NEW ISSUE — BOOK-ENTRY ONLY RATINGS: Fitch: “AA” S&P: “A+” (See “MISCELLANEOUS — Ratings” herein.) In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, subject to certain qualifications described herein, under existing laws, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series B-1 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”). In the further opinion of Bond Counsel, interest on the Series B-1 Bonds is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; although such interest is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation’s alternative minimum tax liabilities. In the opinion of Bond Counsel, subject to certain qualifications described herein under existing law, interest on the Series B-2 Bonds is not excluded from gross income for federal tax purposes. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income taxation. Bond Counsel expresses no opinion regarding or concerning any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein. $20,139,078.45 CYPRESS ELEMENTARY SCHOOL DISTRICT (Orange County, California) General Obligation Bonds, 2008 Election, Series B-1 $4,535,000 CYPRESS ELEMENTARY SCHOOL DISTRICT (Orange County, California) General Obligation Bonds, 2008 Election, Series B-2 (Direct Pay Qualified School Construction Bonds) Dated: Date of Delivery Due: August 1, as shown herein This cover page is not a summary of this issue; it is only a reference to the information contained in this Official Statement. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Cypress Elementary School District (Orange County, California) General Obligation Bonds, 2008 Election, Series B-1 (the “Series B-1 Bonds”) and the Cypress Elementary School District (Orange County, California) General Obligation Bonds, 2008 Election, Series B-2 (Direct Pay Qualified School Construction Bonds) (the “Series B-2 Bonds” and together with the Series B-1 Bonds, the “Bonds”) are issued by the Cypress Elementary School District (the “District”) to finance specific school facility construction, repair and improvement projects approved by the voters of the District, to defease the District’s outstanding 2009 General Obligation Bond Anticipation Notes of the Cypress Elementary School District, and to pay capitalized interest on the Bonds. The Bonds are being issued under the laws of the State of California (the “State”) and pursuant to a resolution of the Board of Trustees of the District. The Bonds are payable from ad valorem taxes to be levied within the District pursuant to the California Constitution and other state law. The Board of Supervisors of the County of Orange, California (the “County”) is empowered and is obligated to levy ad valorem taxes upon all property subject to taxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates), for the payment of principal, accreted value or maturity value of and interest on the Bonds, all as more fully described herein. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS” herein. The Series B-1 Bonds are being issued as current interest bonds (the “Current Interest Bonds”), capital appreciation bonds (the “Capital Appreciation Bonds”) and capital appreciation bonds that convert to current interest bonds (the “Convertible Capital Appreciation Bonds”) and the Series B-2 Bonds will be issued as Current Interest Bonds. Interest on the Current Interest Bonds is payable on February 1, 2012, and thereafter on each February 1 and August 1 to maturity. Principal of the Current Interest Bonds is payable on August 1 in each of the years and in the amounts set forth on the inside front cover hereof. The Series B-1 Bonds issued as Capital Appreciation Bonds will not pay interest on a current, periodic basis but will accrete in value to their maturity value payable only at maturity on August 1 in each of the years and in the amounts set forth on the inside cover hereof. Interest on the Capital Appreciation Bonds will be compounded on each February 1 and August 1 to maturity, commencing August 1, 2011. The Series B-1 Bonds issued as Convertible Capital Appreciation Bonds will initially constitute capital appreciation bonds and will convert to current interest bonds on their respective conversion dates as set forth on the inside front cover hereof (each a “Conversion Date”). Prior to the Conversion Date thereof, the Convertible Capital Appreciation Bonds will not pay interest on a current, periodic basis but will accrete in value to their stated accreted value at the Conversion Date thereof payable only at maturity on August 1 in each of the years and in the amounts set forth on the inside front cover hereof. Prior to the Conversion Date of a Convertible Capital Appreciation Bond, interest on such Convertible Capital Appreciation Bond will be compounded on each February 1 and August 1, commencing August 1, 2011. From and after the Conversion Date of a Convertible Capital Appreciation Bond, such Convertible Capital Appreciation Bond will bear current interest on the accreted value thereof at the rates set forth on the inside front cover page of this Official Statement, payable on each February 1 and August 1 to maturity, commencing on the February 1 or August 1 immediately following such Conversion Date. The Bonds will be issued in denominations of $5,000 principal amounts, maturity value or accreted value at the Conversion Date thereof, as applicable, or any integral multiple thereof as shown on the inside front cover hereof. The Series B-2 Bonds will be issued as “qualified school construction bonds” as defined in Section 54F of the Code and as “specified tax credit bonds” as defined in Section 6431(f)(2) of the Code. The District expects to receive a cash subsidy payment from the United States Treasury on the Series B-2 Bonds so designated as set forth herein. See “THE BONDS — Designation of Series B-2 Bonds as Qualified School Construction Bonds” herein. Each series of the Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for each series of the Bonds. Individual purchases of the Bonds will be made in book-entry form only. Purchasers will not receive physical delivery of the Bonds purchased by them. See “THE BONDS — Form and Registration” herein. Payments of principal, accreted value or maturity value of and interest on the Bonds will be made by the Paying Agent, initially Zions First National Bank, to DTC for subsequent disbursement to DTC Participants, who will remit such payments to the beneficial owners of the Bonds. See “THE BONDS — Payment of Principal and Interest” herein. The Bonds are subject to redemption prior to maturity as described herein. See “THE BONDS — Redemption” herein. Each series of the Bonds will be offered when, as and if issued by the District and received by the Underwriter, subject to the approval of legality by Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel. Certain legal matters will be passed upon for the District by Rutan & Tucker, LLP, Costa Mesa, California, and by Orrick, Herrington & Sutcliffe LLP, as Disclosure Counsel to the District. It is anticipated that each series of the Bonds, in definitive form, will be available fordelivery through the facilities of DTC in New York, New York, on or about April 21, 2011. The date of this Official Statement is April 6, 2011.
