendars or procedural delays.
Although bankruptcy proceedings would not cause the obligation to pay the Special Tax to become extinguished, bankruptcy of a property owner or of a partner or other equity owner of a property owner, could result in a stay of enforcement of the lien for the Special Taxes, a delay in prosecuting superior court foreclosure proceedings or adversely affect the ability or willingness of a property owner to pay the Special Taxes and could result in the possibility of delinquent Special Taxes not being paid in full. In addition, the amount of any lien on property securing the payment of delinquent Special Taxes could be reduced if the value of the property were determined by the bankruptcy court to have become less than the amount of the lien, and the amount of the delinquent Special Taxes in excess of the reduced lien could then be treated as an unsecured claim by the court. Any such stay of the enforcement of the lien for the Special Tax, or any such delay or non payment, would increase the likelihood of a delay in the receipt of Surplus Net Special Taxes. Moreover, amounts received upon foreclosure sales may not be sufficient to fully discharge delinquent installments.
On July 30, 1992, the United States Court of Appeals for the Ninth Circuit issued its opinion in a bankruptcy case entitled In re Glasply Marine Industries. In that case, the court held that ad valorem property taxes levied by Snohomish County in the State of Washington after the date that the property owner filed a petition for bankruptcy were not entitled to priority over a secured creditor with a prior lien on the property. The court upheld the priority of unpaid taxes imposed after the filing of the bankruptcy petition as “administrative expenses” of the bankruptcy estate, payable after all secured creditors. As a result, the secured creditor was to foreclose on the property and retain all of the proceeds of the sale except the amount of the pre-petition taxes.
According to the court’s ruling, as administrative expenses, post-petition taxes would have to be paid, assuming that the debtor has sufficient assets to do so. In certain circumstances, payment of such administrative expenses may be allowed to be deferred. Once the property is transferred out of the bankruptcy estate (through foreclosure or otherwise) it would at that time become subject to current ad valorem taxes.
The Mello-Roos Act provides that the Special Taxes are secured by a continuing lien, which is subject to the same lien priority in the case of delinquency as ad valorem taxes. No case law exists with respect to how a bankruptcy court would treat the lien for the Special Taxes levied after the filing of a petition in bankruptcy. Glasply is controlling precedent for bankruptcy courts in the State. If the Glasply precedent was applied to the levy of the Special Tax, the amount of Special Tax received from parcels whose owners declare bankruptcy could be reduced.
It should also be noted that on October 22, 1994, Congress enacted 11 U.S. C. Section 362(b)(18), which added a new exception to the automatic stay for ad valorem property taxes imposed by a political subdivision after the filing of a bankruptcy petition. Pursuant to this new provision of law, in the event of a bankruptcy petition filed on or after October 22, 1994, the lien for ad valorem taxes in subsequent fiscal years will attach even if the property is part of the bankruptcy estate. Owners of the Bonds should be aware that the potential effect of 11 U.S. C. Section 362(b)(18) on the Special Taxes depends upon whether a court were to determine that the Special Taxes should be treated like ad valorem taxes for this purpose.
In addition, potential investors should be aware that judicial foreclosure proceedings are not summary remedies and can be subject to significant procedural and other delays caused by crowded court calendars and other factors beyond the control of the Designated CFD or the District. Potential investors should assume that, under current conditions, it is estimated that a judicial foreclosure of the lien of Special Taxes will take up to two or three years from initiation to the lien foreclosure sale. At a Special Tax lien foreclosure sale, each parcel will be sold for not less than the “minimum bid amount” which is equal to the sum of all delinquent Special Tax installments, penalties and interest thereon, costs of collection (including reasonable attorneys’ fees), post judgment interest and costs of sale. Each parcel is sold at foreclosure for the amounts secured by the Special Tax lien on such parcel and multiple parcels may not be aggregated in a single “bulk” foreclosure sale. If any parcel fails to obtain a “minimum bid,” the Designated CFD may, but is not obligated to, seek superior court approval to sell such parcel at an amount less than the minimum bid. Such superior court
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approval requires the consent of the owners of 75% of the aggregate principal amount of the outstanding bonds secured by such Special Taxes.
Other laws generally affecting creditors' rights or relating to judicial foreclosure may affect the ability to enforce payment of Special Taxes or the timing of enforcement of Special Taxes. For example, the Soldiers and Sailors Civil Relief Act of 1940 affords protections such as a stay in enforcement of the foreclosure covenant, a six-month period after termination of such military service to redeem property sold to enforce the collection of a tax or assessment, and a limitation on the interest rate on the delinquent tax or assessment to persons in military service if the court concludes the ability to pay such taxes or assessments is materially affected by reason of such service.
Exempt Properties. Certain parcels are exempt from the Special Tax in accordance with each Rate and Method of Apportionment and applicable provisions of the Mello-Roos Act. The Mello-Roos Act provides that properties or entities of the State, federal or local government are exempt from the Special Tax; provided, however, that property within the Designated CFDs acquired by a public entity through negotiated transactions, or by gift or devise, which is not otherwise exempt from the Special Tax will continue to be subject to the Special Tax. In addition, the Mello-Roos Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment and be paid from the eminent domain award. The constitutionality and operation of these provisions of the Mello-Roos Act have not been tested. If for any reason property subject to the Special Tax becomes exempt from taxation by reason of ownership by a non-taxable entity such as the federal government, or another public agency, subject to the limitation of the maximum authorized rate of levy, the Special Tax may be reallocated to the remaining taxable properties within the applicable Designated CFD. This would result in the owners of such property paying a greater amount of the Special Tax and could have an adverse impact upon the timely payment of the Special Tax; however, the amount of Special Tax to be levied and collected from the property owner is subject to the maximum Special Tax as set forth in each Rate and Method of Apportionment.
The Mello-Roos Act further provides that no other properties or entities are exempt from the Special Tax unless the properties or entities are expressly exempted in a resolution of consideration to levy a new special tax or to alter the rate or method of apportionment of an existing special tax. The Act would prohibit the Board from adopting a resolution to reduce the rate of the Special Tax or terminate the levy of the Special Tax unless the Board determined that the reduction of termination of the Special Tax “would not interfere with the timely retirement” of the Special Tax Bonds.
District Formation. California voters, on June 6, 1978, approved an amendment (“Article XIIIA”) to the California Constitution. Section 4 of Article XIIIA, requires a vote of two-thirds of the qualified electorate to impose “special taxes,” or any additional ad valorem, sales or transaction taxes on real property. At an election held pursuant to the Act, more than two-thirds of the qualified electors within each Designated CFD, consisting of the landowners within the boundaries of the applicable Designated CFD, authorized such Designated CFD to incur bonded indebtedness to finance the applicable project and approved the applicable Rate and Method of Apportionment. The Supreme Court of the State has not yet decided whether landowner elections (as opposed to resident elections) satisfy requirements of Section 4 of Article XIIIA, nor has the Supreme Court decided whether the special taxes of a community facilities district constitute a “special tax” for purposes of Article XIIIA.
Section 53341 of the Mello-Roos Act requires that any action or proceeding to attack, review, set aside, void or annul the levy of a special tax or an increase in a special tax pursuant to the Act shall be commenced within 30 days after the special tax is approved by the voters. No such action has been filed with respect to the Special Taxes authorized to be levied within any of the Designated CFDs.
Seismic Conditions. The Designated CFDs are located in a seismically active region in Southern California. Active faults which could cause significant ground shaking over the District include, but are not limited to, the Rose Canyon fault zone, the Elsinore fault zone, the San Jacinto fault zone and the San Andreas fault zone. Earthquakes of magnitude of 6 (Rose Canyon fault) to 8 (San Andreas fault) on the Richter scale are possible.
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In the event of a severe earthquake, there may be significant damage to both property and infrastructure in the Designated CFDs. As a result, the property owners may be unable or unwilling to pay the Special Taxes when due. In addition, the value of land in the Designated CFDs could be diminished in the aftermath of such natural events, reducing the resulting proceeds of foreclosure sales in the event of delinquencies in the payment of the Special Taxes. Development within the Designated CFDs has been built in accordance with applicable building codes, including requirements relating to seismic safety. No assurances can be given that any earthquake insurance will be obtained as to any of the improvements within the Designated CFDs.
Special Taxes are not within Teeter Plan. The Special Taxes are not encompassed within the alternate procedure for the distribution of certain property tax levies on the secured roll pursuant to Chapter 3, Part 8, Division 1 of the California Revenue and Taxation Code (Section 4701 et seq.), commonly referred to as the “Teeter Plan.” The County of San Diego (the “County”) has adopted a Teeter Plan under which a tax distribution procedure is implemented and secured roll taxes are distributed to taxing agencies with the County on the basis of the tax levy, rather than on the basis of actual tax collections. However, by policy, the County does not include special taxes, assessments, or reassessments in its Teeter Plan. The Special Taxes of each Designated CFD are not included in the County’s Teeter Plan.
Right to Vote on Taxes Act. An initiative measure commonly referred to as the “Right to Vote on Taxes Act” (the “Initiative”) was approved by the voters of the State of California at the November 5, 1996 general election. The Initiative added Article XIIIC (“Article XIIIC”) and Article XIIID to the California Constitution. According to the “Title and Summary” of the Initiative prepared by the California Attorney General, Proposition 218 limits “the authority of local governments to impose taxes and property-related assessments, fees and charges.” The provisions of Proposition 218 have not yet been interpreted by the courts, although a number of lawsuits have been filed requesting the courts to interpret various aspects of Proposition 218.
Among other things, Section 3 of Article XIIIC states that “. . . the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge.” The Mello-Roos Act provides for a procedure, which includes notice hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Mello-Roos Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Mello-Roos Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. On July 1, 1997, a bill signed into law by the Governor of the State enacting Government Code Section 5854, states that:
“Section 3 of Article XIIIC of the California Constitution, as adopted at the November 5, 1996, general election, shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after that date, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protected by Section 10 of Article I of the United States Constitution.”
Accordingly, although the matter is not free from doubt, it is likely that Proposition 218 has not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere with the timely retirement of an indebtedness secured by such Special Taxes.
It may be possible, however, for voters or a Designated CFD to reduce the Special Taxes in a manner which does not interfere with the timely repayment of any indebtedness secured by such Special Taxes but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Therefore, no assurance can be given with respect to the levy of Special Taxes for Administrative Expenses. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in amounts greater than the amount necessary for the timely retirement of the Special Tax Bonds.
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Like its antecedents, Proposition 218 is likely to undergo both judicial and legislative scrutiny before its impact on the Designated CFDs and their obligations can be determined. Certain provisions of Proposition 218 may be examined by the courts for their constitutionality under both State and federal constitutional law. The Authority and the District are not able to predict the outcome of any such examination.
The foregoing discussion of Proposition 218 should not be considered an exhaustive or authoritative treatment of the issues. The Designated CFDs do not expect to be in a position to control the consideration or disposition of these issues and cannot predict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of Proposition 218 on the Bonds as well as the market for the Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of Proposition 218.
CONTINUING DISCLOSURE
The Authority and the District have covenanted for the benefit of the Owners of the Bonds to provide certain financial information relating to the District not later than nine (9) months following the June 30 end of the District’s Fiscal Year, commencing on March 30, 2011 (the “Annual Reports”), and to provide notices of the occurrence of certain enumerated events, if deemed by the District to be material. The Annual Reports will be filed by the Dolinka Group, LLC, as Dissemination Agent, on behalf of the District with the Electronic Municipal Market Access system of the Municipal Securities Rulemaking Board (“EMMA”) which may be designated by the State of California. The notices of material events will be filed by the Dissemination Agent, on behalf of the Authority and the District with EMMA. The specific nature of the information to be contained in the Annual Reports, the Semi-Annual Reports and the notices of material events is set forth in the Continuing Disclosure Agreement, a copy of which is included as APPENDIX H. These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12(b)(5) of the Securities and Exchange Commission.
Pursuant to the Continuing Disclosure Agreement, under circumstances and upon satisfaction of requirements specified therein, the District may amend the Continuing Disclosure Agreement or the Continuing Disclosure Agreement may be amended with the approval of the Owners in the manner provided therein. The District’s obligations under the Continuing Disclosure Agreement will terminate upon the defeasance, prior redemption or payment in full of all of the Bonds. The provisions of the Continuing Disclosure Agreement are intended to be for the benefit of the Owners and will be enforceable by the Owners. However, any enforcement action by any Owner will be limited to a right to obtain specific enforcement of the obligations of the Authority and the District under the Continuing Disclosure Agreement, and any failure by the Authority and/or the District to comply with the provisions of its agreement will not be an event of default under the Trust Agreement. See APPENDIX H.
LITIGATION
There is no litigation pending or, to the Authority’s or the District’s knowledge, threatened in any way to restrain or enjoin the issuance, execution or delivery of the Bonds, to contest the validity of the Bonds, the Trust Agreement or the Lease Agreement, or any proceedings of the Authority or the District with respect thereto. In the opinion of the District and its counsel, there are no lawsuits or claims pending against the Authority or the District which will materially affect the Authority’s or the District’s finances so as to impair the ability to pay the Lease Payments and principal of and interest on the Bonds when due.
RATINGS
Moody’s and S&P are expected to assign the Bonds ratings of “Aa3” (negative outlook) and “AAA” (negative outlook), respectively, with the understanding that upon delivery of the Bonds, the Insurance Policy will be issued by AGM. These ratings reflect the respective rating agency’s view of the claims-paying ability and financial strength of AGM. See also “BOND INSURANCE – Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.) – Recent Developments – Ratings.” Moody’s has assigned its underlying rating of “Aa3” (no outlook) to the Bonds. Such underlying rating reflects Moody’s
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global rating scale that is used to rate sovereign, sub-sovereign, financial institution, project finance, structured finance and corporate obligations. Either of the rating agencies may have obtained and considered information and material which has not been included in this Official Statement. Generally, the rating agencies base their ratings on information and material so furnished and on investigations, studies and assumptions made by them. The ratings are not a recommendation to buy, sell or hold the Bonds. Such ratings reflect only the views of the applicable rating agency and an explanation of the significance of such ratings may be obtained from such rating agency. There is no assurance that the credit ratings given to the Bonds will be maintained for any period of time or that such ratings may not be lowered or withdrawn entirely by the applicable rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Bonds. The Underwriter and the District have not undertaken any responsibility after the offering of the Bonds to assure the maintenance of the ratings or to oppose any such revision or withdrawal.
TAX MATTERS
Opinion of Bond Counsel
In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, based upon an analysis of existing statutes, regulations, rulings, and court decisions and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, as described herein, the interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”). In the further opinion of Bond Counsel, the interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income.
The opinions of Bond Counsel set forth in the preceding paragraph are subject to the condition that the Authority complies with certain requirements of the Code that must be satisfied subsequent to the issuance of the Bonds in order that the interest on the Bonds be, or continue to be, excluded from gross income for federal income tax purposes. The Authority has covenanted to comply with each such requirement. Bond Counsel assumes compliance with these covenants. Failure to comply with these covenants may result in the inclusion of such interest in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after the issuance of the Bonds may affect the value of, or the tax status of, the interest on the Bonds.
In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income taxes.
The Lease Agreement, the Trust Agreement, and other related documents refer to certain requirements and procedures which may be changed and certain actions which may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to the interest on the Bonds if any change occurs or is made, or any action is taken or omitted, upon the advice or approval of counsel other than Bond Counsel. Bond Counsel expresses no opinion regarding other tax consequences arising with respect to the Bonds. See APPENDIX G - “PROPOSED FORM OF OPINION OF BOND COUNSEL’S OPINION” for the proposed form of the opinion of Bond Counsel.
Original Issue Discount
If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes “original issue discount” for purposes of federal income taxes and State of California personal income taxes. De minimis original issue discount is disregarded. Under the Code, original issue discount is excludable from gross income for federal income tax purposes to the same extent as the interest on the Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each such Bond, and the basis of such
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Bond acquired at such initial offering price by an initial purchaser of each such Bond will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of tax-exempt income for purposes of determining various other tax consequences of owning such Bonds, even though there will not be a corresponding cash payment. Owners of such Bonds should consult their own tax advisors with respect to the state and local tax consequences of owning such Bonds.
Original Issue Premium
If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is greater than the amount payable at maturity thereof, then the excess of the tax basis of an initial purchaser of such Bond (other than a purchaser who holds such Bond as inventory, stock in trade or for sale to customers in the ordinary course of business) over the principal amount of such Bond constitutes “original issue premium” for purposes of federal income taxes and State of California personal income taxes. Such purchaser will have amortizable original issue premium which is not deductible for federal income tax purposes. The amount of amortizable premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each such Bond based on the purchaser’s yield to maturity (or, in the case of such a Bond eligible for prepayment prior to its maturity, over the period to the prepayment date, based on the purchaser’s yield to the prepayment date and giving effect to any prepayment premium). For purposes of determining gain or loss on the sale or other disposition of such Bond, an initial purchaser who acquires such Bond with an amortizable premium is required to decrease such purchaser’s adjusted basis in such Bond annually by the amount of amortizable premium for the taxable year. The amortization of premium may be taken into account as a reduction in the amount of tax-exempt income for purposes of determining various other tax consequences of owning such Bonds. Owners of such Bonds should consult their tax advisors with respect to the precise determination for federal income tax purposes of the amount of premium attributable to each taxable year and the effect of premium on the sale or other disposition of such a Bond, and with respect to the state and local tax consequences of owning and disposing of such a Bond.
Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption
Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Owners of the Bonds from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation as to which Bond Counsel expresses no opinion.
Internal Revenue Service Audit of Tax-Exempt Bond Issues
The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issuances, including both random and target audits. It is possible that the Bonds will be selected for audit by the Internal Revenue Service. Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority or the Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the Internal Revenue Service. Under current procedures, parties other than the Authority and its appointed counsel, including the Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt status of the Bonds is difficult, obtaining an independent review of Internal Revenue Service positions with which the Authority legitimately disagrees may not be practicable. Any action of the Internal Revenue Service, including but not limited to selection of the Bonds for audit, or an audit of tax-exempt obligations presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority or the Owners to incur significant expense.
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CERTAIN LEGAL MATTERS
Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, will render an opinion with respect to the validity of the Bonds and, as counsel to the District and the Authority will be opining as to the validity of the Lease Agreement and as to certain other matters for the District and Authority. A copy of the form of such approving opinion is attached hereto as APPENDIX G. Payment of the fees and expenses of Bond Counsel is contingent upon the delivery of the Bonds. Certain legal matters will be passed upon for the Authority and the District by Best Best & Krieger LLP, San Diego, as Disclosure Counsel. Certain matters will be passed upon for the Underwriter by McFarlin & Anderson LLP, Lake Forest, California.
UNDERWRITING
The Bonds are being purchased by Stone & Youngberg LLC (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at an aggregate purchase price of $50,085,608.76 (after net original issue discount in the amount of $719,614.45 and the Underwriter’s discount in the amount of $643,104.09).
The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the cover page hereof. The offering prices may be changed from time to time by the Underwriter.
MISCELLANEOUS
All summaries of the Trust Agreement, the Lease Agreement and other documents are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the Authority for further information in connection therewith.
Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized.
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The execution and delivery of this Official Statement has been duly authorized by the Authority and the District.
SAN MARCOS SCHOOLS FINANCING AUTHORITY By: Designated Representative SAN MARCOS UNIFIED SCHOOL DISTRICT By: Designated Representative
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APPENDIX A
SUMMARY OF PRINCIPAL LEGAL DOCUMENTS
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SAN MARCOS SCHOOLS FINANCING AUTHORITY LEASE REVENUE BONDS, SERIES 2010
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The following is a brief summary of certain provisions of the Trust Agreement, the Lease Agreement, the Site Lease, the Agency Agreement, the Assignment Agreement, and the Pledge Agreement relative to the above-referenced Bonds. This summary is not intended to be definitive and is qualified in its entirety by reference to such documents for the complete terms thereof. Copies of such documents are available upon request from the Authority.
DEFINITIONS The following are summaries of definitions of certain terms used in this Summary of Principal Legal Documents. All capitalized terms not defined here or elsewhere in the Official Statement have the meanings set forth in the Trust Agreement, the Lease Agreement, the Site Lease, the Agency Agreement, and the Assignment Agreement, as appropriate. Please see the summary of the Pledge Agreement for summaries of certain definitions used in that agreement.
“Accreted Interest” means, with respect to the Capital Appreciation Bonds, the Accreted Value thereof minus the Principal Amount thereof as of the date of calculation.
“Accreted Value” means, with respect to the Capital Appreciation Bonds, as of the date of calculation, the Denominational Amount thereof, plus interest accreted thereon to such date of calculation, compounded semiannually on each February 15 and August 15 (commencing on the date stated in Exhibit “A”), or such other dates or maturity date(s) as shall be specified in Exhibit “A,” with respect to the Capital Appreciation Bonds maturing on those dates specified in Exhibit “A,” and at the stated yield to maturity thereof, assuming in any such semiannual period that such Accreted Value increases in equal daily amounts on the basis of a 360-day year of twelve 30-day months.
“Accretion Rate” means that rate which, when applied to the Principal Amount of a Capital
Appreciation Bond and compounded semiannually on each February 15 and August 15 (commencing August 15, 2010), produces the Maturity Value on the maturity date (with respect to Capital Appreciation Bonds).
“Additional Bonds” mean the lease revenue bonds or obligations, certificates of participation, or
similar obligations secured by the Site pursuant to the terms of the Trust Agreement. “Additional Rent” means the rental payments specified as such in the Lease Agreement.
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“Agency Agreement” means the Agency Agreement, dated as of June 1, 2010, by and between the Authority and the District, and any duly authorized and executed amendment thereto, pursuant to which the District agrees to cause the Project to be acquired, delivered and installed, as agent of the Authority. “Assignment Agreement” means the Assignment Agreement, dated as of June 1, 2010, by and between the Authority and the Trustee, and any duly authorized and executed amendment thereto, pursuant to which the Authority assigns certain of its rights and remedies under the Lease Agreement to the Trustee. “Authority” means the San Marcos Schools Financing Authority, its successors and assigns.
“Authority Board” means the Board of Directors of the Authority. “Authority Representative” means any officer or employee of the Authority authorized to perform specific acts or duties by resolution duly adopted by the Authority Board. For purposes of this definition, “Authority Representative” includes, but is not limited to, the President, Vice-President, Secretary and Treasurer of the Authority.
“Authorized Denominations” mean (i) with respect to Current Interest Bonds, $5,000 Principal Amount and integral multiples thereof, and (ii) with respect to Capital Appreciation Bonds, $5,000 Accreted Value on the Maturity Date and integral multiples thereof. “Bond Counsel” means a firm of nationally recognized bond attorneys, initially Bowie, Arneson, Wiles & Giannone. “Bond Fund” means the fund of that name established under, and held by the Trustee, pursuant to the Trust Agreement. “Bond Register” means the Bond Register kept by the Trustee as provided in the Trust Agreement. “Bond Year” means each twelve month period extending from August 16 in one calendar year to August 15 of the succeeding calendar year, except in the case of the initial Bond Year which shall be the period from the Delivery Date to August 15, 2010, both dates inclusive. “Bonds” mean the San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 fully-registered bonds issued pursuant to the Trust Agreement and described in the Trust Agreement and any Additional Bonds issued pursuant to the terms of the Trust Agreement
“Business Day” means a day which is not a Saturday or Sunday or a day on which banking institutions are authorized or required by law or executive order to be closed in the State of California and State of New York for commercial banking purposes and on which the Federal Reserve system is not closed.
“Capital Appreciation Bonds” mean those Series 2010 Bonds designated as Capital
Appreciation Bonds pursuant to the Trust Agreement, the interest component of which is compounded semiannually on each Payment Date to maturity as shown in the Trust Agreement.
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“Certificate of Completion” means a certificate of that name executed by a District Representative and the Authority Representative, and filed with the Trustee as set forth in the Trust Agreement.
“Certificate of the Authority” means an instrument in writing signed by an Authority Representative. If and to the extent required by the provisions of the Trust Agreement, each Certificate of the Authority shall include the statements provided for in the Trust Agreement.
“Certificate of the District” means an instrument in writing signed by a District Representative.
If and to the extent required by the provisions of the Trust Agreement, each Certificate of the District shall include the statements provided for in the Trust Agreement “Code” means the Internal Revenue Code of 1986, as amended, and the applicable Regulations. “Completion Date” means the date of substantial completion of the acquisition, construction, delivery and installation of the Project, as evidenced by the filing with the Trustee of a Certificate of Completion, and as set forth in the Trust Agreement. “Construction Costs” mean the costs of the acquisition, construction, installation, and delivery of the Project, and shall, subject to the provisions below, include, without limitation, the cost of any taxes or assessments paid or to be paid in connection with the transfer of any property; the cost of any indemnity and surety bonds; and fees and expenses of attorneys, accountants, financial advisors and consultants; and such other costs, whether or not specified in the Trust Agreement, as may be necessary or incidental to the acquisition, construction, installation and delivery of the Project. “Construction Fund” means the fund of that name established under, and held by the Trustee pursuant to the Trust Agreement. “Continuing Disclosure Agreement(s)” means the Continuing Disclosure Agreement(s) executed by the Authority and the District, and dated the date of issuance of the Bonds, as originally executed and as amended from time to time in accordance with the terms thereof. “Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the District or the Authority relating to the financing of the Project, including but not limited to filing and recording costs, fees and expenses incurred in connection with the preparation of the Bonds; the costs of issuing and delivering the Bonds, including expenses relating to registering or qualifying the Bonds for distribution in any jurisdiction of the United States of America; commissions, financing charges, settlement costs, printing costs, reproduction and binding costs; initial fees and charges of the Trustee, including its first annual administration fees, legal fees and charges; financial and other professional consultant fees; the costs of rating agencies for credit ratings (if any); and, the costs for municipal insurance policies and any reserve policies or other credit facilities. “Costs of Issuance Fund” means the account of that name established under, and held by the Trustee, pursuant to the Trust Agreement.
“County” means the County of San Diego, a county and political subdivision of the State organized and operating pursuant to the laws of the State, and any successor(s) thereto.
“Current Interest Bonds” mean the Series 2010 Bonds, if any, designated as Current Interest Bonds pursuant to the terms of the Trust Agreement, the interest on which is payable on each Payment Date specified for each such Current Interest Bond as designated and maturing in the years and in the
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amounts set forth in the Trust Agreement. “Current Interest Term Bond(s)” mean those Current Interest Bonds with mandatory sinking
fund redemption dates on August 15, 2035 and August 15, 2040. “Delivery Date” or “Dated Date” means the date when the Bonds, duly authenticated and executed by the Trustee, are delivered to Stone & Youngberg LLC, as the original purchaser thereof.
“Denominational Amount” means, with respect to the Capital Appreciation Bonds, the initial offering price thereof, which represents the initial principal amount thereof (exclusive of any initial premium or discount thereon). “District” means the San Marcos Unified School District, a public school district duly organized and existing under the State Constitution and State laws and located in the County, and its successors and assigns.
“District Board” means the Governing Board of the District. “District Representative” means the District’s Superintendent, Assistant Superintendent, Business Services, District Board members and officers, or other representatives designated in writing by the District’s Superintendent.
“DTC” or “Depository” means The Depository Trust Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York in its capacity as securities depository for the Bonds.
“Due Dates” mean a date at least fifteen (15) days prior to each Payment Date commencing with the August 15, 2010, Payment Date, so long as any of the Bonds are Outstanding. “Event of Default” means the events described in the Trust Agreement. “Federal Securities” means: (i) cash (insured at all times by the Federal Deposit Insurance Corporation or fully collateralized by securities described in clause (ii) hereof); (ii) non-callable direct obligations of, or obligations guaranteed as to principal and interest by, the United States of America or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States of America, including: United States Treasury Obligations, Farmers Home Administration, Guaranteed Title XI financing, Government National Mortgage Association (GNMA) and/or State and Local Government Series (“Treasuries”); (iii) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is a real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated; (iv) subject to the prior written consent of the Insurer, pre-funded municipal obligations rated “AAA” and “Aaa” by S&P and Moody’s, respectively; or (v) subject to the prior written consent of the Insurer, securities eligible for “AAA” defeasance under then existing criteria of S&P or any combination thereof, shall be used to effect defeasance of the Bonds unless the Insurer otherwise approves. “Fiscal Year” means the fiscal year of the Authority, commencing July 1 and ending June 30 of each year. “Hazardous Materials” means any hazardous substance, pollutant or contaminant included in
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such (or similar) term under any state, federal or local statute, ordinance, rule or regulation now in effect or hereafter enacted or amended. “Independent Appraiser” means an appraiser, or appraisal firm or company, appointed and paid by the Authority and who, or each of whom: (1) is independent from the Authority and the District; and
(2) does not have any substantial interest, direct or indirect, in the Authority, the District or the Bonds.
“Insurance and Condemnation Fund” means the fund of that name established under, and held by the Trustee, pursuant to the Trust Agreement.
“Insurance Business Day” means any day other than (a) a Saturday or Sunday, (b) any day on which the offices of the Trustee or the Insurer are closed, or (c) any day on which banking institutions are authorized or required by law, executive order or governmental decree to be closed in the City of New York.
“Insurance Policy” means the Insurance Policy, and any endorsement thereto, issued by the
Insurer guaranteeing the scheduled payment of principal and interest on the Bonds when due, or any insurance policy substituted for said Insurance Policy. “Insurer” means Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.), a New York stock insurance company, or any successor thereto or assignee thereof.
“Insurer Rate” means the lesser of: (a) the greater of: (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank, National Association at its principal office in the City of New York, as its prime or base lending rate (“Prime Rate”) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank, National Association) plus 3%, or (ii) the then applicable highest rate of interest on the Bonds, or (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. Interest at the Insurer Rate shall be computed on the basis of the actual days elapsed over a year of 360 days. In the event JPMorgan Chase Bank, National Association ceases to announce its Prime Rate, the Prime Rate shall be the prime rate of such other national bank, as the Insurer shall designate.
“Lease Agreement” means the Lease Agreement, dated as of June 1, 2010, by and between the Authority and the District, and any authorized and executed amendments thereto.
“Lease Payment Fund” means the fund of that name established under, and held by the Trustee,
pursuant to the Trust Agreement, including the accounts therein. “Lease Payments” means the lease payments defined as such under the Lease Agreement as such amounts may be adjusted from time to time in accordance with the Trust Agreement. “Marks-Roos Act” means the Marks-Roos Local Bond Pooling Act of 1985, constituting Section 6584 et seq. of the California Government Code.
“Maturity Value” means the Accreted Value of any Capital Appreciation Bond on its stated
maturity date.
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“Moody’s” means Moody’s Investors Service, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Authority with the consent of the Insurer. “Net Proceeds” means the amount remaining from the gross proceeds of any insurance claim or condemnation award paid with respect to the Site or any component or components thereof, after deducting all expenses (including attorneys’ fees) incurred in the collection of such claim or award.
“Nominee” means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Trust Agreement.
“Opinion of Bond Counsel” means a written opinion of counsel of recognized national standing
in the field of law relating to municipal bonds, appointed and paid by the Authority. “Outstanding” when used with reference to the Bonds, and as of any particular date, means all Bonds theretofore issued (subject to provisions of the Trust Agreement regarding disqualified Bonds) except: (a) any Bond canceled by the Trustee at or before said date; (b) Bonds (or portions of Bonds) for the payment of which moneys or securities shall be held in trust under the Trust Agreement and set aside for such payment or redemption; (c) any Bond in lieu of or in substitution for which another Bond shall have been issued pursuant to the Trust Agreement; or (d) Bonds deemed to have been paid as provided in the Trust Agreement. “Owner” or “Bond Owner” or any similar term, when used with respect to the Bonds, means any person who shall be the registered owner of any Outstanding Bond.
“Participant” means any entity which is recognized as a participant by DTC, or any lawful successor depository for the Bonds, in the book-entry system of maintaining records with respect to Book-Entry Bonds.
“Pass-Through Agreement” means collectively that agreement entitled “Agreement for Cooperation Between San Marcos Unified School District and City of San Marcos and Redevelopment Agency of the City of San Marcos (Project Area No. 3),” entered into June 13, 1989, as clarified by the agreement entitled the “Agreement for Cooperation Between the City of San Marcos, The Redevelopment Agency of the City of San Marcos and the San Marcos Unified School District Relating to School Facilities Financing (San Elijo Hills) and Reaffirming and/or Modifying Certain Aspects of Agreements for Cooperation for Redevelopment Project Areas No. 1, No. 2, and No. 3”, dated as of March 14, 2000. “Payment Dates” means February 15 and August 15, of each year so long as any of the Bonds are Outstanding, commencing August 15, 2010. “Permitted Encumbrances” means, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the District may, pursuant to the Lease Agreement, permit to remain unpaid; (ii) the Assignment Agreement, as it may be amended from time to time; (iii) the Lease Agreement and the Site Lease, as they may be amended from time to time; (iv) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (v) easements, rights–of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Delivery Date; (vi) easements, rights–of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement which will not, in the reasonable opinion of the District, materially affect the use and possession of the Site and will
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not result in the abatement of the Lease Payments; and (vii) any agreements related to the environmental and governmental review, design, financing and/or reimbursement of roads, utilities, traffic signals, intersection improvements, and crosswalks. “Permitted Investments” means any of the following to the extent then permitted by the applicable laws and any investment policies of the District: (1) (a) Direct obligations (other than an obligation subject to variation in principal
repayment) of the United States of America (“United States Treasury Obligations”), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated.
(2) Federal Housing Administration debentures. (3) The listed obligations of government-sponsored agencies which are not backed
by the full faith and credit of the United States of America: - Federal Home Loan Mortgage Corporation (FHLMC) Senior debt obligations and participation certificates (excluded are
stripped mortgage securities which are purchased at prices exceeding their principal amounts)
- Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated systemwide bonds and notes
- Federal Home Loan Banks (FHL Banks) Consolidated debt obligations - Federal National Mortgage Association (FNMA)
Senior debt obligations Mortgage-backed securities (excluded are stripped mortgages securities which are purchased at prices exceeding their principal amounts)
(4) Unsecured certificates of deposit, time deposits, and bankers’ acceptances
(having maturities of not more than 30 days) of any bank the short-term obligations of which are rated “A-1” or better by S&P.
(5) Deposits the aggregate amount of which is fully insured by the Federal Deposit
Insurance Corporation (FDIC) or fully collateralized by securities described in clauses
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1(a) and (b) hereof, in banks which have capital and surplus of at least $25 million. (6) Commercial paper (having original maturities of not more than 30 days) rated
“A-1+” by S&P and “Prime-1” by Moody’s. (7) Money market funds rated in the highest category by S&P and Moody’s,
including such funds for which the Trustee or an affiliate provides investment advice or provides other services.
(8) State Obligations, which means: (a) Direct general obligations of any state of the United States of America or
any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated at least “A3” by Moody’s and “A” by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated.
(b) Direct, general short-term obligations of any state agency or subdivision
described in (a) above and rated “A-1+” by S&P and “MIG-1” by Moody’s. (c) Special Revenue Bonds (as defined in the United States Bankruptcy
Code) of any state or state agency in (a) above and rated “AA” or better by S&P and “Aa” or better by Moody’s.
(9) Pre-refunded municipal obligations rated “AAA” by S&P and “Aaa” by Moody’s
and meeting the following requirements:
(a) the municipal obligations are: (i) not subject to redemption prior to maturity or (ii) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to prepay such municipal obligations other than as set forth in such instructions;
(b) the municipal obligations are secured by cash or United States Treasury
Obligations which may be applied only to payment of the principal, interest and premium on such municipal obligations;
(c) the principal and interest on the United States Treasury Obligations (plus
any cash in escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal, interest, and premium, if any, due and to become due on the municipal obligations (“Verification Report”);
(d) the cash or United States Treasury Obligations serving as security for the
municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations;
(e) no substitution of a United States Treasury Obligation shall be permitted
except with another United States Treasury Obligation and upon delivery of a new Verification Report; and
(f) the cash or the United States Treasury Obligations are not available to
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satisfy any other claims, including those by or against the trustee or escrow agent.
(10) Repurchase agreements with: (i) any domestic bank, or domestic branch of a foreign bank, the long-term debt of which is rated at least “AA” by S&P and Moody’s; (ii) any broker-dealer with “retail customers” or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least “AA” by S&P and Moody’s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corp. (SIPC); or (iii) any other entity rated “AA” by S&P and Moody’s and acceptable to the Insurer, provided that:
(a) The market value of the collateral is maintained at levels and upon such
conditions would be acceptable to S&P and Moody’s to maintain an “A” rating in an “A” rated structured financing (with a market value approach);
(b) The Trustee or a third party acting solely as agent therefor or for the
Authority (“Holder of the Collateral”) has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor’s books);
(c) The repurchase agreement shall state and an opinion of counsel shall be
rendered at the time such collateral is delivered that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession);
(d) All other requirements of S&P in respect of repurchase agreements shall
be met; and
(e) The repurchase agreement shall provide that if during its term the provider’s rating by either S&P or Moody’s is withdrawn or suspended or falls below “A-” by S&P or “A3” by Moody’s, as appropriate, the provider must, at the direction of the Authority or the Trustee (who shall give direction if so directed by the Insurer), within 10 days of receipt of such direction, repurchase all collateral and terminate the agreement, with no penalty or premium to the Authority or the Trustee.
Notwithstanding the above, if a repurchase agreement has a term of 270 days or
less (with no evergreen provision) collateral levels need not be as specified in (a) above, so long as such collateral levels are 103% or better and the provider is rated at least “A” by S&P and Moody’s, respectively.
(11) Investment agreements with a domestic or foreign bank or corporation (other
than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt is rated at least “AA (stable)” by S&P and “Aa (stable)” by Moody’s, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least “AAA (stable)” by S&P and “Aaa (stable)” by Moody’s provided that, by the terms of the investment agreement:
(a) interest payments are to be made to the Trustee at times and in amounts as
necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds;
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(b) the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven days’ prior notice; the Trustee and the Authority hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;
(c) the investment agreement shall state that it is the unconditional and general
obligation of the provider, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors;
(d) the Trustee or the Authority receives the opinion of domestic counsel (which
opinion shall be addressed to the Authority and Insurer) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the Insurer;
(e) the investment agreement shall provide that if during its term: (i) the provider’s
rating by either S&P or Moody’s falls below “AA-” or “Aa3,” respectively, the provider shall, at its option, within ten days of receipt of publication of such downgrade, either: (A) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the Authority or a Holder of the Collateral collateral free and clear of any third-party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody’s to maintain an “A” rating in an “A” rated structured financing (with a market value approach); or (B) repay the principal and accrued but unpaid interest on the investment, and ; (ii) the provider’s rating by either S&P or Moody’s is withdrawn or suspended or falls below “A-“ or “A3,” respectively, the provider must, at the direction of the Authority or the Trustee (who shall give direction if so directed by the Insurer), within 10 days of receipt of such direction, repay the principal and accrued but unpaid interest on the investment, in either case with no penalty or premium to the Authority or the Trustee;
(f) the investment agreement shall state, and an opinion of counsel shall be rendered,
in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; and
(g) the investment agreement must provide that if during its term: (i) the provider
shall default in its payment obligations, the provider’s obligations under the investment agreement shall, at the direction of the Trustee or the District (who shall give such direction if so directed by the Insurer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Trustee or the District, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations shall
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automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Trustee or the District, as appropriate.
(12) The following investment pools:
(a) Local Agency Investment Fund (as set forth in Government Code
Section 16429.1); (b) San Diego County Investment Pool; and (c) California Asset Management Pool (CAMP).
“Principal” or “Principal Amount” means, with respect to any Current Interest Bond, the principal amount stated thereon, and, with respect to any Capital Appreciation Bond, the Denominational Amount. “Principal Office” or “Office of the Trustee” means the main or principal corporate trust office of the Trustee in Los Angeles, California, or such other offices as the Trustee may designate to the Authority in writing from time to time, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted.
“Project” means the construction and acquisition of all or a portion of those facilities and capital projects described in the Trust Agreement, subject to substitution pursuant to the terms of the Trust Agreement.
“Rating Agencies” means Moody’s and S&P, or any national rating agency then rating the Bonds at the request of the Authority. “Rebate Fund” means the fund of that name established under, and held by the Trustee, pursuant to the Trust Agreement. “Record Date” means the close of business on the first day of the calendar month of any Payment Date whether or not such day is a Business Day. “Redemption Fund” means the fund of that name established under, and held by the Trustee, pursuant to the Trust Agreement, in which there is established an “Optional Redemption Account,” “Sinking Fund Redemption Account” and “Mandatory Redemption Account.”
“Redevelopment Payments” means the lesser of $6,000,000 or the amount actually received, in each Fiscal Year, commencing in Fiscal Year 2010-2011, that is contractually or statutorily required to be made to the District from tax increment revenues pursuant to the Pass-Through Agreement, and are specifically limited to those tax increment revenues received from the Redevelopment Agency of the City of San Marcos for Project Area No. 3, and which payments are available for use by the District for certain educational facilities or other capital projects of the District. “Regulations” means any temporary, proposed or final regulations of the United States Department of Treasury with respect to obligations issued pursuant to Section 103 and Sections 141 to 150 of the Code. “Rental Payments” means, individually or collectively, the Lease Payments, Reserve Replenishment Rent and Additional Rent.
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“Rental Period” means the period from the Delivery Date through August 15, 2010, and thereafter, the twelve-month period commencing on August 16 of each year during the Term of the Lease Agreement.
“Representation Letter” shall have the meaning as set forth in the Trust Agreement. “Requisition” means a certificate executed by the Authority Representative and filed with the Trustee requesting disbursement from the Construction Fund or Costs of Issuance Fund, in substantially the form set forth in the Trust Agreement.
“Reserve Facility” means any line of credit, letter of credit, insurance policy, surety bond or other credit source deposited with the Trustee pursuant to the Trust Agreement. “Reserve Fund” means the fund of that name established under, and held by the Trustee, pursuant to the Trust Agreement. “Reserve Replenishment Rent” means the rental payments specified as such and made by the District pursuant to the Lease Agreement. “Reserve Requirement” means, as of the date of calculation, an amount equal to the least of: (i) 125% of average annual aggregate Lease Payments over the remaining term of the Lease Agreement; (ii) the maximum aggregate annual Lease Payments over the remaining term of the Lease Agreement; or (iii) 10% of the net proceeds of the Bonds. “Responsible Officer” means any officer of the Trustee assigned to administer the trusts created under the Trust Agreement. The Trustee shall, at all times, have at least one Responsible Officer which shall be identified to the Authority in writing. “Revenues” means those revenues defined above under clauses (i), (ii), (iii), (iv) and (v) of the Pledge Clause of the Trust Agreement. “Series 2010 Bonds” means the San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 as issued and delivered pursuant to the Trust Agreement.
“Sinking Fund Payment” means the annual sinking fund payment to be deposited in the Sinking Fund Redemption Account of the Redemption Fund to redeem a portion of the Term Bond. “Sinking Fund Payment Date” means the dates the Sinking Fund Payments are due on the Term Bond, as listed in the Trust Agreement. “Site” means those certain parcel(s) of real property situated in the County and State as described in the Lease Agreement and made a part hereof by this reference and the improvements and fixtures thereon including any substitutions thereto or releases thereof as provided in the Lease Agreement. “Site Lease” means the Site Lease, dated as of June 1, 2010, or as of the date of recording, as applicable, by and between the Authority and the District, concerning the leasing of the Site and all authorized amendments to such Site Lease.
“S&P” means Standard and Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation duly organized and existing under the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer
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perform the functions of a securities rating agency, then the term “S&P” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Authority with the consent of the Insurer. “State” means the State of California. “Tax Certificate” means the Tax Certificate executed by the Authority at the time of issuance of the Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may be amended from time to time. “Term” means the time during which the Lease Agreement is in effect, as provided therein. “Title Insurance Policy” means the CLTA Leasehold Title Policy, with any endorsements as required by the Insurer, to be delivered by the District pursuant to the Lease Agreement. “Trust Agreement” means the Trust Agreement, dated as of June 1, 2010, by and between the Trustee and the Authority, and any duly authorized and executed amendments thereto. “Trustee” means Union Bank, N.A., a national banking association organized and existing under the laws of the United States of America, or its duly qualified and appointed successor acting as Trustee under the Trust Agreement.
“Written Request of the Authority” means an instrument in writing signed by an Authority
Representative. “Written Request of the District” means an instrument in writing signed by a District
Representative. “Yield” means that yield which, when used in computing the present worth of all payments of principal and interest (or other payments in the case of Nonpurpose Investments (as defined in the Tax Certificate) which require payments in a form not characterized as principal and interest) on a Nonpurpose Investment or the Bonds produces an amount equal to the purchase price of such Nonpurpose Investment or the Bonds, as the case may be, all computed as prescribed in the applicable Regulations.
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THE SITE LEASE Pursuant to the Site Lease, the District will lease the Site to the Authority for a term ending on August 15, 2040, unless such term is extended or sooner terminated. If on August 15, 2040, the rental payable under the Lease Agreement and attributable to the Site shall have been abated at any time and for any reason and the Lease Agreement shall have been extended, then the term of the Site Lease shall likewise be extended until 10 days after the Bonds shall be fully paid and the Trust Agreement fully discharged, except that the term of the Site Lease shall in no event be extended beyond August 15, 2050. If the District shall exercise its option to prepay a portion or all of the Lease Payments due under the Lease Agreement and thereby purchase a corresponding portion or all of the Authority’s leasehold interest in the Site, pursuant to the Lease Agreement and Rental Payments payable under the Lease Agreement shall have been paid,, then the term of the Site Lease shall terminate or, in the case of such partial exercise, a portion of the Site may be released as provided in the Lease Agreement.
The Authority shall pay the Site Lease Payment to the District for rental of the Site from the proceeds of the Bonds. Upon termination of the Site Lease, the Authority agrees to quit and surrender the Site to the District, and any permanent improvements and structures on the Site will vest in the District.
The Site Lease may be assigned or sold, and the Site may be subleased, as a whole or in part, by the Authority, with the prior written consent of the Insurer or at the direction of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy), without the necessity of obtaining the consent of the District, if an event of default occurs under the Lease Agreement. See “FINANCING PLAN – Substitution or Release of Site.”