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NEW ISSUE — BOOK-ENTRY ONLY RATINGS: Fitch: “AA”S&P: “A+”
(See “MISCELLANEOUS — Ratings” herein.)
In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel, subject to certain qualifications described herein,under existing laws, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance withcertain covenants, interest on the Series B-1 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the InternalRevenue Code of 1986, as amended (the “Code”). In the further opinion of Bond Counsel, interest on the Series B-1 Bonds is not an item of taxpreference for purposes of the federal alternative minimum tax imposed on individuals and corporations; although such interest is included as anadjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation’s alternative minimumtax liabilities. In the opinion of Bond Counsel, subject to certain qualifications described herein under existing law, interest on the Series B-2 Bonds isnot excluded from gross income for federal tax purposes. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of Californiapersonal income taxation. Bond Counsel expresses no opinion regarding or concerning any other tax consequences related to the ownership ordisposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein.
$20,139,078.45CYPRESS ELEMENTARY SCHOOL DISTRICT
(Orange County, California)General Obligation Bonds, 2008 Election, Series B-1
$4,535,000CYPRESS ELEMENTARY SCHOOL DISTRICT
(Orange County, California)General Obligation Bonds, 2008 Election, Series B-2
(Direct Pay Qualified School Construction Bonds)
Dated: Date of Delivery Due: August 1, as shown herein
This cover page is not a summary of this issue; it is only a reference to the information contained in this Official Statement. Investors must read theentire Official Statement to obtain information essential to the making of an informed investment decision.
The Cypress Elementary School District (Orange County, California) General Obligation Bonds, 2008 Election, Series B-1 (the “Series B-1Bonds”) and the Cypress Elementary School District (Orange County, California) General Obligation Bonds, 2008 Election, Series B-2 (Direct PayQualified School Construction Bonds) (the “Series B-2 Bonds” and together with the Series B-1 Bonds, the “Bonds”) are issued by the CypressElementary School District (the “District”) to finance specific school facility construction, repair and improvement projects approved by the voters ofthe District, to defease the District’s outstanding 2009 General Obligation Bond Anticipation Notes of the Cypress Elementary School District, and topay capitalized interest on the Bonds. The Bonds are being issued under the laws of the State of California (the “State”) and pursuant to a resolution ofthe Board of Trustees of the District.
The Bonds are payable from ad valorem taxes to be levied within the District pursuant to the California Constitution and other state law. The Boardof Supervisors of the County of Orange, California (the “County”) is empowered and is obligated to levy ad valorem taxes upon all property subject totaxation by the District, without limitation as to rate or amount (except as to certain personal property which is taxable at limited rates), for the paymentof principal, accreted value or maturity value of and interest on the Bonds, all as more fully described herein. See “SECURITY AND SOURCE OFPAYMENT FOR THE BONDS” herein.
The Series B-1 Bonds are being issued as current interest bonds (the “Current Interest Bonds”), capital appreciation bonds (the “CapitalAppreciation Bonds”) and capital appreciation bonds that convert to current interest bonds (the “Convertible Capital Appreciation Bonds”) and theSeries B-2 Bonds will be issued as Current Interest Bonds. Interest on the Current Interest Bonds is payable on February 1, 2012, and thereafter on eachFebruary 1 and August 1 to maturity. Principal of the Current Interest Bonds is payable on August 1 in each of the years and in the amounts set forth onthe inside front cover hereof.
The Series B-1 Bonds issued as Capital Appreciation Bonds will not pay interest on a current, periodic basis but will accrete in value to theirmaturity value payable only at maturity on August 1 in each of the years and in the amounts set forth on the inside cover hereof. Interest on the CapitalAppreciation Bonds will be compounded on each February 1 and August 1 to maturity, commencing August 1, 2011.
The Series B-1 Bonds issued as Convertible Capital Appreciation Bonds will initially constitute capital appreciation bonds and will convert tocurrent interest bonds on their respective conversion dates as set forth on the inside front cover hereof (each a “Conversion Date”). Prior to theConversion Date thereof, the Convertible Capital Appreciation Bonds will not pay interest on a current, periodic basis but will accrete in value to theirstated accreted value at the Conversion Date thereof payable only at maturity on August 1 in each of the years and in the amounts set forth on the insidefront cover hereof. Prior to the Conversion Date of a Convertible Capital Appreciation Bond, interest on such Convertible Capital Appreciation Bondwill be compounded on each February 1 and August 1, commencing August 1, 2011. From and after the Conversion Date of a Convertible CapitalAppreciation Bond, such Convertible Capital Appreciation Bond will bear current interest on the accreted value thereof at the rates set forth on the insidefront cover page of this Official Statement, payable on each February 1 and August 1 to maturity, commencing on the February 1 or August 1immediately following such Conversion Date.
The Bonds will be issued in denominations of $5,000 principal amounts, maturity value or accreted value at the Conversion Date thereof, asapplicable, or any integral multiple thereof as shown on the inside front cover hereof.
The Series B-2 Bonds will be issued as “qualified school construction bonds” as defined in Section 54F of the Code and as “specified tax creditbonds” as defined in Section 6431(f)(2) of the Code. The District expects to receive a cash subsidy payment from the United States Treasury on theSeries B-2 Bonds so designated as set forth herein. See “THE BONDS — Designation of Series B-2 Bonds as Qualified School Construction Bonds”herein.
Each series of the Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co., as nominee forThe Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for each series of the Bonds. Individual purchasesof the Bonds will be made in book-entry form only. Purchasers will not receive physical delivery of the Bonds purchased by them. See “THE BONDS —Form and Registration” herein. Payments of principal, accreted value or maturity value of and interest on the Bonds will be made by the Paying Agent,initially Zions First National Bank, to DTC for subsequent disbursement to DTC Participants, who will remit such payments to the beneficial owners ofthe Bonds. See “THE BONDS — Payment of Principal and Interest” herein.
The Bonds are subject to redemption prior to maturity as described herein. See “THE BONDS — Redemption” herein.
Each series of the Bonds will be offered when, as and if issued by the District and received by the Underwriter, subject to the approval of legality byBowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel. Certain legal matters will be passed upon for the District by Rutan &Tucker, LLP, Costa Mesa, California, and by Orrick, Herrington & Sutcliffe LLP, as Disclosure Counsel to the District. It is anticipated that each seriesof the Bonds, in definitive form, will be available for delivery through the facilities of DTC in New York, New York, on or about April 21, 2011.
The date of this Official Statement is April 6, 2011.
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MATURITY SCHEDULEBASE CUSIP1: 232723
$20,139,078.45SERIES B-1 BONDS
$4,530,000 Current Interest Bonds
$1,425,000 5.250% Term Bonds due August 1, 2025 — Yield 5.100%* CUSIP Number1 — HK5$3,105,000 5.000% Term Bonds due August 1, 2027 — Yield 5.250% CUSIP Number1 — HL3
$2,614,169.55 Initial Principal Amount of Term Capital Appreciation Bonds due August 1, 20407.900% Accretion Rate — $25,265,000 Maturity Value — Reoffering Yield 7.900% CUSIP Number1 — HN9
$3,553,503.75 Initial Principal Amount of Term Capital Appreciation Bonds due August 1, 20488.050% Accretion Rate — $67,365,000 Maturity Value — Reoffering Yield 8.050% CUSIP Number1 — HP4
$5,861,288.30 Convertible Capital Appreciation Bonds
$5,861,288.30 Initial Principal Amount of Term Convertible Capital Appreciation Bonds due August 1, 20508.125% Accretion Rate to (but excluding) Conversion Date
August 1, 2031 Conversion Date — $29,470,00 Stated Value at Conversion Date8.125% Interest Rate from and after Conversion DateReoffering Yield 8.125% CUSIP Number1 — HW9
$4,535,000SERIES B-2 BONDS
$4,535,000 Current Interest Bonds
$1,220,000 5.330% Term Bonds due August 1, 2018 — Yield 5.330% CUSIP Number1 — HT6$1,205,000 6.050% Term Bonds due August 1, 2021 — Yield 6.050% CUSIP Number1 — HU3$2,110,000 6.650% Term Bonds due August 1, 2025 — Yield 6.650% CUSIP Number1 — HV1
1 Copyright 2011, American Bankers Association. CUSIP data herein is provided by Standard & Poor’s, CUSIP Service Bureau,a division of The McGraw-Hill Companies, Inc. CUSIP numbers are provided for convenience of reference only. Neither theDistrict nor the Underwriter takes any responsibility for the accuracy of such CUSIP numbers.