The Site Lease may be amended, modified, or changed only in accordance with the provisions of the Lease Agreement. The District shall have the right to substitute other real property for the Site, or to release portions of the Site, as provided in the Lease Agreement. The Authority and the District acknowledge that the Authority has assigned its right, title and interest in and to the Site Lease to the Trustee pursuant to the Assignment Agreement. The District consents to such assignment. The District consents to the Trust Agreement and acknowledges and agrees to the rights of the Trustee as set forth therein. As a material inducement to the Trustee, the Authority and the District agree that the Trustee shall be a third party beneficiary under the Site Lease and the Trustee may enforce any right, remedy or claim conferred upon, given or granted to it within the Site Lease.
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THE LEASE AGREEMENT Lease of the Site The Authority agrees to lease the Site to the District and the District agrees to lease the Site from the Authority. The District, as agent of the Authority, will arrange for the completion of the Project. See “THE AGENCY AGREEMENT” below. See also “INTRODUCTION – The Bonds” and “FINANCING PLAN – The Site.” Purchase of the Leasehold During the Term, the Authority will hold a leasehold interest in the Site pursuant to the Site Lease. See “FINANCING PLAN – The Site.” Except as described under the heading “THE SITE LEASE” above, upon the expiration of the Term, the leasehold interest of the Authority will revert to the District. The District may exercise an option to purchase such leasehold interest by paying a purchase price equal to the amount necessary to terminate the Lease Agreement, as described below. Term of the Lease Agreement
The Term of the Lease Agreement shall commence as of June 1, 2010, and shall end on August 15, 2040 (“Termination Date”), unless on such date any Bonds remain Outstanding under the Trust Agreement, amounts are due and owing to the Insurer under the Trust Agreement or the Trust Agreement is not fully discharged, in which case the Lease Agreement shall remain in full force and effect until all Bonds have been fully paid and such amounts owed to the Insurer have been satisfied, except that the Term shall in no event be extended beyond August 15, 2050, or unless terminated prior to such date upon the earliest of any of the following events: a) the payment or prepayment or provision therefor by the District of all Lease Payments, payments of Additional Rent and other amounts due during the Term of the Lease Agreement (see “Lease Payments,” below); or (b) the occurrence of an event of default pursuant to the Lease Agreement, and the termination of the Lease Agreement by the Authority or its successors and assigns pursuant to the Lease Agreement (see discussion under “Events of Default” and “Remedies,” below); or (c) the Site is destroyed or damaged or is taken under the power of eminent domain to such extent that the operation of the Site is materially affected and the Trustee has given notice of prepayment of all of the Outstanding Bonds (see “Mandatory Redemption from Net Proceeds” below). Lease Payments
The District agrees to pay to the Authority the amount set forth for such date in the Schedule of Lease Payments contained in the Lease Agreement, provided that the District shall receive a credit for any amounts on hand in the Lease Payment Fund and the Reserve Fund at the time any Lease Payment is due, and that at such time as the moneys on hand in the Lease Payment Fund are equal to all Lease Payments remaining unpaid, such moneys shall be applied by the Trustee pursuant to the Trust Agreement and to such Lease Payments on behalf of the District, and the District shall not be required to make any further Lease Payments under the Lease Agreement. See “INTRODUCTION – The Bonds, SECURITY FOR THE BONDS – General, – Lease Payment Fund, – Reserve Fund, – Lease Payments, – Covenant to Budget and Appropriate.” If the District fails to make any Lease Payment when due, notwithstanding that moneys are withdrawn from the Reserve Fund for such purpose pursuant to the Trust Agreement, the Lease Payment shall continue as an obligation of the District until paid.
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Reserve Replenishment Rent If: (1) funds have been withdrawn from the Reserve Fund in order to pay principal of or interest
on the Bonds or as a result of investment losses and the amount therein is less than the Reserve Requirement, and/or if there has been a draw on the Reserve Facility under the Trust Agreement, as a result of a deficiency in the District’s payment of Lease Payments made to the Authority; and
(2) Lease Payments are not in abatement pursuant to the Lease Agreement,
then, the District shall pay, over a one-year period, in substantially equal semi-annual payments, from its first available moneys after payment of Lease Payments, to the Trustee, “Reserve Replenishment Rent” in an amount sufficient to: (i) restore the Reserve Fund to the Reserve Requirement, and/or (ii) repay the Reserve Facility provider pursuant to the Trust Agreement. See “SECURITY FOR THE BONDS – Reserve Fund, – Lease Payments, – Covenant to Budget and Appropriate” and “MUNCIPAL BOND INSURANCE.” Additional Rent. In addition to the Lease Payments set forth above, during the Term of the Lease Agreement the District agrees to pay when due or on the next Due Date following receipt of statements therefor or estimates thereof furnished by or on behalf of the Authority or provided otherwise, Additional Rent equal to the sum of the following:
(1) all taxes and assessments of any nature whatsoever, including, but not limited to, excise taxes, ad valorem taxes, ad valorem and specific lien special assessments and gross receipts taxes, if any, levied upon the Site, or upon any interest of the Authority, the Trustee or the Owners therein or in the Lease Agreement; (2) all fees and expenses (not otherwise paid or provided for out of the proceeds of the sale of the Bonds) of the Trustee in connection with the performance of its duties hereunder and under the Trust Agreement and all amounts due to the Insurer under the terms hereof or under the Trust Agreement that do not otherwise constitute Lease Payments or payments of Reserve Replenishment Rent; (3) insurance premiums, if any, on all insurance required under the provisions of the Lease Agreement; (4) all administrative costs of the Authority related to the Project or the Site, including, without limiting the generality of the foregoing, fees and charges of auditors, accountants and attorneys, any amounts payable under the Lease Agreement, and all other necessary administrative costs of the Authority or charges required to be paid by the Authority in order to comply with the terms of the Bonds or the Trust Agreement and to defend and indemnify the Authority and its members, officers and directors; and (5) all other payments required to be paid by the District under the provisions of the Lease Agreement or the Trust Agreement, including amounts payable to the Insurer.
The District shall pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within 60 days after notice in writing from the Trustee to the
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District stating the amount of Additional Rent then due and payable and the purpose thereof. See “SECURITY FOR THE BONDS –Lease Payments, – Covenant to Budget and Appropriate.” Consideration. Rental Payments for each semi-annual Rental Payment during the Term of the Lease Agreement shall constitute the total rent for said semi-annual Rental Payment period, and shall be paid by the District in each semi-annual Rental Payment period for and in consideration of the right of the use and possession of, and the continued use and enjoyment of the Site during each such period for which any Rental Payments are to be paid. The parties to the Lease Agreement have agreed and determined that the Rental Payments represent the fair rental value of the Site. In making such determination, consideration has been given to the costs of financing the Project, other obligations of the Parties under the Lease Agreement, the uses and purposes which may be served by the Site and the benefits therefrom which will accrue to the District and the general public. Rental Payments for the Site during each Rental Period shall constitute the total rent for said Rental Period. See “SECURITY FOR THE BONDS – Abatement.”
Payment; Credit. Each Lease Payment due hereunder shall be paid in lawful money of the United States of America to or upon the order of the Authority at the Principal Office of the Trustee, or such other place or entity as the Authority shall designate. Each Lease Payment shall be deposited with the Trustee no later than the Due Date preceding the Payment Date on which such Lease Payment is due. Any Lease Payment which shall not be paid by the District when due and payable under the terms of the Lease Agreement shall bear interest from the date when the same is due hereunder until the same shall be paid: (a) at the Insurer Rate to the extent that such bond payment has been paid to the Owners, on behalf of the District, by the Insurer pursuant to the Insurance Policy, or (b) in all other cases, at the rate of 10% per annum. Amounts required to be deposited by the District with the Trustee pursuant to the Lease Agreement on any date shall be reduced to the extent of available amounts on deposit in the Lease Payment Fund, or the Bond Fund and its subaccounts. In the event that any payment hereunder is due on a day which is not a Business Day, such payment shall be made on the next Business Day. Notwithstanding any dispute between the Authority and the District hereunder, the District shall make all payments when due and shall not withhold any payments pending the final resolution of such dispute. In the event of a determination that the District was not liable for said payments or any portion thereof, said payments or excess payments, as the case may be, shall be credited against subsequent payments due hereunder.
Appropriations; Covenant. Rental Payments shall be paid from any source of legally available funds of the District. The District covenants to take such action as may be necessary to include all Rental Payments due under the Lease Agreement in its annual budget. It shall be the duty of each and every public official of the District to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the District to carry out and perform the covenants made by the District in the Lease Agreement. During the Term of the Lease Agreement, the District will provide the Trustee with a written certification to that effect. See “SECURITY FOR THE BONDS – Covenant to Budget and Appropriate” and “RISK FACTORS – Appropriation.” Application of Redevelopment Payments. Subject only to the provisions of this Lease Agreement permitting the application thereof for the purposes and on the terms and conditions set forth in the Lease Agreement, to the extent permitted by law, the District irrevocably pledges the Redevelopment Payments to secure the Lease Payments on the basis described in the Lease Agreement; provided, however, that notwithstanding the foregoing, the Redevelopment Payments are pledged to secure only that portion of the Lease Payments attributable to the financing of educational or other capital facilities of the District to which such Redevelopment Payments may contractually or statutorily be applied for the purposes described in the Lease Agreement. Said pledge constitutes a first pledge and lien on the Redevelopment Payments. The District agrees and covenants that all Redevelopment Payments received by the District in
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each Fiscal Year, commencing Fiscal Year 2010-2011, in the lesser of $6,000,000 or the amount actually received, will be applied by the District to the payment of the portion of the Lease Payments coming due in such Fiscal Year attributable to the financing of educational or other capital facilities of the District to which such Redevelopment Payments may contractually or statutorily be applied; provided, however, that, after the payment of such portion of the Lease Payments or the setting aside from such Redevelopment Payments or any other available funds of the District of an amount sufficient to pay such portion of the Lease Payments, all remaining Redevelopment Payments in such Fiscal Year may be used for any purpose for which such Redevelopment Payments may be legally applied. See “SECURITY FOR THE BONDS – Covenant Regarding Application of Redevelopment Payments,” “REDEVELOPMENT PAYMENTS,” “RISK FACTORS – Redevelopment Payments, – Special Risk Factors Related to the Redevelopment Payments,” “APPENDIX C- REDEVELOPMENT PAYMENTS,” “APPENDIX D – FISCAL CONSULTANT’S REPORT 2009/10,” and “APPENDIX F – ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES.”
Pursuant to the Assignment Agreement, the Authority has assigned its rights to receive and collect Lease Payments to the Trustee in trust for the benefit of the Owners of the Bonds. See “THE ASSIGNMENT AGREEMENT” below.
Abatement of Rental Payments. (a) Except as otherwise specifically provided in these subsections (a) and (b), during any period in which, by reason of material damage to, or destruction or condemnation of, the Site, there is substantial interference with the District’s right to use and occupy any portion of the Site, Rental Payments shall be abated proportionately, and the District waives the benefits of California Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement shall continue in full force and effect. The amount of such abatement shall be agreed upon by the District and Authority; provided, however, that the Rental Payments due for any Rental Period shall not exceed the fair rental value of that portion of the Site available for use and occupancy by the District during such Rental Period. The District and the Authority shall calculate such abatement and shall provide the Trustee and the Insurer with a certificate setting forth such calculation and the basis therefor. Such abatement shall continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Site, ending with the substantial completion of the work of repair or replacement of the Site, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement shall be extended as provided in the Lease Agreement, except that the term of the Lease Agreement shall in no event be extended more than ten years beyond the Termination Date.
(b) Notwithstanding the foregoing, to the extent moneys are available for the payment of
Rental Payments in any of the funds and accounts established under the Trust Agreement, Rental Payments shall not be abated as provided above, but rather, shall be payable by the District as a special obligation payable solely from said funds and accounts. See “INTRODCUTION – The Bonds,” “SECURITY FOR THE BONDS – Abatement” and “RISK FACTORS – Abatement” Option to Purchase The District has the option to purchase the Authority’s leasehold interest under the Site Lease in all or any portion of the Site, including the improvements on the Site: (1) on any date by depositing as prepaid rent with the Trustee cash and/or Federal Securities as provided for in the Trust Agreement, or (2) on the dates and in accordance with the terms for redemption of the Bonds set forth in the Trust Agreement. In such event, all or a portion of the obligations of the District under the Lease Agreement, and the security provided by the Lease Agreement for said obligations or said portion of the obligations,
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shall cease and terminate pursuant to the Lease Agreement, with the exception of the obligation of the District to make, or cause to be made, Lease Payments from such deposit. See “THE TRUST AGREEMENT - Defeasance” below. See also “THE BONDS – Redemption.” Maintenance, Repair and Taxes All improvement, repair and maintenance of the Site is the responsibility of the District. The District shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Site and improvements thereon resulting from ordinary wear and tear or want of care on its part. The District shall also pay or cause to be paid all taxes and assessments, including utility charges, charged to the Authority or affecting the Site. The District is obligated to pay governmental charges only insofar as such charges become due during the Term. Under certain circumstances, the District, at the District’s expense and in its name, may, upon the provision of notice to the Insurer and Trustee (as assignee of the Authority), allow such taxes and charges to remain unpaid while it contests them in good faith. Insurance The District shall maintain, or cause to be maintained, throughout the Term of the Lease Agreement, for and commencing on the periods set forth below the following insurance with insurers rated “A” or better by A.M. Best’s Credit Ratings (unless the Insurer approves an insurer with a lower rating), or through insurance provided through a joint powers authority (“JPA” or “JPA Program”) except subsection (e) below, all coverage on the Site required by the Lease Agreement. Such insurance shall consist of: (a) a standard comprehensive general insurance policy or policies in protection of the Authority, its successors and assigns, and the District, and their members, directors, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of construction on, or operation of, the Site. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $150,000 (subject to a deductible clause of not to exceed $50,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. (b) insurance against loss or damage to the Site by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke, sprinkler damage, boiler explosion and such other hazards as are normally covered by such insurance (but excluding earthquake and flood). Such insurance shall be in an amount equal to the full insurable value (without deduction for depreciation) of all structures constituting any part of the Site, (except that such insurance may be subject to a deductible clause of not to exceed $100,000); provided, however, that in no event shall such insurance be maintained in an aggregate amount (together with moneys in the Reserve Fund) less than the aggregate principal amount of Bonds outstanding at the time. (c) rental interruption insurance to cover loss, total or partial, of the use of the Site as the result of any of the hazards covered in the insurance required by the Lease Agreement, in an amount sufficient to pay the total Lease Payments hereunder for a period of 24 months (using the two highest annual Lease Payments during the Term). In the event that the District determines, based on a certification from an Insurance Consultant (defined below in (f)(i)), that such insurance is not
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commercially available, the District may under such circumstances (notwithstanding (f) below) provide for a cash deposit (held by the Trustee), equal to the 24 months of Lease Payments (using the two highest annual Lease Payments during the Term) to satisfy the foregoing requirements. The Net Proceeds of such insurance shall be paid to the Trustee for deposit in the Lease Payment Fund to be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable. (d) workers’ compensation insurance for not less than the amounts required by applicable law to insure District employees against liability for compensation under the Workers’ Compensation Insurance and Safety Act now in force in the State, or any act hereafter enacted as an amendment or supplement thereto or in lieu thereof.
(e) a Title Insurance Policy insuring (i) the District’s fee interest in the Site; (ii) the Authority’s leasehold interest in the Site under the Site Lease; and (iii) the District’s leasehold estate in the Site under the Lease Agreement, subject only to Permitted Encumbrances (any of which estates may be insured through an endorsement to such policy). The Title Insurance Policy shall be in an amount equal to the entire unpaid principal amount of the Bonds, and be issued by a company of recognized standing, duly authorized to issue the same, payable to the Insurer and the Trustee for the benefit of the Owners. (f) for insurance provided through a JPA (except for title insurance, for which the District may not provide coverage through a JPA Program), the District shall provide, or arrange to provide a certificate(s) or certifications as to all of the following:
(i) the JPA Program must be approved by a nationally recognized independent actuary, insurance company, or broker that has actuarial personnel experienced in the area of insurance for which the District is insuring through a JPA and employing accepted actuarial techniques, as may be designated by the District from time to time and satisfactory to the Insurer (“Insurance Consultant”) (this subsection shall not apply in the case of workers’ compensation insurance coverage); (ii) the JPA Program must include an actuarially sound segregated claims reserve fund (held by an independent trustee) out of which each claim shall be paid; the JPA Program must include a claims processing and risk management program; the adequacy of such fund must be evaluated initially and on an annual basis by an Insurance Consultant; and any deficiencies in any claims reserve fund must be remedied in accordance with the recommendation of the Insurance Consultant; (iii) in the event the JPA Program is discontinued, the actuarial soundness of its claims reserve fund, as determined by an Insurance Consultant, must be maintained;
(iv) the District shall cause the Insurance Consultant to submit a written report, on or before April 1, to the Trustee and Insurer, setting forth a determination, employing accepted actuarial techniques, of an adequate amount of reserves for the next Fiscal Year to be maintained in the JPA Program trust fund; and
(v) amounts payable with respect to the JPA Program must not be subject to appropriation or abatement.
The Authority shall cooperate fully with the District at the expense of the District in filing any proof of loss with respect to any insurance policy maintained pursuant to the Lease Agreement and in the prosecution or defense of any prospective or pending condemnation proceeding with respect to the Site or
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any portion thereof. See “SECURITY FOR THE BONDS – Abatement,” –Insurance” and “THE DISTRICT – Insurance.”
Mandatory Redemption from Net Proceeds The Current Interest Bonds are subject to mandatory redemption prior to maturity, as a whole or in part on any date, at a redemption price equal to the principal amount thereof plus accrued but unpaid interest to the redemption date, without premium, from Net Proceeds deposited in the Mandatory Redemption Account of the Redemption Fund pursuant to the Trust Agreement following an event of damage to, or destruction, theft or condemnation of, the Site or any portion thereof or loss of the use or possession of the Site or any portion thereof due to a title defect. See “THE BONDS – Redemption.” The Capital Appreciation Bonds are subject to mandatory redemption prior to maturity , as a whole or in part on any date, at a redemption price equal to the Accreted Value thereof on the redemption date, without premium from Net Proceeds deposited in the Mandatory Redemption Account of the Redemption Fund pursuant to the Trust Agreement following an event of damage to, or destruction, theft or condemnation of, the Site or any portion thereof or loss of the use or possession of the Site or any portion thereof due to a title defect. See “THE BONDS – Redemption.”
Application of Net Proceeds If the District shall certify to the Authority and the Trustee that the Net Proceeds of any insurance award resulting from any damage to or destruction of the Site by fire or other casualty or the Net Proceeds of any eminent domain award, or resulting from any event described under the abatement provisions of the Lease Agreement shall be sufficient, together with any other funds which the District at its option may supply for such purpose, to cover the entire projected repair or replacement cost as provided in the Trust Agreement, estimated in good faith, and shall further certify that such repair or replacement can be completed within the period during which rental interruption insurance proceeds and other designated funds available therefor will cover Lease Payments coming due, the District shall cause the Net Proceeds or other funds, as applicable, to be deposited with the Trustee for deposit in the Insurance and Condemnation Fund promptly upon receipt thereof to be applied to the prompt replacement, repair, restoration, modification or improvement of the Site by the District. Otherwise if the District makes certain certifications described in the Trust Agreement, such Net Proceeds shall be applied to the redemption of the Bonds in whole or in part, as provided in the Trust Agreement. See “THE BONDS – Redemption.”
Substitution or Release of Site
The District shall have the right, but only upon the prior written consent of the Insurer, to substitute alternate real property for any portion of the Site or to release a portion of the Site from the Lease Agreement pursuant to the Lease Agreement. All costs and expenses incurred in connection with such substitution or release shall be borne by the District. Notwithstanding any substitution or release pursuant to the Lease Agreement, there shall be no reduction in or abatement of the Lease Payments due from the District hereunder as a result of such substitution or release. Any such substitution or release of any portion of the Site shall be subject to the following specific conditions, which are hereby made conditions precedent to such substitution or release: (a) an Independent Appraiser shall find (and shall have delivered a certificate to the
District, the Trustee, and the Insurer setting forth its findings) that the Site, as constituted after such substitution or release: (i) has an annual fair rental value greater than or equal to 105% of the maximum amount of Lease Payments payable by the District in any Rental Period, and (ii)
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has a useful life equal to or greater than the useful life of the Site as constituted prior to such substitution or release;
(b) the District shall obtain or caused to be obtained the Title Insurance Policy with
respect to any substituted property in the amount of the fair market value of such substituted property (which fair market value shall have been determined by an Independent Appraiser), of the type and with the endorsement described in the Lease Agreement;
(c) the District shall provide the Trustee with an Opinion of Bond Counsel to the
effect that such substitution or release will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes;
(d) the Authority and/or District shall give, or shall make arrangements to give, any
notice of the occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Agreement;
(e) the District, the Authority, and the Trustee shall execute, and the District shall
cause to be recorded with the County of San Diego Recorder, any document necessary to re-convey to the District the portion of the Site being substituted or released and to include any substituted real property in the description of the Site contained the Lease Agreement and in the Site Lease; and
(f) the District shall certify to the Authority that the substituted real property is of approximately the same degree of essentiality to the District as the portion of the Site for which it is being substituted. See “FINANCING PLAN – Substitution or Release of Site” and “RISK FACTORS – Substitution of Property.” Modifications, Additions and Improvements to the Site The District has the right to make certain modifications, additions and improvements to the Site during the term of the Lease Agreement. Such actions may be taken only at the District’s cost and expense and upon the conditions stated in the Lease Agreement. Such actions shall not relieve or modify the District’s obligation to make Lease Payments. Disclaimers The Authority makes no warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the District of the Project or the Site, or any other representation or warranty with respect to the Project or the Site or any portion thereof. In no event shall the Authority be liable for incidental, indirect, special or consequential damages, in connection with or arising out of the Lease Agreement or the Trust Agreement, or the existence, furnishing, functioning or the District’s use of the Site. Assignment and Subleasing by the District Pursuant to the Assignment Agreement, the Authority has assigned certain of its rights under the Lease Agreement to the Trustee, including its rights to receive and enforce payment of the Lease Payments. See “THE ASSIGNMENT AGREEMENT” below.
(a) The Lease Agreement and the obligation of the District to make Lease Payments hereunder shall remain primary obligations of the District;
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(b) The Authority and the Insurer shall provide prior written consent, which shall not be unreasonably withheld, to such assignment or sublease; (c) Any sublease of the Site by the District shall explicitly provide that such sublease is subject to all rights of the Authority under the Lease Agreement, including, the right to re-enter and re-let the Site or terminate the Lease Agreement upon a default by the District;
(d) The District shall, within 30 days after the delivery thereof, furnish or cause to be furnished to the Authority, Insurer and the Trustee a true and complete copy of such sublease or assignment; (e) No such sublease or assignment by the District shall cause the Site to be used for a purpose other than a governmental function authorized under the provisions of the Constitution and laws of the State; and (f) The District will furnish the Trustee with an Opinion of Bond Counsel to the effect that such sublease or assignment will not, in and of itself, cause the interest on the Bonds to become includable in gross income for federal income tax purposes. Events of Default Defined
The following shall be “events of default” under the Lease Agreement and the terms “events of default” and “default” shall mean, whenever they are used in the Lease Agreement with respect to the Site, any one or more of the following events:
(a) Failure by the District to pay any Rental Payment when the same becomes due and payable, time being expressly declared to be of the essence in the Lease Agreement. In determining whether a default has occurred under this clause, no effect shall be given to payments made under the Insurance Policy.
(b) The District’s interest in the Lease Agreement or any part thereof is assigned or
transferred, either voluntarily or by operation of law or otherwise, without the prior written consent of the Authority and the Insurer, as provided for in the Lease Agreement.
(c) The District or any assignee files any petition or institutes any proceeding under any act
or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby the District asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of the District’s debts or obligations, or offers to the District’s creditors to effect a composition or extension of time to pay the District’s debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of the District’s debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character be filed or be instituted or taken against the District, or if a receiver of the business or of the property or assets of the District shall be appointed by any court, except a receiver appointed at the instance or request of the Authority, or if the District shall make a general assignment for the benefit of the District’s creditors.
(d) The District abandons or vacates the Site.
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(e) The District shall in no event be in default in the observance or performance of any covenant, condition or agreement in the Lease Agreement on its part to be observed or performed, other than as referred to in subsections (a) through (d) above, inclusive, unless the District shall have failed, for a period of 30 days or such additional time as is reasonably required, but in no event greater than 60 days without the prior written consent of the Insurer, to correct any such default after notice by the Authority or the Insurer to the District properly specifying in what manner the District has failed to perform any such covenant, condition or agreement. See “SECURITY FOR THE BONDS – Action on Default” and “RISK FACTORS – Limitation on Enforcement of Remedies; No Acceleration.” Remedies on Default
(a) Upon the occurrence and continuance of any event of default specified in subsections (a)-(d) above as to events of default, the Authority, or its assignee (with the consent of the Insurer, provided the Insurer is not then in default of its payment obligations) shall proceed, and upon the occurrence of any event of default specified in subsection (e) may proceed, to do any of the following:
(1) To terminate the Lease Agreement in the manner provided in the Lease Agreement on
account of default by the District, notwithstanding any re-entry or re-letting of the Site as hereinafter provided for in subparagraph (2) hereof, and to re-enter the Site and remove all persons in possession thereof and all personal property whatsoever situated upon the Site and place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the District. In the event of such termination, the District agrees to surrender immediately possession of the Site, without let or hindrance, and to pay the Authority all damages recoverable at law that the Authority may incur by reason of default by the District, including without limitation, any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon the Site and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. Neither notice to pay Rental Payments or to deliver up possession of the Site given pursuant to law nor any entry or re-entry by the Authority nor any proceeding in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Site nor the appointment of a receiver upon initiative of the Authority to protect the Authority’s interest under the Lease Agreement shall of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the District shall be or become effective by operation of law or acts of the parties to the Lease Agreement, or otherwise, unless and until the Authority shall have given written notice to the District of the election on the part of the Authority to terminate the Lease Agreement. The District covenants and agrees that no surrender of the Site or of the remainder of the term hereof or any termination of the Lease Agreement shall be valid in any manner or for any purpose whatsoever unless stated by the Authority by such written notice.
(2) Without terminating the Lease Agreement, (x) to collect each installment of Rental Payments as the same become due and enforce any other terms or provision hereof to be kept or performed by the District, regardless of whether or not the District has abandoned the Site, or (y) to exercise any and all rights of entry and re-entry upon the Site. In the event the Authority does not elect to terminate the Lease Agreement in the manner provided for in subparagraph (1) hereof, the District shall remain liable and agrees to keep or perform all covenants and conditions contained in the Lease Agreement to be kept or performed by the District and, if the Site is not re-let, to pay the full amount of the Rental Payments to the end of the term of the Lease Agreement or, in the event that the Site is re-let, to pay any deficiency in Rental Payments that results
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therefrom; and further agrees to pay said Rental Payments deficiency punctually at the same time and in the same manner as hereinabove provided for the payment of Rental Payments hereunder, notwithstanding the fact that the Authority may have received in previous years or may receive thereafter in subsequent years Rental Payments in excess of the Rental Payments specified in the Lease Agreement, and notwithstanding any entry or re-entry by the Authority or suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Site. Should the Authority elect to re-enter as provided in the Lease Agreement, the District hereby irrevocably appoints the Authority as the agent and attorney-in-fact of the District to re-let the Site, or any part thereof, from time to time, either in the Authority’s name or otherwise, upon such terms and conditions and for such use and period as the Authority may deem advisable and to remove all persons in possession thereof and all personal property whatsoever situated upon the Site and to place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the District, and the District hereby indemnifies and agrees to save harmless the Authority from any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon and re-letting of the Site and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The District agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Authority to re-let the Site in the event of such re-entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Authority in effecting such re-letting shall constitute a surrender or termination of the Lease Agreement irrespective of the use or the term for which such re-letting is made or the terms and conditions of such re-letting, or otherwise, but that, on the contrary, in the event of such default by the District the right to terminate the Lease Agreement shall vest in the Authority to be effected in the sole and exclusive manner provided for in subparagraph (1) hereof. The District further agrees to pay the Authority the cost of any alterations or additions to the Site necessary to place the Site in condition for re-letting immediately upon notice to the District of the completion and installation of such additions or alterations. The District hereby waives any and all claims for damages caused or which may be caused by the Authority in re-entering and taking possession of the Site as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Site and all claims for damages to or loss of any property belonging to the District, or any other person, that may be in or upon the Site.
(b) In addition to the other remedies set forth in the Lease Agreement, upon the occurrence
of an event of default, the Authority and its assignee shall be entitled to proceed to protect and enforce the rights vested in the Authority and its assignee by the Lease Agreement or by law. The provisions of the Lease Agreement and the duties of the District and of its Board, officers or employees shall be enforceable by the Authority or its assignee by mandamus or other appropriate suit, action or proceeding in any court of competent jurisdiction. Without limiting the generality of the foregoing, the Authority and its assignee shall have the right to bring the following actions:
(i) Accounting. By action or suit in equity to require the District and its Board, officers and employees and its assigns to account as the trustee of an express trust.
(ii) Injunction. By action or suit in equity to enjoin any acts or things which may be unlawful or in violation of the rights of the Authority or its assignee.
(iii) Mandamus. By mandamus or other suit, action or proceeding at law or inequity to enforce the Authority’s or its assignee’s rights against the District (and its Board, officers and employees) and to compel the District to perform and carry out its duties and obligations under the law and its covenants and agreements with the District as provided in the Lease Agreement.
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The term “re-let” or “re-letting” as used in this section shall include, but not be limited to, re-
letting by means of the operation by the Authority of the Site. If any statute or rule of law validly shall limit the remedies given to the Authority hereunder, the Authority nevertheless shall be entitled to whatever remedies are allowable under any statute or rule of law. In the event the Authority shall prevail in any action brought to enforce any of the terms and provisions of the Lease Agreement, the District agrees to pay a reasonable amount as and for attorneys’ fees incurred by the Authority in attempting to enforce any of the remedies available to the Authority hereunder. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LEASE AGREEMENT, THE AUTHORITY SHALL HAVE NO RIGHT UPON A DEFAULT HEREUNDER BY THE DISTRICT TO ACCELERATE LEASE PAYMENTS. Notwithstanding anything to the contrary contained in the Lease Agreement, so long as the Insurer is not in default in its payment obligations under the Insurance Policy, no remedy shall be exercised hereunder without the prior written consent of the Insurer and the Insurer shall have the right to direct the exercise of any remedy hereunder.
(c) Notwithstanding anything to the contrary in the Lease Agreement, the termination of the Lease Agreement by the Authority on account of a default by the District under this section shall not effect or result in a termination of the lease of the Site by the District to the Authority pursuant to the Site Lease. See “RISK FACTORS – Limitation on Enforcement of Remedies; No Acceleration.”
Authority’s Event of Default
The failure by the Authority to observe and perform the covenants, agreements or conditions on its part contained in the Lease Agreement, if such failure shall have continued for a period of 60 days after written notice thereof, specifying such failure and requiring the same to be remedied, shall have been given to the Authority, the Trustee and the Insurer, by the District, shall constitute an Authority Event of Default under the Lease Agreement; provided, however, that if the Authority shall fail to correct such failure within such 60 day period, the Insurer shall have 90 additional days to correct such failure on behalf of the Authority prior to such failure constituting an Authority Event of Default; and, provided further that if, in the reasonable opinion of the Authority or the Insurer, as applicable, the failure stated in the notice can be corrected, but not within such 60 or 90 day period, such failure shall not constitute an Authority Event of Default if corrective action is instituted by the Authority or the Insurer within such 60 or 90 day period and the Authority or the Insurer, as applicable, shall thereafter diligently and in good faith cure such failure in a reasonable period of time. In each and every case upon the occurrence and during the continuance of an Authority Event of Default by the Authority hereunder, the District shall have all the rights and remedies permitted by law. Notwithstanding anything to the contrary contained in the Lease Agreement, the provisions of the Lease Agreement shall not impair, restrict or limit the application of the abatement provisions contained within the Lease Agreement.
Insurer’s Rights
The Lease Agreement provides for certain rights of the Insurer in the event of a default, or certain
other events (as set out in the Lease Agreement and the Trust Agreement, and in certain cases provided that the Insurer is not then in default in its payment obligations under the Insurance Policy) relating to the Insurance Policy. These rights (as set forth in the Lease Agreement and Trust Agreement collectively include, but are not limited to) the right of the Insurer to receive various notices, certificates and documents, to control certain remedies in certain circumstances, to be required to give prior written consent in certain instances, and the right to seek reimbursement(s) of amounts paid under the Insurance Policy. The Insurer is a third-party beneficiary under the Trust Agreement, and may enforce any right,
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remedy or claim conferred upon, given or granted to the Insurer thereunder. See ABOND INSURANCE – The Insurance Policy.@ Amendments, Changes and Modifications
(a) The Lease Agreement and the Site Lease, and the rights and obligations of the Authority and the District hereunder and thereunder may be amended or modified at any time by an amendment to the Lease Agreement or to the Site Lease which shall become binding upon execution by the Authority and the District, but only with the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy) and the Owners of a majority of the principal on the Bonds then Outstanding, provided that no such amendment shall: (i) extend the payment date of any Lease Payments, reduce the interest component or principal component of any Lease Payments or change the prepayment terms and provisions, without the prior written consent of the Owner of each Bond so affected, or (ii) reduce the percentage of the principal on the Bonds, the consent of the Owners of which is required for the execution of any amendment of the Lease Agreement or the Site Lease without the prior written consent of the Owners of all the Bonds then Outstanding.
(b) The Lease Agreement and the Site Lease, and the rights and obligations of the Authority and the District in the Lease Agreement or the Site Lease, may also be amended at any time by an amendment to the Lease Agreement or the Site Lease which shall become binding upon execution by the Authority and the District, without the written consents of any Owners, but only with the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy) and only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the Authority or the District to be observed or performed in the Lease Agreement or the Site Lease by the Authority or the District, or to surrender any right or power reserved Lease Agreement or the Site Lease to or conferred in Lease Agreement or the Site Lease on the Authority or the District; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Lease Agreement or the Site Lease or in regard to questions arising under the Lease Agreement or the Site Lease which the Authority or the District may deem desirable or necessary and not inconsistent herewith or therewith; (iii) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the interest components of Lease Payments; (iv) to provide for the substitution or release of a portion of the Site in accordance with the provisions of the Lease Agreement; (v) or to make such other changes in the Lease Agreement or the Site Lease or modifications to the Lease Agreement or or the Site Lease as the Authority or the District may deem desirable or necessary, and which shall not materially adversely affect the interests of the Owners.
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THE TRUST AGREEMENT Pledge of Revenues The Revenues are irrevocably pledged in the Trust Agreement to and shall be used for the punctual payment of the principal of and interest on the Bonds, and the Revenues shall not be used for any other purpose while any of the Bonds remain Outstanding. This pledge constitutes a first and exclusive lien on the Revenues in accordance with the terms of the Trust Agreement. See “SECURITY FOR THE BONDS - Pledge of Revenues.” Additional Secured Obligations Utilizing the Site As an additional covenant under the Trust Agreement, and during the term hereof, the District hereby covenants that it will not execute and deliver Additional Bonds unless all of the following conditions and limitations have been complied with. Any such Additional Bonds may be issued and sold on a parity basis with the Bonds and shall be subject to the prior written consent of the Insurer. This section and covenant does not apply to, or limit the ability of the Authority or the District to issue and sell other lease revenue bonds, or other securities, which are unrelated to, or not secured by or through, the Site. (a) The Authority or the District, as applicable, shall provide to the Trustee written certification as to the current valuation of the Site, as improved (which certification shall include, incorporate, or reference a reasonably current appraised value, insured replacement value, state valuation information or costs of construction or reconstruction undertaken for the Site (which construction or reconstruction shall have occurred within the prior five (5) calendar years)); (b) The Authority or the District, as applicable, shall provide to the Trustee written certification that the principal amount of Lease Payments due under the Lease Agreement when added to the principal amount of lease payments and/or other rental payments due under the documents providing for the issuance and sale of the Additional Bonds shall be not greater than the current valuation of the Site as stated in (a), above; (c) The Authority or the District, as applicable, shall provide to the Trustee written certification that the amount of Lease Payments due under the terms of the Lease Agreement and the Lease Payments and/or other Rental Payments due under the documents providing for the issuance and sale of the Additional Bonds shall not, at any time, exceed the fair rental value of the Site, as then improved; and (d) The Trustee shall have received a certificate of the District Representative or certificate of the Authority Representative, as applicable, that (i) there exists no Event of Default, or any event which, once all notice or grace periods have passed will constitute an Event of Default, (ii) that the Site has not been impaired or damaged so as to impair the valuation stated in (a) above, and (iii) the Lease Payments due under the terms and conditions of the Lease Agreement shall not then be in abatement. See “SECURITY FOR THE BONDS – Additional Bonds.” Funds and Accounts The Trust Agreement creates the following funds and accounts to be maintained therein, as follows: Construction Fund. There is hereby established with the Trustee a special fund in trust designated
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as the “Construction Fund.” The Trustee shall, on the Delivery Date, deposit an amount, as specified in the Trust Agreement, in the Construction Fund, and shall keep such fund and accounts separate and apart from all other funds and accounts held by it, and shall administer such fund and accounts as provided in the Trust Agreement.
The Trustee shall disburse amounts on deposit in the Construction Fund to pay Construction Costs with respect to the Project, as further described in the Trust Agreement, upon receipt of a properly executed Requisition in the form set forth in the Trust Agreement. Provided that the Trustee receives such form(s) and complies with the provisions of the Trust Agreement, the Trustee shall have no obligation to, or liability for, monitoring the actual use of the funds so disbursed under the Trust Agreement. Each such Requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Unless the Insurer directs otherwise, upon the occurrence and continuance of an Event of Default or an event which with notice or lapse of time would constitute an Event of Default (as set forth in the Lease Agreement), the Trustee shall, upon receipt of notice thereof, cease to disburse funds from the Construction Fund until such Event of Default has been cured or satisfied. If such Event of Default shall not be cured, as set out in the Trust Agreement, any funds remaining in the Construction Fund may be applied to the redemption of Outstanding Bonds if so required under the provisions of the Trust Agreement. Upon the Completion Date (as confirmed in the Certificate of Completion filed with the Trustee), the Trustee shall, at the direction of the Authority given in writing, transfer any amounts remaining in the Construction Fund (other than amounts necessary to pay Construction Costs (or Costs of Issuance) not then due and payable as certified by the Authority) into the Reserve Fund in an amount necessary to satisfy the Reserve Requirement, if any, and to the extent not so required, the Trustee shall transfer the remaining funds to the Bond Fund and thereafter close the Construction Fund. Funds so transferred to the Bond Fund shall be used to pay principal and interest on the Bonds on the next available Payment Date. Upon such transfer, the Trustee shall provide written notice to the Authority of the amount of such transfer. See “INTRODUCTION – The Bonds,” “ESTIMATED SOURCES AND USES OF FUNDS,” “THE BONDS – Redemption,” and “SECURITY FOR THE BONDS –Bond Fund, - Reserve Fund.” Lease Payment Fund. The Trustee will deposit in the Lease Payment Fund all Lease Payments received from the District, proceeds of rental interruption insurance maintained by the District and any other amounts required by the Lease Agreement to be so deposited therein. In the event that on a Due Date there is not on deposit in the Lease Payment Fund an amount equal to the Lease Payment payable on such Due Date, then the Trustee shall immediately transfer from the Reserve Fund to the Lease Payment Fund an amount sufficient to make up the deficiency or draw upon the Reserve Facility for such amounts. The Trustee will withdraw from the Lease Payment Fund on each Payment Date an amount equal to the Lease Payment due on the Due Date preceding such Payment Date. All such sums withdrawn from the Lease Payment Fund will be deposited in the Interest Account of the Bond Fund or, if applicable, the Sinking Fund Redemption Account of the Redemption Fund or the Principal Account of the Bond Fund, as applicable. See “SECURITY FOR THE BONDS –Lease Payment Fund, - Reserve Fund.” Bond Fund. Within the Bond Fund, there is established the Interest Account, the Capitalized Interest Account, and the Principal Account. The Trustee will withdraw from the Bond Fund, on each Payment Date, an amount equal to the Lease Payment due on that date and will apply the same to the payment of interest accrued or accreted and principal due and payable on the Bonds for which such deposit or transfer was made on any Payment Date therefor.
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If on any Payment Date the amount of funds on hand in the Bond Fund is insufficient to pay the
full amount of principal and interest accrued or accreted due and payable on the Bonds, the Trustee shall apply such funds first to the payment of interest accrued or accreted past due, pro rata, if necessary, and second to the payment of principal past due, pro rata, if necessary.
If on any Payment Date the amount of funds on hand in the Bond Fund is sufficient to pay the full amount of the interest accrued or accreted and principal due and payable on the Bonds, and the Trustee shall fail to pay such principal and interest so due and payable on such Payment Date, the District, the Authority and/or the Insurer, as a third-party beneficiary of the Trust Agreement, may, jointly or individually, immediately thereupon pursue any and all of their respective legal remedies to compel the Trustee to comply with the applicable terms and conditions of the Trust Agreement in such respect. This subsection shall not be in derogation of any other rights any party may have to pursue any other legal remedies that each party may have under the terms hereof. See “ESTIMATED SOURCES AND USES OF FUNDS,” “INTRODUCTION – The Bonds,” and “SECURITY FOR THE BONDS –Lease Payment Fund, - Bond Fund.” Reserve Fund and Application of Reserve Fund in Event of Deficiency in Lease Payment Fund. The Reserve Fund is a special trust fund established to maintain funds or security for the payment of Lease Payments by the District. The Reserve Requirement will be satisfied on the Delivery Date with a combination of cash and a Reserve Facility. The Reserve Fund or amounts available under a Reserve Facility will be held as a reserve for the payment when due of the District’s Lease Payments and applied as noted under the heading “THE TRUST AGREEMENT - Lease Payment Fund” below. See also “ESTIMATED SOURCES AND USES OF FUNDS,” “SECURITY FOR THE BONDS –Lease Payment Fund, - Reserve Fund,” and “BOND INSURANCE – The Insurance Policy.” The Authority may substitute a Reserve Facility for all or part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement; provided, however, that prior to any such substitution, the Trustee shall have received written confirmation from the Rating Agencies that such substitution would not cause such Rating Agencies to lower or withdraw its rating then in effect with respect to the Bonds. The Authority shall not substitute any Reserve Facility in lieu of all or any portion of moneys on deposit in the Reserve Fund without the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). Moneys for which a Reserve Facility has been substituted as provided in the Trust Agreement shall be transferred, at the election of the Authority, to the Lease Payment Fund, or upon receipt of an Opinion of Bond Counsel to the effect that such transfer, in and of itself, will not adversely affect the exclusion of principal and interest accrued or accreted due on the Bonds from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the Authority, as directed in a Written Request of the Authority. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund. The moneys in the Reserve Fund and any Reserve Facility shall be held in trust by the Trustee and shall be used and disbursed only for the purposes and uses authorized in the Trust Agreement.
Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility, the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that, more than one Reserve
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Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder, and repayment of expenses with respect thereto, shall be made on a pro rata basis (calculated by reference to the policy limits available thereunder). The Authority shall repay any draws under the Reserve Facility through the payment of Reserve Replenishment Rent and pay all related reasonable expenses incurred by the provider of the Reserve Facility as agreed with the provider and in accordance with the terms of the Reserve Facility.
Notwithstanding anything to the contrary set forth in the Trust Agreement, if, on any Payment Date, the amount on deposit in the Lease Payment Fund is insufficient to pay the principal and interest accrued or accreted on the Bonds on such Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Lease Payment Fund an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Lease Payment Fund.
Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for
the final payments of principal and interest accrued or accreted on the Bonds.
In the event of any transfer from the Reserve Fund or the making of any claim under any Reserve Facility, the Trustee shall, within five Business Days thereafter, provide written notice to the Authority, the District and Insurer of the amount and the date of such transfer or claim.
If there are no amounts currently due under any Reserve Facility and the sum of the amount on
deposit in the Reserve Fund, plus the amount available under any Reserve Facilities, shall be reduced below the Reserve Requirement, the first of Lease Payments thereafter received from the District under the Lease Agreement and not needed to pay the principal and interest accrued or accreted on the Bonds on the next Payment Date, shall be used, first, to reinstate the amounts available under the Reserve Facilities that have been drawn upon and, second, to increase the amount on deposit in the Reserve Fund, so that the amount available under the Reserve Facilities, when added to the amount on deposit in the Reserve Fund, shall equal the Reserve Requirement.
If, as a result of the payment of principal and interest accrued or accreted on the Bonds or otherwise, the Reserve Requirement is reduced, the Trustee shall transfer, on or before each Due Date, the amounts on deposit in the Reserve Fund in excess of such reduced Reserve Requirement to the Construction Fund until the Completion Date and thereafter to the Lease Payment Fund.
On any date on which Bonds are defeased in accordance with the Trust Agreement, the Trustee
shall, if so directed in a Written Request of the Authority, transfer any moneys in the Reserve Fund in excess of the Reserve Requirement resulting from such defeasance to the entity or fund so specified in such Written Request of the Authority, to be applied to such defeasance.
Interest earned on moneys on deposit in the Reserve Fund, including interest earned on a Reserve Facility, shall be retained in such fund, except that any such earnings that cause the balance therein to exceed the Reserve Requirement shall be transferred, by the Trustee, on or prior to each Due Date, to the Construction Fund until the Completion Date and thereafter to the Lease Payment Fund. For purposes of determining the amount on deposit at any time in the Reserve Fund, the Trustee shall quarterly review all Permitted Investments in which funds on deposit in the Reserve Fund are invested and on or before each Due Date, determine the market value of such Permitted Investments (exclusive of accrued or accreted interest but inclusive of any commissions). To the extent the Trustee is
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required to make any valuations of investments hereunder, the Trustee may utilize any computerized pricing services as may be available to it, including those on its regular accounting system and conclusively rely thereon. All moneys paid to the Trustee, as assignee of the Authority, as Reserve Replenishment Rent pursuant to the Lease Agreement, shall be deposited into the Reserve Fund and shall thereafter be held and applied as provided of the Trust Agreement. There shall be no moneys in the Reserve Fund applied for any fees due to the Trustee under the Trust Agreement or the Lease Agreement except as provided in the Trust Agreement. Redemption Fund. The moneys to be used for redemption of the Bonds shall be deposited into the applicable accounts of the Redemption Fund and applied solely for such purpose. See “THE BONDS - Redemption.” Redemption Notice. When redemption is authorized or required pursuant to the Trust Agreement, the Trustee shall give notice of the redemption of the Bonds (“Redemption Notice”) to the Bond Owners and the Insurer at the expense of the Authority. The Redemption Notice shall be given in accordance with the requirements as set forth in the Trust Agreement. Insurance and Condemnation Fund. In the event the Trustee receives Net Proceeds of insurance in connection with damage or destruction of the Site or Net Proceeds of a condemnation award in connection with eminent domain proceedings, such proceeds will be deposited in the Insurance and Condemnation Fund and shall be applied by the Trustee as described herein under “THE LEASE AGREEMENT - Application of Net Proceeds.” Costs of Issuance Fund. A portion of the proceeds from the sale of the Bonds will be deposited with the Trustee in the Costs of issuance Fund and shall be applied to pay all Costs of Issuance. See ESTIMATED SOURCES AND USES OF FUNDS” and “INTRODUCTION – The Bonds.” Rebate Fund. The Rebate Fund is established to hold monies required to be rebated to the United States of America under the Code. Investment Earnings. Interest earned on moneys on deposit in the Reserve Fund shall be retained in such fund, except that any such earnings that cause the balance therein to exceed the Reserve Requirement shall be transferred, by the Trustee, on or prior to each Due Date, to the Construction Fund until the Completion Date and thereafter to the Lease Payment Fund. Interest income on other accounts and funds will generally be retained in the account or fund in which it is earned and shall be applied for the purpose for which such account or fund was established. The Trustee is required to invest and reinvest all moneys held in the accounts and funds established under the Trust Agreement (in accordance with a Written Request of the Authority) in Permitted Investments and as specified in the Trust Agreement. See “SECURITY FOR THE BONDS – Reserve Fund.”
Title Insurance. Proceeds of any policy of title insurance received by the Trustee in respect of the Site pursuant to the terms of the Lease Agreement shall be applied and disbursed by the Trustee as follows: (a) if the District determines (and sets forth in a Certificate of the District) that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Site and will not result in an abatement of Lease Payments payable by the District under the Lease Agreement, such proceeds shall, with the written approval of the Insurer, be remitted to the District and used for any lawful purpose thereof; or (b) if the District determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Site and would result in an abatement in whole or in part of Lease Payments payable by the District under the Lease (disregarding, for the purpose
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of determining whether such an abatement would result, the provisions of the Lease Agreement), then the District shall, in a Written Request of the District, direct the Trustee to, and the Trustee shall, immediately deposit such proceeds in the Redemption Fund and such proceeds shall, with the written approval of the Insurer, be applied to the redemption of the Bonds in the manner provided in the Trust Agreement. Redemption - See “THE BONDS - Redemption.”
Purchase in Lieu of Redemption Without the prior written consent of the Insurer, no Bonds shall be purchased by the Authority,
the District or any of its affiliates, in lieu of redemption, unless such Bonds are redeemed, defeased or cancelled. With the prior written consent of the Insurer, money held in the Redemption Fund and money held in the Principal Account of the Bond Fund hereunder may be used to reimburse the Authority for the purchases of Bonds that would otherwise be subject to redemption from such moneys upon the delivery of such Bonds to the Trustee for cancellation at least 10 days prior to the date on which the Trustee is required to select Bonds for redemption. The purchase price of any Bonds purchased by the Authority hereunder shall not exceed the applicable redemption price of the Bonds which would be redeemed but for the operation of this Section (accrued interest to be paid from the Interest Account of the Bond Fund). Any such purchase must be completed prior to the time notice would otherwise be required to be given to redeem the related Bonds. All Bonds so purchased shall be surrendered to the Trustee for cancellation and applied as a credit against the obligation to redeem such Bonds from such moneys. Event of Default Defined The following shall be “Events of Default” under the Trust Agreement and the terms “Events of Default” shall mean, whenever they are used in the Trust Agreement, any one or more of the following events: (a) An Event of Default shall have occurred under the Lease Agreement. (b) Failure by the District or the Authority to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Trust Agreement or the Lease Agreement, other than such failure as may constitute an Event of Default under clause (a) of this section, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the District or the Authority by the Trustee or the Insurer or to the District, the Authority and the Trustee by the Insurer or the Owners of not less than a majority in aggregate principal amount of Bonds then Outstanding, as applicable; provided, however, that if the failure (other than a failure to pay the fees and expenses of the Trustee) stated in the notice cannot be corrected within such period, then the Trustee and the Owners shall not unreasonably withhold their consent to an extension of such time (provided that no such extension may be for more than 60 days without the prior written consent of the Insurer) if corrective action is instituted by the District within such period and diligently pursued until the default is corrected. For purposes of determining a default in the payment of principal and interest on the Bonds, no effect shall be given to payments made under the Insurance Policy. Notice of Events of Default The Trustee shall not be deemed to have knowledge of any Event of Default hereunder or under the Lease Agreement until a Responsible Officer shall have actual knowledge thereof. Upon the Trustee’s actual knowledge of an event of a default under the Trust Agreement, the Trustee shall give
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notice of such default to the Owners of the Bonds and to the Insurer. Such notice shall state that the District or the Authority is in default and shall provide a brief description of such default. The notice provided for in this section shall be given by first-class mail to the Owners and the Insurer within 30 days of the Responsible Officer’s actual knowledge of such occurrence of default. So long as default is not a payment default, the Trustee may determine, in its sole discretion, not to send notice; provided, however, that failure to send such notice would not prejudice the rights of the Owners or the Insurer as set forth under the Trust Agreement. Remedies on Default Upon the occurrence and continuance of any Event of Default specified in the Trust Agreement, the Trustee shall proceed, subject to its right to receive indemnification satisfactory to it from the Owners or the Insurer for costs and expenses, including reasonable attorneys’ fees, to exercise the remedies set forth in the Lease Agreement or available to the Trustee hereunder, including, but not limited to, mandamus action(s). Upon the occurrence and continuance of any Event of Default hereunder, the Trustee may proceed (and upon written request of the Owners of not less than a majority in aggregate principal amount of Bonds then Outstanding shall proceed) to exercise the remedies set forth in the Lease Agreement or available to the Trustee hereunder. THE BONDS ARE NOT SUBJECT TO ACCELERATION IN THE PAYMENT OF INTEREST OR PRINCIPAL. Application of Funds
All funds received by the Trustee pursuant to any right given or action taken under the provisions
of the Trust Agreement or the Lease Agreement, shall be deposited into the Lease Payment Fund and the amounts in such fund and all other funds held by the Trustee under the Trust Agreement (exclusive of moneys in the Reserve Fund which shall be used to pay principal and interest on the Bonds) shall be applied by the Trustee in the following order upon presentation and surrender of the several Bonds, or the stamping thereon of the payment if partially paid in amounts not equal to integral multiples of $5,000:
First, Costs and Expenses: to the payment of the fees, costs and expenses of the Trustee and then the costs and expenses of the Owners, including reasonable compensation to its or their agents, attorneys and counsel;
Second, Interest: to the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amounts available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Third, Principal: to the payment to the persons entitled thereto of the unpaid of principal on the Bonds, which shall have become due, whether at maturity or by call for redemption, in the order of their redemption dates, and, if the amount available shall not be sufficient to pay in full all of the amounts due with respect to the Bonds on any date, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.
Limited Obligation to Owners Except for the payment of Lease Payments when due in accordance with the Lease Agreement
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and the performance of other covenants and agreements of the Authority and District contained in the Lease Agreement and the Trust Agreement, the Authority and the District shall have no obligation or liability to any of the other parties or the Owners of the Bonds with respect to the Trust Agreement or the terms, issuance, sale, or transfer of the Bonds, or the distribution of Lease Payments to the Owners by the Trustee.
Except as provided in the Trust Agreement, neither the Authority nor the Trustee shall have any obligation or liability to the Owners of the Bonds evidenced by the payment of the Lease Payments by the District when due, or with respect to the performance by the District or the Authority of any other covenant made by them in the Lease Agreement. The Trustee shall not be responsible for the sufficiency of the Lease Agreement or of the assignment made to it of the right to receive Lease Payments pursuant to the Lease Agreement, or the value of or title to the Site. The recitals of facts, covenants and agreements in the Trust Agreement and in the Bonds shall be taken as statements, covenants and agreements of the Authority, as the case may be, and the Trustee assumes no responsibility for the correctness thereof. See “RISK FACTORS – Limitations on Remedies Available; Bankruptcy.” No Obligation for Performance by Trustee Neither the Authority nor the District shall have any obligation or liability to the Owners of the Bonds with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. Limitation on Bond Owners’ Right to Sue
No Owner of any Bond issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Trust Agreement, unless: (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an event of default hereunder; (b) the Owners of at least a majority in aggregate principal amount of all the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers in the Trust Agreement granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omissions are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy hereunder; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Trust Agreement, except in the manner provided in the Trust Agreement, and that all proceedings at law or in equity with respect to an event of default shall be instituted, had and maintained in the manner provided in the Trust Agreement and for the equal benefit of all Owners of the Outstanding Bonds.
The right of any Owner of any Bond to receive payment of said Owner’s proportionate interest in the Lease Payments as the same become due, or to institute suit for the enforcement of such payment, shall not be impaired or affected without the consent of such Owner, notwithstanding the foregoing provisions of this section or any other provision of the Trust Agreement. See “RISK FACTORS – Limitations on Remedies Available; Bankruptcy.”
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Amendments
(a) The Trust Agreement and the rights and obligations of the District, the Authority, the Owners and the Trustee hereunder may be amended or supplemented at any time by an amendment hereof or supplement to the Trust Agreement which shall become binding when the prior written consent of the Insurer (provided the Insurer is not then in default in its payment obligations under the Insurance Policy) and the Owners of a majority of the aggregate principal amount on the Bonds then Outstanding are filed with the Trustee. No such amendment or supplement shall: (i) extend the stated principal Payment Date of any Bond, reduce the interest rate evidenced thereby, extend the time of payment of such interest, reduce the amount of principal evidenced thereby or change the redemption terms and provisions without the prior written consent of the Owner of each Bond so affected and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy); (ii) reduce the percentage of Owners whose consent is required for the execution of any amendment hereof or supplement to the Trust Agreement without the prior written consent of the Owners of all Bonds then Outstanding and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy); (iii) modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee; or (iv) amend this section without the prior written consent of the Owners of all Bonds then Outstanding and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy).
(b) The Trust Agreement and the rights and obligations of the District, the Authority, the Owners and the Trustee hereunder may also be amended or supplemented at any time by an amendment hereof or supplement to the Trust Agreement which shall become binding upon execution, but with the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy), but without the written consents of any Owners, and only to the extent permitted by law and after receipt of an unqualified approving Opinion of Bond Counsel and only for any one of the following purposes:
(i) to add to the agreements, conditions, covenants and terms required by the Authority to be observed or performed in the Trust Agreement or other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority, or to surrender any right or power reserved in the Trust Agreement to or conferred in the Trust Agreement on the Authority;
(ii) to make such provisions for the purpose of curing any ambiguity or of curing,
correcting, or supplementing any defective provision contained in the Trust Agreement or in regard to questions arising under the Trust Agreement that the Authority may deem desirable or necessary and not inconsistent herewith;
(iii) to make such additions, deletions or modifications as may be necessary or
appropriate to assure the exclusion from gross income for federal income tax purposes of interest on the Bonds;
(iv) to provide for the issuance and sale of Additional Bonds in accordance with the
Trust Agreement; or (v) for any other reason, provided such amendment or supplement does not adversely
affect the rights or interests of the Owners; provided, however, that the Authority and the Trustee may rely in entering into any such amendment hereof or supplement to the Trust Agreement, upon receipt of an Opinion of Bond Counsel stating that the requirements of this paragraph have been met with respect to such amendment or supplement.
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Tax Covenants The Authority and the District will not make any use of the proceeds of the Bonds or of any other funds of the Authority or the District, or take or omit to take any other action which will cause the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code or to be “private activity bonds” within the meaning of Section 141 of the Code, or “federally guaranteed” within the meaning of Section 149(b) of the Code. To that end, the Authority and the District, with respect to such proceeds and such other funds, will comply with all such requirements and all applicable Regulations. See “INTRODUCTION – Tax Matters,” “RISK FACTORS – Loss of Tax Exemption,” and “TAX MATTERS.” Other Covenants The Authority has made various other covenants within the Trust Agreement for the benefit of the Owners. Such covenants include, but are not limited to, a confirmation of the assignment to the Trustee under the Assignment Agreement, a performance covenant on behalf of the Authority, prosecution and defense of suits, further assurances, receipt and deposit of Lease Payments in Lease Payment Fund, protection of funds, and existence of authority.
The Authority shall use its best efforts to expend all amounts in the Construction Fund in accordance with federal tax requirements. The District, in conjunction with the Authority, shall have the right to substitute or provide for additional components of the Project with a written certificate(s) in the form contained the Trust Agreement. See “FINANCING PLAN – The Project.” The Authority and the District have also covenanted to provide for continuing disclosure pursuant to a Continuing Disclosure Agreement. See “INTRODUCTION - Continuing Disclosure” and “APPENDIX I - Form of Continuing Disclosure Agreement”). Defeasance
If all or a specified portion of the Outstanding Bonds shall be deemed paid and discharged in any one or more of the following ways:
(a) by paying or causing to be paid the principal, interest and premium (if any) with respect to all or such specified portion of the Outstanding Bonds, as and when the same shall become due and payable;
(b) by depositing with the Trustee, or other designated escrow holder, in trust, before
maturity, moneys which, together with amounts then on deposit in the Lease Payment Fund, are fully sufficient to pay all or such specified portion of the Outstanding Bonds, including all principal, interest and premium (if any) with respect thereto; and/or
(c) by depositing with the Trustee, or other designated escrow holder, in trust, Federal
Securities in such amount as an independent firm of nationally certified public accountants or such other accountant as shall be acceptable to Insurer (“Accountant”) shall determine will, together with the interest to accrue thereon and moneys then on deposit in the Bond Fund together with the interest to accrue thereon, be fully sufficient to pay and discharge all or such specified portion of the Bonds (including all Principal, interest and premium (if any) with respect thereto) at or before their respective maturity dates; To accomplish defeasance under the Trust Agreement, the Authority shall cause to be delivered:
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(i) a report of an Accountant verifying the sufficiency of the escrow established to pay the Bonds in full on the maturity or redemption date (“Verification”); (ii) an escrow deposit agreement (which shall be acceptable in form and substance to the Insurer); and (iii) an Opinion of Bond Counsel, dated the date of defeasance, to the effect that the Bonds are no longer Outstanding under the Trust Agreement. Each Verification and defeasance opinion shall be acceptable in form and substance, and addressed to the Authority, Trustee and Insurer. The Insurer shall be provided with final drafts of the above-referenced documentation not less than five Business Days prior to the funding of the escrow. Notwithstanding that any Bonds shall not have been surrendered for payment, all obligations of the Authority, the Trustee and the District under the Trust Agreement with respect to the Bonds paid, as provided in the above subsections (a) (b) or (c), shall cease and terminate and shall no longer be Outstanding under the Trust Agreement, except only the obligation of the Trustee to pay or cause to be paid from funds deposited therefor to the Owners of the Bonds not so surrendered and paid all sums due thereon and to transfer title to the Site to the District as provided in the Trust Agreement and the Lease Agreement and except the obligation of the District to comply with the covenants set forth in the Trust Agreement and the Lease Agreement. The Bonds shall be deemed to be Outstanding unless and until they are, in fact, paid and retired or the criteria of the Trust Agreement are met. Any funds held by the Trustee, at the time of one of the events described above, which are not required for the payment to be made to the Owners, or for payments to be made to the Trustee by the Authority, shall be paid over to the Authority pursuant to written instruction from the Authority Representative. The Trustee The Trustee is appointed pursuant to the Trust Agreement to receive, hold, invest and disburse the moneys to be paid to it pursuant to the Lease Agreement. The Trust Agreement authorizes the Trustee, among other things, to authenticate and deliver the Bonds, authenticate and deliver Additional Bonds and to apply and disburse the Lease Payments to the Owners of the Bonds. See “INTRODUCTION – The Bonds,” – “Professionals Involved in the Offering” and “THE BONDS – The Trustee.” Compensation. The Trustee is compensated for services rendered pursuant to the Trust Agreement, and the Trustee shall have a lien on any and all funds held by it, prior and superior to the lien of the Owners. Indemnification. The Authority indemnifies the Trustee from and against all claims, losses, costs and expenses (including attorneys’ fees and expenses), expenses, liabilities and damages arising out of matters as described in the Trust Agreement. No indemnification is made for any willful misconduct or negligence under the Trust Agreement by the Trustee, its officers, agents, employees, successors or assigns as specified in the Trust Agreement. Removal. The District, the Authority (so long as no event of default has occurred and is continuing), the Insurer, or the Owners of a majority in aggregate principal amount of Outstanding Bonds may, by written request (a Written Request of the Authority, if applicable) remove the Trustee initially appointed, and any successor thereto, and may appoint a successor or successors thereto, provided that any such successor must meet the requirements set forth in the Trust Agreement. Additional provisions regarding the replacement of the Trustee are set forth in the Trust Agreement. Resignation; Successor. The Trustee may resign by giving 30 days advance written notice to the District, the Authority and the Insurer, and by giving the Owners mailed notice. Upon receiving such notice of resignation, the District and the Authority shall jointly appoint a successor Trustee, which
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appointment shall be subject to the prior written consent of the Insurer. Any resignation or removal of the Trustee and appointment of a successor Trustee becomes effective upon acceptance of appointment by the successor Trustee. In the event the District does not name a successor within 30 days of receipt of notice of the Trustee’s resignation, the Trustee may petition a federal court or other appropriate jurisdiction for appointment of a successor Trustee. The successor Trustee must meet specified qualifications. Co-Trustees. The Trustee may from time to time appoint one or more co-trustees to exercise the powers of the Trustee under the provisions and limitations set forth in the Trust Agreement.
Insurer’s Rights
The Lease Agreement provides for certain rights of the Insurer in the event of a default, or certain other events (as set out in the Lease Agreement and the Trust Agreement, and in certain cases provided that the Insurer is not then in default in its payment obligations under the Insurance Policy) relating to the Insurance Policy. These rights (as set forth in the Lease Agreement and Trust Agreement collectively include, but are not limited to) the right of the Insurer to receive various notices, certificates and documents, to control certain remedies in certain circumstances, to be required to give prior written consent in certain instances, and the right to seek reimbursement(s) of amounts paid under the Insurance Policy. The Insurer is a third-party beneficiary under the Trust Agreement, and may enforce any right, remedy or claim conferred upon, given or granted to the Insurer thereunder. See ABOND INSURANCE – The Insurance Policy.@
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THE AGENCY AGREEMENT The Agency Agreement is entered into between the Authority and the District and provides for the appointment by the Authority of the District as its agent for the application of the proceeds of the Bonds under the Trust Agreement to the Project. The Agency Agreement provides that the District shall supervise the Project and that the District, as agent of the Authority, may enter into any contracts required for the Project.
The Agency Agreement, and the rights and obligations of the District, Authority and the Trustee hereunder, may be amended or modified at any time by an amendment, which shall become binding upon execution by the District, Authority and the Trustee, but only with the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). The Trustee is explicitly recognized as being a third-party beneficiary under the Agency Agreement and may enforce any right, remedy or claim conferred upon, given or granted to it hereunder.
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THE ASSIGNMENT AGREEMENT The Assignment Agreement is entered into between the Authority and the Trustee, pursuant to which the Authority assigns and transfers to the Trustee, for the benefit of the Owners of the Bonds, substantially all of its rights under the Lease Agreement, including the right to receive Lease Payments and other rental amounts and the rights and remedies to enforce payment of Lease Payments and other rental amounts. See “RISK FACTORS – Limitations on Remedies Available; Bankruptcy.”
The Assignment Agreement, and the rights and obligations of the Authority and the Trustee under the Assignment Agreement, may be amended or modified at any time by an amendment, which shall become binding upon execution by the Authority and the Trustee, but only with the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy).
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THE PLEDGE AGREEMENT The Pledge Agreement (“Pledge Agreement”) is made and entered into by and among the San Marcos Unified School District (“District”), Community Facilities Districts Nos. 1, 2, 4, 5 and 6 of the San Marcos Unified School District (collectively for purposes of the Pledge Agreement the “CFDs”) and the San Marcos Schools Financing Authority (“Authority”). Each of the CFDs is a community facilities district formed by the District pursuant to the provisions of the Mello-Roos Community Facilities Act of 1982, as amended (the “Act”), as further defined therein. DEFINED TERMS For purposes of the Pledge Agreement, the following defined terms have the meanings specified below. “Act” means the Mello-Roos Community Facilities Act of 1982, as amended. “Additional Rent” means the rental payments defined as such in the Lease Agreement. “Additional Securities” means securities, bonds, leases, or any other obligations issued or executed and delivered subsequent to the date of delivery of the Bonds, payable from, or secured by, in whole or in part, the Surplus Net Special Taxes. “Administrative Expenses” means the administrative costs with respect to the calculation and collection of the Special Taxes, and costs otherwise incurred to carry out the authorized purposes of the CFDs and the Authority, and to administer the Outstanding Securities, and as such term is further defined in the applicable CFD Formation Documents, the Rate and Methods and the Outstanding Securities Agreements. “Agreement” or “Pledge Agreement” means the Pledge Agreement and as such may be amended from time to time. “Authority” means the San Marcos Schools Financing Authority, a joint exercise of powers agency established pursuant to the laws of the State and a Joint Exercise of Powers Agreement, dated as of January 16, 2001, by and between the District and Community Facilities District No. 2 of the San Marcos Unified School District, and any successors.
“Board” means the Governing Board of the San Marcos Unified School District, in certain cases acting as the Legislative Body of one or more of the CFDs.
“Board of Directors” means the Board of Directors of the Authority. “Bond Year” means, for the purposes of the Pledge Agreement, each twelve (12) month period
extending from August 16 in one calendar year to August 15 of the succeeding calendar year. “Bonds” means the San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010, as issued and sold. “CFD Formation Documents” means those prior resolutions, documents, affidavits, ordinances, notices, contracts and agreements, including but not limited to, joint community facilities agreements,
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mitigation agreements and SB-50 agreements, as applicable, relating to the formation of the CFDs and the approval of the Special Taxes, that may include provisions or covenants concerning the use of Special Taxes, issuance of Outstanding Securities, and any amendments to the foregoing existing as of the date of the Pledge Agreement, or thereafter.
“CFD(s)” means those Community Facilities Districts of the San Marcos Unified School District that are currently formed and operating pursuant to the Act and are parties to the Pledge Agreement. “CFD No. 6” means Community Facilities District No. 6 of the San Marcos Unified School District, which has not issued any Outstanding Securities payable from the Special Taxes, as of the date of the issuance and sale of the Bonds. “District” means the San Marcos Unified School District, a public school district duly organized and existing under the laws and Constitution of the State, and any successor thereto.
“Fiscal Agent(s)” means that financial institution(s) acting in the capacity as fiscal agent, or equivalent capacity, under the terms of the Outstanding Securities Agreements and the successors and assigns thereof. “Fiscal Year” means each year commencing July 1 and concluding on the following June 30. Notwithstanding the foregoing, the first Fiscal Year under the terms of the Pledge Agreement shall commence on July 1, 2009, and end on June 30, 2010. “Lease Agreement” means the Lease Agreement, dated as of June 1, 2010, by and between the District and the Authority. “Lease Payments” means the rental payments defined as such in the Lease Agreement.
“Outstanding Debt Service” means any principal, interest, or premium, if applicable, payable
with respect to the Outstanding Securities. “Outstanding Securities” means those CFD securities that are currently outstanding and were
issued prior to the issuance and sale of the Bonds, including, but not limited to, special tax bonds and revenue bonds, and which, by their terms, have a prior lien on the Special Taxes. The Outstanding Securities are listed in the Pledge Agreement. “Outstanding Securities Agreement(s)” means any fiscal agent agreement, resolution, resolution supplement, indenture, lease agreement, or other document that provides for the issuance and terms and conditions of the Outstanding Securities. “Rate and Method(s)” means the respective Rate and Method of Apportionment of Special Tax for each of the CFDs. “Release Date” means August 20 of each calendar year. “Rental Payments” means, collectively, the Lease Payments, Additional Rent and Reserve Replenishment Rent. “Reserve Replenishment Rent” means the rental payments defined as such in the Lease Agreement.
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“Special Tax(es)” means the Special Taxes levied and collected by the CFDs pursuant to the respective Rate and Method for each CFD, including delinquent Special Taxes and all related penalties and interest collected pursuant to delinquency or foreclosure proceedings. “State” means the State of California. “Surplus Net Special Taxes” means the Special Taxes of each CFD remaining after payment of all Administrative Expenses and Outstanding Debt Service on September 1 of each calendar year, including, but not limited to, costs to conduct foreclosure proceedings, replenishment of reserve funds or accounts, and any other requirements or obligations under the applicable Rate and Method(s), CFD Formation Documents, the applicable Outstanding Securities Agreement(s), and, in the case of CFD No. 6 set forth in the Pledge Agreement. With respect to the Special Taxes of CFD No. 6, the foregoing is specifically subject to the terms set out in the Pledge Agreement. “Trust Agreement” means that Trust Agreement, dated as of June 1, 2010, entered into by and between the Authority and the Trustee, providing for the issuance and terms of the Bonds, and as such may be amended and supplemented. “Trustee” or “Authority Trustee” means Union Bank, N.A., a national banking association duly organized and existing under the laws of the United States of America, and its successors and assigns.
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PLEDGES AND COVENANTS OF AUTHORITY, CFDS AND DISTRICT Authority Pledge and Covenant to Transfer Surplus Net Special Taxes. So long as any of the Bonds are Outstanding (as such term is defined in the Trust Agreement) under the terms of the Trust Agreement, the Authority makes the following pledge, agreements and covenants:
(a) Subject only to the provisions of the Pledge Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein, the Authority irrevocably pledges, all the Surplus Net Special Taxes received pursuant to directives of the District, on behalf of each of the CFDs, as applicable, for use in accordance with the terms of the Agreement, and such pledge shall constitute a first lien on such assets.
(b) The Authority further agrees and covenants to take no action(s) which would impair or
impede the Authority Trustee or Fiscal Agent’s ability, as applicable, to transfer the Surplus Net Special Taxes to the respective CFDs as specified in the Agreement.
CFDs’ Pledges and Covenants to Transfer Surplus Net Special Taxes.
The pledge, transfer and application of Surplus Net Special Taxes pursuant to the terms of the
Pledge Agreement is permitted pursuant to the provisions of the Act, the CFD Formation Documents and the approving Resolutions, inasmuch as such revenues will be used to finance School Facilities which will benefit each of the CFDs as set forth in the Facilities Description (as defined in the Pledge Agreement). The District and the Authority have agreed therein to expend the net construction proceeds to finance the School Facilities (as defined in the Pledge Agreement), which will have direct and indirect benefits to the CFDs.
So long as any of the Bonds are Outstanding under the terms of the Trust Agreement, each of the CFDs makes the following pledge, agreements and covenants:
(a) Subject only to the provisions of the Pledge Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein, each of the CFDs irrevocably pledges all its corresponding Surplus Net Special Taxes for deposit to the District, the Authority or the Authority Trustee in order to make Rental Payments due under the Lease Agreement and for such other purposes permitted under the Pledge Agreement, and related implementing covenants, in accordance with the terms of the Pledge Agreement, and each such pledge shall constitute a first lien on such corresponding assets.
(b) Pursuant to the terms of the Pledge Agreement, and consistent with the Outstanding
Securities Agreement(s), CFD Formation Documents and the Rate and Methods, each CFD agrees and covenants to transfer the corresponding Surplus Net Special Taxes, upon receipt and/or availability thereof, to, or at the direction of, the District for the purposes permitted under the terms of the Pledge Agreement. Each CFD further agrees and covenants to take no action(s) which would impair or impede the ability of each CFD to collect and transfer the Surplus Net Special Taxes as specified in the Pledge Agreement.
(c) Commencing with the 2010/2011 Bond Year for CFD Nos. 1 and 2 and with the
2009/2010 Bond Year for CFD Nos. 4 and 5 (commencing with the Bond Year beginning on August 16, 2010 and August 16, 2009, respectively), the CFDs shall, on or immediately after the immediately following September 2, transfer the Surplus Net Special Taxes to, or at the direction of, the District within
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five (5) business days of the actual receipt and/or availability of such Surplus Net Special Taxes. The Surplus Net Special Taxes of CFD No. 6 shall be subject to transfer as set forth in the Pledge Agreement (described in this Summary). District Pledge and other Covenants.
So long as any of the Bonds are Outstanding under the terms of the Trust Agreement, the District makes the following pledge, agreements and covenants:
(a) The District agrees and covenants to receive all Surplus Net Special Taxes from the CFDs as stated above in the Pledge Agreement.
(b) Subject only to the provisions of the Pledge Agreement permitting the application thereof
for the purposes and on the terms and conditions set forth therein, the District irrevocably pledges all the Surplus Net Special Taxes to secure the payment or prepayment of the obligations described in (i) and (ii) below, and further agrees and covenants to, as and when due, apply all funds for either of the following purposes, subject to the terms of the Pledge Agreement:
(i) the payment of Rental Payments pursuant to the terms of the Lease Agreement;
and/or
(ii) the prepayment of the Bonds in accordance with the terms of the Trust Agreement.
(i) and (ii) together being the “Pledge.”
The Pledge constitutes a first lien on the Surplus Net Special Taxes, subject to the permitted use allowed under the terms of the Pledge Agreement, provided any such use of Surplus Net Special Taxes shall generally conform to the terms of the Pledge Agreement. Any amounts owing to the Insurer under the Insurance Policy (as defined in the Trust Agreement) are secured on a parity with the Bonds, which security shall include the Surplus Net Special Taxes. The District, the CFDs and the Authority, individually and collectively, agree that the contributions of Surplus Net Special Taxes and the financing of the School Facilities set out in the Facilities Description is a fair and equitable means of allocation of the obligations and benefits (direct and indirect) relating to provision of such public educational facilities for the District and each of the CFDs.
(c) Notwithstanding the Pledge above, but subject to the terms of the Pledge Agreement, the
District, with the consent of the Insurer (as defined in the Trust Agreement), may use the Surplus Net Special Taxes of CFD Nos. 4, 5 and 6 to fund school facilities costs, provided any such use of Surplus Net Special Taxes shall be in proportion to the school facilities costs for which such Surplus Net Special Taxes may be applied, and related financing costs, if applicable, and as permitted under the applicable CFD Formation Documents and Rate and Methods, either directly, or indirectly through the issuance or execution and delivery of Additional Securities by the District, the CFDs, or the Authority, either individually or in any combination.
(d) Notwithstanding subsection (c), above, CFD No. 6 covenants that it shall not issue, or
cause to be issued, special tax bonds, or other securities to which the Special Taxes of CFD No. 6 may be pledged (for purposes of the Pledge Agreement, the “Additional CFD No. 6 Bonds”), unless the Special Taxes levied and collected on taxable property within CFD No. 6 shall be not less than 110% of (i) the Special Taxes of CFD No. 6 pledged under the terms thereof (determined based on such Special Taxes of
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CFD No. 6 pledged pursuant to the terms of the Pledge Agreement), and (ii) the debt service payable on the Additional CFD No. 6 Bonds. This subparagraph shall not apply to CFD Nos. 1, 2, 4 and 5. Limitation on Pledge.
(a) The Surplus Net Special Taxes subject to the Pledge will be available for the payments described in the Pledge Agreement in the Bond Year in which such funds are received by the District.
(b) Notwithstanding the provisions set forth within the Pledge Agreement, if on the Release
Date (i) all payments required with respect to the Bonds, as set forth above, for the prior Bond Year have been fully and completely satisfied, (ii) all payments of principal and interest due on the Bonds on the immediately preceding August 15 have been made, and (iii) the Reserve Fund for the Bonds is funded to at least the applicable Reserve Requirement, then, without further action by any of the parties thereto, all Surplus Net Special Taxes of CFD Nos. 4 and 5 held by the District for the immediately preceding Bond Year shall be released from the Pledge and other conditions thereof and may be freely applied by the District as set forth in the Pledge Agreement. This subparagraph (b) shall not apply to Surplus Net Special Taxes of CFD No. 1 and CFD No. 2 or to the Special Taxes of CFD No. 6.
(c) (i) All Surplus Net Special Taxes of CFD No. 6, for the immediately prior Bond
Year (commencing with the Bond Year beginning on August 16, 2009), shall on or immediately after September 2 of each calendar year immediately following the completion of the prior such Bond Year (commencing on September 2, 2010) become subject to the Pledge set forth therein and shall on, or immediately following, such date be subject to transfer as set forth in Section 4(c) thereof;
(ii) Notwithstanding the provisions of the Pledge Agreement, if on the applicable
Release Date (commencing on August 20, 2011) (1) all payments required under Section 5(b) thereof have been fully and completely satisfied, (2) all payments of principal and interest due on the Bonds on the immediately preceding August 15 (commencing on August 15, 2011) have been made, and (3) the Reserve Fund for the Bonds is funded to at least the applicable Reserve Requirement, then, without further action of any of the parties thereto, all Surplus Net Special Taxes of CFD No. 6 held by the District during the immediately preceding Bond Year shall be released from the Pledge and other conditions of the Pledge Agreement and may be freely applied by the District as set forth in this subsection (c). This subsection applies only to the Surplus Net Special Taxes of CFD No. 6.
CFD No. 6 - Implementing Foreclosure Covenant.
So long as there are any Bonds Outstanding under the terms of the Trust Agreement, and in
furtherance of CFD No. 6’s obligation to pledge and transfer the Surplus Net Special Taxes of CFD No. 6, CFD No. 6 makes the following covenant: Commence Foreclosure Proceedings. 1. On or about July 1 of each Fiscal Year, CFD No. 6 will compare the amount of Special Taxes levied within its boundaries to the amount of Special Taxes actually received, and:
(A) Individual Delinquencies. If CFD No. 6 determines that: (i) any single parcel within CFD No. 6 is subject to a Special Tax delinquency in the aggregate amount of $5,000 or more, or (ii) any owner owns one or more parcels subject to a Special Tax delinquency in
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an aggregate amount of $5,000 or more, then CFD No. 6 shall send, or cause to be sent, a notice of delinquency (and a demand for immediate payment) to the property owner within 45 days of the CFD No. 6’s determination, and (if the delinquency remains uncured) CFD No. 6 shall take action to authorize the commencement of foreclosure proceedings within 90 days of the CFD No. 6’s determination, to the extent permissible under applicable law, and shall thereafter diligently prosecute these proceedings in superior court to the extent permitted by law.
(B) Aggregate Delinquencies. If CFD No. 6 determines that the total amount of delinquent
Special Taxes for the prior Fiscal Year for CFD No. 6 (including the total of delinquencies under paragraph (A) above) exceeds five percent (5%) of the total Special Taxes due and payable for the prior Fiscal Year, CFD No. 6 shall notify, or cause to be notified, all property owners who are then delinquent in the payment of Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and (to the extent these delinquencies remain uncured) CFD No. 6 shall take action to authorize the commencement of foreclosure proceedings within 90 days of CFD No. 6’s determination against each parcel of land within CFD No. 6 with a Special Tax delinquency to the extent permissible under applicable law, and shall thereafter diligently prosecute these proceedings in superior court to the extent permitted by law.
(C) Additional Notices. In addition to the actions taken above under subsections (A) and (B),
CFD No. 6 shall determine, or cause to be determined, on or about June 30 of each year, whether or not any owners of taxable property within CFD No. 6 are delinquent in the payment of Special Taxes. If such delinquencies exist, CFD No. 6 will send, or cause to be sent, a notice of delinquency to the owner of the property within 45 days of such determination.
(D) Limiting Provision. Notwithstanding the foregoing, however, CFD No. 6 shall not be
required to order, or take action upon, the commencement of foreclosure proceedings under subsection (B), above, if those delinquencies, if not remedied, will not result in a draw on the Reserve Fund established under the Trust Agreement such that the Reserve Fund will fall below the Reserve Requirement (as defined in the Trust Agreement) and no draw has been made on the Reserve Fund that has not been fully replenished. The foregoing sentence shall not affect the requirement(s) above for notices of delinquencies as provided for in this subsection (D).
The net proceeds received following a judicial foreclosure sale of land within CFD No. 6 resulting from a property owner’s failure to pay the Special Taxes when due are included within the Surplus Net Special Taxes under the Pledge Agreement. CFD No. 6 reserves the right to elect to accept payment from a property owner of at least the enrolled amount of the Special Taxes for a parcel(s) but less than the full amount of the penalties, interest, costs and attorneys’ fees related to the Special Tax delinquency for that parcel(s). Further, notwithstanding any provision of the Act or other law of the State, or any other term set forth in the Pledge Agreement to the contrary, in connection with any judicial foreclosure proceeding related to delinquent Special Taxes:
(i) CFD No. 6 is thereby expressly authorized to credit bid at any foreclosure sale, without any requirement that funds be set aside in the amount of the credit bid, in the amount
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specified in Section 53356.5 of the Act, or such lesser amount as determined under clause (ii) below or otherwise under Section 53356.6 of the Act.
(ii) CFD No. 6 may permit, in its sole and absolute discretion, property with delinquent Special Tax payments to be sold for less than the amount specified in Section 53356.5 of the Act, if it determines that sale is in the interest of CFD No. 6.
2. The District’s Assistant Superintendent, Business Services, or his/her respective designee(s) (“CFD Authorized Representative(s)”), are thereby authorized on behalf of CFD No. 6 to:
(A) pursue collection of all such Special Taxes pursuant to the provisions of the Pledge Agreement;
(B) contract for such services as necessary for collection of Special Taxes, including, but not
limited to, legal services for any applicable foreclosure proceedings, the cost to be borne by CFD No. 6 (subject to Board ratification of any expenditures which are not paid as an Administrative Expense) and the property owners that have failed to timely pay their Special Taxes, including all costs, interest, and penalties consistent with applicable law;
(C) file, or authorize to be filed, actions up to and including legal action(s) necessary to
collect any delinquent Special Taxes including foreclosure of any lien securing the Special Taxes;
(D) authorize counsel retained by CFD No. 6 to require payment on CFD No. 6’s behalf of all
costs and all attorneys’ fees incurred in applicable litigation as a condition of redemption prior to entry of judgment, as well as on post-judgment redemption; and/or
(E) with the assistance of counsel retained by CFD No. 6, and other CFD No. 6 consultants,
pursuant to Government Code Section 53356.2: (i) record notices of intent to remove the delinquent Special Taxes from the tax rolls; and (ii) request that the applicable San Diego County officials remove current and future delinquent Special Taxes from the tax rolls.
All actions undertaken by the CFD Authorized Representatives pursuant to the provisions of this 2(A) through (E), inclusive, shall be reported to the Board on a regular basis and are subject to the Board authority to subsequently direct different or alternative action(s). CFD No. 6 is thereby expressly authorized to include costs and attorneys’ fees related to foreclosure of delinquent Special Taxes as “Administrative Expenses.” CFDs with Outstanding Securities - Foreclosure Covenant. So long as any of the Bonds are Outstanding, each of the CFDs with Outstanding Securities, covenants to comply with any foreclosure covenants set forth in each corresponding Outstanding Securities Agreements during the term of the Outstanding Securities, and all such foreclosure covenants set forth in each CFDs Outstanding Securities Agreement(s) are incorporated in the Pledge Agreement as though fully set forth therein by such reference.
Effective on the final maturity, payment or defeasance of each CFDs Outstanding Securities, as
applicable, and termination of the corresponding Outstanding Securities Agreement pursuant to its terms, the covenant set forth under the heading “CFD No. 6 – Implementing Foreclosure Covenant” above will apply, in its entirety, to each such CFD. Such covenant is in furtherance of the CFDs’ respective
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obligation to pledge and transfer the Surplus Net Special Taxes for the benefit of the District under the provisions of the Pledge Agreement, which covenant is necessary, convenient and desirable to secure the Pledge.
Implementing Covenant of CFDs. So long as there are any Outstanding Bonds under the Trust Agreement, each CFD shall take all actions necessary to cause the annual levy and collection of the Special Taxes according to, and at the maximum rate(s) permitted by, the corresponding Rate and Method. Such covenant is in furtherance of their respective obligation to pledge and transfer the Surplus Net Special Taxes for the benefit of the District under the provisions of the Pledge Agreement, which covenant is necessary, convenient and desirable to secure the Pledge set out in the Pledge Agreement. Implementing Covenants of CFDs and Authority. So long as there are any Outstanding Bonds under the Trust Agreement, the CFDs and the Authority make the following covenants for the benefit of the District under the provisions of the Pledge Agreement.
Covenant 1. Punctual Transfer. The CFDs and the Authority will duly and punctually transfer all Surplus Net Special Taxes to the District, the Authority or to the Authority Trustee as required under the terms of the Pledge Agreement. Time of such transfer and performance is of the essence.
Covenant 2. Books and Accounts. The CFDs and the Authority will keep, or cause to be kept, proper books of records and accounts, of the transfer of the Surplus Net Special Taxes to the District. Such books of records and accounts shall at all times during business hours be subject to the inspection of the District.
Covenant 3. Further Assurances. The CFDs and the Authority will adopt, make, execute and deliver any and all further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the obligations and covenants under the Pledge Agreement.
Term. The term of the Pledge Agreement shall commence upon the issuance, sale, and delivery of the Bonds. The Pledge Agreement shall terminate when no Bonds remain Outstanding under the Trust Agreement. Alteration or Amendment. No alteration or amendment to the Pledge Agreement shall be deemed binding upon the parties unless the same has been executed by the District, the CFDs and the Authority, and which shall be subject to the prior written consent of the Insurer. Trustee as Third Party Beneficiary. The Trustee is recognized as being a third-party beneficiary under the Pledge Agreement and may
A-51
enforce any right, remedy or claim conferred upon, given or granted to the District, or required of thereunder, and may enforce any obligation or covenant of the District thereunder. Limitation of Rights. Nothing in the Pledge Agreement expressed or implied is intended or shall be construed to give to any person or party other than the Trustee, the District, the CFDs and the Authority any legal or equitable right, remedy or claim under or in respect of the Pledge Agreement or any covenant, condition or provision therein or therein contained, and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the Trustee, the District and the Owners of the Bonds. BAWG/DS/150443.2 17001.40.2
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APPENDIX B
AUDITED FINANCIAL STATEMENTS OF THE DISTRICT
FOR FISCAL YEAR ENDED JUNE 30, 2009
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SAN MARCOS UNIFIED SCHOOL DISTRICT COUNTY OF SAN DIEGO
SAN MARCOS, CALIFORNIA
AUDIT REPORT
JUNE 30, 2009
Wilkinson Hadley King & Co. LLP CPA's and Advisors
218 W. Douglas Avenue El Cajon, CA 92020
Introductory Section
San Marcos Unified School District Audit Report
For The Year Ended June 30, 2009
TABLE OF CONTENTS
f'age Exhibit/Table
FINANCIAL SECTION
Independent Auditor's Report on Financial Statements........................................................ 1 Management's Discussion and Analysis (Required Supplementary Information)................. 3
~c...Financial Statements
Government-wide Financial Statements: Statement of Net Assets ............................................................................................ . 15 Exhibit A-1 Statement of Activities ............................................................................................... . 16 Exhibit A-2
Fund Financial Statements: Balance Sheet- Governmental Funds ....................................................................... . 17 Exhibit A-3 Reconciliation of the Governmental Funds
Balance Sheet to the Statement of Net Assets .................................................... . 18 Exhibit A-4 Statement of Revenues, Expenditures, and Changes in
Fund Balances- Governmental Funds ................................................................. . 19 Exhibit A-5 Reconciliation of the Statement of Revenues, Expenditures, and Changes in
Fund Balances of Governmental Funds to the Statement of Activities ................ . 20 Exhibit A-6 Statement of Net Assets- Internal Service Fund ....................................................... . 22 Exhibit A-7 Statement of Revenues, Expenses, and Changes in
Fund Net Assets - Internal Service Fund .............................................................. . 23 Exhibit A-8 Statement of Cash Flows- Proprietary Funds ........................................................... . 24 Exhibit A-9 Statement of Fiduciary Net Assets - Fiduciary Funds ................................................ . 25 Exhibit A-1 0
Notes to the Financial Statements ................................................................................. . 26
Required Supplementary Information:
Budgetary Comparison Schedules:
General Fund.............................................................................................................. 41 Exhibit B-1
Schedule of Funding Progress -Pension Plan................................................................ 42
Combining Statements as Supplementary l.nformation:
Combining Balance Sheet- All Non major Governmental Funds..................................... 43 Exhibit C-1 Combining Statement of Revenues, Expenditures and Changes in
Fund Balances -All Nonmajor Governmental Funds................................................. 45 Exhibit C-2
Special Revenue Funds:
Combining Balance Sheet- Nonmajor Special Revenue Funds................................ 47 Exhibit C-3 Combining Statement of Revenues, Expenditures and Changes
in Fund Balances - Nonmajor Special Revenue Funds......................................... 49 Exhibit C-4
Debt Service Funds:
Combining Balance Sheet- Nonmajor Debt Service Funds....................................... 51 Exhibit C-5 Combining Statement of Revenues, Expenditures and Changes
in Fund Balances - Nonmajor Debt Service Funds............................................... 52 Exhibit C-6
Capital Projects Funds:
San Marcos Unified School District Audit Report
For The Year Ended June 30, 2009
TABLE OE__CQI'liENTS
Page ExhibiUT able
Combining Balance Sheet- Nonmajor Capital Projects Funds.................................. 53 Exhibit C-7 Combining Statement of Revenues, Expenditures and Changes
in Fund Balances - Nonmajor Capital Projects Funds........................................... 54 Exhibit C-8
OTHER SUPPLEMENTARY INFORMATION SECTION
Local Education Agency Organization Structure .................................................................. . 55 Schedule of Average Daily Attendance ................................................................................ . 56 Table D-1 Schedule of Instructional Time ............................................................................................ .. 57 Table D-2 Schedule of Financial Trends and Analysis ........................................................................ .. 58 Table D-3 Reconciliation of Annual Financial and Budget Report
With Audited Financial Statements ................................................................................. . 59 Table D-4 Schedule of Charter Schools ................................................................................................ . 60 Table D-5 Schedule of Expenditures of Federal Awards .................................................................... .. 61 Table D-6 Notes to the Schedule of Expenditures of Federal Awards .................................................. . 62 Notes to Supplementary Information ................................................................................... .. 63 Report on Internal Control over Financial Reporting and on Compliance and
Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ...................................................... . 64
Report on Compliance with Requirements Applicable To each Major Program and Internal Control over Compliance In Accordance With OMB Circular A-133 ...................................................................... .. 66
Auditor's Report on State Compliance ................................................................................. . 68 Schedule of Findings and Questioned Costs ...................................................................... . 70 Summary Schedule of Prior Audit Findings .......................................................................... . 75
Financial Section
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Wilkinson Hadley King & Co. LLP CPA's and Advisors
218 W. Douglas Avenue El Cajon, CA 92020
Independent Auditor's Report on Financial Statements
Board of Trustees San Marcos Unified School District San Marcos, California
Members of the Board of Trustees:
We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of San Marcos Unified School District as of and for the year ended June 30, 2009, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of San Marcos Unified School District's management. Our responsibility is to express opinions on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.