This Official Statement does not constitute an offering of any security other than the originaloffering of the Bonds by the District. No dealer, broker, salesperson or other person has been authorizedby the District to give any information or to make any representations other than as contained in thisOfficial Statement, and if given or made, such other information or representation not so authorizedshould not be relied upon as having been given or authorized by the District.
The Bonds are exempt from registration under the Securities Act of 1933, as amended, pursuantto Section 3(a)2 thereof. This Official Statement does not constitute an offer to sell or a solicitation of anoffer to buy Bonds in any state in which such offer or solicitation is not authorized or in which the personmaking such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to makesuch offer or solicitation.
The information set forth herein other than that furnished by the District, although obtained fromsources which are believed to be reliable, is not guaranteed as to accuracy or completeness, and is not tobe construed as a representation by the District. The information and expressions of opinions herein aresubject to change without notice and neither delivery of this Official Statement nor any sale madehereunder shall, under any circumstances, create any implication that there has been no change in theaffairs of the District since the date hereof. This Official Statement is submitted in connection with thesale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any otherpurpose.
The Underwriter has provided the following sentence for inclusion in this Official Statement: TheUnderwriter has reviewed the information in this Official Statement in accordance with, and as a part of,its responsibilities to investors under the federal securities laws as applied to the facts and circumstancesof this transaction, but the Underwriter does not guarantee the accuracy or completeness of suchinformation.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OREFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THEBONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPENMARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN SECURITIESDEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THANTHE PUBLIC OFFERING PRICES STATED ON THE INSIDE FRONT COVER PAGE HEREOFAND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THEUNDERWRITER.
CYPRESS ELEMENTARY SCHOOL DISTRICT(ORANGE COUNTY, CALIFORNIA)
BOARD OF TRUSTEES
Valeri Peters Wagner, PresidentDonna Erickson, Vice President
Brian Nakamura, ClerkStephen Blount, Member
David Giese, Member
DISTRICT ADMINISTRATORS
Sheri Loewenstein, SuperintendentTimothy McLellan, Ed.D., Assistant Superintendent, Business Services
PROFESSIONAL SERVICES
Bond Counsel
Bowie, Arneson, Wiles & GiannoneNewport Beach, California
General ...........................................................................................................................................1
The District .....................................................................................................................................1
THE BONDS ...............................................................................................................................................2
Authority for Issuance; Purpose......................................................................................................2
Form and Registration.....................................................................................................................2
Payment of Principal and Interest ...................................................................................................2
Designation of Series B-2 Bonds as Qualified School Construction Bonds...................................4
APPENDIX A − INFORMATION RELATING TO THE DISTRICT’S OPERATIONS AND BUDGET ....................................................................................................................................A-1
APPENDIX B − FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2010 .............................................................................................................B-1
APPENDIX C − PROPOSED FORMS OF OPINIONS OF BOND COUNSEL....................................C-1
APPENDIX D − FORM OF CONTINUING DISCLOSURE CERTIFICATE ......................................D-1
APPENDIX E − SUMMARY OF COUNTY OF ORANGE INVESTMENT POLICY ........................E-1
APPENDIX F − ORANGE COUNTY INVESTMENT POLICY STATEMENT.................................. F-1
APPENDIX G − BOOK-ENTRY ONLY SYSTEM...............................................................................G-1
APPENDIX H − TABLE OF ACCRETED VALUES FOR CAPITAL APPRECIATION BONDS .....H-1
APPENDIX I − TABLE OF ACCRETED VALUES FOR CONVERTIBLE CAPITAL APPRECIATION BONDS .......................................................................................................... I-1
$20,139,078.45CYPRESS ELEMENTARY SCHOOL DISTRICT
(Orange County, California)General Obligation Bonds, 2008 Election, Series B-1
$4,535,000CYPRESS ELEMENTARY SCHOOL DISTRICT
(Orange County, California)General Obligation Bonds, 2008 Election, Series B-2(Direct Pay Qualified School Construction Bonds)
INTRODUCTION
General
This Official Statement, which includes the cover page and appendices hereto, is provided tofurnish information in connection with the sale of $20,139,078.45 aggregate principal amount of CypressElementary School District (Orange County, California) General Obligation Bonds, 2008 Election, SeriesB-1 (the “Series B-1 Bonds”), consisting of current interest bonds (the “Current Interest Bonds”), capitalappreciation bonds (the “Capital Appreciation Bonds”) and capital appreciation bonds that convert tocurrent interest bonds (“Convertible Capital Appreciation Bonds”), and $4,535,000 aggregate principalamount of Cypress Elementary School District (Orange County, California) General Obligation Bonds,2008 Election, Series B-2 (Direct Pay Qualified School Construction Bonds) (the “Series B-2 Bonds” andtogether with the Series B-1 Bonds, the “Bonds”), consisting of Current Interest Bonds, all as indicated onthe inside front cover hereof, to be offered by the Cypress Elementary School District (the “District”).
This Official Statement speaks only as of its date, and the information contained herein is subjectto change. The District has no obligation to update the information in this Official Statement, except asrequired by the Continuing Disclosure Certificate to be executed by the District. See “OTHER LEGALMATTERS – Continuing Disclosure.”
The purpose of this Official Statement is to supply information to prospective buyers of theBonds. Quotations from and summaries and explanations of the Bonds, the resolution of the Board ofTrustees of the District providing for the issuance and payment of the Bonds, and the constitutionalprovisions, statutes and other documents described herein, do not purport to be complete, and reference ishereby made to said documents, constitutional provisions and statutes for the complete provisions thereof.
Any statements in this Official Statement involving matters of opinion, whether or not expresslyso stated, are intended as such and not as representations of fact. This Official Statement is not to beconstrued as a contract or agreement between the District and the purchasers or owners of any of theBonds.
Copies of documents referred to herein and information concerning the Bonds are available fromthe District by contacting: Cypress Elementary School District, 9470 Moody Street, Cypress, California90630, Attention: Assistant Superintendent, Business Services. The District may impose a charge forcopying, handling and mailing such requested documents.
The District
The District was established in 1895 and is located in an area of approximately six square mileslocated in northern Orange County, California, and includes the City of Cypress and portions of the citiesof La Palma and Buena Park. The District provides public education for kindergarten through 6th grade,including special education classes. The District currently operates six elementary schools and estimatesthat total current enrollment is approximately 3,971 students. For additional information about theDistrict, see Appendix A – “INFORMATION RELATING TO THE DISTRICT’S OPERATIONS ANDBUDGET.”
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THE BONDS
Authority for Issuance; Purpose
The Bonds are issued under the provisions of Article 4.5 of Chapter 3 of Part 1 of Division 2 ofTitle 5 of the California Government Code, certain provisions of the California Education Code andArticle XIIIA of the California Constitution and pursuant to a resolution adopted by the Board of Trusteesof the District on March 10, 2011 (the “Resolution”).
At an election held on November 4, 2008, the District received authorization under a ballotmeasure to issue bonds of the District in an aggregate principal amount not to exceed $53,600,000 tofinance specific school facility construction, repair and improvement projects (the “Authorization”). Themeasure required approval by at least 55% of the votes cast by eligible voters within the District, andreceived a favorable vote of approximately 69.2%. On May 5, 2009, the County of Orange, California(the “County”), on behalf of the District, issued the first series of the authorized bonds under theAuthorization in the aggregate initial principal amount of $16,999,051.75 (the “Series A Bonds”). TheBonds represent the second and third series of the authorized bonds to be issued under the Authorization.Simultaneously with the issuance of the Series A Bonds, the District issued $6,998,641.95 aggregateinitial principal amount of 2009 General Obligation Bond Anticipation Notes of the Cypress ElementarySchool District (the “Notes”) in anticipation of the sale of additional general obligation bonds of theDistrict under the Authorization.
Proceeds from the Bonds will be used to finance specific school facility construction, repair andimprovement projects approved by the voters of the District, to defease the District’s outstanding Notes,and to pay capitalized interest on the Bonds.