In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of San Marcos Unified School District as of June 30, 2009, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards, we have also issued our report dated October 29, 2009, on our consideration of San Marcos Unified School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.
The Management's Discussion and Analysis and the budgetary comparison information identified as Required Supplementary Information in the table of contents are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
Our audit was performed for the purpose of forming opinions on the financial statements which collectively comprise the San Marcos Unified School District's basic financial statements. The accompanying schedule of expenditures of federal awards required by U. S. Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations and the combining financial statements and supporting schedules listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
~~ ~ ~ ~Lo. 1 Ll-P El Cajon, California October 29, 2009
2
SAN MARCOS UNIFIED SCHOOL DISTRICT Managemenfs Discussion and Analysis (Unaudited) Year Ended June 30, 2009
This section of the San Marcos Unified School District's annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended June 30, 2009.
FINANCIAL HIGHLIGHTS
~ Total assets including all funding sources at year's end equals $375,844,393. This includes valuations of buildings, land and equipment. Net assets are valued at $221,390,106 (See Exhibit A-1).
~ General Fund revenues exceeded expenditures by $1,428,193 in 2008-09, increasing the ending balance to $24,977,703.
~ The District continued to maintain the required reserves of $4.2 million designated for economic uncertainties at year-end. This represents 3% general fund total expenditure budget, as required by the State. In addition, the unappropriated fund balance decreased to $8.6 million. These funds will help with the projected budget deficit in 2009-10 and in the future years.
~ The total ending balance is $24,977,703, which is made up of the reserves mentioned above and other restricted reserve balances.
~ The District expends about 94% of unrestricted funds on personnel. In addition, 3% of the expenditure adopted budget is budgeted for maintenance.
~ Construction of Joli Anne Leichtag started in the spring of 2007 and was completed in August 2008. SEMS, a twelve classroom-two story building, was under construction with on an opening date of September 2009. The total reconstruction of San Marcos Elementary will begin in July 2009 with a completion date of September 2010.
~ Student enrollment grew by 515 students or 3%. The trend will continue into 2009-10 with an estimated increase of 350 students.
~ No mandate cost reimbursements were received for claims to the State in 2008-09. The State tab to K-12 School Districts is growing, No funds are budgeted until received.
~ The District received $5.9 million in Federal Stimulus Funds in 08-09. Additional funds of 4.6 million are expected in 09-10 for Special Education and Title I purposes. These funds are considered nonreoccurring.
~ The District received major state revenue reductions in 08-09 and has budgeted for additional reductions in 09-10.
3
SAN MARCOS UNIFIED SCHOOL DISTRICT Management's Discussion and Analysis (Unaudited) Year Ended June 30, 2009
The financial statements also include notes that explain some of the information in the statements and provide more detailed data. Figure A-1 shows how the various parts of this annual report are arranged and related to one another.
Figure A-1. Organization of San Marcos Unified School District's Annual Financial Report
~-------------------·i---------------------
Management's Discussion and
Analysis
District-Wide Financial
Statements
SUMMARY
' '
Basic Financial
Information
Fund Financial
Statements
4
Required Supplementary
Information
'11----...., Notes to the
Financial Statements
DETAIL
SAN MARCOS UNIFIED SCHOOL DISTRICT Management's Discussion and Analysis (Unaudited)
Year Ended June 30, 2009
Figure A-2 summarizes the major features of the District's financial statements, including the portion of the District's activities they cover and the types of information they contain.
Figure A-2. Major Features of the District-Wide and Fund Financial Statements
Fund Statements
Type of District-Wide Governmental Proprietary Funds Fiduciary Funds Statements Funds
Scope Entire district, The activities of the Activities the district Instances in which the except fiduciary district that are not operates similar to district administers activities proprietary or private businesses: resources on behalf of
fiduciary, such as self-insurance fund someone else, such as special education and scholarship programs building maintenance and student activities
monies Required jinandal • Statement of Net • Balance Sheet • Statement of Net • Statement of statements Assets • Statement of Assets Fiduciary Net Assets
• Statement of Revenues, • Statement of • Statement of Activities Expenditures & Revenues, Changes in
Changes in Fund Expenses & Fiduciary Net Assets Balances Changes in Fund
Net Assets
• Statement of Cash Flows
Accounting basis Accrual accounting Modified accrual Accrual accounting Accrual accounting and measurement and economic accounting and current and economic and economic focus resources focus financial resources resources focus resources focus
focus
Type of All assets and Only assets expected All assets and All assets and asset/liability liabilities, both to be used up and liabilities, both liabilities, both short-information financial and liabilities that come financial and capital, term and long-term;
capital, short-term due during the year or and short-term and Standard's funds do and long-term soon thereafter; no long-term not currently contain
capital assets included nonfinancial assets, though they can
Type of All revenues and Revenues for which All revenues and All revenues and inflow/outflow expenses during cash is received during expenses during the expenses during the information year, regardless of or soon after the end of year, regardless of year, regardless of
when cash is the year; expenditures when cash is received when cash is received received or paid when goods or or paid or paid
services have been received and payment is due during the year or soon thereafter
5
SAN MARCOS UNIFIED SCHOOL DISTRICT
Management's Discussion and Analysis (Unaudited) Year Ended June 30, 2009
The remainder of this overview section of management's discussion and analysis highlights the structure and contents of each of the statements.
OVERVIEW OF THE FINANCIAL STATEMENTS
The annual financial report of the San Marcos Unified School District includes two components:
)> Management Discussion and Analysis providing a narrative introduction and analysis of the financial statements for the current and prior years.
)> District-Wide Financial Statements providing both short-term and long-term information about the District's overall financial status.
These components augment the Fund Financial Statements that focuses on individual aspects of District operations.
District-Wide Financial Statements
The new district-wide statements report 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 District assets and liabilities, such as land, buildings and long-term debt. All current year revenues and expenses are accounted for in the statements, regardless of when cash is received or paid (full accrual).
The district-wide statements report the District's net assets and how they have changed. Net assets- the difference between the District's assets and liabilities - are one measure of the District's financial health or position. Over time, increases or decreases in net assets are an indicator of whether the District's financial position is improving or deteriorating.
District-wide financial statements distinguish between governmental activities and business-type activities. Since San Marcos Unified School District has no business-type activities, all district operations are reported within the category of governmental activities.
6
SAN MARCOS UNIFIED SCHOOL DISTRICT
Management's Discussion and Analysis (Unaudited)
Year Ended June 30, 2009
Fund Financial Statements
The fund financial statements provide more detailed information about the component funds that jointly comprise the District budget. Funds are accounting devices used to track specific sources of funding and spending for particular programs. Some funds are required by state law. Others are established to control and manage money for particular purposes (e.g., repaying long-term debt), or to show that certain revenues are properly accounted for and represented.
The governmental fund financial statements tell how District operations were financed, as well as what remains for future spending. They provide a detailed view of the short-term financial position of the district, without consideration of long-term assets and liabilities.
FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE
Net Assets
Table 1 shows that District assets totaled $375,844,393 as of June 30, 2009. Cash represents the second largest component of district assets at $77,939,628. Facilities represent the largest component, with land and buildings historically valued at $304,844,784, plus an additional $6,788,764 for facilities under construction (work in progress). Equipment is valued at $25,384,132. Accumulated depreciation on assets equals ($58,506,664). It should be noted that all capital assets are valued at historical cost less depreciation, not market value. The current market value for land and buildings owned by the district is considerably higher. This is especially true for the actual (insured) replacement value of buildings owned by the District. It should be noted that the value of building and land was estimated by an inventory company. The actual cost data dating back to 1949 was not available. Depreciation schedules were used with the actual dates of ownership and occupancy of school and district facilities. Liabilities total $154,454,287 as of June 30, 2009.
7
SAN MARCOS UNIFIED SCHOOL DISTRICT Managemenfs Discussion and Analysis (Unaudited) Year Ended June 30, 2009
Table 1- Net Assets Community Facilities Districts bonded debt Assets June June 30, 2008 June 30, 2009 constitutes the majority of Current Assets; debt. The G.O. Bond of $23 Cash I $ 83,035,345 $ 77,939,628 million was issued in 1996 for Other I 14,443,775 19,393,749 modernization. The District Capital Assets: sold a COP issue to build the Land 57,919,623 62,945,144 new Administration Center. Improvement of 22,175,012 23,020,771 It is funded from RDA Sites revenues. The bonded debt Buildin!':s 186,960,725 218,878,869 equals other long-term Equipment 24,603,166 25,384,132 liabilities.
Work in Progress 19,619,436 6,788,764
Overall, net assets of the San Less Accumulated (50,567,817) (58,506,664) Depreciation
Marcos Unified School Total $358,189,265 $375,844,393 District were determined to
Assets be $221,390,106 on June 30, 2009.
Liabilities Current Liabilities $ 7,116,253 $ 8,735,005 Long-Term 87,900,076 145,719,282
Liabilities Total 95,016,329 154,454,287
Liabilities
Net Assets I $263,172,936 $221,390,106
Table 2- Chan!':e in Net Assets Buildings and equipment are fixed assets, however, and will be depreciated over
2007-08 2008-09 their useful life. Operational assets have Beginning Net Assets $ 244,582,510* $ 208,97 4,409* increased through savings due to
Endinl! Net Assets 263,172,936 221,390,106 increased enrollment and additional state
Change in Net Assets $ 18,590,426 $ 12,415,697 funding. The District has only deficit spent in one of the last seven years. The SEMS addition appears as work in process in2008-09.
8
SAN MARCOS UNIFIED SCHOOL DISTRICT Management's Discussion and Analysis (Unaudited) Year Ended June 30,2009
Governmental Activities
Table 3 (on the following page) shows that expenses related to educating and caring for children account for 82.5% of total District expenditures. Facilities related costs account for 13.85%, while purely administrative costs account for less than 3.65% of total expense.
Overall, the District expended $134,820,460 in 2008-09 in the General Fund, whereas revenues totaled $136,272,800. Deficit spending did not occur in this year due to unspent categorical grants and additional enrollment growth. In 2008-09, general fund expenditures for employee salaries and benefits were $117,778,159 or 87% of total expense. The general cost of living salary increase was 0%. Salary increases were based on a negotiated formula, yet health costs rose on average 8.0%. The State implemented revenue reductions for all Districts at mid -year and into future years.
The cost of all governmental activities this year was $159,706,363. Users of District programs paid some of this cost, primarily from cafeteria food sales, before and after school childcare programs, and construction projects. These expenses include all funds such as general operations, food services and all construction funds.
9
SAN MARCOS UNIFIED SCHOOL DISTRICT Management's Discussion and Analysis (Unaudited) Year Ended June 30, 2009
Table 3- Governmental Activities
2007-08
Expenditures Instruction $ 92,176,147 Instruction- Related Services 14,827,709 Pupil Support Services 15,696,226 Maintenance and Operations 13,898,083 General Administration 6,423,376 Interest on Long-Term Debt 4,143,226
Miscellaneous 5,155,114
Total Expenditures $152,319,881
Revenues Program Revenues:
Charges for Services $ 4,894,441 Grants and Contributions 38,175,144
General Revenues: Taxes Levied for General Purposes 33,004,697 Taxes Levied for Debt Services 16,643,004 State Revenue Limit Aid 70,142,852 Interest and Investment Earnings 3,635,447
Miscellaneous 4,414,722
Total Revenues $170,910,307 Difference $ 18,590,426
SAN MARCOS UNIFIED SCHOOL DISTRICT Management's Discussion and Analysis (Unaudited) Year Ended June 30, 2009
FINANCIAL ANALYSIS OF DISTRICT FUNDS
District accounts are organized into various funds, each of which is considered a separate accounting identity. The operations of each fund are accounted for with a separate set of self-balancing accounts. Governmental resources allocated to individual funds are recorded for the purpose of specific activities in accordance with Jaws, regulations and other requirements. The General Fund serves as the general operating fund for the district. It is used to account for all financial resources of the District except those required to be accounted for in a Special Revenue Fund, Capital Project Fund, Debt Service Fund, Proprietary Fund, or Fiduciary Fund.
General Fund
General Fund revenues totaled nearly $136.3 million for 2008-09, an increase of 2.5% from the prior year. General Fund expenditures plus transfers totaled $134.9 million, a decrease of .6%. Employee salaries and benefits jointly comprise both the largest share of expenditures at 87.3% and also the most rapidly growing component. Unexpended grant funds will be re-budgeted in 2009-10 for expenditure.
The $25 million ending balance at June 30, 2009, included $4.2 million reserves designated for economic uncertainty. The reserves plus fund balance are over four times the level of reserves required for California school districts of this size.
2008-09
How is $179,672 generated by typical classroom utilized?
Cafeteria Program $6,880 3.829% , .. IUb•••Y llooo,~ooooo ooOIModUo$1,235
0.687%
Instructional Support Leadership $4,954 2.757%
~-Pu,oOOTicono<pocOoUoon $3,872 2.155%
Nurses, Counselors, Health Personnel $8,482
4.721%
'--•••••••Site La•darship $12,687 7.061%
SAN MARCOS UNIFIED SCHOOL DISTRICT
Management's Discussion and Analysis (Unaudited)
Year Ended June 30, 2009
Special Revenue Funds
~ The Adult Education Fund is used to account separately for state and local revenues for adult education programs. The District operates a small adult education program with a total budget of about $67,500.
~ The Deferred Maintenance Fund is used to account separately for state apportionments and District contributions for deferred maintenance purposes. The district received $539,278 in state funding to support deferred maintenance activities for school facilities. Several major heating/ventilation, paving and carpet projects are planned for summer 2009. The District will carry a reserve of $800,000.
~ The Cafeteria Fund is used to account separately for federal, state and local resources to operate the Child Nutrition program. The program continued to operate as self-supporting by increasing ala carte food sales and reimbursement revenues to offset rising personnel costs. The annual resources are about $6.1 million. The largest revenue sources are federal funds, local sales and federal commodities (free food).
Capital Projects Funds
~ The Capital Facilities Fund is used to account for resources received from developer impact fees. Local construction activity generated $.9 million in fee revenue this year, along with a beginning balance of $40 million that is earmarked for facilities to accommodate enrollment growth. About $13.5 million was expended to provide additional school classrooms and facilities. In addition, the RDA fund had resources of $19 million. These funds were used for completion of the San Elijo Middle School construction and Joli Ann Leichtag. Two rooms used for Kindergarten in San Elijo Middle School were converted to science classrooms in the summer of 2006. The balance of funds will be used for San Marcos Elementary School construction projects.
~ The County School Facilities Fund was established to receive apportionments from the State School Facilities Fund for new facility construction and modernization projects. Funds were received and expended for Joli Ann Leichtag Elementary. The District is expecting up to $14 million from the State for approved projects. The State must sell Bonds to complete the apportionment.
~ The Special Reserve Fund for Capital Outlay Projects balance of $0.4 million was used for capital outlay (buses) needs, a small balance remains for vehicle needs.
12
SAN MARCOS UNIFIED SCHOOL DISTRICT Managemenfs Discussion and Analysis (Unaudited) Year Ended June 30, 2009
Debt Service Funds
>o- The Bond Interest and Redemption Fund is used to account for the accumulation of resources for the repayment of District general obligation bonds. This fund is maintained by the San Diego County Auditor and Controller's Office.
Proprietary Funds
>-- The Self-Insurance Fund is used to separate monies associated with the self-insurance activities and payment of health insurance costs of the District. The District maintains a reserve of $1.3 million.
Fiduciary Funds
>-- Student Body Funds are used to account for the activities of student groups. The district serves as fiscal agent for these student funds. All expenditures must be approved by student clubs and officers.
CAPITAL ASSET AND DEBT ADMINIS1RATION
Capital Assets
During 2008-09, the District invested $17.7 million in capital assets, including school land and buildings, bus replacement, cafeteria equipment and computer networking. The bulk was for facility construction and modernization funded from bond proceeds.
Long-Term Debt
All major long-term debt is financed through special tax assessments on homes within the district. No liability on the general fund exists for delinquency in taxes. The General Fund is liable for the debt (approximately $14 million) if the flow of Redevelopment Agency taxes to the District ceases for any reason on bonds sold in 2003-04 and 2005-06. This event is not expected to occur.
13
SAN MARCOS UNIFIED SCHOOL DISTRICT
Managemenfs Discussion and Analysis (Unaudited) Year Ended June 30, 2009
FACTORS BEARING ON THE DISTRICT'S FINANCIAL FUTURE
The San Marcos Unified School District remains in a stronger financial position than many California school districts. General Fund reserves of $25 million provide a buffer against economic uncertainty. Mello-Roos taxes and construction bonds provide resources to address facility needs and to match state bond funds requested. Enrollment growth continues to generate added operating revenue. Still, several factors are cause for caution.
The escalating costs of special education requirements are continuing to exceed increases in revenue. All public school systems in California are primarily funded from State budget resources. The projected condition of the state economy and budget is of great concern. The district has been conservative in developing the 2009-10 budgets to stay within acceptable budget conditions. The State of California's financial recession is causing considerable hardship to all school districts and government agencies.
GASB 45 requires districts to highlight the unfunded liability associated with the retiree health benefits plan starting in 2008-09. At this time, the District will not be required to fund this debt over a 30 year period. The actuarial study was updated and presented to the Board for review in 2008-09. Negotiations in 2007-08 have reduced the projected long-term debt over the next 70 years. Staff is researching the possibility of funding this debt in 2010. Presently, the District is on a pay-as-you-go program.
CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT
This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have any questions about this report or need additional financial information, contact the District's Business Office at (760) 752-1212.
14
Basic Financial Statements
(This page intentionally left blank)
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF NET ASSETS JUNE 30, 2009
ASSETS: Cash in County Treasury Cash in Revolving Fund Cash with Fiscal Agent Investments Accounts Receivable Stores Inventories Prepaid Expenses Capital Assets:
Land Improvements Buildings Equipment Work in Progress
Total Governmental Activities 159,706,365 ~86,429 31,950,149 161,034 Total Primary Government $ 159,706,365 $ 4,586,429 $ 31,950,149 $ 161,034
General Revenues: Taxes and Subventions Federal and State Revenues, not restricted to specific purposes Interest and Investment Earnings Interagency Revenues Miscellaneous
Total General Revenues Change in Net Assets
Net Assets- Beginning Adjustment to Beginning Net Assets (Note M) Net Assets- Ending
The accompanying notes are an integral part of this statement.
16
$
$
EXHIBITA-2
Net (Expense) Revenue and Changes in Net Assets
Governmental Activities
(73,946, 767) (11,622,199)
(7,411,312) (5,302,671)
(13,919,673) (1,190,608) (2,360,893)
(715) (7,141,153)
(112,762) (123,008,753) (123,008,753)
59,276,889 68,666,936
2,101,999 62,915
5,315,711 135,424,450
12,415,697 261,810,038 (52,835,629) 221 ,390, 106
SAN MARCOS UNIFIED SCHOOL DISTRICT BALANCE SHEET- GOVERNMENTAL FUNDS JUNE 30, 2009
ASSETS: Cash in County Treasury $ Cash in Revolving Fund Cash with a Fiscal Agent/Trustee Investments Accounts Receivable Due from Other Funds Stores Inventories
Total Assets $
LIABILITIES AND FUND BALANCE: Liabilities:
Accounts Payable $ Due to Other Funds Deferred Revenue
Total Liabilities
General Fund
13,511,813 20,000
15,701,622 281,362
98,721 29,613,518
3,181,413 2,854
1,451,548 4,635,815 -----
Fund Balance: Reserved Fund Balances:
Reserve for Revolving Cash 20,000 Reserve for Stores Inventories 98,721 Reserve for Legally Restricted Balance 7,438,005
Designated Fund Balances: Designated for Economic Uncertainties 4,200,000 Other Designated 4,593,393
Unreserved 8,627,584 Unreserved, reported in nonmajor:
Debt Service Funds Total Fund Balance 24,977,703
Total Liabilities and Fund Balances $ 29,613,518
The accompanying notes are an integral part of this statement.
17
EXHIBIT A-3
Capital Other Total Facilities Governmental Governmental
SAN MARCOS UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2009
Total fund balances- governmental funds balance sheet
Amounts reported for governmental activities in the statement of net assets ("SNA") are different because:
Capital assets: In governmental funds, only current assets are reported. In the statement of net assets, all assets are reported, including capital assets and accumulated depreciation.
Capital assets relating to governmental activities, at historical cost: 337,017,680 (58,506,664) Accumulated depreciation:
Net:
Unamortized costs: In governmental funds, debt issue costs are recognized as expenditures in the period they are incurred. In the government-wide statements, debt issue costs are amortized over the life of the debt. Unamortized debt issue costs included in the prepaid expense on the statement of net assets are:
Unmatured interest on long-term 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:
Deferred recognition of earned but unavailable revenues: In governmental funds, revenue is recognized only to the extent that it is "available", meaning it will be collected soon enough after the end of the period to finance expenditures of that period. Receivables for revenues that are earned but unavailable are deferred until the period in which the revenues become available. In the government-wide statements, revenue is recognized when earned, regardless of availability. The amount of unavailable revenues that were deferred as a liability in governmental funds, but are recognized in the government-wide statements, is:
Long-term liabilities: In governmental funds, only current statement of net assets, all liabilities, including long-term liabilities relating to governmental activities consist of:
General obligation bonds payable Net OPEB obligation Compensated absences payable Lease revenue bonds Other general long-term debt Capital leases payable
liabilities are reported. In the liabilities, are reported. Long-term
Total:
19,454,930 2,319,620
673,230 5,190,000
108,775,000 9,306,502
Internal service funds: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full cost-recovery basis. Because internal service funds are presumed to operate for the benefit of governmental activities, assets and liabilities of internal service funds are reported with governmental activities in the statement of net assets. Net assets for internal service funds are:
EXHIBITA-4
$ 88,370,446
278,511,016
758,490
( 1 ,898,219)
512
(145,719,282)
1,367,143
Net assets of governmental activities - statement of net assets $ - 2_21,:3~0,1 06
The accompanying notes are an integral part of this statement.
18
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES- GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2009
General Fund
Revenues: Revenue Limit Sources:
State Apportionments $ 63,229,184 Local Sources 33,191,724
Federal Revenue 12,364,077 Other State Revenue 14,360,801 Other Local Revenue 13,127,014
Total Revenues 136,272,800
Expenditures: Instruction 88,888,444 Instruction - Related Services 14,522,425 Pupil Services 9,504,467 Ancillary Services 1,218,745 Community Services 4,026,588 Enterprise 1,440 General Administration 4,441,505 Plant Services 12,031,975 Other Outgo 91,278 Debt Service:
Principal 73,574 Interest 20,019 Total Expenditures ~820,460
Excess (Deficiency) of Revenues Over (Under) Expenditures 1,452,340
Other Financing Sources (Uses): Transfers In Transfers Out (40,000) Other Sources 15,853
Total Other Financing Sources (Uses) (24, 147)
Net Change in Fund Balance 1 ,428,193
Fund Balance, July 1 23,549,510 Fund Balance, June 30 $ ~.977,703
The accompanying notes are an integral part of this statement.
19
$
$
EXHIBIT A-5
Capital Other Total Facilities Governmental Governmental
SAN MARCOS UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2009
Net change in fund balances -total governmental funds
Amounts reported for governmental activities in the statement of net assets ("SNA") are different because:
Capital outlay: In governmental funds, the costs 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 expenditures and depreciation expense for the period is:
Expenditures for capital outlay Depreciation expense
Net
17,671,273 (7,239,265)
Debt service: In governmental funds, repayments of long-term debt are reported as expenditures. In the government-wide statements, repayments of long-term debt are reported as reductions of liabilities. Expenditures for repayment of the principal portion of long-term debt were:
Earned but unavailable revenues: In governmental funds, revenues are recognized only to the extent that they are "available", meaning they will be collected soon enough after the end of the period to finance expenditures of that period. In the government-wide statements, revenue is recognized when earned, regardless of availability. The amount of earned but unavailable revenues relating to the current period, less revenues that became available in the current period but related to a prior period, is:
Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is recognized in the period that it becomes due. In the government-wide statement of activities, it is recognized in the period that it is incurred. Unmatured interest owing at the end of the period, less matured interest paid during the period but owing from the prior period, was:
Compensated absences: In governmental funds, compensated absences are measured by the amounts paid during the period. In the statement of activities, compensated absences are measured by the amounts earned. The difference between compensated absences paid and compensated absences earned was:
Postemployment benefits other than pensions (OPES): In governmental funds, OPEB costs are recognized when the employer contributions are made. In the statement of activities, OPEB costs are recognized on the accrual basis. This year, the difference between the OPES costs and actual employer contributions was:
Debt proceeds: In governmental funds, proceeds from debt are recognized as Other Financing Sources. In the government-wide statements, proceeds from debt are reported as increases to liabilities. Amounts recognized in governmental funds as proceeds from debt, net of issuance premium or discount, were:
Internal Service Funds: Internal service funds are used to conduct certain activities for which costs are charged to other funds on a full cost-recovery basis. Because internal service funds are presumed to benefit governmental activities, internal service activities are reported as governmental in the statement of activities. The net increase or decrease in internal service funds was:
Donated capital assets: In governmental funds, donated capital assets are not reported because they do not affect current financial resources. In the government-wide statemets, 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 valued of capital assets donated was:
20
EXHIBIT A-6
$ 434,258
10,432,008
4,991,496
512
(883,747)
(83,800)
(2,319,620)
(15,853)
(108,274)
19,934
Amortization of debt issue premium or discount: In governmental funds, if debt is issued at a premium or discount it is recognized as an Other Financing Source or an Other Financing Use in the period it is incurred. In the government-wide statements, the premium or discount is amortized as interest over the life of the debt. Amortization of premium or discount for the period is:
Change in net assets of governmental activities - statement of activities
The accompanying notes are an integral part of this statement.
21
$
--~1,217)
12,415,697
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF NET ASSETS INTERNAL SERVICE FUND JUNE 30, 2009
ASSETS: Current Assets: Cash in County Treasury Accounts Receivable
Total Current Assets Total Assets
LIABILITIES: Current Liabilities:
Accounts Payable Due to Other Funds
Total Current Liabilities Total Liabilities
NET ASSETS: Unrestricted Net Assets
Total Net Assets
The accompanying notes are an integral part of this statement.
22
$
$
$
Non major Internal Service
Fund
Self-Insurance Fund
218,963 1,337,041 1,556,004 1,556,004
138,861 50,000
188,861 188,86_1_
1 ,367,143
$==="1 ,~36"'7"", 1~43"=
EXHIBIT A-7
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS- INTERNAL SERVICE FUND FOR THE YEAR ENDED JUNE 30, 2009
Operating Revenues: Local Revenue
Total Revenues
Operating Expenses: Classified Salaries Employee Benefits Books and Supplies Services and Other Operating Expenses
Total Expenses
Operating Income (Loss)
Income (Loss) before Contributions and Transfers
lnterfund Transfers In Change in Net Assets
Total Net Assets- Beginning Total Net Assets- Ending
$
$
23
EXHIBIT A-8
Nonmajor Internal Service
Fund
Self-Insurance Fund
15,773,403 15,773,403
37,705 20,504 43,857
15,819,612 15,921,678
(148,275)
(148,275)
40,000 (108,275)
1,475,418 1 ,367,143
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Cash Flows from Operating Activities: Cash Received from Customers and Primary Government Cash Payments for Payroll and Other Operating Costs Cash Payments for Insurance Expenses
Net Cash Provided (Used) by Operating Activities
Cash Flows from Investing Activities: Interest and Dividends on Investments
Net Cash Provided (Used) for Investing Activities
Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year
Reconciliation of Operating Income to Net Cash Provided by Operating Activities:
Operating Income (Loss) Change in Assets and Liabilities:
Decrease (Increase) in Receivables Decrease (Increase) in Due From Other Funds Increase (Decrease) in Accounts Payable Increase (Decrease) in Due To Other Funds
Total Adjustments Net Cash Provided (Used) by Operating Activities
The accompanying notes are an integral part of this statement.
$
$
$
$
24
EXHIBIT A-9
Nonmajor Internal Service
Fund
Self-Insurance Fund
15,669,503 (128,099)
(15,542,343) (939)
26,851 26,851
25,912 193,051 218,963
(108,275)
(103,901) 80,450
107,638 50,000
-134,187 25,912
SAN MARCOS UNIFIED SCHOOL DISTRICT STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS JUNE 30, 2009
ASSETS: Cash on Hand and in Banks
Total Assets
LIABILITIES: Due to Student Groups
Total Liabilities
NET ASSETS: Total Net Assets
The accompanying notes are an integral part of this statement.
25
Agency Fund
Student Body Fund
$ 521,166 $ -- __ .§.21 '166
$ __ ~52~1 ... 1"'66;;. 521,166
$-~~~=
EXHIBIT A-10
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
A Summary of Significant Accounting policies
San Marcos Unified School District (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 (GAAP) as prescribed by ·the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants (AI CPA).
1. Reporting Entity
The District's combined financial statements include the accounts of all its operations. The District evaluated whether any other entity should be included in these financial statements. The criteria for including organizations as component units within the District's reporting entity, as set forth in GASB Statement No. 14, "The Financial Reporting Entity," include whether:
the organization is legally separate (can sue and be sued in its name) the District holds the corporate powers of the organization the District appoints a voting majority of the organization's board the District is able to impose its will on the organization the organization has the potential to impose a financial benefit/burden on the District there is fiscal dependency by the organization on the District
The District also evaluated each legally separate, tax-exempt organization whose resources are used principally to provide support to the District to determine if its omission from the reporting entity would result in financial statements which are misleading or incomplete. GASB Statement No. 14 requires inclusion of such an organization as a component unit when: 1) The economic resources received or held by the organization are entirely or almost entirely for the direct benefit of the District, its component units or its constituents; and 2) The District or its component units is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the organization; and 3) Such economic resources are significant to the District.
Based on these criteria, the District has two component units, the San Marcos Community Facilities Districts and the San Marcos Schools Financing Authority.
2. Basis of Presentation._B.asis of Accounting
a. Basis of Presentation
Government-wide Statements: The statement of net assets and the statement of activities include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double-counting of internal activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions.
The statement of activities presents a comparison between direct expenses and program revenues for each function of the District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. The District does not allocate indirect expenses in the statement of activities. Program revenues include (a) fees, fines, and charges paid by the recipients of goods or services offered by the programs and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues.
Fund Financial Statements: The fund financial statements provide information about the District's funds, with separate statements presented for each fund category. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds.
26
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities.
The District reports the following major governmental funds:
General Fund. This is the District's primary operating fund. It accounts for all financial resources of the District except those required to be accounted for in another fund.
Capital Facilities Fund. This fund is used to account for resources received from developer impact fees assessed under provisions of the California Environment Quality Act.
In addition, the District reports the following fund types:
Special Revenue Funds. These funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes.
Capital Projects Funds. These funds account for the acquisition and/or construction of all major governmental fixed assets.
Debt Service Funds. These funds account for the accumulation of resources for, and the payment of general long-term debt principal, interest, and related costs.
Internal Service Funds. These funds are used to account for revenues and expenses related to services provided to parties inside the District. These funds facilitate distribution of support costs to the users of support services on a cost-reimbursement basis. Because the principal users of the internal services are the District's governmental activities, this fund type is included in the "Governmental Activities" column of the government-wide financial statements.
Permanent Funds. These funds are used to account for permanent foundations that benefit an LEA. The District maintains one non-major permanent fund.
Agency Funds. These funds are used to report student activity funds and other resources held in a purely custodial capacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary investment, and remittance of fiduciary resources to individuals, private organizations, or other governments.
Fiduciary funds are reported in the fiduciary fund financial statements. However, because their assets are held in a trustee or agent capacity and are therefore not available to support District programs, these funds are not included in the government-wide statements.
b. Measurement Focus .. Basis of Accounting
Government-wide, Proprietary, and Fiduciary Fund Financial Statements: These financial statements are reported using the economic resources measurement focus. The government-wide and proprietary fund financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the District gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, entitlements, and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied.
27
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
Governmental Fund Financial Statements: Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The District does not consider revenues collected after its year-end to be available in the current period. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources.
When the District incurs an expenditure or expense for which both restricted and unrestricted resources may be used, it is the District's policy to use restricted resources first, then unrestricted resources.
Under GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," all proprietary funds will continue to follow Financial Accounting Standards Board ("FASB") standards issued on or before November 30, 1989. However, from that date forward, proprietary funds will have the option of either 1) choosing not to apply future FASB standards (including amendments of earlier pronouncements), or 2) continuing to follow new FASB pronouncements unless they conflict with GASB guidance. The District has chosen to apply future FASB standards.
3. 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 when the commitments are paid. All encumbrances are liquidated as of June 30.
4. As~.ets..J.i.abililies, and Equill'
a. Deposits and Investments
Cash balances held in banks and in revolving funds are insured to $250,000 by the Federal Depository Insurance Corporation. All cash held by the financial institutions is fully insured or collateralized. For purposes of the statement of cash flows, highly liquid investments are considered to be cash equivalents if they have a maturity of three months or less when purchased.
In accordance with Education Code Section 41001, the District maintains substantially all its cash in the San Diego County Treasury. The county pools these funds with those of other districts 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 funds, except for the Tax Override Funds, in which interest earned is credited to the general fund. Any investment losses are proportionately shared by all funds in the pool.
The county is authorized to deposit cash and invest excess funds by California Government Code Section 53648 et seq. The funds maintained by the county are either secured by federal depository insurance or are collateralized.
Information regarding the amount of dollars invested in derivatives with San Diego County Treasury was not available.
28
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
b. Stores Inventories and prepaid .~pendjtures
Inventories are recorded using the purchases method in that the cost is recorded as an expenditure at the time individual inventory items are purchased. Inventories are valued at average cost and consist of expendable supplies held for consumption. Reported inventories are equally offset by a fund balance reserve, which indicates that these amounts are not "available for appropriation and expenditure" even though they are a component of net current assets.
The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditure when incurred.
c. Capital Assets
Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated fixed assets are recorded at their estimated fair value at the date of the donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. A capitalization threshold of $5,000 is used.
Capital assets are being depreciated using the straight-line method over the following estimated useful lives:
Asset Class
Buildings Building Improvements Vehicles Office Equipment Computer Equipment
d. Receivable and Payable..Balarlclls
Estimated Useful Lives
20-50 20-25 5-15 5-15 5-15
The District believes that sufficient detail of receivable and payable balances is provided in the financial statements to avoid the obscuring of significant components by aggregation. Therefore, no disclosure is provided which disaggregates those balances.
There are no significant receivables which are not scheduled for collection within one year of year end.
e. _C_Q__m_Qensated Absences
Accumulated unpaid employee vacation benefits are recognized as liabilities of the District. The current portion of the liabilities is recognized in the general fund at year end.
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 the creditable service period for calculation of retirement benefits when the employee retires.
f. 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 cash received on specific projects and programs exceeds qualified expenditures.
29
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
g. lnterfund Activity
lnterfund activity results from loans, services provided, reimbursements or transfers between funds. Loans are reported as interfund receivables and payables as appropriate and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers In and Transfers Out are netted and presented as a single "Transfers" line on the government-wide statement of activities. Similarly, interfund receivables and payables are netted and presented as a single "Internal Balances" line of the government-wide statement of net assets.
Secured property taxes attach as an enforceable lien on property as of March 1. Taxes are payable in two installments on November 15 and March 15. Unsecured property taxes are payable in one installment on or before August 31. The County of San Diego bills and collects the taxes for the District.
i. Fund Balance Reserves and Deslgnat.ions
Reservations 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 reserve for stores inventory reflect the portions of fund balance 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.
j. Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of management's estimates. Actual results could differ from those estimates.
B. Compliance and Accountability
1. Finance-Related Legal and Contractual Provisions
In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of financerelated legal and contractual provisions, if any, are reported below, along with actions taken to address such violations:
Violation None reported
Action Taken Not applicable
2. Deficit Fund Balance or Fund Net Assets of Individual Funds
Following are funds having deficit fund balances or fund net assets at year end, if any, along with remarks which address such deficits:
Fund Name None reported
Deficit Amount
Nolapplicable
30
Remarks Not applicable
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
C. Cash and Investments
1. Cash in County Treasury:
In accordance with Education Code Section 41001, the District maintains substantially all of its cash in the San Diego County Treasury as part of the common investment pool ($55,244,501 as of June 30, 2009). The fair value of the District's portion of this pool as of that date, as provided by the pool sponsor, was $55,244,501. Assumptions made in determining the fair value of the pooled investment portfolios are available from the County Treasurer.
2. Cash on Hand in Banks and in Revolving Fund
Cash balances on hand and in banks ($521,166 as of June 30, 2009) and in the revolving fund ($30,000) are insured up to $250,000 by the Federal Depository Insurance Corporation. All cash held by the financial institution is fully insured or collateralized.
3. Investments:
The District's investments at June 30, 2009 are shown below.
Investment or Investment Type Fimm Funds-Treasury Blackrock T-Funds Certificates of Deposit-Wells Fargo GIG-San Marcos Redevelopment Agency GIG-Federal Home Loan Other Investments Total Investments
4. Analysis of Specific Deposit and Investment Risks
$
Fair Value 4,035,224 4,090,888
516,491 13,206,268
816,256 431,884
$=~2~3,~09""7"',0~11"=
GASB Statement No. 40 requires a determination as to whether the District was exposed to the following specific investment risks at year end and if so, the reporting of certain related disclosures:
a. Credit Risk
Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The county is restricted by Government Code Section 53635 pursuant to Section 53601 to invest only 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 repurchase agreements. The ratings of securities by nationally recognized rating agencies are designed to give an indication of credit risk. At year end, the District was not exposed to credit risk.
b. Custodial Credit Risk
Deposits are exposed to custodial credit risk if they are not covered by depository insurance and the deposits are uncollateralized, collateralized with securities held by the pledging financial institution, or collateralized with securities held by the pledging financial institution's trust department or agent but not in the District's name.
Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the government, and are held by either the counterparty or the counterparty's trust department or agent but not in the District's name. At year end, the District was not exposed to custodial credit risk.
31
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
c. Concentration of Credit Risk
This risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. At year end, the District was not exposed to concentration of credit risk.
d. Interest Rate Risk
This is the risk that changes in interest rates will adversely affect the fair value of an investment. At year end, the District was not exposed to interest rate risk.
e. Foreign Currency Risk
This is the risk that exchange rates will adversely affect the fair value of an investment. At year end, the District was not exposed to foreign currency risk.
5. lnYestment Accounting Policy
The District is required by GASB Statement No. 31 to disclose its policy for determining which investments, if any, are reported at amortized cost. The District's general policy is to report money market investments and short-term participating interest-earning investment contracts at amortized cost and to report nonparticipating interest-earning investment contracts using a cost-based measure. However, if the fair value of an investment is significantly affected by the impairment of the credit standing of the issuer or by other factors, it is reported at fair value. All other investments are reported at fair value unless a legal contract exists which guarantees a higher value. The term "short-term" refers to investments which have a remaining term of one year or less at time of purchase. The term "nonparticipating" means that the investment's value does not vary with market interest rate changes. Nonnegotiable certificates of deposit are examples of nonparticipating interest-earning investment contracts.
The District's investments in external investment pools are reported at an amount determined by the fair value per share of the pool's underlying port1olio, unless the pool is 2a7-like, in which case they are reported at share value. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission ("SEC") as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940.
32
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
D. Capital Assets
Capital asset activity for the year ended June 30, 2009, was as follows:
Beginning Balances --·~~---
Governmental activities: Capital assets not being depreciated:
Increases Decreases
Land $ 61,679,418 $ 1,265,726 $ $ Work in progress Total capital assets not being depreciated
Capital assets being depreciated: Buildings Improvements Equipment Total capital assets being depreciated
Less accumulated depreciation for: Buildings Improvements Equipment
Total accumulated depreciation Total capital assets being depreciated, net
Governmental activities capital assets, net
Depreciation was charged to functions as follows:
Instruction Instruction-Related Services Pupil Services Ancillary Services Community Services General Administration Plant Services
Balances due to and due from other funds at June 30, 2009, consisted of the following:
Due To Fund
General Fund General Fund General Fund Capital Facilities Fund Cafeteria Fund General Fund
Due From Fund
Self Insurance Fund Cafeteria Fund Capital Facilities Fund General Fund General Fund Adult Education Fund
Total
All amounts due are scheduled to be repaid within one year.
33
$
Amount
50,000 222,204
6,778 140
2,714 2,380
$=~=28=4=,2=16=
19,629,422 19,629,422
318,399 318,399
(318,399) _ __.(c=-318,399)
19,629,422 $
Ending Balances
62,945,144 6,788,764
69,733,908
218,878,869 23,020,771 25,384,132
267,283,772
(35,448,204) (7,311 ,889)
(15,746,571) (58,506,664) 208,777,108 278,511,016
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
2. Transfers To and From Other Funds
Transfers to and from other funds at June 30, 2009, consisted of the following:
_T_ffi_n_&effiF~ro~m~---------
General Fund Blended Component Fund
F. Sb.Qrt-Term Debt Activity
_T_ra_n_s~rs T-eo ____________ _
Self Insurance Fund Blended Component Fund
Total
Amount
$ 40,000 4,202,253
$--4-;242,253-
The District accounts for short-term debts for maintenance purposes through the General Fund. The proceeds from loans are shown in the financial statements as Other Resources.
G. Long-Term Obligaiillns
1. Long-Term Obligation Activity
Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the year ended June 30, 2009, are as follows:
Governmental activities: General obligation bonds $ Capital leases Lease revenue bonds CFD & RDA bonds Net OPEB obligation Accreted interest Compensated absences Total governmental activities $
Commitments under capitalized lease agreements for facilities and equipment provide for minimum future lease payments as of June 30, 2009, as follows:
Year Ending June 30: 2010 2011 2012 2013 2014 2015-2019 2020-2024 2025-2029 2030-2034 Total Minimum Rentals Less Amount Representing Interest Present Value of Net Minimum Lease Payments
The District participates in one joint powers agreement (JPA) entity, The San Diego County Schools Risk Management (SDCSRM). The relationship between the District and the JPA is such that the JPA is not a component unit of the District.
The JPA arranges for and provides for various types of insurances for its member districts as requested. The JPA is governed by a board consisting of a representative from each member district. The board controls the operations of the JPA, including selection of management and approval of operating budgets, independent of any influence by the member districts beyond their representation on the board. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionate to their participation in the JPA.
35
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
Combined condensed unaudited financial information of the District's share of the JPA for the year ended June 30, 2009 is as follows:
Total Assets Total Liabilities Total Fund Balance
Total Cash Receipts Total Cash Disbursements Net Change in Fund Balance
$ 5,161,970 2,397,072 2,764,898
3,616,886 3,703,543
(86,657)
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).
PERS:
Plan Description
The District contributes to the School Employer Pool under the California Public Employees' Retirement System (CaiPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CaiPERS. The plan provides retirement and disability benefits, annual cost-of-living 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. CaiPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CaiPERS annual financial report may be obtained from the CaiPERS Executive Office, 400 P Street, Sacramento, California 95814.
Funding Policy
Active plan members are required to contribute 7% of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CaiPERS Board of Administration. The required employer contribution rate for fiscal year 2008-09 was 9.42% of annual payroll. The contribution requirements of the plan members are established by state statute. The District's contributions to CaiPERS for the fiscal year ending June 30, 2009, 2008 and 2007 were $1,726,501, $1,726,813 and $1,547,508, respectively, and equal 100% of the required contributions for each year.
STRS:
Plan Description
The 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 legislatively 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 STRS annual financial report may be obtained from the STRS, 7667 Folsom Boulevard, Sacramento, California 95826.
36
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
Funding Policy
Active plan members are required to contribute 8% of their salary and the 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 2008-09 was 8.25% of annual payroll. The contribution requirements of the plan members are established by state statute. The District's contributions to STRS for the fiscal year ending June 30, 2009, 2008 and 2007 were $5,352,120, $5,297,052 and $4,822,904, respectively, and equal 100% of the required contributions for each year. The amount contributed by the State on behalf of the District was $2,930,361.
J. Postemployment Benefits Other Than Pension Benefits
Plan Description
The San Marcos Unified School District (District) administers a single-employer healthcare plan (Plan). For classified employees including management hired prior to July 1, 2007, who retire at age 55 or older with at least ten consecutive years of District benefit eligible service and who are covered under District health benefits at retirement, are eligible to receive District-paid retiree medical benefits. Retiree medical benefits cease at age 65 except for employees hired prior to July 1, 1997 with at least twenty years of benefit eligible service at retirement. These employees are eligible to receive post-65 medical coverage including Medicare Part B reimbursement for the retiree only. Spouses of retirees also receive District-paid medical up to the spouse's attainment of age 65, if the retiree is also receiving medical benefits. Effective June 30, 2012, spouse coverage will cease when the retiree attains age 65. For eligible retirees who retire prior to July 1, 2007 , the District contributes a portion of the retiree medical costs based on a sliding scale from 50% to 100% (50% for employees with at least ten years of benefit eligible service plus 5% per additional year of benefit eligible service up to 100%).
For eligible employees who retire on or after July 1, 2007, the District pays 100% of the cost for medical coverage up to an annual maximum of $11,625 for pre-65 coverage and $11,625 for post-65 coverage including the Medicare Part B reimbursement. Effective January 1, 2009, for eligible employees who retired prior to July 1, 2007, the District's contribution for pre-65 coverage will be limited to the composite rate in effect for the PacifiCare HMO or another reasonably equivalent plan designated by the District. Classified employees hired on or after July 1, 2007 receive no retiree health benefits.
For certificated employees including management hired prior to July 1, 1996 who retire at age 55 or older with at least ten consecutive years of District benefit eligible service and who are covered under District health benefits at retirement are eligible to receive District-paid retiree medical benefits for life. Certificated employees hired on or after July 1, 1996 who retire at age 55 or older with at least ten consecutive years of District benefit eligible service are eligible to receive District-paid retiree medical benefits to the retiree's attainment of age 65. Spouses of retirees also receive District-paid medical up to the spouse's attainment of age 65, if the retiree is also receiving benefits.
For eligible employees who retire on or after July 1, 2007, the District's contribution will be limited to an annual maximum of $11,265 for pre-65 coverage and $11,265 for post-65 coverage including the Medicare Part B Reimbursement. Effective January 1, 2009, for eligible employees who retired prior to July 1, 2007, the District's contribution for pre-65 coverage will be limited to the composite rate in effect for the PacifiCare HMO or another reasonably equivalent plan designated by the District. Certificated employees hired on or after July 1, 2007 receive no retiree health benefits.
Confidential employees receive the same District-paid benefits under the same provisions and eligibility requirements as classified employees. Membership of the plan consists of approximately 1,074 eligible active employees and 266 eligible retirees who are in receipt of health benefits.
37
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
Contribution Information
The contribution requirements of Plan members and the District are established and amended by the District and the Teachers Association (CEA) and the local California Service Employees Association (CSEA). The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year 2008-09, the District contributed $2,334,072 to the Plan, all of which was used for current premiums.
Annual OPEB Cost and Net OPEB Obligation
The District' annual other post employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the Districts annual OPEB cost of the year, the amount actually contributed to the plan and changes in the District's net obligation to the Plan:
Annual required contribution Interest on net OPEB obligation Adjustment to annual required contrib1 Annual OPEB cost (expense) Contribution made Increase in net OPEB obligation Net OPEB obligation, beginning of year Net OPEB obligation, end of year
$ 4,653,692
2,334,072 2,319,620
$ =="'2'co3~19~,6~2~0
The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for 2009 was as follows:
Year Ended ____.JlJrlelQ._
2009
Funding Status and Funding Progress
Annual Required Contribution
$4,653,692
Percentage Contributed
50%
Net OPEB . Obligation
$2,319,620
Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Since this is the first year of implementation, only the current year is presented.
Actuarial Methods and Assumptions
Projections of benefits for financial reporting purposes are based on the substantive plan (the Plan as understood by the employer and the Plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the employer and Plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.
38
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
In the July 1, 2008 actuarial valuation, the actuarial cost method used was the Entry Age Normal (EAN) cost method. The EAN cost method is a projected benefit cost method which means the "cost" is based on the projected benefit expected to be paid at retirement. The EAN normal cost equals the level annual amount of contribution from the employee's date of hire (entry date) to their retirement date that is sufficient to fund the projected benefit. For plans unrelated to pay, the normal cost is calculated to remain level as a percentage of pay. The EAN actuarial accrued liability equals the present value of all future benefits for retired and current employees and their beneficiaries less the portion expected to be funded by normal costs. All employees eligible as of the measurement date in accordance with the provisions of the Plan listed in the data provided by the employer were included in the valuation.
Medical cost trend rates ranged from an initial rate of 9.0% reduced to a rate of 5.0% after eight years. The UAAL is being amortized at a level-percentage of payroll method with the remaining amortization period at July 1, 2009 of 29 years. The actuarial value of assets was not determined in this actuarial valuation; however, any assets of the plan to be determined will be on a market basis.
K. Commitments and Contingencies
Litigation
The District is involved in various litigation. In the opinion of management and legal counsel, the disposition of all litigation pending will not have a material effect on the financial statements.
Stare and Federal Allowances Awards and Grants
The District has received state and federal funds for specific purposes that are subject to view and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believed that any required reimbursement will not be material.
L. Risk Management
The District is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The district has one self-insurance fund (Internal Service Fund) to account for and finance its uninsured risks of loss. The Internal Service Fund provides medical, dental and vision coverage to employees.
During the year ended June 30, 2009 the District discovered that $55,590,000 of tax increment pass-through revenue refunding bonds issued by the San Marcos Public Facilities Authority and payable through the Redevelopment Agency of the City of San Marcos had not been recorded as long-term debt based on the assumption that the debt was reflected on the financial statements of the City's Redevelopment Agency. In addition, the District discovered misstatements in the recording of capitalized assets and corresponding depreciation which amounted to an adjustment of $2,754,371. Based on these adjustments, the District has restated beginning net assets on the government-wide statement of activities. The adjustments are noted as follows:
Beginning Net Assets-Originally Stated $ 261,810,038
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
N. Subsequent EY.eols
On July 28, 2009 Governor Schwarzenegger signed a package of bills amending the 2008-09 and 2009-10 California State budgets. The budget amendments were designed to address the State's budget gap of $24 billion that had developed as a result of the deepening recession since the State's last budget actions in February 2009. The July budget package reduced, on a state-wide basis, $1.6 billion in 2008-09 Proposition 98 funding through a reversion of undistributed categorical program balances. The budget language identified 51 specific programs and required the amount associated with these programs that were "unallocated, unexpended, or not liquidated as of June 30, 2009" to revert to the State's General Fund. The July budget package also provided an appropriation in 2009-10 to backfill $1.5 billion of these cuts to repay the 2008-09 reversion of undistributed categorical program balances.
The District recorded the revenue and related receivable associated with its portion of the unallocated, unexpended or unliquidated categorical program balances identified in the July 2009 State Budget package prior to notification by the state that the 2009-10 re-appropriation should not be accrued. In accordance with Governmental Accounting Standards Board Statement No. 33, an adjustment to reduce revenue and the related receivable have been included in these financial statements.
40
Required Supplementary Information
Required supplementary information includes financial information and disclosures required by the Governmental Accounting Standards Board but not considered a part of the basic financial statements.
SAN MARCOS UNIFIED SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2009
Budgeted Amounts Original Final
Revenues: Revenue Limit Sources:
State Apportionments $ 65,290,000 $ 63,229,184 Local Sources 32,574,800 33,191,729
Federal Revenue 6,069,837 17,771,319 Other State Revenue 17,008,470 16,627,258 Other Local Revenue 13,940,223 13,583,684
Total Revenues 134,883,330 __ 1~'!4.403, 17 4
Expenditures: Instruction 90,876,166 92,395,221 Instruction • Related Services 13,671,379 15,362,064 Pupil Services 9,138,750 10,167,364 Ancillary Services 795,346 1,290,815 Community Services 3,823,068 4,318,982 Enterprise 1,442 General Administration 4,715,331 4,815,302 Plant Services 12,088,399 12,590,492 Other Outgo 736,531 131,281 Debt Service:
Principal 73,574 73,574 Interest 20,019 20,019 Total Expenditures 135,938,563 141,166,556
~-----
Excess (Deficiency) of Revenues Over (Under) Expenditures ___(_1_,Q55,233) 3,236,618
Other Financing Sources (Uses): Transfers Out Other Sources
Total Other Financing Sources (Uses) ~--~~
Net Change in Fund Balance (1,055,233) 3,236,618
Fund Balance, July 1 23,549,510 23,549,510 ~
Fund Balance, June 30 $ 22,494,277 $~ ~~26,78~,.1_~8
SAN MARCOS UNIFIED SCHOOL DISTRICT REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS SAN MARCOS UNIFIED SCHOOL DISTRICT YEAR ENDED JUNE 30, 2009
Actuarial Acturial Accrued Actuarial Value of Liability (AAL) Valuation Assets -Entry Age
Date (a) (b)
6/30/09 $ 74,134,925
Unfunded AAL
(UAAL) (b-a)
$ 74,134,925
42
UAAL as a Funded Covered Percentage of Ratio Payroll Covered Payroll
~IJ)__ (c) ((b-a)/c)
$ 90,187,645 82.2%
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Combining Statements and Budget Comparisons as Supplementary Information
This supplementary information includes financial statements and schedules not required by the Governmental Accounting Standards Board, nor a part of the basic financial statements, but are presented for purposes of additional analysis.
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS JUNE 30, 2009
ASSETS: Cash in County Treasury Cash in Revolving Fund Cash with a Fiscal AgenUTrustee Investments Accounts Receivable Due from Other Funds Stores Inventories
Total Assets
LIABILITIES AND FUND BALANCE: Liabilities:
Accounts Payable Due to Other Funds Deferred Revenue
Total Liabilities
Fund Balance: Reserved Fund Balances:
Reserve for Revolving Cash Reserve for Stores Inventories Reserve for Legally Restricted Balance
Designated Fund Balances: Designated for Economic Uncertainties Other Designated
Unreserved, reported in nonmajor: Debt Service Funds
Total Fund Balance
Total Liabilities and Fund Balances
43
Special Debt Revenue Service
Funds Funds
$ 2,857,967 $ 1 ,804,135 10,000
431,884 707,619
2,714 186,581
$ 4,196,765 $ 1 ,804,135
$ 79,843 $ 224,584
43,835 348,262
10,000 186,581 57,671
1,661,312 1,932,939
1 ,804,135 3,848,503 1 ,804,135
$ 4,196,765 $ 1 ,804,135
Capital Foundation Projects Permanent Funds Fund
$ 6,077,424 $ 45,967
5,423,635
25,083 167
$ 11,526,142 $ 46,134
$ 573,248 $
573,248
10,952,894 46,134
10,952,894 46,134
$ 11,526,142 $ 46,134
44
$
$
$
$
EXHIBIT C-1
Total Non major
Governmental Funds (See Exhibit A-3)
10,785,493 10,000
5,423,635 431,884 732,869
2,714 186,581
17,573,176
653,091 224,584
43,835 921,510
10,000 186,581 57,671
1,661,312 12,931,967
1 ,804,135 16,651,666
17,573,176
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Special Debt Revenue Service
Funds Funds Revenues:
Federal Revenue $ 3,625,450 $ Other State Revenue 893,375 17,747 Other Local Revenue 2,679,900 1,820,223
Total Revenues 7,198,725 1,837,970
Expenditures: Instruction 59,958 Instruction - Related Services 6,753 Pupil Services 5,178,791 Ancillary Services 200 Community Services 22,016 Enterprise 35,753 General Administration 194,459 Plant Services 723,879 Debt Service:
Principal 3,000,000 Interest 2,978,572 Total Expenditures 6,221,809 5,978,572
Excess (Deficiency) of Revenues Over (Under) Expenditures 976,916 ( 4, 140,602)
Other Financing Sources (Uses): Transfers In 4,202,253 Transfers Out
Total Other Financing Sources (Uses) 4,202,253
Net Change in Fund Balance 976,916 61,651
Fund Balance, July 1 2,871,587 1,742,484 Fund Balance, June 30 $ 3,848,503 $ 1 ,804,135
45
EXHIBIT C-2
Total Non major
Capital Foundation Governmental Projects Permanent Funds (See Funds Fund Exhibit A-5)
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR SPECIAL REVENUE FUNDS JUNE 30, 2009
ASSETS: Cash in County Treasury Cash in Revolving Fund Investments Accounts Receivable Due from Other Funds Stores Inventories
Total Assets
LIABILITIES AND FUND BALANCE: Liabilities:
Accounts Payable Due to Other Funds Deferred Revenue
Total Liabilities
Fund Balance: Reserved Fund Balances:
Reserve for Revolving Cash Reserve for Stores Inventories Reserve for Legally Restricted Balance
Designated Fund Balances: Designated for Economic Uncertainties Other Designated
Total Fund Balance
Total Liabilities and Fund Balances
$
$
$
$
47
Adult Education Cafeteria
Fund Fund ---~-~---
58,504 $ 1,952,114 10,000
6,610 698,745 2,714
186,581 65,114 $ 2,850,154
5,063 $ 74,780 2,380 222,204
43,835 7,443 340,819
10,000 186,581
57,671
1,661,312 651,442
57,671 2,509,335
65,114 $ 2,850,154
Deferred Foundation Maintenance Special
Fund Revenue Fund
$ 806,520 $ 40,829
431,884 1,545 719
$ 808,065 $ 473,432
$ $
808,065 473,432 808,065 473,432
-
$ 808,065 $ 473,432
48
$
$
$
$
EXHIBIT C-3
Total Nonmajor
Special Revenue
Funds(See Exhibit C-1)
2,857,967 10,000
431,884 707,619
2,714 186,581
4,196,765
79,843 224,584
43,835 348,262
10,000 186,581 57,671
1,661,312 1,932,939 3,848,503
4,196,765
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Revenues: Federal Revenue Other State Revenue Other Local Revenue
Total Revenues
Expenditures: Instruction Instruction - Related Services Pupil Services Ancillary Services Community Services Enterprise General Administration Plant Services
Total Expenditures
Excess (Deficiency) of Revenues Over (Under) Expenditures
Net Change in Fund Balance
Fund Balance, July 1 Fund Balance, June 30
49
Adult Education Cafeteria
Fund Fund
$ $ 3,625,450 77,077 277,020
1,185 2,195,884 --78,262 -- 6,098,354
58,308 6,753
5,178,791
35,753 2,349 192,110
131,052 67,410 5,537,706
10,852 560,648
10,852 560,648
46,819 1,948,687 $ 57,671 $ 2,509,335
EXHIBIT C-4
Total Nonmajor
Special Deferred Foundation Revenue
Maintenance Special Funds(See Fund Revenue Fund Exhibi! C-2)
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR DEBT SERVICE FUNDS JUNE 30, 2009
ASSETS: Cash in County Treasury
Total Assets
LIABILITIES AND FUND BALANCE: Liabilities: Total Liabilities
Fund Balance: Unreserved, reported in nonmajor:
Debt Service Funds Total Fund Balance
Total Liabilities and Fund Balances
51
Bond Interest
$_----.'1 'i;8064"<, 1"'350 $=~1 ·~80~4~, 1~35"'
$ 1 ,804,135 1,804,135
$.=="1 ·~80~4~, 1~35~
Total Nonmajor
Debt Service
Funds (See Exhibit C-1)
$ 1,804,135 $-~ 1 ,804,135
$ 1 ,804,135 1 ,804,135
$=~1 ·~80~4~, 1~35"'
EXHIBIT C-5
EXHIBIT C-6
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NON MAJOR DEBT SERVICE FUNDS FOR THE YEAR ENDED JUNE 30, 2009 Total
Non major Debt
Bond Blended Service Interest Component Funds (See
__ & Redemption Unit Exhibit C-2) Revenues:
Other State Revenue $ 17,747 $ $ 17,747 Other local Revenue 1,820,223 1,820,223
Total Revenues 1,837,970 1,837,970
Expenditures: Debt Service:
Principal 1,255,000 1,745,000 3,000,000 Interest 521,319 2,457,253 2,978,572 Total Expenditures 1,776,319 4,202,253 5,978,572
Excess (Deficiency) of Revenues Over (Under) Expenditures 61,651 (4,202,253) (4, 140,602)
Other Financing Sources (Uses): Transfers In 4,202,253 4,202,253
Total Other Financing Sources (Uses) 4,202,253 4,202,253
Net Change in Fund Balance 61,651 61,651
Fund Balance, July 1 1,742,484 1,742,484 Fund Balance, June 30 $ 1 ,804,135 $ $ 1 ,804,135
52
EXHIBIT C-7
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR CAPITAL PROJECTS FUNDS JUNE 30, 2009
Total Non major
Capital County School Capital Blended Projects
Facilities Outlay Component Funds (See Fund Projects Unit Exhibit C-1)
ASSETS: Cash in County Treasury $ 1,959,898 $ 184,490 $ 3,933,036 $ 6,077,424 Cash with a Fiscal Agent/Trustee 5,423,635 5,423,635 Accounts Receivable 8,497 1,696 14,890 25,083
Total Assets $ 1,968,395 $ 186,186 $- 9,371,561 $ 11,526,142
Other Designated 1,566,378 186,186 9,200,330 10,952,894 Total Fund Balance 1,566,378 186,186 9,200,~~Q_ 10,952,894
Total Liabilities and Fund Balances $ 1,968,395 $ 186,186 $ 9,371,561 $ 11,526,142
53
EXHIBIT C-8
SAN MARCOS UNIFIED SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR CAPITAL PROJECTS FUNDS FOR THE YEAR ENDED JUNE 30, 2009 Total
Nonmajor Capital
County School Capital Blended Projects Facilities Outlay Component Funds (See
Fund Projects Unit _._E<~ibit C-?.L Revenues:
Other State Revenue $ 15,600 $ $ $ 15,600 Other Local Revenue 198,085 46,468 6,381,997 6,626,550
Total Revenues 213,685 46,468 6,381,997 6,642,150 ------~.
Total Expenditures 9,404,540 343,129 1,407,311 11,154,980
Excess (Deficiency) of Revenues Over (Under) Expenditures (9, 190,855) (296,661) 4,974,686 (4,512,830)
Other Financing Sources (Uses): Transfers Out (4,202,253) (4,202,253)
Total Other Financing Sources (Uses) (4,202,253) (4,202,253)
Net Change in Fund Balance (9, 190,855) (296,661) 772,433 (8,715,083)
Fund Balance, July 1 10,757,233 482,847 8,427,897 19,667,977 Fund Balance, June 30 $ 1,566,378 $ 186,186 $ 9,200,330 $ 10,952,894
54
Other Supplementary Information
This section includes financial information and disclosures not required by the Governmental Accounting Standards Board and not considered a part of the basic financial statements. It may, however, include information which is required by other enltties.
Supplementary Information Section
SAN MARCOS UNIFIED SCHOOL DISTRICT LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2009
The Board of Supervisors of San Diego County adopted a resolution on May 27, 1975, creating a new unified school district comprising the area of Rich-Mar Union School District named "San Marcos Unified School District." The District serves the San Marcos Community located in north San Diego County. The District operates eleven elementary schools, three middle schools, two comprehensive high schools, a continuation high school, an independent study high school, and an adult school.
Name
Mrs. Sharon Jenkins
Mrs. Beckie Garrett
Mr. David Horacek
Mr. Jay Petrek
Mr. Randy Walton
Governing Board=----------------
Office
President
Vice President
Clerk
Member
Member
Administration
Kevin Holt Superintendent
Gary Hamels Assistant Superintendent
Business Services
Gina Bishop Assistant Superintendent
Instructional Services
David McAdams Director of Accounting
55
Term and Term Expiration
Four Year Term Expires December 2010
Four Year Term Expires December 2010
Four Year Term Expires December 2012
Four Year Term Expires December 2012
Four Year Term Expires December 2012
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE YEAR ENDED JUNE 30, 2009
Elementary: Kindergarten Grades 1 through 3 Grades 4 through 8 Home and Hospital Special education
Elementary totals
High School: Grades 9 through 12, regular classes Special education Continuation education Home and Hospital
High school totals
Classes for adults: Concurrently enrolled Not concurrently enrolled
Average daily attendance is a measurement of the number of pupils attending classes of the district. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs.
56
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME YEAR ENDED JUNE 30, 2009
1986-87 1982-83 Minutes
Grade Level Actual Minutes Requi~~f!lent - ·····-~--
Kindergarten 33,630 36,000
Grade 1 48,675 50,400
Grade 2 48,675 50,400
Grade 3 48,675 50,400
Grade 4 49,560 54,000
Grade 5 49,560 54,000
Grade 6 49,560 54,000
Grade 7 49,560 54,000
Grade 8 49,560 54,000
Grade 9 59,826 64,800
Grade 10 59,826 64,800
Grade 11 59,826 64,800
Grade 12 59,826 64,800
2008-09 Actual Minutes
36,420
55,140
55,140
55,140
55,140
55,140
55,140
56,926
56,926
64,860
64,860
64,860
64,860
TABLE D-2
Number Number of Days of Days
Traditional Multitrack Calendar Calendar Status
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
180 Complied
Districts, including basic aid districts, must maintain their instructional minutes at either the 1982-83 actual minutes or the 1986-87 requirements, whichever is greater, as required by Education Code Section 46201. This schedule is required of all districts, including basic aid districts.
The district has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. This schedule presents information on the amount of instruction time offered by the district and whether the district complied with the provisions of Education Code Sections 46200 through 46206.
57
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS YEAR ENDED JUNE 30, 2009
(Budget) General Fund 2010
Revenues and other financial sources $ 132,644,360 -------------
Expenditures, other uses and transfers out 134,257,245
Change in fund balance (deficit) (1.~1?,885)
Ending fund balance $ 23,364,818 '
Available reserves $ 20,350,319
Available reserves as a percentage of total outgo 15.1%
This schedule discloses the district's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the district's ability to continue as a going concern for a reasonable period of time.
The district's general fund balance has decreased by $552,978 over the past two years. The fiscal year 2009-10 budget projects a decrease of $1,612,885. For a district this size, the state recommends available reserves of at least 3% of total general fund expenditures, other uses and transfers out.
Long-term debt has increased by $54,990,554 over the past two years.
Average daily attendance (ADA) has increased by 1 ,060 over the past two years.
58
SAN MARCOS UNIFIED SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2009
June 30, 2009, annual financial and budget report fund balances
Adjustments and reclassifications:
Increasing (decreasing) the fund balance:
Accounts receivable overstatement (Note N)
June 30, 2009, audited financial statement fund balances
General Fund
$ _ __:2cc7 .. 17_{lJQ.1_
(2, 198,998)
$.===='2"4"',97'='7=", 7~0~3
TABLE D-4
This schedule provides the information necessary to reconcile the fund balances of all funds and the total liabilities balance of the general long-term debt account group as reported on the SACS report to the audited financial statements. Funds that required no adjustment are not presented.
59
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS YEAR ENDED JUNE 30, 2009
The following charter schools are chartered by San Marcos Unified School District.
Charter Schools
Bayshore Prep Charter Academy
60
Included In Audit?
No
TABLE D-5
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2009
Federal Grantor/ Pass-Through Grantor/ Program Title
U S DEE'ABIMEt>II QF HEALTH AND I::IUMI\t-1 SEBILICES Direct Program:
Medi-Cal• Passed Through State Department of Education:
Child Care and Development • Total U. S. Department of Health and Human Services
U.S. DEPARTMENT OE EQUCIIIIQN Direct Programs:
TAT Alcohol Abuse Reduction School Counseling Demonstration
Total Direct Programs Passed Through State Department of Education:
Title I
Special Education •
Vocational Education
Preschool*
Title IV Drug Free
Wellness Grant
Title V Innovative Education
Title II Technology
Advanced Placement
Gear Up Program
Title Ill Immigrant Education
Title Ill LEP
Title II Teacher Quality
Federal Air Space Total Passed Through State Department of Education Total U. S. Department of Education
U.S. DEPIIBTMENT QF AGRICULIURE Passed Through State Department of Education:
National School Lunch Program • Total U. S. Department of Agriculture TOTAL EXPENDITURES OF FEDERAL AWARDS
Federal CFDA
Number --·-------
93.778
93.575
84.184A 84.215E
84.010
84.027
84.048
84.173
84.186
84.186
84.298
84.318
84.330
84.334
84.365
84.365
84.367
N/A
10.555
• Indicates clustered program under OMB Circular A-133 Compliance Supplement
The accompanying notes are an integral part of this schedule.
61
TABLE D-6
Pass-Through Entity Identifying Federal
Number Expenditures -- -----~----~--- ~' -
$ 362,224
03942 3,891 366,115
10,477 27,387 37,864
03064 1,621,001
03379 2,874,919
03550 76,714
03430 339,143
03453 44,213
04349 17,756
04110 1,724
04045 24,933
04831 13,381
00088 116,161
04201 81,869
04203 364,066
04341 451,602
N/A 500 6,027,982 6,065,846
---~------
03396 3,625,448 3,625,448
$ 10,057,409
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2009
Basis of Presentation
The accompanying schedule of expenditures of federal awards includes the federal grant activity of San Marcos Unified School District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the general purpose financial statements.
62
SAN MARCOS UNIFIED SCHOOL DISTRICT NOTES TO SUPPLEMENTARY INFORMATION YEAR ENDED JUNE 30, 2009
NOTE 1 - Early Retirement Incentive Program
The district has adopted an early retirement incentive program, pursuant to Education Code Sections 22714 and 44929, whereby the service credit to eligible employees is increased by two years. Eligible employees must have five or more years of service under the State Teachers' Retirement System and retire during a period of not more than 120 days or less than 60 days from the date of the formal action taken by the district.
Retjree lnformatiQn
A total of thirteen employees have retired in exchange for the additional two years of service credit.
Replacement Employee Service Retired Employee (If Applicable)
Position Vacated _Age_ Credit Salary Benefits Salary Benefits ----.~~ ----·----
As a result of this early retirement incentive program, the district expects to incur additional costs. The breakdown in additional costs is presented below:
Retirement costs Postretirement health benefit costs Total additional costs
63
$ 740,814 291,876
$.==="1 '"'03~2"",6""'90~.
Other Independent Auditor's Reports
Wilkinson Hadley King & Co. LLP CPA's and Advisors
218 W. Douglas Avenue El Cajon, CA 92020
Report on Internal Control oyer Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance wjtb Govemment Auditing Standards
Board of Trustees Sao Marcos Unified School District San Marcos, California
Members of the Board of Trustees:
We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of San Marcos Unified School District as of and for the year ended June 30, 2009, which collectively comprise the San Marcos Unified School District's basic financial statements and have issued our report thereon dated October 29, 2009. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.
Internal Control Oyer Ejnancia! Reportjng In planning and performing our audit, we considered Sao Marcos Unified School District's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements but not for the purpose of expressing an opinion on the effectiveness of the San Marcos Unified School District's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the San Marcos Unified School District's internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the San Marcos Unified School District's ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the San Marcos Unified School District's financial statements that is more than inconsequential will not be prevented by the San Marcos Unified School District's internal control.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the San Marcos Unified School District's internal control.
Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we considered to be material weaknesses, as defined above.
Compliance and Other Matters As part of obtaining reasonable assurance about whether San Marcos Unified School District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
64
This report is intended solely for the information and use of management, others within the entity, the Board of Trustees, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.
El Cajon, California October 29, 2009
65
Wilkinson Hadley King & Co. LLP CPA's and Advisors
218 W. Douglas Avenue El Cajon, CA 92020
Report go Comp!jaoce wjth Regujrements App!jcable_ To each Major program and on Internal Control oyer Compljance In Accordance With OMB Circular A-133
Board of Trustees Sao Marcos Unified School District San Marcos, California
Members of the Board of Trustees:
Comp!jance
We have audited the compliance of San Marcos Unified School District with the types of compliance requirements described in the U. S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended June 30, 2009. Sao Marcos Unified School District's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of Sao Marcos Unified School District's management. Our responsibility is to express an opinion on San Marcos Unified School District's compliance based on our audit.
We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about San Marcos Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Sao Marcos Unified School District's compliance with those requirements.
In our opinion, San Marcos Unified School District complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs for the year ended June 30, 2009.
Internal Control Oyer Comoljaoce The management of San Marcos Unified School District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered Sao Marcos Unified School District's internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of San Marcos Unified School District's internal control over compliance.
66
A control deficiency in an entity's internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the entity's internal control.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the entity's internal control.
Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we considered to be material weaknesses.
This report is intended solely for the information and use of management, others within the entity, the Board of Trustees, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.
1J~ ~ ~ 4lo.,LLP El Cajon, California October 29, 2009
67
Wilkinson Hadley King & Co. LLP CPA's and Advisors
218 W. Douglas Avenue El Cajon, CA 92020
A1Jdjtor's Report on State Compljance
Board of Trustees San Marcos Unified School District San Marcos, California
Members of the Board of Trustees:
We have audited the basic financial statements of the San Marcos Unified School District ("District") as of and for the year ended June 30, 2009, and have issued our report thereon dated October 29, 2009. Our audit was made in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the State's audit guide, Standards and Procedures for Audits of California K-12 Local Education Agencies 2008-09, published by the Education Audit Appeals Panel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The District's management is responsible for the District's compliance with laws and regulations. In connection with the audit referred to above, we selected and tested transactions and records to determine the District's compliance with the state laws and regulations applicable to the following items:
-=D-=e-=sc=rcoiP:.:tc::io"'n _____ _
Attendance Accounting: Attendance Reporting Independent Study Continuation Education Adult Education Regional Occupational Centers and Programs
Instructional Time: School Districts County Offices of Education
Community Day Schools Morgan-Hart Class Size Reduction Program Instructional Materials:
General Requirements Grades K-8 Only Grades g-12 Only
Ratios of Administrative Employees to Teachers Classroom Teacher Salaries Early Retirement Incentive Program GANN Limit Calculation School Accountability Report Card Mathematics and Reading Professional Development
Class Size Reduction Program (Including In Charter Schools): General Requirements Option One Classes Option Two Classes Only One School Serving Grades K-3
After School Education and Safety Program: General Requirements After School Before School
Contemporaneous Records of Attendance, For Charter Schools Mode of Instruction, for Charter Schools Nonclassroom-Based Instruction/Independent Study, For Charter Schools Determination of Funding for Nonclassroom-Based
Instruction, For Charter Schools Annual Instructional Minutes -Classroom Based, For Charter Schools
7 Yes 3 Yes 4 Yes 4 N/A
4 Yes 4 Yes 5 Yes 1 N/A 1 N/A
15 N/A
3 N/A 3 N/A
The term "N/A" is used above to mean one or more of the following: 1) The District did not offer the program during the current fiscal year, 2) The program applies only to a different type of local education agency, or 3) The procedures in the audit guide have been revised by subsequent state legislation. The numerals enclosed in brackets which follow some items are explained as follows:
[1] This program is not required to be audited per flexibility provisions of SBx3 4. [2] The number of procedures to be performed was reduced per flexibility provisions in SBx3 4. Section 19825 procedures (e) and (g) were not performed. [3] The number of procedures to be performed was reduced per flexibility provisions in SBx3 4. Section 19828.3 procedures (b), (c) and (e) were not performed.
Based on our audit, we found that, for the items tested, San Marcos Unified School District complied with the state laws and regulations referred to above, except as described in the Findings and Recommendations section of this report. Further, based on. our examination, for items not tested, nothing came to our attention to indicate that the San Marcos Unified School District had not complied with the state laws and regulations.
This report is intended solely for the information and use of the Board of Trustees, management, State Controller's Office, Department of Finance, Department of Education, and pass-through entities, and is not intended to be and should not be used by anyone other than these specified parties.
El Cajon, California October 29, 2009
69
Findings and Recommendations Section
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2009
A. Summary of Auditor's Results
1. Financial Statements
Type of auditor's report issued:
Internal control over financial reporting:
One or more material weaknesses identified?
One or more significant deficiencies identified that are are not considered to be material weaknesses?
Noncompliance material to financial statements noted?
2. Federal Awards
Internal control over major programs:
One or more material weaknesses identified?
One or more significant deficiencies Identified that are not considered to be material weaknesses?
Type of auditor's report issued on compliance for major programs:
Any audit findings disclosed that are required to be reported in accordance with section 51 O(a) of Circular A-133?
Identification of major programs:
!Jnql.!alifjed
Yes
Yes
Yes
Yes
Yes
.Unqualified
Yes
CEDA Number(s) Name of F~deral Program or CLu.ster
Title I 84.010 84.027 84.367
Special Education Title II Teacher Quality
Dollar threshold used to distinguish between type A and type B programs:
Auditee qualified as low-risk auditee?
70
$301,722
X Yes
X No
X None Reported
X No
X No
X None Reported
X No
No
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2009
3. State Awards
Internal control over state programs:
One or more material weaknesses identified?
One or more significant deficiencies identified that are are not considered to be material weaknesses?
Type of auditor's report issued on compliance for state programs:
B. Financial Statement Findings
None
C. Federal Award Findings and Questioned Costs
None
D. State Award Findings and Questioned Costs
Finding 2009-1 (40000) Early Retirement Incentive
Criteria or Specific Reguirem.sml
Yes X No
Yes X None Reported
Determine that the school district received approval from the county office of education or that the county office of education received approval from the Superintendent of Public Instruction for the certification of the CaiSTRS Early Retirement Incentive program.
Condition In our review of the certification of employer participation for the CaiSTRS Early Retirement Incentive Program, the school district had not obtained the proper approval from the county office of education or Superintendent of Public Instruction. Upon further examination, the CaiSTRS Service Retirement unit did not accept the certification due to specifics disclosed in the board resolution and changes to the window period; however, the district is currently appealing this decision as of the audit date. Also, it should be noted that the payment warrant submitted to CaiSTRS for the full balance payable on the retirement incentive was subsequently cashed and accepted by CaiSTRS even though the certification currently still has not been accepted.
Questione.Q Costs None
&!commendation Obtain the proper approval from the county office of education or Superintendent of Public Instruction for the certification of the CaiSTRS Early Retirement Incentive program. Communicate with the CaiSTRS Service Retirement Unit and resolve the issues that are preventing approval of the early retirement incentive. Continue the appeal process until all specifics have been rectified and the proper approval has been obtained.
71
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2009
LEA's Respon..se The Assistant Superintendent of Human Resources is in communication with the CaiSTRS service requirement unit administration. The appeals process is underway. CaiSTRS has accepted our participation in the program several times before using the same criteria used for the 2008-09 retirement incentive. Staff expects a positive outcome.
Finding 2009-2(40000) After School Education and Safety Program - Before School Component
Criteria or Specific Requirement Determine that the local education agency operating the After School Education and Safety Program is compliant with the state components for the before school program.
Condition In review of parent notices, policy sheets, and other relevant program documentation for the before school program offered for Leichtag Elementary School, a proper late arrival policy was not established and a late arrival form was not utilized for pupils that did not attend the entire program. We selected fifteen pupils from the month tested and noted there were no sign-in times for any pupils for the month tested; therefore, we could not determine the length of time each pupil was in the program. Also, pupil service days appeared to be counted manually and did not reconcile to the total days claimed for the month tested. As a result, all 337 days claimed for the pupils tested are not valid as we could not determine the length of lime, if any, that the pupils were in the program and manual counts could not be reconciled to the actual number of pupil days claimed.
Questioned Coslli Leichlag Elementary School -a total of 337 days are questioned for the pupils tested.
Recommendation At Leichtag Elementary School, establish a late arrival form to be completed, signed, and kept on file for pupils that do not attend for the entire program time offered. Establish a procedure to ensure that a sign-in time and signature is present for each pupil upon daily arrival in order to justify the pupil's attendance is at least half time of the daily program hours. Monitor all pupil days counted to ensure proper sign-in times and signatures are evident in order to validate their days of attendance and participation in the program.
LEA's Response All district sites offering the before school component have been trained on the proper documentation for student participation. These include both policy statements and use of a late arrival form to document parent guardian consent. These forms will be maintained in the participants file.
The sites have also received hardware, software, and training for the City Span attendance system which is based on student bar coded cards which will record late arrival and departure dates and times. These records will form the basis for accurate attendance records.
72
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2009
Finding 2009-3(40000) After School Education and Safety Program -After School Component
Criteria or Specific Requirement Determine that the local education agency operating the After School Education and Safety Program is compliant with the state components for the after school program.
Condition In review of parent notices, policy sheets, and other relevant program documentation for the after school program offered for Woodland Park Middle School, a proper early release policy was not established and an early release form was not utilized for pupils that did not attend for the entire program. We selected fifteen pupils from the month tested and noted that the pupils left the program early a significant number of days; however, there was no early release form retained or kept on file to justify the early time released. As a result, 277 days out of 308 days tested are not valid to be claimed as the pupils did not complete the full day of participation in the program and had no early release form on file.
In review of parent notices, policy sheets, and other relevant program documentation for the after school program offered for Alvin Dunn Elementary School, a proper early release policy was not established and an early release form was not utilized for pupils that did not attend for the entire program. We selected fifteen pupils from the month tested and noted that the pupils left the program early a significant number of days; however, there was no early release form retained or kept on file to justify the early time released. In addition, only half of the pupils were being signed out of the program and there were no times listed for any of the pupils that left the program. As a result, all 291 days claimed for the fifteen pupils tested are not valid as we could not determine the length of time, if any, that the pupils were in the program.
Questioned Costs Woodland Park Middle School - a total of 277 days are questioned for the pupils tested. Alvin Dunn Elementary School -a total of 291 days are questioned for the pupils tested.
Recommen_datilm At Woodland Park Middle School, establish an early release form to be completed, signed, and kept on file for pupils that do not attend for the entire program time offered. Ensure pupils that leave the program early have met the specific requirements as established within the early release form. Implement procedures to monitor and ensure that all pupil days counted have proper daily sign-out times and signatures in order to validate their participation in the program.
At Alvin Dunn Elementary School, establish an early release form to be completed, signed, and kept on file for pupils that do not attend for the entire program time offered. Ensure pupils that leave the program early have met the specific requirements as established within the early release form. Require all pupils that leave the program on a daily basis to have an actual sign-out time and certified release signature recorded in order to justify the actual time each pupil left the program. Implement procedures to monitor and ensure that all pupil days counted have proper daily sign-out times and signatures in order to validate their participation in the program.
73
SAN MARCOS UNIFIED SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2009
LEA's Response All district sites offering the after school component have been trained on the proper documentation for student participation. These include both policy statements and use of an early release form to document parent guardian consent. These forms will be maintained in the participants file.
The sites have also received hardware, software, and training for the City Span attendance system which is based on student bar coded cards which will record late arrival and departure dates and times. These records will form the basis for accurate attendance records.
74
SAN MARCOS UNIFIED SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2009
Finding/Recommendation
Finding 2008-1 Closing Procedures
In the search for unrecorded liabilities a significant invoice had not been accrued in the County School Facilities Fund; therefore, an audit adjustment was required to recognize the obligation. The district did not identify all significant liabilities at year end as cut-off procedures were not adequately reviewed.
Establish a process to identify and ensure that all significant accounts payable have been accrued at year end. Monitor the cut-off process of invoices and purchase orders in order to assure all significant liabilities have been posted to the proper period.
Current Status
Implemented
75
Management's Explanation If Not Implemented
C - 1
APPENDIX C
REDEVELOPMENT PAYMENTS
General
Pursuant to the Lease Agreement the District has agreed and covenanted that all Redevelopment Payments received in a Fiscal Year, commencing Fiscal Year 2010-11, in the lesser of (i) the amount actually received or (ii) $6,000,000 will be applied by the District to the payment of the portion of the Lease Payments coming due in such Fiscal Year attributable to the financing of educational or other capital facilities of the District to which such Redevelopment Payments may be contractually or statutorily applied. The Redevelopment Payments include all payments that are contractually required to be made to the District by the Agency pursuant to the Pass-Through Agreement from District Pass-Through Revenue (defined below). See “Pass-Through Agreements – The Project Area No. 3 Pass-Through Agreements” and “– The SMPFA 2006 Bonds.”
Pursuant to the Pass-Through Agreement, the payment to the District by the Agency of the District Pass-Through Revenues is subordinate to the payment of scheduled debt service on the outstanding San Marcos Public Facilities Authority Tax Increment Pass-Through Revenue Refunding Bonds (Project Area No. 3 – San Marcos Unified School District) 2006 Series A (the “SMPFA 2006 Bonds”) and the payments of the Annual Agency Fee and Program Costs (each as defined below). See “The SMPFA 2006 Bonds.”
See “APPENDIX F – ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES” for estimated Redevelopment Payments that will be available to be applied to the payment of Lease Payments and thereby the payment of debt service on the Bonds.
Tax Allocation Financing
General. Section 33000 and following of the California Health and Safety Code (the “Redevelopment Law”) provide a means for financing redevelopment projects based upon the allocation of taxes collected within a project area of a redevelopment agency. The taxable valuation of such a project area last equalized prior to adoption of the redevelopment plan establishing such project area, or base roll, is established and, except for any period during which taxable valuation drops below the base year level, the taxing agencies (described below) within the project area thereafter receive the taxes produced by the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation over the base roll (except such portion generated by rates levied to pay voter-approved bonded indebtedness after January 1, 1989 for the acquisition or improvement of real property), generally referred to as tax allocation or tax increment revenues, are allocated to the redevelopment agency.
Allocation of Taxes. Pursuant to Article 6 (California Streets and Highways Code Section 33670 and following) of Chapter 6 of the Redevelopment Law and Section 16 of Article XVI of the Constitution of the State of California, taxes levied on property in a project area of a redevelopment agency each year by or for the benefit of the State of California or any city, county, city and county, district or other public corporation (referred to collectively as “taxing agencies”) for fiscal years beginning after the effective date of the project area are divided as follows:
(1) To Taxing Agencies: That portion of the taxes that would be produced by the rate upon which the tax is levied each year by or for each of said taxing agencies upon the total sum of the assessed value of the taxable property in the project area as shown upon the assessment roll used in connection with the taxation of such property by such taxing agency last equalized prior to the effective date of the ordinance approving the project area (or ordinances approving amendments to the redevelopment plan adding to the project area), shall be allocated to, and when collected shall be paid into the funds of the respective taxing agencies as taxes by or for said taxing agencies on all other property are paid; and
C - 2
(2) To the Redevelopment Agency: Except for the taxes that are attributable to a tax rate levy by a taxing agency for the purpose of producing revenues to repay bonded indebtedness approved by the voters of the taxing agency on or after January 1, 1989, which shall be allocated to and when collected shall be paid to such taxing agency, that portion of said levied taxes each year in excess of the amounts provided in (1) above, shall be allocated to, and when collected, shall be paid into a special fund of the redevelopment agency to pay the principal of and interest on bonds, loans, moneys advanced to, or indebtedness (whether funded, refunded, assumed, or otherwise) incurred by the redevelopment agency to finance or refinance, in whole or in part, redevelopment activities within the project area. Unless and until the total assessed valuation of the taxable property in the project area exceeds the total assessed value of the taxable property in the project area as shown by the last equalized assessment roll referred to in paragraph (1) above, all of the taxes levied and collected upon the taxable property in the project area shall be paid into the funds of the respective taxing agencies. When said bonds, loans, advances, and indebtedness, if any, and interest thereon, have been paid, all moneys thereafter received from taxes upon the taxable property in the project area shall be paid into the funds of the respective taxing agencies as taxes on all other property are paid.
The Agency. The Agency was established pursuant to the Redevelopment Law. The City Council of the City (the “City Council”) adopted Ordinance No. 73-266 on August 18, 1973, which activated the Agency. The Agency is charged with the responsibility for eliminating blight within its redevelopment project areas through the process of redevelopment.
Project Area No. 3
General. Under the Redevelopment Law, a city or county that activates its redevelopment agency is required to adopt, by ordinance, a redevelopment plan for each redevelopment project to be undertaken by the redevelopment agency. A redevelopment agency may only undertake those activities within a redevelopment project specifically authorized in the adopted redevelopment plan.
The City Council adopted an ordinance approving the redevelopment plan for Redevelopment Project Area No. 3 (“Project Area No. 3”) on July 11, 1989. Project Area No. 3 encompasses approximately 6,301 acres and is generally bounded by Discovery Street and Barham Drive on the north, the City’s incorporated limits to the south, the City’s incorporated limits to the east and Poinsettia Avenue on the west. A portion of Project Area No. 3 extends north of South Santa Fe Avenue in the northwest area of the City.
More than three quarters of Project Area No. 3 is zoned for residential use. Of the remaining portion, commercial and office zoning collectively account for approximately 1.5%, industrial zoning accounts for slightly less than 7% and the balance is reserved for public facilities.
Approximately 8,968 residential parcels have been developed in Project Area No. 3 and approximately 156 non-residential parcels have been developed in Project Area No. 3. Major residential developments in Project Area No. 3 include San Elijo Hills, an approved master planned community of approximately 2,000 acres located entirely within Project Area No. 3. The current development plan permits the development of a maximum of 3,398 dwelling units, 13 acres of neighborhood commercial uses, school and other public uses and 1,010 acres of public parks and open space (the “San Elijo Hills Project”). As of September 2009, approximately 660 residential dwelling units remained to be developed. Phase 1 of the San Elijo Hills Town Center has been completed which includes an Albertson’s and 12,141 square feet of ground floor retail space and two floors of residential condominiums above this retail space.
Old Creek Ranch is a master planned community of approximately 416 acres located primarily within Project Area No. 3. At build out the community is expected to include 401 single-family homes, 1,123 multi-family homes, 103 acres of light industrial development and 181 acres of open space. As of September 2009, 470 residential dwelling units remain to be developed. Cornerstone Development plans to develop 300 units of duplexes and triplexes within the development and building permits for a model duplex was issued in June 2009.
C - 3
Assessed Values
Growth of Incremental Assessed Value. The following table shows the total assessed value, incremental assessed value and percentage growth in assessed value for the period from 1991 through 2010 within Project Area No. 3:
Table C-1
REDEVELOPMENT AGENCY OF THE CITY OF SAN MARCOS PROJECT AREA NO. 3
TAXABLE ASSESSED VALUATION AND INCREMENTAL ASSESSED VALUE 1991 through 2010
General. Prior to 1994, under the Redevelopment Law, a redevelopment agency could enter into an agreement to pay tax increment revenues to any taxing agency that had territory located within a project area of a redevelopment project in an amount that the redevelopment agency determined was appropriate to alleviate any financial burden or detriment to such taxing agency caused by the redevelopment project. Such agreements normally provided for a pass-through of tax increment revenue directed to the affected taxing agency, and, therefore, such agreements are commonly referred to as “pass-through” agreements.
The Project Area No. 3 Pass-Through Agreements. On June 13, 1989, the City, the Agency and the District entered into the Original Pass-Through Agreement to alleviate the financial burden which may be caused to the District because of redevelopment activities in Project Area No. 3. On March 14, 2000, the City, the Agency and the District entered into the Second Pass-Through Agreement to clarify the Original Pass-Through Agreement and to provide terms and provisions relating to the financing of school facilities funding, to further delineate the obligations of the City and the Agency under a separate agreement to mitigate the impacts of development within the portion Project Area No. 3 included within a planned community known as San Elijo Hills (the “San Elijo Hills Project”), to resolve disputes between the District, the City and the Agency regarding the Original Pass-Through Agreement and to reaffirm and/or modify certain aspects relating to the distribution of tax increment revenue for Project Area No. 3 and two other project areas established by
C - 6
the Agency. (The Original Pass-Through Agreement, as clarified by the Second Pass-Through Agreement, is referred to herein as the “Pass-Through Agreement”)
Pursuant to the Pass-Through Agreement, the Agency, the City and the District agreed to the allocation to the District of a portion of the tax increment generated within Project Area No. 3 in accordance with the format and formulas provided for in the Pass-Through Agreement (the “Project Area No. 3 Tax Revenues”).