Form and Registration
Each series of the Bonds will be issued in fully registered form only, without coupons, indenominations of $5,000 principal amount, Maturity Value (as defined below) or accreted value at theirConversion Date (as defined below), as applicable, or integral multiples thereof. Each series of the Bondswill initially be registered in the name of Cede & Co., as nominee of The Depository Trust Company(“DTC”), New York, New York. DTC will act as security depository of the Bonds. Purchases of Bondsunder the DTC book-entry system must be made by or through a DTC participant, and ownershipinterests in Bonds will be recorded as entries on the books of said participants. Except in the event thatuse of this book-entry system is discontinued for the Bonds, beneficial owners will not receive physicalcertificates representing their ownership interests. See Appendix G – “BOOK-ENTRY ONLYSYSTEM.”
Payment of Principal and Interest
The Series B-1 Bonds will be issued as Current Interest Bonds, Capital Appreciation Bonds andConvertible Capital Appreciation Bonds as set forth on the inside front cover hereof. The Series B-2Bonds will be issued as Current Interest Bonds as set forth on the inside cover hereof.
Current Interest Bonds. The Series B-1 Bonds and the Series B-2 Bonds issued as CurrentInterest Bonds will be dated as of their date of delivery, and bear interest at the rates set forth on theinside front cover page of this Official Statement, payable on February 1 and August 1 of each year (each,an “Interest Date”), commencing on February 1, 2012, computed using a year of 360 days, comprisingtwelve 30-day months. Current Interest Bonds authenticated and registered on any date prior to the closeof business on January 15, 2012, shall bear interest from their dated date. Current Interest Bonds
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authenticated during the period between the 15th day of the calendar month immediately preceding anInterest Date (the “Record Date”) and the close of business on that Interest Date shall bear interest fromthat Interest Date. Any other Current Interest Bond shall bear interest from the Interest Date immediatelypreceding the date of its authentication. If, at the time of authentication of any Current Interest Bond,interest is then in default on outstanding Bonds, such Bond shall bear interest from the Interest Date towhich interest has previously been paid or made available for payment thereon.
Capital Appreciation Bonds. The Series B-1 Bonds issued as Capital Appreciation Bonds will bedated as of their date of delivery. The Series B-1 Bonds issued as Capital Appreciation Bonds will notbear interest on a periodic basis; instead, each Capital Appreciation Bond will increase in value by theaccumulation of earned interest from its initial principal amount on the date of issuance (as stated on theinside front cover page of this Official Statement) to its maturity value on the date of maturity (“MaturityValue”), as stated on the inside front cover page of this Official Statement. Interest commences to accrueon the date of delivery, and is compounded on each February 1 and August 1, commencing on August 1,2011 (each such compounding date, an “Accretion Date”).
Convertible Capital Appreciation Bonds. The Series B-1 Bonds issued as Convertible CapitalAppreciation Bonds will be dated as of their date of delivery. The Convertible Capital AppreciationBonds will initially constitute capital appreciation bonds and will convert to current interest bonds ontheir respective conversion dates as set forth on the inside front cover hereof (each a “Conversion Date”).Prior to the Conversion Date thereof, the Convertible Capital Appreciation Bonds will not bear interest ona periodic basis; instead, each Convertible Capital Appreciation Bond will accrete in value daily from itsinitial principal amount on the date of issuance thereof (as stated on the inside front cover page of thisOfficial Statement) to its stated accreted value at the Conversion Date thereof (on the basis of a 360-dayyear consisting of twelve 30-day months), as stated on the inside front cover page of this OfficialStatement, on the basis of a constant interest rate compounded semiannually on each Accretion Date,commencing on August 1, 2011.
From and after the Conversion Date of a Convertible Capital Appreciation Bond, suchConvertible Capital Appreciation Bond will bear current interest on the accreted value thereof at the rateapplicable thereto set forth on the inside front cover page of this Official Statement, payable on eachInterest Date, commencing on the February 1 or August 1 immediately following such Conversion Date,computed using a year of 360 days, comprising twelve 30-day months. Following the Conversion Datethereof, each Convertible Capital Appreciation Bond will bear interest from the Interest Date nextpreceding the date of authentication thereof, unless it is authenticated after the close of business on aRecord Date and on or prior to the succeeding Interest Date, in which event it shall bear interest fromsuch Interest Date, or unless it is authenticated on or before the Record Date preceding the first InterestDate following its Conversion Date, in which event it will bear interest from its Conversion Date;provided, however, that if, at the time of authentication of any Convertible Capital Appreciation Bond,interest is in default on any outstanding Convertible Capital Appreciation Bonds, such ConvertibleCapital Appreciation Bond shall bear interest from the Interest Date to which interest has previously beenpaid or made available for payment on the outstanding Convertible Capital Appreciation Bonds.