Pursuant to the Pass-Through Agreement, the Agency agreed to pay to the District certain mitigation obligations for the San Elijo Hills Project for anticipated impacts to the District as a result of development of such project. The Agency agreed to issue, or cause the San Marcos Public Facilities Authority (the “SMPFA”) to issue, bonds in series in an aggregate amount sufficient to fund the mitigation obligations (the “Project Area No. 3 Mitigation Bonds”). The Pass-Through Agreement provided that the Project Area No. 3 Mitigation Bonds would be secured, in order of priority, by the Project Area No. 3 Tax Revenues generated by the San Elijo Hills Project, the school fees collected from the San Elijo Hills Project pursuant to State law (the “San Elijo Hills Project School Fees”) and the remaining Project Area No. 3 Tax Revenues. The District agreed that the Project Area No. 3 Tax Revenues and the San Elijo Hills Project School Fees shall be pledged towards the repayment of the Project Area No. 3 Mitigation Bonds. The District further agreed to subordinate the Project Area No. 3 Tax Revenues as needed to provide reasonable coverage on each series of the Project Area No. 3 Mitigation Bonds to the extent that such coverage revenue, in sizing such bonds, is projected to be used over the life of such bonds for coverage only.
The Pass-Through Agreement provides that within thirty (30) days of the second annual debt service payment on each series of the Project Area No. 3 Mitigation Bonds, and annually thereafter, the Agency and/or the City shall pay the District one hundred percent (100%) of unused Project Area No. 3 Tax Revenue, including any such increment required to provide coverage for the Project Area No. 3 Mitigation Bonds, for the preceding year.
To satisfy the mitigation obligations of the Agency pursuant to the Pass-Through Agreement, the SMPFA, acting for the Agency, issued three series of Project Area No. 3 Mitigation Bonds (the “Prior Project Area No. 3 Mitigation Bonds”) to fund the Agency’s mitigation obligations.
The SMPFA 2006 Bonds
Issuance. On January 26, 2006, the SMPFA issued its $56,860,000 SMPFA 2006 Bonds to make a loan to the Agency (the “Loan”) pursuant to a Loan Agreement, dated as of February 1, 2006 (the “Loan Agreement”), by and among the SMPFA, the Agency and the trustee for the SMPFA 2006 Bonds. The proceeds of the Loan were used to (a) refund the Prior Project Area No. 3 Mitigation Bonds, (b) finance, on behalf of the District, certain school facilities, (c) purchase a reserve surety for such bonds and (d) pay costs of issuance.
Security for the SMPFA 2006 Bonds. The SMPFA 2006 Bonds are special obligations of the SMPFA, secured and payable solely from certain revenues, consisting primarily of amounts payable by the Agency under the Loan Agreement.
Pursuant to the Loan Agreement, the Agency pledged on a first lien basis all District Pass-Through Revenue to secure the payment of the principal of and interest and premium, if any, on the Loan in accordance with the Loan Agreement and the trust agreement pursuant to which the SMPFA 2006 Bonds were issued.
C - 7
The Loan Agreement defines the following terms:
“Adjusted Gross Increment” means Gross Increment minus the Increment Inflation Component.
“District Pass-Through Revenue” is defined in the Loan Agreement to mean the sum of 14.55% of the Adjusted Gross Increment plus 29.10% of the Incremental Inflation Component that is allocated to the Agency for the benefit of the District pursuant to the Pass-Through Agreement.
“Gross Increment” means the portion of taxes levied on assessable property within Project Area No. 3 that is allocated and paid to the Agency pursuant to California Health & Safety Code Section 33670(b). See “APPENDIX C - REDEVELOPMENT PAYMENTS – Tax Allocation Financing – Allocation of Taxes” herein.
“Increment Inflation Component” means that portion of the Gross Increment that results from the increase (not to exceed 2% in any given year) in the Base Year full cash value of Project Area No. 3 or portions of Project Area No. 3 permitted to reflect year-to-year inflation under Section 2(b) of Article XIIIA of the California Constitution and California Revenue and Taxation Code Section 51.
The Loan Agreement provides that the Agency shall cause to be collected and received by the fiscal agent for the Loan Agreement all District Pass-Through Revenue and certain other revenues in order to make all payments on the Loan when due. If any District Pass-Through Revenue shall remain on deposit with such fiscal agent on the first business day immediately succeeding any October 1 on which principal on the SMPFA 2006 Bonds is payable, after all payments on the Loan have been made and the Agency has certified to such fiscal agent that all reasonable and verified costs incurred by the Agency with respect to the administration of the Loan (the “Program Costs”) and the $75,000 annual fee charged by the Agency for the administration of the Loan (the “Annual Agency Fee”) have been paid pursuant to the Loan Agreement, the fiscal agent shall transfer such remaining District Pass-Through Revenue to the District, to be used for any lawful purposes of the District.
Pursuant to the provisions of the Pass-Through Agreement and the Loan Agreement, the receipt by the District and the use of District Pass-Through Revenue to fund Lease Payments is subordinate to the use of such revenues to fund payments on the Loan when due and to pay Program Costs and the Annual Agency Fee.
Historical Tax Increment Revenues of Project Area No. 3
The amount of Redevelopment Payments available to the District for the payment of Lease Payments is dependent upon the amount of District Pass-Through Revenue which is, in turn, dependent upon the Gross Increment generated within Project Area No. 3. The following is a summary of the historical taxable valuation and resulting Gross Increment generated in Project Area No. 3. The summary is not intended to be a projection of future Redevelopment Payments.
C - 8
Table C-4
REDEVELOPMENT AGENCY OF THE CITY OF SAN MARCOS PROJECT AREA NO. 3
HISTORIC ASSESSED VALUE AND TAX INCREMENT RECEIPTS
Actual Receipts $30,749,488 $35,092,009 $36,466,155 $35,158,096 not available Source: Fiscal Consultant’s Report, dated February 12, 2010.
See “APPENDIX D – FISCAL CONSULTANT’S REPORT 2009/10” for additional information regarding the history of the growth of Gross Increment.
C - 9
Secured Taxpayers
The table below shows the twenty (20) largest secured taxpayers within Project Area No. 3 for Fiscal Year 2009-10:
Table C-5
REDEVELOPMENT AGENCY OF THE CITY OF SAN MARCOS PROJECT AREA NO. 3
LARGEST FISCAL YEAR 2009-10 LOCAL SECURED TAXPAYERS 2009-10 % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Hunter Industries Industrial $ 53,441,994 1.58% 2. San Elijo Hills Development Co. LLC Residential Development 45,255,598 1.34 3. Lo Land Assets LP Residential Development 30,000,000 0.89 4. Fieldstone Rancho Santalina LLC Residential Development 20,829,000 0.62 5. Amtrust Bank Residential Development 20,001,000 0.59 6. Northwoods Apartments Homes LP Apartments 19,500,279 0.58 7. Jewel Food Stores Inc. Commercial Store 16,683,120 0.49 8. 830 RSF Road LLC Apartments 16,526,062 0.49 9. Vista North County No. 168 Ltd. Apartments 13,520,715 0.40 10. All City Storage LLC Industrial 10,320,000 0.31 11. 3 Tier Investments LLC Residential Development 8,276,386 0.24 12. Koll/Per La Costa Meadows LLC Industrial 8,269,531 0.24 13. Scripps Health Vacant Commercial 8,215,026 0.24 14. Dei LLC Industrial 7,852,938 0.23 15. Centinela Investments Ltd. Mobile Home Park 6,774,979 0.20 16. Coral Apartments LP Apartments 6,723,242 0.20 17. Woodspear/Vista 88 Ltd. Apartments 6,317,598 0.19 18. Hanson Aggregates Pacific Southwest Inc. Industrial 5,956,718 0.18 19. San Elijo Hills Town Center LLC Commercial Store 5,645,326 0.17 20. San Marcos Flex LLC Apartments 5,535,023 0.16
$315,644,535 9.33% Source: California Municipal Statistics, Inc.
C-1
0
Ass
essm
ent A
ppea
ls
The
follo
win
g ta
ble
sum
mar
izes
the
tax
asse
ssm
ents
app
eals
pen
ding
thro
ugh
Nov
embe
r 200
9 w
ith re
spec
t to
prop
erty
with
in P
roje
ct A
rea
No.
3.
See
“APP
END
IX D
– F
ISC
AL
CO
NSU
LTA
NT’
S R
EPO
RT
2009
/10”
for a
dditi
onal
info
rmat
ion
rega
rdin
g ta
x as
sess
men
t app
eals
.
Tab
le C
-6
R
ED
EV
EL
OPM
EN
T A
GE
NC
Y O
F T
HE
CIT
Y O
F SA
N M
AR
CO
S PR
OJE
CT
AR
EA
NO
. 3
ASS
ESS
ME
NT
APP
EA
LS
SUM
MA
RY
FI
SCA
L Y
EA
RS
2004
-200
5 T
HR
OU
GH
200
8-20
09
Fi
scal
Y
ear
Stip
ulat
ed/
Red
uced
With
draw
n/
Den
ied/
No
Cha
nge/
In
valid
Pend
ing
Tota
l
AV
of A
ll Pa
rcel
s (P
ortio
n of
Pro
ject
Are
a)
R
eque
sted
Red
uctio
ns[1
]
(Por
tion
of P
roje
ct A
rea)
Gra
nted
Red
uctio
ns[2
]
(Por
tion
of P
roje
ct A
rea)
Ave
rage
R
educ
tion
Pend
ing
Red
uctio
ns[3
]
(Por
tion
of P
roje
ct A
rea)
Tota
l Pro
ject
Are
a V
alue
20
08
4 1
225
230
$182
,268
,184
5.
26%
$2
98,0
00
0.01
0%
$272
,000
0.
010%
$6
8,00
0 $4
4,55
0,98
6 1.
29%
$3
,465
,652
,293
20
07
334
174
226
734
424,
830,
954
11.0
8%
37,9
02,2
63
0.99
0%
28,3
89,7
47
0.74
0%
84,9
99
87,2
11,5
93
2.28
%
3,83
2,64
0,25
6 20
06
417
217
0 63
4 39
1,47
4,08
4 9.
92%
11
1,01
4,19
3 2.
810%
63
,368
,477
1.
610%
15
1,96
3 0
0.00
%
3,94
4,79
8,51
0 20
05
7 24
0
31
28,7
46,2
81
0.78
%
495,
316
0.01
3%
263,
196
0.01
0%
37,5
99
0 0.
00%
3,
681,
406,
485
2004
1
8
0
9
4,37
5,10
6 0.
14%
35,0
00
0.00
1%
35,
000
0.00
1%
35,
000
0 0.
00%
3,
044,
692,
220
Tota
ls
763
424
451
1,63
8
$1
49,7
44,7
72
$9
2,32
8,39
0
$377
,561
$1
31,7
62,5
79
His
toric
al R
ate
of S
tipul
ated
/Red
uced
App
eals
47
%
Ave
rage
Gra
nted
Red
uctio
n as
Per
cent
age
of R
eque
sted
Red
uctio
n[4]
62%
[1
] R
efle
cts t
otal
requ
este
d re
duct
ions
for a
ll st
ipul
ated
/redu
ced
parc
els.
[2]
Ass
umed
no
redu
ctio
n in
ass
esse
d va
lue
for t
hose
app
eals
for w
hich
the
Boa
rd v
alue
was
zer
o.
[3]
Pend
ing
appe
als a
re th
ose
appe
als t
hat d
id n
ot d
ispl
ay a
Fin
al A
ctio
n C
ode
and
whe
re th
e B
oard
val
ue w
as z
ero.
[4
] R
efle
cts t
he to
tal g
rant
ed re
duct
ion
as a
per
cent
age
of to
tal r
eque
sted
redu
ctio
n fo
r all
stip
ulat
ed/re
duce
d ap
peal
s. N
ote:
A
ppea
ls w
here
an
appl
ican
t opi
nion
of v
alue
was
hig
her t
han
the
asse
ssed
val
ue w
ere
dete
rmin
ed to
be
cler
ical
err
ors a
nd d
elet
ed to
pre
vent
skew
ed d
ata
resu
lts.
Sour
ce: S
an D
iego
Cou
nty
Audi
tor C
ontr
olle
r’s &
Ass
esso
r’s O
ffice
.
D-1
APPENDIX D
FISCAL CONSULTANT’S REPORT 2009/10
(This page intentionally left blank)
ROSENOW SPEVACEK GROUP INC.
FISCAL CONSULTANT REPORT
2009/10
San Marcos Unified School District
Series 2010 Authority Lease Revenue Bonds
February 12, 2010
SAN M ARCOS UNIFIED SCHOOL DISTRICT 2009/10 Fiscal Consultant Report
i
TABLE OF CONTENTS Introduction ...................................................................................................................................... 1
Redevelopment Plan Limitations .................................................................................................. 2
General Assumptions in the Revenue Projections ............................................................................ 4
SAN M ARCOS UNIFIED SCHOOL DISTRICT 2009/10 Fiscal Consultant Report
1
INTRODUCTION This Fiscal Consultant Report (“Report”) has been prepared at the request of the San Marcos Unified School District (“District”) to substantiate the availability of tax increment revenues to support the District’s proposed Series 2010 Authority Lease Revenue Bonds (“2010 Bonds”). Tax increment revenues generated by the San Marcos Redevelopment Project Area No. 3 (“Project Area”) and paid to the District are intended to be pledged to payment of the 2010 Bonds debt service. This Report presents historical assessment information and future revenue projections for the Project Area.
The following exhibits have been incorporated into this Report:
Exhibit 1: Redevelopment Plan Limits
Exhibit 2: Financial Plan Limits with CPI Adjustment
Exhibit 3: Base Year Assessed Value
Exhibit 4: Historic Assessed Value and Tax Increment Receipts
Exhibit 5: 1% Tax Rate Levy Distribution
Exhibit 6: Increase in Assessed Value Due to Sales
Exhibit 7: 2009-10 Top Ten Secured Taxpayers
Exhibit 8: Secured Assessed Value By Land Use
Exhibit 9: Assessment Appeal History
Exhibit 10: Tax Increment Revenue Projections for Project Area No. 3
The projected assessed values and tax revenues presented in this Report are based upon assumptions formulated from the following:
1. Historical growth trends;
2. Trended growth in valuation as permitted by Article XIIIA of the California Constitution (“Proposition 13”); and
3. Assessment and apportionment procedures of the County of San Diego (“County”); and
4. The revised agreement for cooperation between the San Marcos Redevelopment Agency (“Agency”) and the San Marcos Unified School District.
Revenue projections have been conservatively estimated in order to reduce the possibility of overstating future tax increment revenues. While precautions have been taken to assure the accuracy of the data used in the formulation of these projections, it cannot be assured that projected valuations will be realized. Actual values may be affected by future events and conditions that cannot be controlled or predicted with certainty.
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Redevelopment Plan Limitations State Redevelopment Law requires redevelopment agencies to include certain time and financial limits within adopted redevelopment plans. All of the applicable time and financial limits for the San Marcos Redevelopment Project Area No. 3 are presented on Exhibit 1.
Redevelopment Plan Limits Exhibit 1Project Area No. 3
Date of Adoption: 7/11/1989Time LimitsIncur Debt Eliminated1
** Tax increment limits are exclusive of pass-through payments; Project Area 3's limit is annual and excludes pass-through agreement payments and the low and moderate income housing set aside associated with those payments
Source: San Marcos Redevelopment Agency, California State Department of Finance
To calculate the status of the tax increment limit applicable to Project Area No. 3, RSG has applied the actual Consumer Price Index (“CPI”) adjustment factors to date to the tax increment limits listed above in Exhibit 1. As shown in Exhibit 2, the application of the CPI inflator to the annual tax increment limit of $50 million for Project Area No. 3, results in the current annual limit of $83,593,141. Current annual collections are well below this limit, and assuming an annual 2% increase in assessed valuation, the Agency will not exceed the 2009 annual limits. Even at higher growth levels, given the annual CPI adjustment, it is unlikely that the limits will be reached. The CPI-adjusted bonded indebtedness limit for Project Area No. 3 is $167,186,282 in 2009, well below the amount of outstanding bonds. Exhibit 2 shows the CPI-adjusted financial limits for Project Area No. 3.
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Financial Plan Limits with CPI Adjustment Exhibit 2 Project Area No. 3
1 Represents the annual tax increment limit, not cumulative.
Source: San Marcos Redevelopment Agency, California State Department of Finance
Project Area 3
Year CPI Increase
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GENERAL ASSUMPTIONS IN THE REVENUE PROJECTIONS
Assessed Valuation The redevelopment plan for Project Area No. 3 (“Redevelopment Plan”) provides that the Agency may collect tax increment to finance project implementation. Tax increment revenue is generated from increases in the current year total assessed value above the base year value. Exhibit 3 presents a summary of the Base Year Assessed Value of Project Area as provided by the County of San Diego Auditor-Controller (“County Auditor-Controller”).
Base Year Assessed Value Exhibit 3Project Area No. 3
Secured $348,245,450Utility $0
Unsecured $13,171,721Totals $361,417,1711 The Base Year Assessed Valuation reflected above is net of all other exemptionsSource: County of San Diego Auditor-Controller's Office
Tax increment revenue is generated from the application of the tax rate upon the increases in total assessed value above the base year assessed value. The current total assessed value for Project Area No. 3, net of all exemptions (except homeowners because the Agency received subvention payments for homeowner exemptions) is $3,465,652,293. The base year value for Project Area No. 3 changed from fiscal year 2006-07 to 2007-08 due to AB 2670, which modified the way the California Board of Equalization allocates state assessed utility value to redevelopment agencies.
Exhibit 4 summarizes year-to-year changes in Project Area No. 3’s assessed values for the past five years based upon the County Auditor-Controller’s annual assessed value reports. During this period, the total assessed value for the Project Area has increased from approximately $3 billion to $3.5 billion (14% increase).
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Tax Increment Collection History Exhibit 4 presents a summary of historical assessed values and tax increment revenue collections for the past five years.
Historic Assessed Value and Tax Increment Receipts1 Exhibit 4Project Area 3
Estimated Receipts $26,160,079 $33,197,543 $35,833,813 $34,712,231 $31,042,351Actual Receipts $30,749,488 $35,092,009 $36,466,155 $35,158,096 not available1 The assessed values represented above are net of all other exemptionsSource: San Diego County Auditor-Controller, City of San Marcos
Over the past five years, assessed value of Project Area No. 3 has grown an average of 4% per year. In each of those years actual revenue received by the Agency exceeded the expected revenue based on assessed values. This is due to supplemental tax revenue and penalty collections, which are not included in the tax increment projections in Exhibit 10. However, as shown in Exhibit 4, Project Area No. 3 has experienced a decline in total assessed value for Fiscal Years 2008-09 and 2009-10.These recent declines in assessed value may be due in part to decreasing housing prices that are affecting homes that were initially purchased at the height of the market and have been resold at lower values. As shown in Exhibit 8. Project Area No. 3 has a high percentage of residential land uses. Further, assessed values in Project Area 3 may have been affected by a reassessment of parcels under Proposition 8. In 1978, California voters passed Proposition 8, which allows a temporary reduction in assessed value when a property suffers a decline in its value. A decline-in-value occurs when the current market value of a property is less than the current assessed value as of January 1st.
Growth Assumptions The growth assumptions were established by RSG to account for the following factors that affect future tax increment collections.
Article XIIIA (Proposition 13) Inflationary Adjustments As enacted by Proposition 13 in 1978, Article XIIIA of the State Constitution limits annual inflationary adjustments to property assessed values to a maximum of 2% annually. Each year, the State Board of Equalization establishes this annual increase based on the statewide Consumer Price Index (CPI) for the previous year (October to September). Since its passage in 1978, there have been five occurrences when the inflationary adjustment was less than 2%. This occurred in fiscal years 1983-84, 1995-96, 1996-97, 1999-00, and 2004-05; the inflationary adjustments for these fiscal years was 1.00%, 1.19%, 1.11%, 1.853% and 1.867%, respectively.
On December 14, 2009 the State Board of Equalization announced that, because of negative growth in the consumer price index for the prior year, county assessors should assume an adjustment factor of .99763 for the 2010-11 assessment roll. For this reason, RSG assumed this
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negative growth factor for 2010-11. Because the Proposition 13 factor tends to remain at the 2% level historically, it is expected that inflationary adjustments will be 2% in the years thereafter.
Unsecured Roll The 2009-10 unsecured roll represents approximately 2% of the overall assessed value for Project Area No. 3. Over the last four years, the average growth rate in unsecured value for Project Area No. 3 has been approximately 5%. Although the growth of unsecured valuations will continue to vary from one year to the next, a 2% increase in unsecured valuations has been assumed over the projection period.
Tax Rates Tax rates, including the 1% basic levy and any override rate, are assigned by Tax Rate Area. Exhibit 5 below presents a summary of the fiscal year 2009-10 tax rates, by Tax Rate Area, for Project Area No. 3 as reported by the Auditor Controller. Because the override rate may decrease over time, RSG’s projections assume only the basic 1% levy.
1% Tax Rate Levy Distribution Exhibit 5Project Area No. 3
Source: San Diego County Auditor Controller's Office
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County Administrative Charges The County charges an administrative fee for disbursing property tax increment revenues to redevelopment agencies. This fee is based on actual cost, prorated among redevelopment project areas based on their respective assessed values. In fiscal year 2008-09, the County charged the Agency $316,706.57 in administrative charges for Project Area No. 3, which represents less than 1% of the gross tax increment received by the Agency in fiscal year 2008-09. Because supplemental taxes have always exceeded the negative impacts of the County Administrative Charge, the revenue projections do not deduct this charge.
Unitary Utility Revenue As provided by Assembly Bill 454, property tax revenue from unitary utility property is disbursed in a different manner than revenue from non-unitary property. For fiscal year 2008-09, the County Auditor-Controller has determined the unitary tax revenue to be $102,667.46 for Project Area No. 3. For fiscal year 2009-10, the County Auditor-Controller has determined the estimated unitary tax revenue to be $104,692.35 for Project Area No. 3. Since unitary utility apportionments are not increased in the same manner as other secured and unsecured assessed property, and are difficult to project, RSG has conservatively projected no annual growth in unitary utility revenue over the term of the projections in Exhibit 10.
Changes in Value Caused by Ownership Changes To analyze the impact of property sales on assessed values in the Project Area, RSG compiled statistics of 2009 (January 1 through December 31) and 2010 (January 1 through January 31st) sales. A monthly and year-to-date summary of these sales is presented in Exhibit 6 (not including multi-parcel transfers or transfers with no sale price). Exhibit 6 indicates that the total number of property sales and the amount that the transfer value exceeded the properties’ assessed values. The cumulative presale value is based on the 2009-10 roll. The sales recorded in 2009 will be reassessed at their transfer value on the 2010-11 assessment roll. Similarly, those sales recorded in 2010 will be reassessed at their transfer value on the 2011-12 assessment roll.
SAN M ARCOS UNIFIED SCHOOL DISTRICT 2009/10 Fiscal Consultant Report
Projected Increase in 2010-11 Values Due to Sales: $3,963,200Total Project Area 3 2009-10 Value: $3,465,652,293Percentage Increase in 2010-11 Values Due to Sales: 0.11%Source: Metroscan& San Diego County Auditor-Controller
Project Area No. 3
Based on an analysis of property transfers in the Project Area No. 3, RSG has determined that property sales are anticipated to add approximately $3.96 million of value to its secured assessed value in 2010-11. Because of other economic down-trending, the projections included in Exhibit 10 do not include this added value.
Supplemental Tax Revenue Supplemental Revenue is revenue generated by the tax increment created when a sale takes place or a construction project is completed after January 1st of a given year (the assessor’s office cut-off date for the next year’s assessment roll), but the reassessment occurs and the owner is issued a supplemental tax bill for the period between the sale or completion and the next regular tax bill. Because these costs/revenues/refunds cannot be accurately projected, and historically the revenues have exceeded the costs resulting in slightly higher revenues than anticipated, no provision is made to reflect their impact on future revenues.
County Collections/Delinquencies The Agency is not on the County’s “Teeter Plan”, which stabilizes property tax payments at 100% of the anticipated receipts. Consequently, delinquent property taxes will impact the Agency’s tax increment revenues. Conversely, the Agency will benefit from revenue generated by penalties and interest charged on delinquent property taxes. For fiscal year 2008-09, the Countywide delinquency rate was 3.9%.
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Foreclosures Due to current residential market conditions, RSG has analyzed foreclosure information provided by Dataquick for Project Area No. 3. According to Dataquick as of January, 2010, 473 residential properties are in pre-foreclosure, 140 are at auction and 104 are bank owned. These 717 residential properties are 7% of the 10,232 households1 in Project Area No. 3.
Education Revenue Augmentation Fund
Due to the State’s effort to take redevelopment funds to balance the State Budget, the Commission may be required to make Educational Revenue Augmentation Fund (“ERAF”) payments for fiscal years 2009-10 and 2010-11. In 2008-09 the State of California approved the budget contingent upon a $350 million shift of tax increment monies from redevelopment agencies to be applied to ERAF. The California Redevelopment Association filed a lawsuit on behalf of all redevelopment agencies asserting that the take from redevelopment was unconstitutional. On April 30, 2009 a judgment in favor of redevelopment agencies was rendered, affirming that the take was unconstitutional and therefore illegal.
Following this judgment, the State of California approved the fiscal year 2009-10 budget relying on a $2.05 billion ERAF shift from redevelopment agencies over the next two years. The additional shift to ERAF (referred to as the Supplemental Educational Revenue Augmentation Fund or “SERAF”) is estimated to result in a payment of $20,220,665 in 2009-2010 and $4,163,078 in 2010-11 from the Agency. Within the budget, there is a provision by which the Agency has the option to suspend the 2009-10 20% housing set-aside contribution in order to assist the SERAF shift in that year; however the loan will need to be repaid by June 30, 2015.
While the California Redevelopment Association believes this shift of tax increment from redevelopment falls under the same circumstances as the previous attempt, the Agency potentially could lose up to $24 million to ERAF/SERAF shifts over the next two years. The California Redevelopment Association has filed another lawsuit in an effort to thwart this and future takes from redevelopment.
Any Agency obligation to make ERAF/SERAF payments should not affect the Agency’s pass through payment to the District, therefore, no deduction has been made in the projections presented in Exhibit 10.
A State General Fund budget deficit is expected to arise in one or more future years and the potential impact of future legislation could be material to the Agency and its ability to conduct its redevelopment activities. RSG cannot predict whether the State Legislature will, in future years, enact legislation requiring shifts of tax increment revenues to the State or to schools, whether through an arrangement similar to ERAF or by any other arrangement. It is also not known whether any future shifts in revenue would be limited or affected (such as by an offset of amounts required to be shifted) by pre-existing agreements between redevelopment agencies and school districts, community college districts and county superintendents of schools. Accordingly, RSG is not able to predict the effect, if any, such a shift, if enacted, would have on future Tax Revenues.
1 Total households were obtained from the U.S. Bureau of the Census, 2000 Census of Population and Housing and ESRI Business Analyst.
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LOW AND MODERATE INCOME HOUSING FUND DEPOSITS Health and Safety Code (HSC) Section 33334.2 requires the Agency to deposit 20% of the Project’s tax increment revenue into a Low and Moderate Income Housing Fund for the purposes of maintaining and expanding the supply of housing affordable to very low, low, and moderate income households.
The Agency has, however, agreed to set-aside additional housing funds pursuant to a stipulation for entry and judgment regarding Case No. N44744 filed in the Superior Court of the State of California, County of San Diego. The Agency is required to deposit into the housing fund 24.7% of Project Area No. 3 revenues. The projections provide for the set-aside of tax increment pursuant to this judgment. Pursuant to the revised agreement with the San Marcos Unified School District, the pass-through payments to SMUSD are net of housing set-aside funds. Annual deposits of the 24.7% housing set aside have been identified in the tax increment revenue projections.
TAXING AGENCY PAYMENTS/ PAYMENTS TO DISTRICT Under the versions of HSC Section 33676(a)(2) operative during the early 1980s through 1993 which affected redevelopment plans adopted during that timeframe, any effected taxing agency could elect to be allocated tax revenues from increases in the assessed value of the taxable property base year as calculated annually per Section 110.1(f) of the Revenue and Taxation Code. These revenues are also known as the “Inflationary Revenue.” The base year used to calculate the Inflationary Revenue includes the local secured value only. It does not include state-assessed secured value or personal property value.
In addition to the payments made under HSC Section 33676, the Agency has entered into tax sharing agreements with several taxing entities pursuant to HSC Section 33401.
The agreement with the District provides for SMUSD to receive its share of the Inflationary Revenue, after deduction of the 24.7% housing set-aside funds. Additionally, 50% of the District’s share of the remaining Tax Increment Revenue, after deduction of the 24.7% set-aside funds, shall be provided to the District. For 2009-10 the District’s share of the 1% levy in Project Area No. 3 was 39.161%. The projections assume continuation of this average rate in the future.
Developer Agreement Payments The San Marcos Redevelopment Agency has entered into numerous agreements with various property owners and developers (known as Disposition and Development Agreements or Owner Participation Agreements); however, none of these agreements affect the required payments to the District.
Outstanding Bonds In 2006, the San Marcos Public Facilities Authority issued the “$56,860,000 Tax Increment Pass-Through Revenue Refunding Bonds: (Project Area No. 3 - San Marcos Unified School District), 2006 Series A” bonds. The proceeds of these bonds were used to refund previously issued bonds, and provide new money for the benefit of District projects. Debt service on these bonds is paid by the Agency from annual allocations of Project Area No. 3 tax increment to the District. The debt service on these bonds is deducted from available revenue presented in the tax increment projections in Exhibit 10.
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TOP TEN TAXPAYERS Utilizing the County’s 2009-10 Secured Assessment Roll, the top ten largest taxpayers within Project Area No. 3 have been identified and are listed in Exhibit 7.
Exhibit 7
No. Assessed % ofTaxpayer Parcels Land Use(s) Value1 Total AV
1 Hunter Industries Inc. 9 Industrial, Recreational, Commercial $52,097,992 1.50%
Note: Values will vary from Exhibit 7 due to use of different sources
1 The secured assessed values represented above are net of all other exemptions
Project Area No. 3 is primarily comprised of residential land uses, which represents 88.42% of the total secured assessed value in the area.
ASSESSMENT APPEALS In conjunction with the preparation of tax increment revenue projections, information on assessment appeals has been obtained. Property taxpayers that wish to dispute the value of their property may file an assessment appeal with the County Clerk of the Board of Supervisors. In most cases, an assessment appeal is filed because the applicant believes that present market conditions cause the property to be worth less than its assessed value.
Exhibit 9 summarizes the assessment appeal history of Project Area No. 3 (through November, 2009), which was provided by the San Diego County Assessor’s Office.
1 Reflects total requested reductions for all stipulated/reduced appeals.
Source: San Diego County Auditor Controller's & Assessor's Office
Pending Reductions3
(Portion of Project Area) (Portion of Project Area) (Portion of Project Area) (Portion of Project Area)
Note: Appeals where an applicant opinion of value was higher than the assessed value were determined to be clerical errors and deleted to prevent skewed data results.
Assessment Appeal History
Withdrawn/Denied/No
Change/Invalid
AV of All Appeals Requested Reductions1 Granted Reductions2
Historical Rate of Stipulated/Reduced AppealsAverage Granted Reduction as Percentage of Requested Reduction4
2Assumed no reduction in assessed value for those appeals for which the board value was zero.
3 Pending appeals are those appeals that did not display a Final Action Code and where the Board value was zero.
4 Reflects the total granted reduction as a percentage of total requested reduction for all stipulated/reduced appeals.
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Review of the secured and unsecured roll assessment appeals for Project Area No. 3 shows a number of appeals that are still pending, as shown above in Exhibit 9. A majority of the pending appeals in Project Area No. 3 have occurred in fiscal year 2008-09 and 2009-10, where the pending reductions are 2.28% and 1.29%, respectively, of the total assessed value of those areas. If pending appeals were granted in Project Area No. 3 and values were reduced to the applicants’ opinion, the Agency’s gross tax revenues would be reduced by approximately $131,762,579.
The vast majority of the closed and pending appeals are Proposition 8 appeals, which only apply to a single tax year. Proposition 8 appeals are market driven; in most cases, the applicant or property owner believes that the present market conditions (i.e. comparable sales prices, decreased lease rates, excessive vacancies) cause the property to have a different value than its assessed value.
Because Proposition 8 appeals do not have a sustaining effect on future tax rolls and because of the estimated minimal impacts of pending appeals based on historical appeal adjustments, the assessed values used to generate tax increment revenue in the attached projections do not make an adjustment for pending appeals. The historical rate of reductions for Project Area No. 3 is 47% with the average granted reduction being 62% of the requested reduction amount.
Top Ten Taxpayer Appeals Estancia Coastal LLC, which is the third largest taxpayer in Project Area No. 3 has 1 pending appeal filed in 2009. By comparing the assessor value to the applicant opinion, the appeals seek a reduction in value of $12 million. All City Storage LLC, the tenth largest taxpayer in Project Area No. 3 has 2 pending appeals filed in 2009 and has requested a reduction in value of $1.9 million. RSG did not assume any reduction in value due to these appeals in Exhibit 10.
TAX INCREMENT REVENUE PROJECTIONS Exhibit 10 represents the tax increment revenue projections for Project Area No. 3 based upon the assumptions described in this Report.
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Tax Increment Projections - San Marcos Unified School District Pass Through EXHIBIT 10San Marcos Project Area No. 3
Year SBE Assessed Estimated Unitary Total "Inflationary 2006 15% RemainingInflation Valuation Tax Utility Gross Revenue" Inflationary Projects TOTAL Bond Deb Svc SMUSD
Pursuant to the Pledge Agreement and subject to the limitations therein, the Authority, the District and the Designated CFDs have pledged to apply the Surplus Net Special Taxes to the payment of Rental Payments due under the Lease Agreement.
The availability of Surplus Net Special Taxes and the application thereof for the above-described purposes is subordinate to the payment of debt service on all outstanding bonded indebtedness of the Designated CFD from which such Surplus Net Special Taxes are generated, as applicable, and to the payment of costs to conduct foreclosure proceedings against properties that are delinquent in the payment of Special Taxes within such Designated CFD, the replenishment of any reserve fund established for such bonded indebtedness of such Designated CFD and any other requirements of obligation of such Special Taxes set forth in the rate and method of apportionment of the Special Taxes for such Designated CFD, the CFD Formation Documents (as defined in the Pledge Agreement) and the documents providing for the issuance of such bonded indebtedness. See “SECURITY FOR THE BONDS – Pledge Agreement” in the Official Statement and “APPENDIX A – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Pledge Agreement.”
The Mello-Roos Act
The Mello-Roos Act provides an alternative method of financing certain public capital facilities and public services within defined geographic boundaries. Once duly established, a community facilities district is a legally constituted governmental entity. Upon approval by two-thirds of the qualified electors of a community facilities district and compliance with the provisions of the Mello-Roos Act, a community facilities district may issue bonds and may levy and collect special taxes to repay such bonded indebtedness.
The Designated CFDs – Formation and Authorized and Existing Bonded Indebtedness
Formation - General. Acting pursuant to the Mello-Roos Act, the Board of the District initiated separate proceedings to establish each of the Designated CFDs by first adopting a resolution declaring its intention to establish each such Designated CFD and to authorize the incurrence of a bonded indebtedness of such Designated CFD and the levy of Special Taxes within the boundaries of each such Designated CFD to, among other purposes, pay debt service on such bonded indebtedness or to finance authorized facilities directly.
Following public hearings conducted pursuant to the Mello-Roos Act for each Designated CFD, the Board adopted resolutions establishing such Designated CFD and determining the necessity to incur a bonded indebtedness to finance the acquisition or construction of school facilities for such Designated CFD.
Subject to approval by a two-thirds vote of the qualified electors within a community facilities district and compliance with the provisions of the Mello-Roos Act, a community facilities district may levy and collect special taxes to pay debt service on bonded indebtedness incurred pursuant to the Mello-Roos Act to finance authorized facilities or to directly pay the costs to acquire or construct such facilities or to provide authorized services. When less than twelve registered voters reside within the boundaries of a community facilities district, the qualified electors of such community facilities district are the owners of land within such community facilities district.
CFD No. 1.
Formation. The Board adopted its resolution establishing CFD No. 1 on April 30, 1990. On July 11, 1990, at an election held in CFD No. 1, the landowner within CFD No. 1 authorized the issuance of up to $7,500,000 of bonds and the levy of the Special Tax to pay the principal and interest on the bonds (“CFD
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No. 1 Special Tax”). On August 27, 1990, the Board adopted Ordinance No. 1-90/91 directing the levy of the CFD No. 1 Special Tax. A Notice of Special Tax was recorded on August 3, 1990.
Bonded Indebtedness. In March 1991, CFD No. 1 issued $7,110,000 aggregate principal amount of its special tax bonds. Such special tax bonds were subsequently refunded from the proceeds of the $3,850,000 2001 Special Tax Refunding Bonds of Community Facilities District No. 1 (Palos Vista) of the San Marcos Unified School District issued in April 2001 (the “2001 CFD No. 1 Special Tax Refunding Bonds”) of which $1,790,000 is currently outstanding. Except for the 2001 CFD No. 1 Special Tax Refunding Bonds, no additional indebtedness of CFD No. 1 secured by the CFD No. 1 Special Taxes will be incurred.
CFD No. 2
Formation. The Board adopted its resolution establishing CFD No. 2 on April 22, 1991. On July 15, 1991, at an election held in CFD No. 2, the landowner within CFD No. 2 authorized the issuance of up to $15,000,000 of bonds and the levy of the Special Tax to pay the principal and interest on the bonds (“CFD No. 2 Special Tax”). On September 23, 1991, the Board adopted Ordinance No. 1-91/92 directing the levy of the CFD No. 2 Special Tax. A Notice of Special Tax was recorded on September 19, 1991.
Bonded Indebtedness. In April 1992, CFD No. 2 issued $4,740,000 aggregate principal amount of its special tax bonds. Such special tax bonds were subsequently refunded from the proceeds of the $3,830,000 2001 Special Tax Refunding Bonds of Community Facilities District No. 2 (Discovery Hills, Zone A) of the San Marcos Unified School District issued in April 2001 (the “2001 CFD No. 2 Special Tax Refunding Bonds”) of which $1,985,000 is currently outstanding. Except for special tax bonds issued to refund the 2001 CFD No. 2 Special Tax Refunding Bonds, no additional indebtedness of CFD No. 2 secured by CFD No. 2 Special Taxes will be incurred.
CFD No. 4
Formation and Annexations. The Board adopted its resolution establishing CFD No. 4 on June 15, 1998. On June 23, 1998, at an election held in CFD No. 4, the owners of property within CFD No. 4 authorized the issuance of up to $50,000,000 of bonds and the levy of the Special Tax to pay the principal and interest on the bonds (“CFD No. 4 Special Taxes”). On July 20, 1998, the Board adopted Ordinance No. 98-1 directing the levy of the CFD No. 4 Special Tax. A Notice of Special Tax Lien was recorded on June 26, 1998. The Board undertook proceedings on nine (9) different occasions between 2001 and 2004 to annex additional properties to CFD No. 4.
Bonded Indebtedness. CFD No. 4 has issued the following debt secured by the CFD No. 4 Special Taxes:
2000 - $3,815,000 San Marcos Unified School District Community Facilities District No. 4 Special Tax Bonds Series 2000 (Zone A Special Taxes) (the “2000 CFD No. 4 Special Tax Bonds”). The 2000 CFD No. 4 Special Tax Bonds were refunded from the proceeds of the 2002 CFD No. 4 Special Tax Refunding Bonds (defined below).
2002 - $7,500,000 Community Facilities District No. 4 Series 2002 Special Tax Refunding Bonds of the San Marcos Unified School District (the “2002 CFD No. 4 Special Tax Refunding Bonds”) of which $6,320,000 is currently outstanding.
2004 - $7,175,000 Community Facilities District No. 4 Series 2004 Special Tax Bonds of the San Marcos Unified School District (the “2004 CFD No. 4 Special Tax Bonds”) of which $6,675,000 is currently outstanding.
2006 - $11,025,000 Community Facilities District No. 4 Series 2006 Special Tax Bonds of the San Marcos Unified School District (the “2006 CFD No. 4 Special Tax Bonds”) of which $10,445,000 is currently outstanding.
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The 2002 CFD No. 4 Special Tax Refunding Bonds, the 2004 CFD No. 4 Special Tax Bonds and the 2006 CFD No. 4 Special Tax Bonds (collectively, the “Outstanding CFD No. 4 Special Tax Bonds”) were issued on a parity. CFD No. 4 is authorized to issued additional bonds secured by the CFD No. 4 Special Taxes on the parity with the Outstanding CFD No. 4 Special Tax Bonds. The remaining bond authorization for CFD No. 4 is $23,908,336.56.
CFD No. 5
Formation. The Board adopted its resolution establishing CFD No. 5 on May 15, 1998. On May 11, 1998, at an election held in CFD No. 5, the owners of property within CFD No. 5 authorized the issuance of up to $30,000,000 of bonds and the levy of the Special Tax to pay the principal and interest on the bonds (“CFD No. 5 Special Taxes”). On May 26, 1998, the Board adopted Ordinance No. 98-2 directing the levy of the CFD No. 5 Special Tax. A Notice of Special Tax Lien was recorded on May 14, 1998.
Bonded Indebtedness. CFD No. 5 has issued the following debt secured by the CFD No. 5 Special Taxes:
1999 - $12,950,000 Community Facilities District No. 5 Series 1999 Special Tax Bonds of the San Marcos Unified School District (“1999 CFD No. 5 Special Tax Bonds”). The 1999 CFD No. 5 Special Tax Bonds were refunded from the proceeds of the 2003 CFD No. 5 Special Tax Bonds (defined below).
2002 - $12,500,000 Community Facilities District No. 5 Series 2002 Special Tax Bonds of the San Marcos Unified School District (“2002 CFD No. 5 Special Tax Bonds”) of which $10,710,000 is currently outstanding.
2003 - $14,710,000 Community Facilities District No. 5 Series 2003 Special Tax Bonds of the San Marcos Unified School District (“2003 CFD No. 5 Special Tax Bonds”) of which $12,250,000 is currently outstanding.
The 2002 CFD No. 5 Special Tax Bonds and the 2003 CFD No. 5 Special Tax Bonds (collectively, the “Outstanding CFD No. 5 Special Tax Bonds”) were issued on a parity. CFD No. 5 is authorized to issue additional bonds secured by the CFD No. 5 Special Taxes on the parity with the Outstanding CFD No. 5 Special Tax Bonds. The remaining bond authorization for CFD No. 5 is $648,357.67.
CFD No. 6
Formation. The Board adopted its resolution establishing CFD No. 6 on September 27, 2004. On November 8, 2004, at an election held in CFD No. 6, the owners of property within CFD No. 6 authorized the issuance of up to $200,000,000 of bonds and the levy of the Special Tax to pay the principal and interest on such bonds (“CFD No. 6 Special Taxes”). On December 18, 2005, the Board adopted Ordinance No. 01-02/05 directing the levy of the CFD No. 6 Special Tax. A Notice of Special Tax Lien was recorded on December 13, 2004 and subsequently amended on March 25, 2005. Additional properties have been annexed to CFD No. 6 on four (4) separate occasions since CFD No. 6 was originally formed.
Bonded Indebtedness. CFD No. 6 has incurred no bonded indebtedness to date.
Location and Description of the Designated CFDs
CFD No. 1. CFD No. 1 encompasses the Emerald Heights development located in the hills at the northwestern edge of the City of Escondido, California, west of Interstate 15 and north of State Highway 78. The City of Escondido is located approximately 30 miles north of downtown San Diego, California and approximately 15 miles east, inland, from the Pacific Ocean.
Emerald Heights was developed as a planned community including 690 single-family detached homes on a total of approximately 488 acres. The development includes a recreation center consisting of a recreation
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building, three tennis courts, a basketball court, swimming pools, Jacuzzi, and grass play areas. Of the 690 single-family detached homes originally subject to the levy of the CFD No. 1 Special Tax, the special tax obligation for 189 of such homes has been prepaid and such homes are no longer subject to the CFD No. 1 Special Tax. The balance of the 501 such homes remain subject to the levy of the CFD No. 1 Special Tax.
The development was completed in 1995. All homes within CFD No. 1 are owned by individual homeowners.
CFD No. 2. CFD No. 2 is located in the City of San Marcos, California, approximately 30 miles north of downtown San Diego, California and approximately 12 miles inland from the Pacific Ocean, west of Interstate 15 and south of State Highway 78 in the rolling foothills of the Las Posas Mountain Range. CFD No. 2 has an area of approximately 263 acres and lies on the south side of the business district of the City of San Marcos. The development within CFD No. 2, commonly referred to as the Discovery Hills development, consists of 556 single-family detached homes. Of the 556 homes initially subject to the levy of CFD No. 2 Special Taxes, 7 homes have prepaid the Special Taxes as of January 1, 2010 and are no longer subject to the levy of CFD No. 2 Special Taxes. The balance of 549 homes remain subject to the levy of CFD No. 2 Special Taxes.
There are four neighborhoods or product types within CFD No. 2. The first, Discovery Creek, totals 166 homes. The second neighborhood, The Trails, consists of 100 homes. The third neighborhood is Chancellor’s Crest, consisting of 77 homes and the final neighborhood, Glen Arbor, consists of 213 homes.
The development was completed in 1995. All homes within CFD No. 2 are owned by individual homeowners.
CFD No. 4. CFD No. 4 was established as an annexable community facilities district, i.e., a community facilities district into which separate developments could be annexed to mitigate the impact of such developments on the District’s school facilities. The last annexation to CFD No. 4 occurred in 2004. CFD No. 4 encompasses portions of thirteen (13) separate developments consisting of 1,228 single-family homes located throughout the District:
Rancho Dorado: Rancho Dorado, incorporated into CFD No. 4 upon its formation, is comprised of approximately 88 net acres and consists of 276 single-family homes and an approximate 6-acre community park located within the City of San Marcos.
Hidden Meadows: Hidden Meadows, annexed to CFD No. 4 in 2000, is comprised of approximately 21 net acres of residential housing and consists of 41 single family homes located on half-acre lots in Vista, California.
Richland View Estates: Richland View Estates, annexed to CFD No. 4 in 2000, is comprised of approximately 22 net acres and consists of 15 single-family homes located in the City of San Marcos. The CFD No. 4 Special Tax obligation has been paid for two of these homes.