Accreted Values. The rate of interest at which a Capital Appreciation Bond’s Maturity Value orConvertible Capital Appreciation Bond’s stated accreted value at the Conversion Date thereof isdiscounted to its initial principal amount is known as the “Accretion Rate,” and is stated on the insidefront cover hereof. For any Capital Appreciation Bond, the value of principal plus accrued interest on anygiven Interest Date prior to maturity may be calculated by discounting the Maturity Value of the CapitalAppreciation Bond from its maturity date to that Interest Date at a discount rate equal to the AccretionRate, assuming a year of 360 days comprising twelve 30-day months. The imputed value on any other
4
date may be calculated on the basis of a straight-line interpolation between the values calculated for theInterest Dates immediately preceding and following the date in question.
For any Convertible Capital Appreciation Bond, the value of principal plus accrued interest onany given Accretion Date prior to the Conversion Date thereof may be calculated by discounting thestated accreted value at the Conversion Date of the Convertible Capital Appreciation Bond from itsConversion Date to that Accretion Date at a discount rate equal to the Accretion Rate, assuming a year of360 days comprising twelve 30-day months. The imputed value on any other date may be calculated onthe basis of a straight-line interpolation between the values calculated for the Accretion Datesimmediately preceding and following the date in question.
The Underwriter has prepared the Tables of Accreted Values shown in Appendices H and Ihereto, in order to provide the value per $5,000 of Maturity Value for each Capital Appreciation Bond oneach Accretion Date prior to maturity and the value per $5,000 of accreted value at the Conversion Datefor each Convertible Capital Appreciation Bond on each Accretion Date prior to the Conversion Datethereof.
Payment of Bonds. The principal of the Current Interest Bonds, the Maturity Value of the CapitalAppreciation Bonds and the stated accreted value of Convertible Capital Appreciation Bonds at theConversion Date thereof is payable upon the surrender thereof at the principal corporate trust office ofZions First National Bank, the paying agent, bond registrar, authentication agent and transfer agent withrespect to the Bonds (the “Paying Agent”), at the maturity thereof or upon redemption prior to maturity.Payment of interest on any Current Interest Bond and the Convertible Capital Appreciation Bonds afterthe Conversion Date on each Interest Date (or on the following business day, if the Interest Date does notfall on a business day) shall be made to the person appearing on the registration books of the PayingAgent, as the registered owner thereof (the “Owner”) as of the preceding Record Date, such interest to bepaid by check mailed by first class mail to the Owner at the Owner’s address as it appears on theregistration books. The Owner of an aggregate principal amount of $1,000,000 or more of Current InterestBonds or Capital Appreciation Bonds after the Conversion Date may request in writing to the PayingAgent that such Owner be paid interest by wire transfer to the bank within the continental United Statesand account number on file with the Paying Agent as of the applicable Record Date.
The principal, Maturity Value and accreted value of and interest and premiums, if any, on theBonds shall be payable in lawful money of the United States of America from monies on deposit in theinterest and sinking fund of the District within the County treasury (the “Interest and Sinking Fund”),consisting of ad valorem taxes collected and held by the Treasurer-Tax Collector of the County (the“County Treasurer”), together with any premium and accrued interest received by the District uponissuance of the Bonds. So long as all outstanding Bonds are held in book-entry form and registered in thename of a securities depository or its nominee, all payments of principal and accreted value of, premium,if any, and interest on the Bonds and all notices with respect to such Bonds shall be made and given tosuch securities depository or its nominee and not to beneficial owners. So long as the Bonds are held byCede & Co., as nominee of DTC, payment shall be made by wire transfer. See Appendix G – “BOOK-ENTRY ONLY SYSTEM.”
Designation of Series B-2 Bonds as Qualified School Construction Bonds
The Series B-2 Bonds will be issued as “qualified school construction bonds” as defined inSection 54F of the Internal Revenue Code of 1986 (the “Code”) and as “specified tax credit bonds” asdefined in Section 6431(f)(2) of the Code. The District expects to receive a cash subsidy payment (the“Subsidy”) from the United States Treasury (the “Treasury”) on the Series B-2 Bonds so designated equalto the lesser of (i) 100% of the tax credit rate posted by the Internal Revenue Service and applicable to the
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Series B-2 Bonds so designated or (ii) the interest due on such Series B-2 Bonds on each Interest Date onor about each Interest Date for the Series B-2 Bonds. The Subsidy does not constitute a full faith andcredit guarantee of the United States with respect to the Series B-2 Bonds, but is required to be paid bythe Treasury under the Code. Any Subsidy payments received by the District are required to be depositedinto the Interest and Sinking Fund of the District within the County treasury. The County is obligated tomake all payments of principal of and interest on the Series B-2 Bonds whether or not such Subsidypayments are received and deposited in the Interest and Sinking Fund. See “SECURITY AND SOURCEOF PAYMENT FOR THE BONDS – General.” The District makes no assurances about future legislativeor policy changes or the netting of other tax liabilities against the Subsidy by the Treasury which mayaffect the amount or receipt of Subsidy payments.