Mission Cove: Mission Cove, annexed to CFD No. 4 in 2001, is comprised of approximately 5 net acres and consists of 28 single-family homes located in the City of San Marcos.
Granite Homes: Granite Homes, annexed to CFD No. 4 in 2001, is comprised of approximately 6 net acres and consists of 28 single-family homes located in the City of San Marcos.
Olive Hills: Olive Hills, annexed to CFD No. 4 in 2002, is comprised of approximately 33 net acres of residential housing and consists of 96 single-family homes located in the City of San Marcos.
Sage Canyon Ranch Estates: Sage Canyon, annexed to CFD No. 4 in 2002, is comprised of approximately 41 net acres and consists of 84 single-family homes located in the City of San Marcos.
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Loma Alta: Loma Alta, annexed to CFD No. 4 in 2002, is comprised of approximately 14 net acres and consists of approximately 94 single-family homes located in the City of San Marcos.
Pinehurst: Pinehurst, annexed to CFD No. 4 in 2002, is comprised of approximately 19 net acres and consists of 33 single-family homes located in the City of San Marcos.
Silver Crest: Silver Crest, annexed to CFD No. 4 in 2003, is comprised of approximately 20 net acres and consists of 129 single-family homes located in the City of San Marcos.
Rock Springs Ranch: Rock Springs Ranch, annexed to CFD No. 4 in 2003, is comprised of approximately 2 net acres and consists of 12 single-family homes located in the City of San Marcos.
Vistancia: Vistancia, annexed to CFD No. 4 in 2003, is comprised of approximately 4 net acres and consists of 39 single-family homes located in the City of San Marcos.
La Costa Greens: La Costa Greens, annexed to CFD No. 4 in 2004, is comprised of approximately 156 net acres and consists of 363 single-family homes located in the City of Carlsbad.
All homes within CFD No. 4 are owned by individual homeowners.
CFD No. 5. CFD No. 5, comprised of approximately 679 gross and 345 net acres, is a master planned community known as “Rancho Carillo” located in the City of Carlsbad approximately 3 miles east of Interstate 5 adjacent to the community of La Costa. The Palomar Airport is one mile to the west of the development. CFD No. 5 consists of one commercial parcel, 973 single-family homes and 691 multi-family homes, an elementary school, 182 acres of open space, and sites for a community park, community facility, church and day care facility.
All homes within CFD No. 5 are owned by individual homeowners.
CFD No. 6. CFD No. 6 was established to supersede CFD No. 4 as an annexable community facilities district into which separate developments could be annexed in order to mitigate the impact of such developments on the District’s school facilities. The most recent annexation to CFD No. 6 occurred in 2006. CFD No. 6 currently consists of 514 single-family and 13 multi-family homes and 208 undeveloped lots. Individual homeowners currently own 519 of the homes representing 76% of the developed property within CFD No. 6. The developments included in CFD No. 6 are described briefly as follows:
Rancho Santalina: Rancho Santalina, a Fieldstone Communities development located in the City of San Marcos and added to CFD No. 6 in 2004, is comprised of 260 parcels. Of the 260 parcels, 99 single-family homes have been developed and are subject to the levy of the CFD No. 6 Special Tax, 137 residential lots remain undeveloped and 24 parcels are exempt from the levy of the CFD No. 6 Special Tax.
Venzano: Venzano, a Standard Pacific Homes development located in the San Elijo Hills master planned community in the City of San Marcos and annexed to CFD No. 6 in 2004, is comprised of 138 parcels. Of the 138 parcels, 100 single-family homes have been developed and are subject to the levy of the CFD No. 6 Special Tax, 31 residential lots remain undeveloped and 7 parcels are exempt from the levy of the CFD No. 6 Special Tax.
Crescent Court: Crescent Court, a Barratt American courtyard home development located in the City of San Marcos and annexed to CFD No. 6 in 2005, is comprised of 50 parcels. All of the parcels have been developed as multi-family homes and are subject to the levy of the CFD No. 6 Special Tax.
La Costa Ridge: La Costa Ridge, a Morrow Development located in the City of Carlsbad and annexed to CFD No. 6 in 2005, is comprised of 308 parcels. Of the 308 parcels, 228 single-family homes have been developed, 39 residential lots remain undeveloped and 41 parcels are exempt from the levy of
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the CFD No. 6 Special Tax. The 228 developed single-family homes include 1 unit for which the Special Tax obligation is prepaid, and 227 units that are subject to the levy of the CFD No. 6 Special Tax.
Vineyard: Vineyard, a Hallmark Communities residential development located in the City of San Marcos and annexed to CFD No. 6 in 2005, is comprised of 25 parcels. Of the 25 parcels, 22 single-family homes have been developed and are subject to the levy of the CFD No. 6 Special Tax, 1 residential lot remains undeveloped and 2 parcels are exempt from the levy of the CFD No. 6 Special Tax.
Starling: Starling, a Standard Pacific Homes residential development located in the City of San Marcos and annexed to CFD No. 6 in 2006, is comprised of 28 parcels. All of the 28 parcels have been developed as single-family homes and are subject to the levy of the CFD No. 6 Special Taxes.
Estimated Assessed Value-to-Lien Ratios
The assessed values and special tax burden on individual parcels varies within the Designated CFDs and also varies among the individual parcels within each Designated CFD. The value of individual parcels is significant because in the event of a delinquency in the payment of Special Taxes, the District may foreclose only against the delinquent parcels.
Aggregate Value-to-Lien Ratios. The table below sets forth the value-to-lien ratios for all parcels subject to the levy of Special Taxes within all Designated CFDs. The table sets forth the assessed value-to-lien ratios within various ranges and for the parcels within each range: the number of such parcels, the aggregate assessed value for all such parcels for Fiscal Year 2009-10, the aggregate proportionate share of the existing indebtedness of the Designated CFDs and the projected portion of the Lease Payments allocable to such parcels, the aggregate Special Tax levy against such parcels in Fiscal Year 2009-10 and the percentage of the aggregate Special Tax levy for all Designated CFDs for Fiscal Year 2009-10 levied against such parcels. It should be noted that the value-to-lien ratios reflect only the indebtedness of the Designated CFDs and the Bonds and does not include any other indebtedness such as general obligation bonds, assessment district bonds or other community facilities district bonds that may be secured by the properties within the Designated CFDs.
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TABLE E-1
SAN MARCOS UNIFIED SCHOOL DISTRICT DESIGNATED CFDS
ASSESSED VALUE-TO-LIEN RATIOS[1]
Assessed Value-to-Lien
Ratio Number
of Units [2]
Fiscal Year 2009-10 Taxable Assessed Value
CFD Indebtedness and
Lease Payments [3]
Fiscal Year 2009-10 Special
Tax Levy % of
Tax Levy Less than 5:1 29 $3,283,730 $918,654 $55,294 0.92%
Total 4,469 $2,226,018,659 $105,113,418 $6,031,440 100.00% [1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table. [2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
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TABLE E-2
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 1
ASSESSED VALUE-TO-LIEN RATIOS[1]
Assessed Value-to-Lien
Ratio Number
of Units [2]
Fiscal Year 2009-10 Taxable Assessed Value
CFD Indebtedness and
Lease Payments [3]
Fiscal Year 2009-10 Special
Tax Levy % of
Tax Levy Less than 5:1 1 $50,628 $11,114 $737 0.20%
Greater than 100:1 0 0 0 0 0.00% Total 501 $161,540,258 $5,578,996 $369,753 100.00%
[1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table. [2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
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TABLE E-3
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 2
Greater than 100:1 0 0 0 0 0.00% Total 549 $177,922,841 $4,670,330 $366,817 100.00%
[1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table. [2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
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TABLE E-4
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 4
ASSESSED VALUE-TO-LIEN RATIOS[1]
Assessed Value-to-Lien
Ratio Number
of Units [2]
Fiscal Year 2009-10 Taxable Assessed Value
CFD Indebtedness and
Lease Payments [3]
Fiscal Year 2009-10 Special
Tax Levy % of
Tax Levy Less than 5:1 6 $597,734 $160,797 $10,675 0.47%
Total 1,228 $752,341,170 $33,927,336 $2,252,453 100.00%
[1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table. [2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
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TABLE E-5
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 5
ASSESSED VALUE-TO-LIEN RATIOS[1]
Assessed Value-to-Lien
Ratio Number
of Units [2]
Fiscal Year 2009-10 Taxable Assessed Value
CFD Indebtedness and
Lease Payments [3]
Fiscal Year 2009-10 Special
Tax Levy % of
Tax Levy Less than 5:1 7 $947,144 $281,939 $12,167 0.63%
Total 1,665 $778,818,403 $44,482,617 $1,919,698 100.00%
[1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table. [2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
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TABLE E-6
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 6
ASSESSED VALUE-TO-LIEN RATIOS[1]
Assessed Value-to-Lien
Ratio Number
of Units [2]
Fiscal Year 2009-10 Taxable Assessed Value
CFD Indebtedness and
Lease Payments [3]
Fiscal Year 2009-10 Special
Tax Levy % of
Tax Levy Less than 5:1 15 $1,688,224 $464,805 $31,715 2.82%
Greater than 100:1 0 0 0 0 0.00% Total 526 $355,395,987 $16,454,138 $1,122,719 100.00%
[1] In preparing this table, the assessed values were derived from information obtained from the County Assessor, the CFD Indebtedness was provided by California Municipal Statistics, Inc. and the special tax levy was obtained from information prepared for the District as part of the fiscal year 2009-10 special tax levy. Dolinka Group, LLC computed the Assessed Value-to-Lien Ratios and compiled and formatted the data into the table.
[2] Number of units does not include units for which the Special Tax obligation is prepaid or undeveloped parcels. {3} Includes the Lease Payments.
Direct and Overlapping Debt
Numerous local public agencies overlap the boundaries of one or more of the Designated CFDs. These local agencies may have outstanding indebtedness. Tables E-7 through E-11, inclusive, below set forth the existing indebtedness of such local public agencies as of January 1, 2010, payable from taxes or assessments that may be levied on one or more of the Designated CFDs, as prepared by California Municipal Statistics, Inc. (each, an “Overlapping Debt Report”). Each Overlapping Debt Report is included for information purposes only. The Authority and the District believe that the information is current as of its date, but make no representation as to its completeness or accuracy. Such local public agencies may issue additional indebtedness at anytime, without the consent of the Authority, the District or the Designated CFDs.
The Overlapping Debt Reports also include other long-term indebtedness of local public agencies that are not payable from property taxes, assessments or special taxes on land in the Designated CFDs. In many cases such long-term obligations are payable only from the general fund or other revenues of the issuing agency. Additional such indebtedness may be authorized by any such local public agencies at any time.
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TABLE E-7
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 1
DIRECT AND OVERLAPPING DEBT FISCAL YEAR 2009-10
2009-10 Assessed Valuation: $223,310,648 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 1/1/10 Metropolitan Water District 0.012% $ 35,872 Palomar Community College District 0.243 368,753 Palomar Pomerado Health Systems 0.357 1,490,915 City of Escondido 1.850 1,486,660 San Marcos Unified School District Community Facilities District No. 1 100. 1,810,000 (1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $5,192,200 OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 0.064% $ 275,600 San Diego County Pension Obligations 0.064 546,249 San Diego County Superintendent of Schools Obligations 0.064 14,094 Palomar Community College District General Fund Obligations 0.286 19,906 San Marcos Unified School District General Fund Obligations 2.689 132,837 City of Escondido General Fund Obligations 2.324 1,575,372 TOTAL OVERLAPPING GENERAL FUND DEBT $2,564,058 COMBINED TOTAL DEBT $7,756,258 (2) (1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-
bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt ($1,810,000) ..........................................................0.81% Total Direct and Overlapping Tax and Assessment Debt............2.33% Combined Total Debt ..................................................................3.47% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Statistics, Inc.
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TABLE E-8
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 2
DIRECT AND OVERLAPPING DEBT FISCAL YEAR 2009-10
2009-10 Assessed Valuation: $179,600,432 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 1/1/10 Metropolitan Water District 0.002% $ 5,979 Palomar Community College District 0.195 295,913 Palomar Pomerado Health Systems 0.287 1,198,579 San Marcos Unified School District Community Facilities District No. 2 100. 1,995,000 (1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $3,495,471 OVERLAPPING GENERAL FUND DEBT: % Applicable (2) Debt 1/1/10 San Diego County General Fund Obligations 0.008% $ 34,450 San Diego County Pension Obligations 0.008 68,281 San Diego County Superintendent of Schools Obligations 0.008 1,762 Palomar Community College District General Fund Obligations 0.035 2,436 San Marcos Unified School District General Fund Obligations 0.327 16,154 City of San Marcos General Fund Obligations 0.835 429,148 TOTAL OVERLAPPING GENERAL FUND DEBT $552,231 COMBINED TOTAL DEBT $4,047,702 (3) (1) Excludes issue to be sold. (2) Based on redevelopment adjusted all property assessed valuation of $27,176,163. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-
bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt ($1,995,000) ..........................................................1.11% Total Direct and Overlapping Tax and Assessment Debt............1.95% Combined Total Debt ..................................................................2.25% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Statistics, Inc. .
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TABLE E-9
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 4
DIRECT AND OVERLAPPING DEBT FISCAL YEAR 2009-10
2009-10 Assessed Valuation: $757,417,672 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 1/1/10 Metropolitan Water District 0.030% $ 89,679 Palomar Community College District 0.823 1,248,903 San Marcos Unified School District School Facilities Improvement District No. 1 5.495 741,716 Palomar Pomerado Health Systems 0.702 2,931,716 San Marcos Unified School District Community Facilities District No. 4 100. 23,310,000 (1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $28,322,014 OVERLAPPING GENERAL FUND DEBT: % Applicable (2) Debt 1/1/10 San Diego County General Fund Obligations 0.154% $ 663,163 San Diego County Pension Obligations 0.154 1,314,413 San Diego County Superintendent of Schools Obligations 0.154 33,915 Palomar Community College District General Fund Obligations 0.689 47,954 San Marcos Unified School District General Fund Obligations 6.477 319,964 City of San Marcos General Fund Obligations 5.843 3,003,010 City of Vista General Fund Obligations 0.271 316,284 TOTAL OVERLAPPING GENERAL FUND DEBT $5,698,703 COMBINED TOTAL DEBT $34,020,717 (3) (1) Excludes issue to be sold. (2) Based on redevelopment adjusted all property assessed valuation of $537,833,564. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded
capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt ($23,310,000) ......................................................................3.08% Total Direct and Overlapping Tax and Assessment Debt .........................3.74% Combined Total Debt................................................................................4.49% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Securities, Inc.
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TABLE E-10
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 5
DIRECT AND OVERLAPPING DEBT FISCAL YEAR 2009-10
2009-10 Assessed Valuation: $779,342,840 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 1/1/10 Metropolitan Water District 0.043% $ 128,540 Palomar Community College District 0.356 540,230 San Marcos Unified School District School Facilities Improvement District No. 1 5.654 763,178 Palomar Pomerado Health Systems 1.209 5,049,066 San Marcos Unified School District Community Facilities District No. 5 100. 23,230,000 (1) City of Carlsbad Assessment District No. 96-1 100. 14,580,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $44,291,014 OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 0.224% $ 964,600 San Diego County Pension Obligations 0.224 1,911,873 San Diego County Superintendent of Schools Obligations 0.224 49,330 Mira Costa Community College District General Fund Obligations 0.585 21,499 Palomar Community College District General Fund Obligations 0.419 29,162 San Marcos Unified School District General Fund Obligations 9.386 463,668 TOTAL OVERLAPPING GENERAL FUND DEBT $3,440,132 COMBINED TOTAL DEBT $47,731,146 (2) (1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-
bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt ($23,230,000) ........................................................2.98% Total Direct and Overlapping Tax and Assessment Debt............5.68% Combined Total Debt ..................................................................6.12% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Securities, Inc.
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TABLE E-11
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 6
DIRECT AND OVERLAPPING DEBT FISCAL YEAR 2009-10
2009-10 Assessed Valuation: $388,621,883 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 1/1/10 Metropolitan Water District 0.017% $ 50,818 Palomar Community College District 0.422 640,385 San Marcos Unified School District School Facilities Improvement District No. 1 2.819 380,509 Palomar Pomerado Health Systems 0.141 588,849 San Marcos Unified School District Community Facilities District No. 6 100. - (1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $1,660,561 OVERLAPPING GENERAL FUND DEBT: % Applicable (2) Debt 1/1/10 San Diego County General Fund Obligations 0.088% $ 378,950 San Diego County Pension Obligations 0.088 751,093 San Diego County Superintendent of Schools Obligations 0.088 19,380 Palomar Community College District General Fund Obligations 0.394 27,422 San Marcos Unified School District General Fund Obligations 3.707 183,126 City of San Marcos General Fund Obligations 2.198 1,129,662 TOTAL OVERLAPPING GENERAL FUND DEBT $2,489,633 COMBINED TOTAL DEBT $4,150,194 (3) (1) Excludes issue to be sold. (2) Based on redevelopment adjusted all property assessed valuation of $307,824,408. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-
bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Direct Debt................................................................................ - % Total Direct and Overlapping Tax and Assessment Debt...........0.43% Combined Total Debt .................................................................1.07% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Securities, Inc.
Overlapping Service or Maintenance Districts
In addition to the taxes or assessments that may be levied on properties within one or more of the Designated CFDs, certain local public agencies may levy assessments, special taxes and/or standby charges to finance capital improvements, certain public services such as police, fire or vector control services, maintenance of public improvements such as landscaped medians and parkways and street light energy charges and maintenance.
The Authority and the District have no control over the amount of additional taxes, assessments or standby charges that may be levied on properties within one or more of the Designated CFDs by other local public agencies having jurisdiction over such properties. Furthermore, nothing prevents the owners of property within any Designated CFD from consenting to the issuance of additional debt by a local public agency which secured by the levy of assessments, other special taxes or taxes. To the extent that such indebtedness is payable from assessments, other special taxes or taxes, such assessments, other special taxes or taxes will be secured by liens on a parity with the lien of the Special Taxes.
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The debt on the property within the Designated CFDs could increase, without any corresponding increase in the value of the property therein, and thereby severely reduce the ratio that the exists at the time the Bonds are issued between the value of the property and the debt secured by the Special Taxes and other taxes, special taxes or assessments which may also be levied on such property. The incurring of such additional debt could affect the ability or the willingness of the owners of such properties to pay the Special Taxes when due. See “RISK FACTORS – Special Risk Factors Related to Surplus Net Special Taxes – Assessed Value,” “- Assessed Value-to-Lien Ratios” and “– Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property” in the body of the Official Statement.
Estimated Surplus Net Special Taxes for Each Designated CFD
The following tables sets forth for each Designated CFD for each Fiscal Year (a) the projected Special Tax levy for such Designated CFD minus any applicable administrative expenses, (b) minus the outstanding debt service on any special tax bonds secured by the levy of Special Taxes for such Designated CFD and (c) the resulting Surplus Net Special Taxes for such Designated CFD.
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TABLE E-12
SAN MARCOS UNIFIED SCHOOL DISTRICT SURPLUS NET SPECIAL TAXES OF CFD NO. 1
[1] Projected Special Tax levy, net of the annual Administrative Expense Requirement. [2] Assumes no further development activity beyond the 501 parcels in CFD No. 1 categorized as
Developed Property for Fiscal Year 2009-10 and no further obligations and no delinquencies. Actual levy would be adjusted for any delinquencies in the payment of Special Taxes.
[3] Excludes the 189 parcels that had each prepaid its Special Tax obligation under the CFD No. 1 Rate and Method.
[4] Includes revenues that are not currently at the maximum tax rates, only the amount needed to cover 110% coverage on debt service.
Source: Dolinka Group, LLC.
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TABLE E-13
SAN MARCOS UNIFIED SCHOOL DISTRICT SURPLUS NET SPECIAL TAXES OF CFD NO. 2
[1] Projected Special Tax levy, net of the annual Administrative Expense Requirement. [2] Assumes no further development activity beyond the 549 parcels in CFD No. 2 categorized as Developed
Property for Fiscal Year 2009-10 and no further obligations and no delinquencies. Actual levy would be adjusted for any delinquencies in the payment of Special Taxes.
[3] Excludes the seven (7) parcels that had each prepaid its Special Tax obligation under the CFD No. 2 Rate and Method.
[4] Includes revenues that are not currently at the maximum tax rates, only the amount needed to cover 110% coverage on debt service.
Source: Dolinka Group, LLC.
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TABLE E-14
SAN MARCOS UNIFIED SCHOOL DISTRICT SURPLUS NET SPECIAL TAXES OF CFD NO. 4
[1] Projected Special Tax levy, net of the annual Administrative Expense Requirement. [2] Assumes no further development activity beyond the 1,228 parcels in CFD No. 4 categorized as
Developed Property for Fiscal Year 2009-10. [3] Excludes the one (1) parcel categorized as Undeveloped Property for Fiscal Year 2009-10 and three (3)
parcels that had each prepaid its Special Tax obligation under the CFD No. 4 Rate and Method. Source: Dolinka Group, LLC.
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TABLE E-15
SAN MARCOS UNIFIED SCHOOL DISTRICT SURPLUS NET SPECIAL TAXES OF CFD NO. 5
[1] Projected Special Tax levy, net of the annual Administrative Expense Requirement. [2] Assumes no further development activity beyond the 1,665 parcels in CFD No. 5 categorized as
Developed Property for Fiscal Year 2009-10. [3] Excludes the one (1) parcel categorized as Undeveloped Property for Fiscal Year 2009-10. Source: Dolinka Group, LLC
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TABLE E-16
SAN MARCOS UNIFIED SCHOOL DISTRICT SURPLUS NET SPECIAL TAXES OF CFD NO. 6
[1] Projected Special Tax levy, net of the annual Administrative Expense Requirement. [2] Assumes no further development activity beyond the 526 parcels in CFD No. 6 categorized as Developed
Property for Fiscal Year 2009-10. [3] Excludes the 208 parcels categorized as Undeveloped Property for Fiscal Year 2009-10 and one (1) parcel
that had prepaid its Special Tax obligation under the CFD No. 6 Rate and Method. Source: Dolinka Group, LLC.
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Rates and Methods of Apportionment of Special Taxes of the Designated CFDs
CFD No. 1 Rate and Method of Apportionment of the CFD No. 1 Special Tax. The Board and the qualified elector of CFD No. 1 adopted and approved the rate and method of apportionment of the CFD No. 1 Special Tax (the “CFD No. 1 Rate and Method”) for determining and apportioning annual amounts of CFD No. 1 Special Taxes and maximum annual amounts of CFD No. 1 Special Taxes (as set forth in the Resolution of Formation establishing CFD No. 1). Pursuant to the CFD No. 1 Rate and Method, each parcel, except exempt property, within the boundaries of CFD No. 1 is subject to the levy of the CFD No. 1 Special Tax annually to pay: (a) debt service on the indebtedness of CFD No. 1 incurred to pay for authorized school facilities, (b) for the direct cost of such authorized school facilities, (c) the amount necessary to replenish any required reserve fund, and (d) for the administrative expenses of CFD No. 1 incurred in the administration of any bonded indebtedness of CFD No. 1 or the levy of any CFD No. 1 Special Taxes. The CFD No. 1 Special Taxes are authorized to be levied over a period of years so long as necessary to pay such amounts.
The CFD No. 1 Special Tax levy for Fiscal Year 2009-10, based upon the application of the CFD No. 1 Rate and Method is set forth in Table E-12 above.
CFD No. 1 Special Taxes may be prepaid by paying the present value of future CFD No. 1 Special Taxes plus administrative expenses incurred by CFD No. 1 for the calculation of the prepayment. Funds received from the prepayment of CFD No. 1 Special Taxes will first be applied for the call and redemption of the 2003 CFD No. 1 Special Tax Refunding Bonds and remaining funds may then be used to prepay principal components of the Lease Payments.
CFD No. 2 Rate and Method of Apportionment of CFD No. 2 Special Taxes. The Board and the qualified elector of CFD No. 2 adopted and approved the rate and method of apportionment of the CFD No. 2 Special Tax (the “CFD No. 2 Rate and Method”) for determining and apportioning annual amounts of CFD No. 2 Special Taxes and maximum annual amounts of CFD No. 2 Special Taxes (as set forth in the Resolution of Formation establishing CFD No. 2). The only taxable property remaining in CFD No. 2 is the property within Zone A of CFD No. 2.
The CFD No. 2 Rate and Method provides that all Assessor’s Parcels within CFD No. 2 shall be classified annually as either Developed Property or Undeveloped Property and shall be subject to the levy of the CFD No. 2 Special Tax in accordance with the CFD No. 2 Rate and Method. All Assessor’s Parcels located within Zone A become classified as Developed Property for a fiscal year when a subdivision map which includes such Assessor’s Parcels has been recorded in the Office of the County Recorder for San Diego County. All Assessor’s Parcels within Zone A are classified as Developed Property.
The CFD No. 2 Rate and Method further classifies taxable properties into one of the land use classifications specified in the CFD No. 2 Rate and Method which determine minimum lot size. There are three such land use classifications: Res-4.2 that includes lots in sizes greater than 4,200 square feet and less than 5,000 square feet; Res-5.0 that includes lots in sizes greater than 5,000 square feet and less than 6,000 square feet and Res-6.0 that includes lots in sizes greater than 6,000 square feet and less than 7,000 square feet. There are no lots in excess of 7,000 square feet. Each land use classification is subject to a different maximum special tax as set forth in the CFD No. 2 Rate and Method.
The CFD No. 2 Rate and Method provides that the Board shall determine the amount of money to be collected each fiscal year from the taxable property in Zone A. Such amount shall include the sums necessary to pay for debt service on indebtedness of CFD No. 2 secured by the CFD No. 2 Special Taxes levied within Zone A, to create or replenish reserve funds determined necessary for existing or future indebtedness secured or to be secured by CFD No. 2 Special Taxes levied in Zone A and to pay for administrative and acquisition and construction expenses to be paid from CFD No. 2 Special Tax proceeds.
The CFD No. 2 Special Tax levy for Fiscal Year 2009-10 based upon the application of the CFD No. 2 Rate and Method is set forth in Table E-13 above.
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CFD No. 2 Special Taxes may be prepaid by paying the present value of future CFD No. 2 Special Taxes plus administrative expenses incurred by CFD No. 2 for the calculation of the prepayment. Funds received from the prepayment of CFD No. 2 Special Taxes will first be applied for the call and redemption of the 2001 CFD No. 2 Special Tax Refunding Bonds and remaining funds may then be used to prepay principal components of the Lease Payments.
CFD No. 4 Rate and Method of Apportionment of CFD No. 4 Special Taxes. The Board and the qualified elector of CFD No. 4 adopted and approved the rate and method of apportionment of the CFD No. 4 Special Tax (the “CFD No. 4 Rate and Method”) for determining and apportioning annual amounts of CFD No. 4 Special Taxes and maximum annual amounts of CFD No. 4 Special Taxes (as set forth in the Resolution of Formation establishing CFD No. 4).
The CFD No. 4 Rate and Method provides that all the taxable property within CFD No. 4 shall be classified annually as either Developed Property or Undeveloped Property. Prior to the time that a taxable parcel is classified as Developed Property the maximum CFD No. 4 Special Tax will escalate as provided in the CFD No. 4 Rate and Method, however, once a taxable parcel is classified as Developed Property the CFD No. 4 Special Tax applicable to such parcel shall be fixed and shall thereafter not be subject to escalation. Taxable property is classified as Developed Property when a building permit has been issued for such property by the City of Carlsbad, the City of Escondido, the City of San Marcos, the City of Vista or the County, as applicable, on or before January 1 of a given fiscal year. All taxable property within CFD No. 4 is Developed Property.
Developed Property is further classified pursuant to designated land use classifications that are applicable to Zone A or Zone B, as applicable, of CFD No. 4 and taxed according to the annual special tax applicable to such land use classification. The land use classifications applicable to Developed Property within Zone A or Zone B are based upon the size of the residence or other building constructed on such Developed Property.
The CFD No. 4 Rate and Method provides that the CFD No. 4 Special Tax may be levied on all taxable property within CFD No. 4 in each fiscal year to generate the amount required in such fiscal year to pay: (a) the regularly scheduled debt service payments on all Bonds (as defined in the CFD No. 4 Rate and Method) which are due in the calendar year commencing during such fiscal year, (b) credit or liquidity fees on such Bonds, (c) Administrative Expenses (as defined in the CFD No. 4 Rate and Method), (d) the costs associated with the release of funds from an escrow account, and (e) any amount required to establish, maintain, or replenish any reserve funds and credit enhancement facilities established in association with the Bonds.
The CFD No. 4 Rate and Method provides that the CFD No. 4 Special Taxes shall be levied for a period not to exceed thirty (30) years or until all Bonds have been retired.
The CFD No. 4 Special Tax levy for Fiscal Year 2009-10 based upon the application of the CFD No. 4 Rate and Method and the termination of the CFD No. 4 Special Tax levy is set forth in Table E-14 above.
The owner of a parcel of Developed Property within CFD No. 4 may prepay the entire outstanding CFD No. 4 Special Tax obligation at any time pursuant to the prepayment formula set forth in the CFD No. 4 Rate and Method. Funds received from the prepayment of CFD No. 4 Special Taxes will first be applied for the call and redemption of the 2002 CFD No. 4 Special Tax Refunding Bonds, the 2004 CFD No. 4 Special Tax Bonds and/or the 2006 CFD No. 4 Special Tax Bonds and remaining funds may then be used to prepay principal components of the Lease Payments.
CFD No. 5 Rate and Method of Apportionment of CFD No. 5 Special Taxes. The Board and the qualified elector of CFD No. 5 adopted and approved the rate and method of apportionment of the CFD No. 5 Special Tax (the “CFD No. 5 Rate and Method”) for determining and apportioning annual amounts of CFD No. 5 Special Taxes and maximum annual amounts of CFD No. 5 Special Taxes (as set forth in the Resolution of Formation establishing CFD No. 5).
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The CFD No. 5 Rate and Method provides that the all taxable property within CFD No. 5 shall be classified annually as either Developed Property or Undeveloped Property. Prior to the time that a taxable parcel is classified as Developed Property the maximum CFD No. 5 Special Tax will escalate as provided in the CFD No. 5 Rate and Method, however, once a taxable parcel is classified as Developed Property the CFD No. 5 Special Tax applicable to such parcel shall be fixed and shall thereafter not be subject to escalation. Taxable property is classified as Developed Property when a building permit has been issued for such property by the City of Carlsbad on or before January 1 of a given fiscal year. All taxable property within CFD No. 5 is Developed Property.
Developed Property is further classified pursuant to designated land use classifications that are applicable to CFD No. 5 and taxed according to the annual special tax applicable to such land use classification. The land use classifications applicable to Developed Property are based upon the size of the residential dwelling unit or other building constructed on such Developed Property.
The CFD No. 5 Rate and Method provides that the Board shall levy the annual CFD No. 5 Special Tax that is applicable to each Assessor’s Parcel which is classified as Developed Property.
The CFD No. 5 Rate and Method provides that the CFD No. 5 Special Taxes shall be levied for a period not to exceed thirty (30) years or until all Bonds have been retired.
The CFD No. 5 Special Tax levy for Fiscal Year 2009-10 based upon the application of the CFD No. 5 Rate and Method and the termination of the CFD No. 5 Special Tax levy is set forth in Table E-15 above.
The owner of a parcel of Developed Property within CFD No. 5 may prepay the entire outstanding CFD No. 5 Special Tax obligation at any time pursuant to the prepayment formula set forth in the CFD No. 5 Rate and Method. Funds received from the prepayment of CFD No. 5 Special Taxes will first be applied for the call and redemption of the 2002 CFD No. 5 Special Tax Bonds and/or the 2003 CFD No. 5 Special Tax Bonds and remaining funds may then be used to prepay principal components of the Lease Payments.
CFD No. 6 Rate and Method of Apportionment of CFD No. 6 Special Taxes. The Board and the qualified elector of CFD No. 6 adopted and approved the rate and method of apportionment of the CFD No. 6 Special Tax (the “CFD No. 6 Rate and Method”) for determining and apportioning annual amounts of CFD No. 6 Special Taxes and maximum annual amounts of CFD No. 6 Special Taxes (as set forth in the Resolution of Formation establishing CFD No. 6).
The CFD No. 6 Rate and Method provides that all the taxable property within CFD No. 6 shall be classified annually as either Developed Property or Undeveloped Property. Prior to the time that a taxable parcel is classified as Developed Property the maximum CFD No. 6 Special Tax will escalate as provided in the CFD No. 6 Rate and Method, however, once a taxable parcel is classified as Developed Property the CFD No. 6 Special Tax applicable to such parcel shall be fixed and shall thereafter not be subject to escalation. Taxable property is classified as Developed Property when a building permit has been issued for such property by the City of Carlsbad, the City of Escondido, the City of San Marcos, the City of Vista or the County, as applicable, on or before January 1 of a given fiscal year.
Developed Property is further classified pursuant to designated land use classifications that are applicable to CFD No. 6 and taxed according to the annual special tax applicable to such land use classification. The land use classifications applicable to Developed Property are based upon the size of the residential dwelling unit or other building constructed on such Developed Property.
The CFD No. 6 Rate and Method provides that the CFD No. 6 Special Tax may be levied on all taxable property within CFD No. 6 in each fiscal year to generate the amount required in such fiscal year to pay: (a) the regularly scheduled debt service payments on all Bonds (as defined in the CFD No. 6 Rate and Method) which are due in the calendar year commencing during such fiscal year, (b) credit or liquidity fees on such Bonds, (c) Administrative Expenses (as defined in the CFD No. 6 Rate and Method), (d) the costs associated with the release of funds from an escrow account and (e) any amount required to establish,
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maintain, or replenish any reserve funds and credit enhancement facilities established in association with the Bonds (the “Minimum Special Tax Levy Requirement”).
The CFD No. 6 Rate and Method provides that the Board shall levy the annual CFD No. 6 Special Tax that is applicable to each Assessor’s Parcel which is classified as Developed Property. The Board shall then levy the annual CFD No. 6 Special Tax that is applicable to each Assessor’s Parcel which is classified as Undeveloped Property in an amount such that the total levy does not exceed the Minimum Special Tax Levy Requirement.
The CFD No. 6 Rate and Method provides that the CFD No. 6 Special Taxes shall be levied on Developed Property for a period not to exceed thirty (30) years after such property is classified as Developed Property.
The CFD No. 6 Special Tax levy for Fiscal Year 2009-10 based upon the application of the CFD No. 6 Rate and Method and the termination of the CFD No. 6 Special Tax levy is set forth in Table E-16 above.
The owner of Undeveloped Property may make a one-time election to prepay a portion of the annual CFD No. 6 Special Tax applicable to Developed Property pursuant to the prepayment formula set forth in the CFD No. 6 Rate and Method. No such partial prepayment shall be allowed, however, unless the amount of the annual CFD No. 6 Special Tax applicable to Developed Property that may be levied on all taxable property within CFD No. 6 both prior to and after the proposed partial prepayment is at least 1.1 times the annual debt service on the outstanding Bonds of CFD No. 6, net of administrative expenses. The owner of a parcel of Developed Property within CFD No. 6 may prepay the entire outstanding CFD No. 6 Special Tax obligation at any time pursuant to the prepayment formula set forth in the CFD No. 6 Rate and Method. Funds received from the prepayment of CFD No. 6 may be used to prepay principal components of the Lease Payments.
Special Tax Delinquency History
Aggregate Delinquency History. The following table shows the aggregate Special Tax delinquency history for the Designated CFDs for Fiscal Year 2005-06 through Fiscal Year 2008-09.
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Table E-17
SAN MARCOS UNIFIED SCHOOL DISTRICT
DESIGNATED CFDS HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [2][3] Fiscal
2009-10 [4] 4,354 $3,015,714 174 $126,193 4.18% NA NA NA [1] Includes one (1) parcel within CFD No. 5 that has 115 multi-family units. [2] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [3] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [4] Fiscal Year 2009-10 first installment information as of March 9, 2010. _____________________ Source: District Fiscal Year 2009-10 Special Tax Levy Reports.
The following tables show the Special Tax delinquency history for each of the Designated CFDs for Fiscal Year 2005-06 through Fiscal Year 2008-09.
Table E-18
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 1
HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [1][2] Fiscal Year Parcel Amount Parcel Amount % Parcel Amount %
2009-10 [3] 501 $184,877 16 $5,892 3.19% NA NA NA [1] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [2] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [3] Fiscal Year 2009-10 first installment information as of March 9, 2010. _____________________ Source: District Fiscal Year 2009-10 Special Tax Levy Reports.
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Table E-19
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 2
HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [1][2] Fiscal Year Parcel Amount Parcel Amount % Parcel Amount %
2009-10 [3] 549 $183,409 19 $6,397 3.49% NA NA NA [1] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [2] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [3] Fiscal Year 2009-10 first installment information as of March 9, 2010. _____________________ Source: District Fiscal Year 2009-10 Special Tax Levy Reports.
Table E-20
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 4
HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [1][2] Fiscal Year Parcel Amount Parcel Amount % Parcel Amount %
2009-10 [3] 1,228 $1,126,225 67 $62,946 5.59% NA NA NA [1] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [2] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [3] Fiscal Year 2009-10 first installment information as of March 9, 2010. _____________________ Source: District Fiscal Year 2009-2010 Special Tax Levy Reports.
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Table E-21
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 5
HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [2][3] Fiscal Year Parcel [1] Amount Parcel Amount % Parcel Amount %
2009-10 [4] 1,550 $959,845 58 $36,439 3.80% NA NA NA [1] Includes one (1) parcel within CFD No. 5 that has 115 multi-family units. [2] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [3] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [4] Fiscal Year 2009-10 first installment information as of March 9, 2010. _____________________ Source: District Fiscal Year 2009-10 Special Tax Levy Reports.
Table E-22
SAN MARCOS UNIFIED SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO. 6
HISTORICAL SPECIAL TAX COLLECTION AND DELINQUENCY
Special Tax Levy Fiscal Year-End Delinquency Current Delinquency [1][2] Fiscal Year Parcel Amount Parcel Amount % Parcel Amount %
2005-06 NA NA NA NA NA NA NA NA 2006-07 60 $116,832 5 $9,358 8.01% 0 $0 0.00% 2007-08 262 $546,863 5 $16,626 3.04% 2 $3,739 0.68% 2008-09 446 $943,929 35 $45,312 4.80% 2 $4,122 0.44%
2009-10 [3] 526 $561,359 14 $14,518 2.59% NA NA NA [1] Current delinquencies for Fiscal Year 2005-06 and 2006-07 prepared by Special District Financing & Administration as of July 30, 2009. [2] Current delinquencies for Fiscal Year 2007-08 and 2008-09 provided by Bowie, Arneson, Wiles and Giannone as of January 25, 2010. [3] Fiscal Year 2009-10 first installment information as of March 9, 2010. __________________________________________________ Source: District Fiscal Year 2009-10 Special Tax Levy Reports.
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Covenant for Superior Court Foreclosure
Authority to Institute Judicial Foreclosure Proceedings. Pursuant to Section 53356.1 of the Mello-Roos Act, in the event of any delinquency in the payment of the Special Tax within a Designated CFD, such Designated CFD may order the institution of a superior court action to foreclose the lien therefor within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale. Such judicial foreclosure action is not mandatory.
The Mello-Roos Act provides that the legislative body of a community facilities district may, by resolution, adopted prior to the issuance of debt under the Mello-Roos Act, covenant for the benefit of debtholders to commence and diligently pursue judicial foreclosure actions regarding delinquent installments of special taxes. Such resolution may specify a deadline for commencement of the foreclosure action and any other terms and conditions the legislative body determines reasonable regarding such foreclosure action.
Existing Tax Collection and Foreclosure Covenants for CFD Nos. 1, 2, 4 and 5. The Board, acting as the legislative body of CFD Nos. 1, 2, 4 and 5, adopted such resolutions prior to the issuance of the 2003 CFD No. 1 Special Tax Refunding Bonds, the 2001 CFD No. 2 Special Tax Refunding Bonds, the Outstanding CFD No. 4 Special Tax Bonds and the Outstanding CFD No. 5 Special Tax Bonds. These covenants, incorporated in the Outstanding Security Agreements for each of these Designated CFDs, are set forth below.
Covenant for CFD Nos. 1 and 2. On or about February 15 and June 15 of each fiscal year, CFD No. 1 will compare the amount of CFD No. 1 Special Taxes levied therein to the amount of CFD No. 1 Special Taxes received by CFD No. 1 and (A) if CFD No. 1 determines that (i) any single parcel within CFD No. 1 is subject to a CFD No. 1 Special Tax delinquency in the aggregate amount of $5,000 or more or (ii) any owner owns one or more parcels subject to a CFD No. 1 Special Tax delinquency in an aggregate amount of $5,000 or more, then the District shall send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 45 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings shall be commenced by CFD No. 1 within 90 days of such determination to the extent permissible under applicable law; and (B) if CFD No. 1 determines that the total amount of delinquent CFD No. 1 Special Taxes for the prior fiscal year for CFD No. 1 (including the total of delinquencies under (A) above) exceeds 5% of the total CFD No. 1 Special Taxes due and payable for the prior fiscal year, CFD No. 1 shall notify or cause to be notified property owners who are then delinquent in the payment of CFD No. 1 Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and shall commence foreclosure proceedings within 90 days of such determination against each parcel of land within CFD No. 1 with a CFD No. 1 Special Tax delinquency. The same covenant applies to delinquencies in the payment of CFD No. 2 Special Taxes.
Covenant for CFD No. 4. On or about March 1 and July 1 of each fiscal year, CFD No. 4 will compare the amount of CFD No. 4 Special Taxes levied in CFD No. 4 to the amount of CFD No. 4 Special Taxes received by CFD No. 4 and (A) if CFD No. 4 determines that (i) any single parcel within CFD No. 4 is subject to a CFD No. 4 Special Tax delinquency in the aggregate amount of $10,000 or more or (ii) any owner owns one or more parcels subject to a CFD No. 4 Special Tax delinquency in an aggregate amount of $10,000 or more, then CFD No. 4 shall send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 60 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings shall be commenced by CFD No. 4 within 120 days of such determination to the extent permissible under applicable law; and (B) if CFD No. 4 determines that the total amount of delinquent CFD No. 4 Special Taxes for the prior fiscal year for CFD No. 4 (including the total of delinquencies under (A) above) exceeds 5% of the total CFD No. 4 Special Taxes due and payable for the prior fiscal year, CFD No. 4 shall notify or cause to be notified property owners who are then delinquent in the payment of CFD No. 4 Special Taxes (and demand immediate payment of the delinquency) within 60 days of such determination, and shall commence foreclosure proceedings within 120 days of such determination against each parcel of land within CFD No. 4 with a CFD No. 4 Special Tax delinquency.
Covenant for CFD No. 5. On or about March 1 and July 1 of each fiscal year, CFD No. 5 will compare the amount of CFD No. 5 Special Taxes levied in CFD No. 5 to the amount of CFD No. 5
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Special Taxes received by CFD No. 5 and (A) if CFD No. 5 determines that (i) any single parcel within CFD No. 5 is subject to a CFD No. 5 Special Tax delinquency in the aggregate amount of $6,000 or more or (ii) any owner owns one or more parcels subject to a CFD No. 5 Special Tax delinquency in an aggregate amount of $6,000 or more, then CFD No. 5 shall send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 60 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings shall be commenced by CFD No. 5 within 120 days of such determination to the extent permissible under applicable law; and (B) if CFD No. 5 determines that the total amount of delinquent CFD No. 5 Special Taxes for the prior fiscal year for CFD No. 5 (including the total of delinquencies under (A) above) exceeds 5% of the total CFD No. 5 Special Taxes due and payable for the prior fiscal year, CFD No. 5 shall notify or cause to be notified property owners who are then delinquent in the payment of CFD No. 5 Special Taxes (and demand immediate payment of the delinquency) within 60 days of such determination, and shall commence foreclosure proceedings within 120 days of such determination against each parcel of land within CFD No. 5 with a CFD No. 5 Special Tax delinquency.
Pledge Agreement Provisions Related to the Existing Covenants for CFD Nos. 1, 2, 4 and 5. Pursuant to the Pledge Agreement, CFD Nos. 1, 2, 4 and 5 have covenanted to comply with the foregoing foreclosure covenants during the remaining term of the Outstanding Securities of each such Designated CFD. Effective upon the final maturity, payment or defeasance of the Outstanding Securities of each such Designated CFD, the CFD No. 6 Covenant described below will apply, in its entirety, to each such Designated CFD.
Covenant for CFD No. 6. CFD No. 6 has incurred no bonded indebtedness to date. Consequently, there is no existing foreclosure covenant applicable to CFD No. 6. Pursuant to the Pledge Agreement, CFD No. 6 covenants that so long as there are any Bonds outstanding under the terms of the Trust Agreement, CFD No. 6 is to commence judicial foreclosure proceedings under the following terms and conditions (the “CFD No. 6 Covenant”):
1. On or about July 1 of each fiscal year, CFD No. 6 will compare the amount of CFD No. 6 Special Taxes levied within its boundaries to the amount of CFD No. 6 Special Taxes actually received, and:
(a) Individual Delinquencies. If CFD No. 6 determines that: (i) any single parcel within CFD No. 6 is subject to a CFD No. 6 Special Tax delinquency in the aggregate amount of $5,000 or more, or (ii) any owner owns one or more parcels subject to a CFD No. 6 Special Tax delinquency in an aggregate amount of $5,000 or more, then CFD No. 6 shall send, or cause to be sent, a notice of delinquency (and a demand for immediate payment) to the property owner within 45 days of CFD No. 6’s determination, and (if the delinquency remains uncured) CFD No. 6 shall take action to authorize the commencement of foreclosure proceedings within 90 days of CFD No. 6’s determination, to the extent permissible under applicable law, and shall thereafter diligently prosecute these proceedings in superior court to the extent permitted by law.
(b) Aggregate Delinquencies. If CFD No. 6 determines that the total amount of delinquent CFD No. 6 Special Taxes for the prior fiscal year for CFD No. 6 (including the total of delinquencies under paragraph (a) above) exceeds five percent (5%) of the total CFD No. 6 Special Taxes due and payable for the prior fiscal year, CFD No. 6 shall notify, or cause to be notified, all property owners who are then delinquent in the payment of CFD No. 6 Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and (to the extent these delinquencies remain uncured) CFD No. 6 shall take action to authorize the commencement of foreclosure proceedings within 90 days of CFD No. 6’s determination against each parcel of land within CFD No. 6 with a CFD No. 6 Special Tax delinquency to the extent permissible under applicable law, and shall thereafter diligently prosecute these proceedings in superior court to the extent permitted by law.
(c) Additional Notices. In addition to the actions taken under (a) and (b) above, CFD No. 6 shall determine, or cause to be determined, on or about June 30 of each year,
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whether or not any owners of taxable property within CFD No. 6 are delinquent in the payment of CFD No. 6 Special Taxes. If such delinquencies exist, CFD No. 6 will send, or cause to be sent, a notice of delinquency to the owner of the property within 45 days of such determination.
2. Notwithstanding the requirements described in 1. above, CFD No. 6 shall not be required to order, or take action upon, the commencement of foreclosure proceedings under subparagraph (c) above, if those delinquencies (if not remedied) will not result in a draw on the Reserve Fund established under the Trust Agreement such that the Reserve Fund will fall below the Reserve Requirement (as defined in the Trust Agreement) and no draw has been made on the Reserve Fund that has not been fully replenished.
3. The net proceeds received following a judicial foreclosure sale of land within CFD No. 6 are included as Surplus Net Special Taxes under the Pledge Agreement.
4. CFD No. 6 reserves the right to elect to accept payment from a property owner of at least all of the enrolled amount of the CFD No. 6 Special Taxes for a parcel but less than the full amount of penalties, interest, costs and attorneys’ fees related to a delinquency of CFD No. 6 Special Taxes for such parcel.
It should be noted that any foreclosure proceedings commenced as described above could be stayed by the commencement of bankruptcy proceedings by or against the owner of the delinquent property. See “RISK FACTORS – Special Risk Factors Related to Surplus Net Special Taxes - Bankruptcy and Foreclosure Delay” in the body of the Official Statement.
Limitations on Judicial Foreclosure Proceedings. No assurances can be given that a judicial foreclosure action, once commenced, will be completed or that it will be completed in a timely manner. See “RISK FACTORS – Special Risk Factors Related to Surplus Net Special Taxes - Bankruptcy and Foreclosure Delay” in the body of the Official Statement. If a judgment of foreclosure and order of sale is obtained, the judgment creditor (the applicable Designated CFD) must cause a Notice of Levy to be issued. Under current law, a judgment debtor (property owner) has 120 days from the date of service of the Notice of Levy and 20 days from the subsequent notice of sale in which to redeem the property to be sold. If a judgment debtor fails to so redeem and the property is sold, his only remedy is an action to set aside the sale, which must be brought within 90 days of the date of sale. If, as a result of such action, a foreclosure sale is set aside, the judgment is revived and the judgment creditor is entitled to interest on the revived judgment as if the sale had not been made. The constitutionality of the aforementioned legislation, which repeals the former one-year redemption period, has not been tested; and there can be no assurance that, if tested, such legislation will be upheld. Any parcel subject to foreclosure sale must be sold at the minimum bid price unless a lesser minimum bid price is authorized by the owners of 75% of the principal amount of outstanding bonds secured by the Special Taxes levied within the applicable Designated CFD.
No assurances can be given that the real property subject to sale or foreclosure will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Special Tax installment. The Mello-Roos Act does not require the District or the Designated CFDs to purchase or otherwise acquire any lot or parcel of property offered for sale or subject to foreclosure if there is no other purchaser at such sale. The Mello-Roos Act does specify that the Special Tax will have the same lien priority in the case of delinquency as for ad valorem property taxes.
If delinquencies in the payment of Special Taxes exist, there could be a default or delay in payments to the Authority of Surplus Net Special Taxes, which default or delay may result in a default or delay in payments to the owners of the Bonds pending prosecution of foreclosure proceedings and receipt by the applicable Designated CFD of foreclosure sale proceeds, if any. However, within the limits of the applicable Rate and Method of Apportionment and the Mello-Roos Act, each Designated CFD may adjust the Special Taxes levied on all property within such Designated CFD in future fiscal years to provide an amount, taking into account such delinquencies, required to pay debt service on the bonds secured by such Special Taxes. There is, however, no assurance that the maximum Special Tax rates will be at all times sufficient to pay the
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amounts required to be paid on the Outstanding Securities of such Designated CFD or to fund the estimated Surplus Net Special Taxes for such Designated CFD.
Special Taxes Are Not Within Teeter Plan
The Special Taxes are not encompassed within the alternative procedure for the distribution of certain property tax levies on the secured roll pursuant to Chapter 3, Part 8, Division 1 of the California Revenue and Taxation Code (Section 4701 and following), commonly referred to as the “Teeter Plan.” The County has adopted a Teeter Plan under which a tax distribution procedure is implemented and secured roll taxes are distributed to taxing agencies within the County on the basis of the tax levy, rather than on the basis of actual tax collections. However, by policy, the County does not include special taxes, assessments, or reassessments in the Teeter Plan. The Special Taxes of each Designated CFD are not included in the County’s Teeter Plan.
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APPENDIX F
ESTIMATED DEBT SERVICE COVERAGE ON THE BONDS FROM
REDEVELOPMENT PAYMENTS AND SURPLUS NET SPECIAL TAXES
[1] Surplus Net Special Taxes, net of annual administrative expenses and Outstanding Debt Service. [2] Assumes no further development activity beyond the units developed and levied for Fiscal year 2009-10. Actual Surplus Net Special Taxes would be adjusted for
issuance of any parity bonds and any delinquencies in the payment of Special Taxes. [3] Includes revenues of CFD Nos. 1 and 2 that are not currently at the maximum tax rates, only the amount needed to cover 110% coverage on debt service for the
corresponding parity bonds issued in connection with the Bonds. [4] Source: Fiscal Consultant's Report dated as of February 8, 2010 prepared by Rosenow Spevacek Group, Inc. [5] Includes capitalized Interest and Debt Service Reserve Fund available for debt service repayments on the Bonds.
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APPENDIX G
PROPOSED FORM OF BOND COUNSEL’S OPINION Upon delivery of the Bonds, Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel to the San Marcos Schools Financing Authority, expects to render their final approving opinion with respect to the Bonds in substantially the following form:
San Marcos Schools Financing Authority c/o San Marcos Unified School District 255 Pico Avenue, Suite 250 San Marcos, CA 92069 Re: $51,448,327.30 San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 Final Opinion of Bond Counsel Members of the Board of Directors: We have acted as Bond Counsel in connection with the issuance and sale by the San Marcos Schools Financing Authority (“Authority”) of $51,448,327.30 aggregate principal amount of bonds designated “San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010” (“Bonds”). The Bonds are issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, as amended (comprising Article 4 of Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California) (“Marks-Roos Act”), Resolution No. 35-09/10, adopted by the Board of Directors of the Authority on March 16, 2010 (“Resolution”), and the Trust Agreement executed in connection therewith, dated as of June 1, 2010, by and between the Authority and Union Bank, N.A., as Trustee (“Trust Agreement”). Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Trust Agreement and Lease Agreement, dated as of June 1, 2010, by and between the Authority and the San Marcos Unified School District (“School District”). As Bond Counsel, we have examined copies certified to us as being true and complete copies of the proceedings in connection with the formation of the Authority and the issuance of the Bonds (“Authority Proceedings”), including the Resolution, the Trust Agreement, the Lease Agreement, the Site Lease, the Tax Certificate and other related documents in connection with the issuance and sale of the Bonds (each as defined in the Trust Agreement). We have also examined certificates and representations of fact made by public officials and officers of the Authority, the School District, the Underwriter and others as we have deemed necessary to render this opinion. Attention is called to the fact that, except as set forth above, we have not been requested to examine and have not examined any documents or information relating to the Authority other than the record of the Authority Proceedings hereinabove referred to, and no opinion is expressed as to any financial or other information, or the adequacy thereof, which has been or may be supplied to any purchaser of the Bonds. We have not been engaged and have not undertaken to review the accuracy, completeness or sufficiency of the Official Statement and no opinion is expressed herein as to the accuracy, completeness or sufficiency of the Official Statement or other offering materials relating to the Bonds. The Trust Agreement, the Tax Certificate and other documents related to the Authority Proceedings refer to certain requirements and procedures which may be changed and certain actions which may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Bond, or the interest thereon, if any such change is made, or action is taken or omitted, upon the advice or approval of counsel other than ourselves. The opinions expressed herein are based on an analysis of existing statutes, regulations, rulings and court decisions. The opinions may be affected by actions or events occurring after the date hereof. We have
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not undertaken to determine, or to inform any person, whether any such actions or events occur. Our engagement with respect to the Bonds has concluded with the issuance thereof and we disclaim any obligation to update this opinion. As to questions of fact material to our opinion, we have relied upon the representations of fact and certifications referred to above, and we have not undertaken by independent investigation to verify the authenticity of signatures or the accuracy of the factual matters represented, warranted or certified therein. Furthermore, we have assumed compliance with all covenants contained in the Trust Agreement, the Lease Agreement, the Tax Certificate and certain other documents related to the Authority Proceedings, including, without limitation, covenants compliance with which is necessary to assure that future actions or events will not cause the interest on the Bonds to be included in gross income for federal income tax purposes. Failure to comply with certain of such covenants may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of original issuance of the Bonds. In addition, we call attention to the fact that the rights and obligations under the Bonds, the Resolution, the Trust Agreement, the Lease Agreement and related documents are subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to creditors’ rights and remedies, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against school districts in the State. We advise you that a State court may not strictly enforce certain covenants in the foregoing documents if it concludes that enforcement would be unreasonable under the circumstances. Based on the foregoing, and in reliance thereon, and our consideration of such questions of law as we have deemed relevant to the circumstances, as of the date hereof, we are of the following opinions:
1. The Authority has, and the Authority Proceedings show, full power and authority to issue the Bonds pursuant to the Marks-Roos Act. The Bonds constitute legal, valid and binding obligations of the Authority, payable in accordance with their terms. The Bonds are limited obligations of the Authority payable solely from, and secured by, a pledge of the Revenues (as defined in the Trust Agreement), and from other funds and accounts pledged therefore pursuant to the Resolution, the Trust Agreement and the Lease Agreement, and are not obligations of the School District, the State or any public agency thereof.
2. The Resolution has been duly and validly adopted by the Authority and is valid and binding
upon the Authority and enforceable in accordance with its terms. The Trust Agreement and the Lease Agreement have been duly and validly authorized, executed and delivered by the Authority and/or the School District, and, assuming due authorization, execution and delivery by the Trustee, constitute valid and binding obligations of the Authority and the School District, enforceable in accordance with their terms.
3. Interest on the Bonds is excluded from gross income for federal income tax purposes under
Section 103 of the Internal Revenue Code of 1986 and is exempt from State personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other federal or State tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds.
We express no opinion as to any matter other than as expressly set forth above.
Very truly yours,
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APPENDIX H
FORM OF CONTINUING DISCLOSURE AGREEMENT
This CONTINUING DISCLOSURE AGREEMENT (the “Disclosure Agreement”) is executed and entered into as of June 1, 2010, by and among the San Marcos Schools Financing Authority, a joint exercise of powers authority organized and existing under and by virtue of the Constitution and of the laws of the State of California (the “Authority”), and the San Marcos Unified School District for and on behalf of itself and (a) Community Facilities District No. 1 of the San Marcos Unified School District (“Community Facilities District No. 1”), (b) Community Facilities District No. 2 of the San Marcos Unified School District (“Community Facilities District No. 2”), (c) Community Facilities District No. 4 of the San Marcos Unified School District (“Community Facilities District No. 4”), (d) Community Facilities District No. 5 of the San Marcos Unified School District (“Community Facilities District No. 5”), and (e) Community Facilities District No. 6 of the San Marcos Unified School District (“Community Facilities District No. 6” and collectively with Community Facilities District No. 1, Community Facilities District No. 2, Community Facilities District No. 4 and Community Facilities District No. 5, the “Designated CFDs”), Union Bank, N.A., a national banking association organized and existing under and by virtue of the laws of the United States (the “Bank”) in its capacity as Trustee (the “Trustee”) under the Trust Agreement (defined below), and Dolinka Group, LLC in its capacity as Dissemination Agent (the “Dissemination Agent”) in connection with the issuance of the San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010 (the “Bonds”)
Section 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Authority and the San Marcos Unified School District (the “District”) for the benefit of the Owners of the Bonds and in order to assist the Participating Underwriter (as defined herein) in complying with S.E.C. Rule 15c2-12(b)(5).
Section 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Agreement 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 Authority pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.
“Disclosure Representative” shall mean the Assistant Superintendent, Business Services of the District or his or her designee, or such other officer or employee as the District shall designate in writing to the Dissemination Agent from time to time.
“Dissemination Agent” shall mean Dolinka Group, LLC, or any successor Dissemination Agent designated in writing by the Authority and the District and which have filed with the Authority and the District a written acceptance of such designation.
“EMMA System” shall mean the Electronic Municipal Market Access system of the Municipal Securities Rulemaking Board (the “MSRB”) or such other electronic system designated by the MSRB or the Securities and Exchange Commission (the “S.E.C.”) for compliance with S.E.C. Rule 15c2-12(b).
“Fiscal Year” shall mean the twelve-month period beginning on July 1 of each year and ending on June 30 of the following year.
“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.
“MSRB” means the Municipal Securities Rulemaking Board and any successor entity designated under the Rule as the repository for filings made pursuant to the Rule.
“Participating Underwriter” shall mean Stone & Youngberg LLC as the original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds.
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“Redevelopment Payments” shall have the meaning given such term in the Lease Agreement, dated as of June 1, 2010, by and between the Authority and the District.
“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.
“S.E.C.” means the Securities and Exchange Commission.
“Tax-exempt” shall mean that interest on the Bonds is excluded from gross income for federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating any other tax liability, including any alternative minimum tax or environmental tax.
“Trust Agreement” shall mean that certain Trust Agreement, dated as of June 1, 2010, by and between the Authority and the Trustee pursuant to which the Bonds were issued.
Section 3. Provision of Annual Reports.
(a) The Authority and the District shall, or shall cause the Dissemination Agent to, not later than nine months following the end of each Fiscal Year, commencing March 30, 2011, provide to the MSRB, through the EMMA system in an electronic format and accompanied by identifying information as prescribed by the MSRB, to the Trustee, to the Participating Underwriter, an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement; 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 if not available by that date. Not later than fifteen (15) Business Days prior to said date, the Authority and the District shall provide the Annual Report to the Dissemination Agent. In each case, the Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference (or incorporate by reference) other information as provided in Section 4 of this Disclosure Agreement. The information contained or incorporated in each Annual Report shall be for the fiscal year which ended on the preceding June 30. The Authority or the District shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Dissemination Agent may conclusively rely upon such certifications of the Authority or the District and shall have no liability, duty or obligation whatsoever to review any such Annual Report. Further, the Dissemination Agent shall have no liability for the contents of any such Annual Report.
(b) If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB through the EMMA system by the date specified in subsection (a), the Dissemination Agent shall send a notice to the MSRB through the EMMA system, in substantially the form attached as Attachment A.
(c) The Dissemination Agent shall:
(i) determine each year prior to the date for providing the Annual Report the electronic filing requirements of the MSRB for the Annual Reports; and
(ii) provide notice to the Authority that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and confirming that it has been filed with the MSRB through the EMMA system and to the Trustee and the Participating Underwriter.
Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by reference the following:
(a) Audited Financial Statements of the District 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 financial 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
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financial 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.
(b) To the extent not contained in the audited financial statements filed pursuant to the preceding clause (a), the Annual Report shall contain information showing the following:
(i) information concerning the actual revenues, expenditures and beginning and ending fund balances relating to the General Fund of the District for the most recent completed Fiscal Year, including information showing tax revenue collections by source;
(ii) the District’s approved annual budget for the current Fiscal Year, or a summary thereof, including any interim budget reports adopted prior to the date of the Annual Report;
(iii) information showing the aggregate principal amount of long-term bonds, leases and other obligations of the District which are payable out of the General Fund of the District, as of the close of the most recent completed Fiscal Year;
(iv) information concerning the assessed valuation of properties within the District for the most recent completed Fiscal Year, showing the valuation for secured, public utility and unsecured property;
(v) information showing the balance sheet of the General Fund of the District as of the close of the most recent completed Fiscal Year, including categorized assets, liabilities and reserved and unreserved fund balances; and
(vi) balances in the funds and accounts established under the Trust Agreement, the Lease Agreement and the Pledge Agreement, including:
(A) The Reserve Fund and a statement of the Reserve Requirement;
(B) The funds or accounts holding any Redevelopment Payments or Surplus Net Special Taxes set aside to pay Lease Payments; and
(C) Other funds and accounts held under the Trust Agreement, including the Construction Fund, the Costs of Issuance Fund, the Rebate Fund, the Lease Payment Fund, the Bond Fund, the Redemption Fund and the Insurance and Condemnation Fund.
(c) As to each the Designated CFDs, the Annual Report shall show information containing the following:
(i) Amount of the Surplus Net Special Taxes collected from such Designated CFD for the most recent Fiscal Year;
(ii) Principal amount of any outstanding bonds secured by the Special Taxes authorized to be levied within such Designated CFD;
(iii) Information regarding the annual Special Taxes levied within such Designated CFD, amount collected, amount delinquent and percent delinquent for the most recent Fiscal Year;
(iv) Summary description of the status of foreclosure proceedings of parcels, if any, within such Designated CFD and a summary of the results of foreclosure sales, if available; and
(v) Identity of any delinquent property owner representing more than 10% of the annual Special Tax levy and value-to-lien ratios of the applicable properties (using assessed values).
(d) Amount of the Redevelopment Payments received in the most recent Fiscal Year.
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(e) In addition to any of the information expressly required to be provided under paragraphs (a), (b), (c) and (d) of this Section, the Authority or the District, as applicable, shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.
Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the Authority or the District or related public entities, which have been submitted to the MSRB through the EMMA system or the S.E.C. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The Authority shall clearly identify each such other document so incorporated by reference.
Section 5. Reporting of Significant Events.
(a) Pursuant to the provisions of this Section 5, the Authority shall give or cause to be given, notice of the occurrence of any of the following events, if material:
1. Principal and interest payment delinquencies;
2. Non-payment related defaults;
3. Unscheduled draws on debt service reserves reflecting financial difficulties;
4. Unscheduled draws on credit enhancements reflecting financial difficulties;
5. Substitution of credit or liquidity providers, or their failure to perform;
6. Adverse tax opinions or events affecting the tax-exempt status of the security;
7. Modifications to rights of security holders;
8. Bond calls;
9. Defeasances;
10. Release, substitution or sale of property securing repayment of the securities; and
11. Rating changes.
(b) The Dissemination Agent shall, within ten (10) Business Days of obtaining actual knowledge of the occurrence of any of the events listed in paragraph (a) of this Section (except events listed in clauses (a)(1), (8) or (9)), with no obligation to determine the materiality thereof, notify the Disclosure Representative of such event, and request that the Authority or the District, as applicable, promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f). For the purpose of this Disclosure Agreement “actual knowledge” means the actual knowledge of the officer or employee of the Dissemination Agent with primary responsibility for matters related to the administration of Bonds at the principal office of the Dissemination Agent.
(c) As soon as practicable based on the time needed to discover the occurrence of a Listed Event and to assess its materiality, the Authority or the District shall as soon as possible, but in no event later than three (3) Business Days, determine if such event would constitute material information for Owners of the Bonds under applicable Federal Securities law and if material, prepare and disseminate notice thereof, provided that any event under subsection (a)(11) will always be deemed to be material.
(d) If the Authority or the District has determined that the occurrence of a Listed Event would be material under applicable Federal Securities law, the Authority or the District shall as soon as practicable
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notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f).
(e) If in response to a request under subsection (b), the Authority or the District determines that the Listed Event would not be material, the Authority or the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f).
(f) If the Dissemination Agent has been instructed by the Authority or the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the MSRB through the EMMA system. Notwithstanding the foregoing:
(i) Notice of the occurrence of a Listed Event described in subsections (a)(1), (8) or (9) shall be given by the Dissemination Agent unless the Authority gives the Dissemination Agent affirmative instructions not to disclose such occurrence; and
(ii) Notice of Listed Events described in subsections (a)(8) and (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Owners of the affected Bonds pursuant to the Trust Agreement.
Section 6. Termination of Reporting Obligation. The Authority’s and the District’s respective obligations under this Disclosure Agreement shall terminate upon the defeasance, prior redemption or payment in full of all of the Bonds.
Section 7. Dissemination Agent. The Authority and the District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be the Dolinka Group, LLC. The Dissemination Agent may resign by providing thirty (30) days’ written notice to the Authority, the District and the Trustee. If at any time there is no designated Dissemination Agent appointed by the Authority and the District, or if the Dissemination Agent so appointed is unwilling or unable to perform the duties of the Dissemination Agent hereunder, the Trustee shall be the Dissemination Agent and undertake or assume its obligations hereunder.
Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Authority and the District may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment requested by the Authority and the District, provided the Dissemination Agent shall not be obligated to enter into any amendment increasing or affecting its duties or obligations), and any provision of this Disclosure Agreement may be waived, if such amendment or waiver is supported by an opinion of counsel expert in federal securities law, acceptable to the Authority, the District and the Dissemination Agent, to the effect that such amendment or waiver would not, in and of itself, cause the undertakings herein to violate the Rule if such amendment or waiver had been effective on the date hereof but taking into account any subsequent change in or official interpretation of the Rule.
If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.
If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the first annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial statements or information, in order to provide information to investors to enable them to evaluate the ability of the District to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be given in the same manner as for a Listed Event under Section 5.
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Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Authority and the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement 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 Agreement. If the Authority and the District choose 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 Agreement, the Authority and the District shall have no obligation under this Disclosure Agreement 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 Authority, the District or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Dissemination Agent may, and, at the request of any Participating Underwriter or the Owners of at least 25% of the aggregate principal amount of the outstanding Bonds, shall (but only to the extent funds in any amount satisfactory to the Dissemination Agent have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges whatsoever related thereto, including without limitation, fees and expenses of its attorneys), or any Owner may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Authority and the District to comply with their obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an event of default under the Trust Agreement and the sole remedy under this Disclosure Agreement in the event of any failure of the Authority and the District or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance.
Section 11. Duties, Immunities and Liabilities of the Dissemination Agent. The Trustee and the Dissemination Agent shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement. This Disclosure Agreement does not apply to any other securities issued or to be issued by the Authority or the District. The Trustee shall have no obligation to make any disclosure concerning the Bonds, the Authority, the School District or any other matter, provided that no provision of this Disclosure Agreement shall limit the duties or obligations of the Trustee under the Trust Agreement. The Dissemination Agent shall have no responsibility for the preparation, review, form or content of any notice of a Listed Event. The fact that the Trustee has or may have any banking, fiduciary or other relationship with the School District or any other party, apart from the relationship created by the Trust Agreement, shall not be construed to mean that the Trustee has knowledge or notice of any event or condition relating to the Bonds or the District except in its respective capacities under such agreements. No provision of this Disclosure Agreement shall require or be construed to require the Dissemination Agent to interpret or provide an opinion concerning any information disclosed hereunder. Information disclosed hereunder by the Trustee or the Dissemination Agent may contain such disclaimer language concerning the Trustee’s or the Dissemination Agent’s responsibilities hereunder with respect thereto as the Dissemination Agent may deem appropriate. The Dissemination Agent may conclusively rely on the determination of the Authority or the District as to the materiality of any event for purposes of Section 5 hereof. Neither the Trustee nor the Dissemination Agent make any representation as to the sufficiency of this Disclosure Agreement for purposes of the Rule. The Trustee and the Dissemination Agent shall be paid compensation by the District for their services provided hereunder in accordance with their respective schedule of fees, as amended from time to time, and all reasonable expenses, legal fees and advances made or incurred by the Trustee or the Dissemination Agent, as applicable, in the performance of their duties hereunder. The obligations of the Authority and the District under this Section shall survive the termination of this Disclosure Agreement.
Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Authority, the District, the Dissemination Agent, the Participating Underwriter and the Owners from time to time of the Bonds, and shall create no rights in any other person or entity.
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Section 13. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
Dated: ____________, 2010
SAN MARCOS SCHOOLS FINANCING AUTHORITY By: _____________________________________ Authorized Officer SAN MARCOS UNIFIED SCHOOL DISTRICT, for and on behalf of itself and each of the Designated CFDs By: _____________________________________ Authorized Officer UNION BANK, N.A., as Trustee By: _____________________________________ Authorized Officer DOLINKA GROUP, LLC, as Dissemination Agent By: _____________________________________ Authorized Officer
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ATTACHMENT A
NOTICE OF FAILURE TO FILE ANNUAL REPORT
Name of Authority: San Marcos Schools Financing Authority
Name of Bond Issue: San Marcos Schools Financing Authority Lease Revenue Bonds, Series 2010
Date of Issuance: _________________, 2010
NOTICE IS HEREBY GIVEN that the San Marcos Schools Financing Authority and the San Marcos Unified School District have not provided an Annual Report with respect to the above-referenced Bonds as required by the Trust Agreement, dated as of June 1, 2010 by and between the Authority and Union Bank, N.A., as Trustee. The Authority and the District anticipate that the Annual Report will be filed by _____________.
Dated: ________________
DOLINKA GROUP, LLC as Dissemination Agent on Behalf of the Authority and the District By: Authorized Signatory
cc: San Marcos Schools Financing Authority San Marcos Unified School District
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APPENDIX I
BOOK-ENTRY-ONLY SYSTEM
The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, Accreted Value of and interest on the Bonds to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the Bonds, confirmation and transfer of beneficial ownership interests in the Bonds and other Bond-related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the Bonds is based solely on information furnished by DTC to the Authority which the Authority believes to be reliable, but the Authority and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. 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 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 securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has 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 turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 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 the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.
I -2
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 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 affect 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. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bonds documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of notices be provided directly to them. 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 such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal, Accreted Value and redemption price of and interest 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 Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, Accreted Value, redemption price and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, 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 service as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC’s book-entry-only system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof.
I -3
Discontinuance of DTC Services In the event that (a) DTC determines not to continue to act as securities depository for the Bonds, or (b) the Authority determines that DTC shall no longer act and delivers a written certificate to the Trustee to that effect, then the Authority will discontinue the Book-Entry-Only System with DTC for the Bonds. If the Authority determines to replace DTC with another qualified securities depository, the Authority will prepare or direct the preparation of a new single separate, fully-registered Bond for each maturity of the Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Resolution. If the Authority fails to identify another qualified securities depository to replace the incumbent securities depository for the Bonds, then the Bonds shall no longer be restricted to being registered in the Bond registration books in the name of the incumbent securities depository or its nominee, but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the Bonds shall designate. In the event that the Book-Entry-Only System is discontinued, the following provisions would also apply: (i) the Bonds will be made available in physical form, (ii) principal, Accreted Value of, and redemption premiums if any, on the Bonds will be payable upon surrender thereof at the trust office of the Trustee identified in the Resolution, and (iii) the Bonds will be transferable and exchangeable as provided in the Resolution. The Authority and the Trustee do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the Bonds, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal or Accreted Value of, redemption price of or interest on the Bonds; (iii) the delivery of any notice which is permitted or required to be given to registered owners under the Resolution; (iv) the selection by DTC or any DTC Participant of any person to receive payment in the event of a partial redemption of the Bonds; (v) any consent given or other action taken by DTC as registered owner; or (vi) any other matter arising with respect to the Bonds or the Resolution. The Authority and the Trustee cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal or Accreted Value of or interest on the Bonds paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The Authority and the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the Bonds or any error or delay relating thereto.
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J -1
APPENDIX J
SAN DIEGO COUNTY INVESTMENT POOL
The following information concerning the Treasury Pool of San Diego County (the “Treasury Pool” or the “Pool”) has been provided by the Treasurer–Tax Collector of the County (the “County Treasurer”) and has not been confirmed or verified by the School District or the Underwriter. No representation is made herein as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof or that the information contained or incorporated hereby by reference is correct as of any time subsequent to its date.
In accordance with Government Code Section 53600 et seq., the County Treasurer manages funds deposited with it by the School District. The County is required to invest such funds in accordance with California Government Code Sections 53601 et seq. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code. All investments in the County Treasurer’s investment portfolio conform to the statutory requirements of Government Code Section 53601 et seq., authorities delegated by the County Board of Supervisors (the “Board of Supervisors”) and the County Treasurer’s investment policy.
General
Pursuant to a resolution adopted July 8, 1958, the Board of Supervisors delegated to the County Treasurer the authority to invest and reinvest funds of the County. Applicable law limits this delegation of authority to a one-year period and must be renewed annually by action of the Board of Supervisors. In addition to funds of the County (and the various departments in the County, such as Public Works and Public Administration), funds of certain local agencies within the County, including school districts in the County, are required under State law to be deposited into the County Treasury (“Involuntary Depositors”). In addition, certain agencies, including community college districts, invest certain of their funds in the County Treasury on a voluntary basis (“Voluntary Depositors” and together with the Involuntary Depositors, the “Depositors”). Deposits made by the County and the various local agencies are commingled in a pooled investment fund (the “Treasury Pool” or the “Pool”). No particular deposits are segregated for separate investment.
Under State law, Depositors in the Pool are permitted to withdraw funds which they have deposited on 30 days’ notice. The County does not expect that the Pool will encounter liquidity shortfalls based on its current portfolio and investment guidelines or realize any losses that may be required to be allocated among all Depositors in the Pool.
The County has established an Oversight Committee (“Oversight Committee”) as required by State law. The members of the Oversight Committee include the County Treasurer, the Chief Financial Officer, members of the public, and a representative from a special district and a school district. The role of the Oversight Committee is to review and monitor the Investment Policy that is prepared by the County Treasurer.
The Treasury Pool’s Portfolio
As of April 30, 2010, the securities in the Treasury Pool had a market value of $6,391,324,838 and a book value of $6,366,095,019, for a net unrealized gain of $25,229,819.
The effective duration for the Treasury Pool was 0.520 years as of April 30, 2010. “Duration” is a measure of the price volatility of the portfolio and reflects an estimate of the projected increase or decrease in the value of the portfolio based upon a decrease or increase in interest rates. A duration of 0.520 means that for every one percent increase in interest rates the market value of the portfolio would decrease by 0.520%.
As of April 30, 2010, approximately 3.72% of the total funds in the Pool were deposited by Voluntary Depositors, such as cities and fire districts, 7.54% by community college districts, 41.99% by the County, 7.48% by Non-County entities and 39.27% by K-12 school districts.
J -2
Standard & Poor’s Ratings Group maintains ratings of “AAAf” (extremely strong protection against losses and credit defaults) and “S1” (low sensitivity to changing market conditions) on the Pool. The ratings reflect only the view of the rating agency and any explanation of the significance of such ratings may be obtained from such rating agency as follows: Standard & Poor’s Rating Services, a Division of The McGraw-Hill Companies, Inc., 55 Water Street, New York, New York 10041.
Investments of the Treasury Pool
Authorized Investments. Investments of the Pool are placed in those securities authorized by various sections of the California Government Code, which include obligations of the United States Treasury, Agencies of the United States Government, local and State bond issues, bankers acceptances, commercial paper of prime quality, certificates of deposit (both collateralized and negotiable), repurchase and reverse repurchase agreements, medium term corporate notes, shares of beneficial interest in diversified management companies (mutual funds), and asset-backed (including mortgage related) and pass-through securities.
Generally, investments in repurchase agreements cannot exceed a term of one year and the security underlying the agreement shall be valued at 102% or greater of the funds borrowed against the security and the value of the repurchase agreement shall be adjusted no less than quarterly. In addition, reverse repurchase agreements generally may not exceed 20% of the base value of the portfolio and the term of the agreement may not exceed 92 days.
Securities lending transactions are considered reverse repurchase agreements for purposes of this limitation. “Base Value” is defined as the total cash balance excluding any amounts borrowed (i.e., amounts obtained through selling securities by way of reverse repurchase agreements or other similar borrowing methods).
Legislation which would modify the currently authorized investments and place restrictions on the ability of municipalities to invest in various securities is considered from time to time by the Legislature. At all times, the Pool’s investments will comply with California Government Code and the County’s Investment Policy (the “Investment Policy”).
The Investment Policy. The Investment Policy currently states the primary goals of the County Treasurer when investing public funds to be as follows: the primary objective is to safeguard the principal of the funds under the County Treasurer’s control, the secondary objective is to meet the liquidity needs of the Pool Participants and the third objective is to achieve an investment return on the funds under the control of the County Treasurer within the parameters of prudent risk management. The Investment Policy contains a goal that 50% of the Pool should be invested in securities maturing in one year or less, with the remainder of the portfolio being invested in debt securities with maturities spread over more than one year to five years. Furthermore, at least 25% of the securities must mature within 90 days. The maximum effective duration for the Pool shall be 1.50 years.
With respect to reverse repurchase agreements, the Investment Policy provides for a maximum maturity of 92 days (unless the reverse repurchase agreement includes a written guarantee of a minimum earning or spread for the entire period of such agreement) and a limitation on the total amount of reverse repurchase agreements and/or securities lending agreements to 20% of the total investments in the Pool. The Investment Policy states that the uses of reverse repurchase agreements shall be to invest the proceeds from the agreement into permissible securities that have the highest short-term credit ratings; to supplement the yield on securities owned by the Pool; or to provide funds for the immediate payment of an obligation. The maturity of the reverse repurchase agreement and the maturity of the security purchased shall be the same.
J -3
The County from time to time has engaged in securities lending transactions. Generally, these transactions involve the transfer by the governmental entity, through an agent, of securities to certain broker-dealers and financial institutions or other entities in exchange for collateral, and this collateral may be cash or securities. Most commonly, these transactions provide for the simultaneous return of the collateral to the securities borrower upon receipt of the same securities at a later date. Presently, the County has suspended its securities lending transactions program, but may decide to enter into a securities lending agreement in the future. Any such securities lending transactions are considered reverse repurchase agreements under the Investment Policy and, accordingly, the total principal amount of reverse repurchase agreements and securities lending agreements may not exceed 20% of the Pool. Since the inception of the County’s securities lending program in 1987, there has not been any loss of principal to the Pool resulting from these securities lending transactions or the investment of the related collateral.
The Investment Policy also authorizes investments in covered call options and put options, which are options that the County Treasurer sells to a third party the right to buy an existing security in the Pool or sell a security to the Pool, both at a specific price within a specific time period. Under the Investment Policy, securities subject to covered calls are not to be used for reverse repurchase agreements; cash sufficient to pay for outstanding puts are to be invested in securities maturing on or before the expiration date of the option; the maximum maturity of a covered call option/put option is to be 90 days and not more than 10% of the total investments in the Pool could have options written against them at any given time.
Beginning early August 2007, the Pool halted all investments in asset-backed commercial paper and has no plans to resume investment in this type of security until the current credit crisis has passed. Further, the Pool is not invested in any structured investment vehicles and has never invested in collateralized debt obligations.
In order to limit exposure to credit risk, the Pool has limited purchases of corporate securities to maturities less than 60 days.
Certain Information Relating to the Pool
The following table reflects information with respect to the Pool as of the close of business, April 30, 2010. As described above, a wide range of investments is authorized by State law. Therefore, there can be no assurances that the investments in the Pool will not vary significantly from the investments described below. In addition, the value of the various investments in the Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions. Therefore, there can be no assurance that the values of the various investments in the Pool will not vary significantly from the values described below. In addition, the values specified in the following table were based upon estimates of market values provided to the County by a third party. Accordingly, there can be no assurance that if these securities had been sold on April 30, 2010, the Pool necessarily would have received the values specified.
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TR
EA
SUR
ER
–TA
X C
OL
LE
CT
OR
OF
TH
E C
OU
NT
Y O
F SA
N D
IEG
O P
OR
TFO
LIO
ST
AT
IST
ICS
as o
f Apr
il 30
, 201
0
Pe
rcen
t of
Port
folio
B
ook
Val
ue
M
arke
t Pri
ce
A
ccru
ed
Inte
rest
Mar
ket V
alue
N
et
Unr
ealiz
ed
Gai
n/(L
oss)
Y
ield
to
Mat
urity
Wei
ghte
d A
vera
ge
Day
s to
M
atur
ity
US
Trea
sury
Bill
s
1.64
%
$104
,868
,700
99.9
6%
$62,
899
$104
,953
,500
84
,800
0.
22%
90
U
S Tr
easu
ry N
otes
4.47
27
5,85
4,70
1
103.
97
1,79
0,57
9 28
5,91
2,64
9 10
,057
,948
2.
93%
84
6 FN
MA
Dis
coun
t Not
es
7.
99
510,
869,
534
99.9
8 0
510,
906,
400
36,8
66
0.18
%
49
Fede
ral F
arm
Cre
dit B
ank
Not
es
2.
47
156,
583,
897
100.
90
1,11
7,34
7 15
7,65
9,37
5 1,
075,
478
2.50
%
526
Fede
ral H
ome
Loan
Ban
k N
otes
14.0
9 89
6,18
7,23
2
10
0.75
3,
268,
799
901,
164,
578
4,97
7,34
6 1.
39%
46
8 Fe
dera
l Hom
e Lo
an M
ortg
. Cor
p.
Dis
c N
otes
9.81
62
7,05
0,02
0
99
.97
0 62
7,12
9,03
2 79
,012
0.
22%
67
Fe
dera
l Hom
e Lo
an M
ortg
. Cor
p.
Not
es
10
.89
69
0,32
6,89
3
10
1.39
5,
177,
289
695,
829,
596
5,50
2,70
3 1.
90%
63
0 Fa
nnie
Mae
10.0
6 64
0,57
6,39
1
10
0.63
4,
562,
671
642,
671,
174
2,09
4,78
3 1.
95%
1,
026
Cor
pora
te M
ediu
m T
erm
Not
es
0.
81
50,6
57,6
33
10
3.98
63
9,02
8 51
,992
,000
1,
334,
367
3.56
%
433
Bon
d Fu
nd
0.
55
35,0
00,0
00
10
0.20
37
,518
35
,070
,070
70
,070
0.
57%
1
Mon
ey M
arke
t Fun
ds
0.
92
59,0
35,0
00
10
0.00
3,
834
59,0
35,0
00
0 0.
02%
1
Rep
urch
ase
Agr
eem
ents
4.25
27
0,97
5,35
9
10
0.00
1,
864
270,
975,
359
0 0.
25%
3
Neg
otia
ble
Cer
tific
ates
of D
epos
it
11.4
1 72
9,00
0,29
2
100.
00
122,
826
728,
968,
000
(32,
292)
0.
20%
19
C
omm
erci
al P
aper
19.9
4 1,
274,
400,
867
99
.98
0 1,
274,
349,
605
(51,
262)
0.
22%
32
C
olla
tera
lized
/FD
IC C
ertif
icat
es o
f D
epos
it
0.7
0 4
4,70
8,00
0
10
0.00
21
,817
44
,708
,500
0
0.55
%
70
Tota
ls fo
r Apr
il 20
10
100
.00%
$6
,366
,095
,019
100.
53%
$1
6,80
6,47
1 $6
,391
,324
,838
$2
5,22
9,81
9 0.
94%
31
2
Tota
l for
Mar
ch 2
010
100
.00%
$5
,554
,023
,895
100.
61%
$1
9,15
0,99
4 $5
,578
,222
,577
$2
4,19
8,68
2 1.
11%
35
7
Cha
nge
From
Prio
r Mon
th
$8
12,0
71,1
24
(0
.08%
) ($
2,34
4,52
3)
$813
,102
,261
$1
,031
,137
(0
.17%
) (4
5)
Portf
olio
Eff
ectiv
e D
urat
ion
0.52
0 Y
ears
Mar
ch
Ret
urn
A
nnua
lized
Fisc
al Y
ear
To
Dat
e R
etur
n
A
nnua
lized
C
alen
dar
Yea
r T
o D
ate
Ret
urn
A
nnua
lized
Boo
k V
alue
0.
079%
0.
957%
1.
021%
1.
2264
%
0.34
3%
1.04
2%
Mar
ket V
alue
0.
070%
0.
855%
0.
910%
1.
092%
0.
305%
0.
927%
__
____
____
____
____
____
____
___
Sour
ce:
Cou
nty,
Tre
asur
er-T
ax C
olle
ctor
of t
he C
ount
y.
K -1
APPENDIX K
SPECIMEN MUNICIPAL BOND INSURANCE POLICY
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MUNICIPAL BOND INSURANCE POLICY
ISSUER: BONDS: $ in aggregate principal amount of
Policy No.: -N
Effective Date:
Premium: $ ASSURED GUARANTY MUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) ("AGM"), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the "Trustee") or paying agent (the "Paying Agent") (as set forth in the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of the Owners or, at the election of AGM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on which AGM shall have received Notice of Nonpayment, AGM will disburse to or for the benefit of each Owner of a Bond the face amount of principal of and interest on the Bond that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by AGM, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in AGM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by AGM is incomplete, it shall be deemed not to have been received by AGM for purposes of the preceding sentence and AGM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, who may submit an amended Notice of Nonpayment. Upon disbursement in respect of a Bond, AGM shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner's right to receive payments under the Bond, to the extent of any payment by AGM hereunder. Payment by AGM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of AGM under this Policy. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. "Business Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment" means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless AGM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. "Nonpayment" means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. "Nonpayment" shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer which has been recovered from such Owner pursuant to the
Page 2 of 2 Policy No. -N United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. "Notice" means telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to AGM which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner" shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. AGM may appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer's Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to AGM pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to AGM and shall not be deemed received until received by both and (b) all payments required to be made by AGM under this Policy may be made directly by AGM or by the Insurer's Fiscal Agent on behalf of AGM. The Insurer's Fiscal Agent is the agent of AGM only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of AGM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, AGM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to AGM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy sets forth in full the undertaking of AGM, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In witness whereof, ASSURED GUARANTY MUNICIPAL CORP. (FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) has caused this Policy to be executed on its behalf by its Authorized Officer. ASSURED GUARANTY MUNICIPAL CORP.
(FORMERLY KNOWN AS FINANCIAL SECURITY ASSURANCE INC.) By
Authorized Officer Form 500NY (5/90)
(212) 826-0100
L-1
APPENDIX L
ACCRETED VALUE TABLE
San Marcos School Financing Authority Lease Revenue Bonds, Series 2010
Date
Capital Appreciation Bonds Maturing August 15, 2031
Accretion Rate: 6.64%
Capital Appreciation Bonds Maturing August 15, 2032
Accretion Rate: 6.71%
Capital Appreciation Bonds Maturing August 15, 2033
Accretion Rate: 6.76%
Capital Appreciation Bonds Maturing August 15, 2034
Accretion Rate: 6.81% June 22, 2010 1,256.15 1,159.20 1,073.05 992.40 August 15, 2010 1,268.30 1,170.50 1,083.65 1,002.25 February 15, 2011 1,310.40 1,209.80 1,120.25 1,036.35 August 15, 2011 1,353.90 1,250.35 1,158.10 1,071.65 February 15, 2012 1,398.85 1,292.30 1,197.25 1,108.15 August 15, 2012 1,445.30 1,335.70 1,237.75 1,145.85 February 15, 2013 1,493.30 1,380.50 1,279.55 1,184.90 August 15, 2013 1,542.85 1,426.80 1,322.80 1,225.25 February 15, 2014 1,594.10 1,474.70 1,367.55 1,266.95 August 15, 2014 1,647.00 1,524.15 1,413.75 1,310.10 February 15, 2015 1,701.70 1,575.30 1,461.55 1,354.70 August 15, 2015 1,758.20 1,628.15 1,510.95 1,400.80 February 15, 2016 1,816.55 1,682.75 1,562.00 1,448.50 August 15, 2016 1,876.85 1,739.25 1,614.80 1,497.85 February 15, 2017 1,939.15 1,797.60 1,669.40 1,548.85 August 15, 2017 2,003.55 1,857.90 1,725.80 1,601.60 February 15, 2018 2,070.05 1,920.20 1,784.15 1,656.10 August 15, 2018 2,138.80 1,984.65 1,844.45 1,712.50 February 15, 2019 2,209.80 2,051.25 1,906.80 1,770.85 August 15, 2019 2,283.20 2,120.05 1,971.25 1,831.10 February 15, 2020 2,359.00 2,191.20 2,037.90 1,893.50 August 15, 2020 2,437.30 2,264.70 2,106.75 1,957.95 February 15, 2021 2,518.20 2,340.65 2,177.95 2,024.60 August 15, 2021 2,601.80 2,419.20 2,251.60 2,093.55 February 15, 2022 2,688.20 2,500.35 2,327.70 2,164.85 August 15, 2022 2,777.45 2,584.25 2,406.35 2,238.55 February 15, 2023 2,869.65 2,670.95 2,487.70 2,314.80 August 15, 2023 2,964.95 2,760.55 2,571.80 2,393.60 February 15, 2024 3,063.40 2,853.20 2,658.70 2,475.10 August 15, 2024 3,165.10 2,948.90 2,748.60 2,559.40 February 15, 2025 3,270.15 3,047.85 2,841.50 2,646.55 August 15, 2025 3,378.75 3,150.10 2,937.55 2,736.65 February 15, 2026 3,490.90 3,255.80 3,036.80 2,829.85 August 15, 2026 3,606.80 3,365.05 3,139.45 2,926.20 February 15, 2027 3,726.55 3,477.95 3,245.60 3,025.80 August 15, 2027 3,850.30 3,594.60 3,355.30 3,128.85 February 15, 2028 3,978.10 3,715.20 3,468.70 3,235.40 August 15, 2028 4,110.20 3,839.85 3,585.95 3,345.55 February 15, 2029 4,246.65 3,968.70 3,707.15 3,459.45 August 15, 2029 4,387.65 4,101.85 3,832.45 3,577.25 February 15, 2030 4,533.30 4,239.45 3,961.95 3,699.10 August 15, 2030 4,683.80 4,381.70 4,095.90 3,825.05 February 15, 2031 4,839.30 4,528.70 4,234.35 3,955.25 August 15, 2031 5,000.00 4,680.65 4,377.45 4,089.95 February 15, 2032 4,837.65 4,525.40 4,229.20 August 15, 2032 5,000.00 4,678.35 4,373.20 February 15, 2033 4,836.50 4,522.15 August 15, 2033 5,000.00 4,676.10 February 15, 2034 4,835.35 August 15, 2034 5,000.00
____________________________ Source: Stone & Youngberg, LLC