Section 54F of the Code requires that the proceeds of qualified school construction bonds, such asthe Series B-2 Bonds, be applied solely to the construction, rehabilitation or repair of a public schoolfacility, or the acquisition of land on which such a facility is to be constructed and to payment of costs ofissuance not in excess of 2% of the issue price of said bonds. Internal Revenue Service Notice 2009-35,released April 3, 2009, provided that bond proceeds may also be expended for “costs of acquisition ofequipment to be used in such portion or portions of the public school facility that is being constructed,rehabilitated or repaired” with the proceeds of the related qualified school construction bonds. Thus,expenditure of the proceeds of the Series B-2 Bonds will subject to both the limitations of theAuthorization and of Section 54F of the Code.
The California Department of Education allocated a portion of the State’s allocation of qualifiedschool construction bonds to the District (the “Allocation”) in the amount of $4,539,884. The principalamount of the Series B-2 Bonds designated as qualified school construction bonds under the Code will bededucted from the Allocation. The District expects to expend the proceeds of sale of the Series B-2 Bondsdesignated as qualified school construction bonds within 18 months after the date of their delivery.
Redemption
Optional Redemption of Series B-1 Bonds. The Series B-1 Bonds issued as Current InterestBonds maturing on or before August 1, 2021, are not subject to redemption prior to their respective statedmaturity dates. The Series B-1 Bonds issued as Current Interest Bonds maturing on and after August 1,2022, are subject to redemption prior to their respective stated maturity dates, at the option of the District,from any source of available funds, as a whole or in part on any date on or after August 1, 2021, at aredemption price equal to the principal amount of the Series B-1 Bonds issued as Current Interest Bondscalled for redemption, together with interest accrued thereon to the date of redemption, without premium.
The Series B-1 Bonds issued as Capital Appreciation Bonds shall not be subject to optionalredemption prior to maturity.
The Series B-1 Bonds issued as Convertible Capital Appreciation Bonds are subject toredemption prior to their respective stated maturity dates, at the option of the District, from any source ofavailable funds, as a whole or in part on any date on or after August 1, 2036, at a redemption price equalto the stated accreted value at the Conversion Date of the Series B-1 Bonds issued as Convertible CapitalAppreciation Bonds called for redemption, together with interest accrued thereon from the last InterestDate for which interest has been paid to the date of redemption, without premium.
Excess Proceeds Extraordinary Mandatory Redemption of Series B-2 Bonds. The Series B-2Bonds are subject to extraordinary mandatory redemption, in whole or in part, within 90 days followingthe third anniversary of the delivery date of the Series B-2 Bonds, or 90 days following the date oftermination of any period of time negotiated with the Internal Revenue Service that extends the date by
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which the proceeds of the sale of the Series B-2 Bonds must be expended, as evidenced in writing fromthe Internal Revenue Service, at a redemption price equal to the principal amount of the Series B-2 Bondscalled for redemption, without premium, plus accrued interest to the redemption date, in a total amountequal to the unexpended proceeds of the sale of the Series B-2 Bonds.
Optional Extraordinary Redemption of Series B-2 Bonds Upon Occurrence of Tax LawChange. The Series B-2 Bonds are subject to redemption prior to their respective stated maturity dates, atthe option of the District upon the occurrence of a Tax Law Change (as defined below), from any sourceof available funds, as a whole or in part on any date, at a redemption price equal to the greater of: (a) theoriginal issue price (but not less than 100%) of such principal amount of the Series B-2 Bonds to beredeemed; or (b) the principal amount thereof plus the Make-Whole Premium (as defined below),together, in each case, with accrued interest, if any, to the date fixed for redemption.
“Tax Law Change” means legislation has been enacted by the Congress of the United States orpassed by either House of the Congress, or a decision has been rendered by a court of the United States,or an order, ruling, regulation (final, temporary or proposed) or official statement has been made by or onbehalf of the Treasury Department of the United States, the Internal Revenue Service or othergovernmental agency of appropriate jurisdiction, the effect of which, as reasonably determined by theDistrict, would be to suspend, reduce or terminate the timely payment from the United States Treasury tothe District with respect to the portion of the Series B-2 Bonds designated as qualified school constructionbonds, or to state or local government issuers generally with respect to obligations of the generalcharacter of such portion of the Series B-2 Bonds so designated, pursuant to Sections 54A, 54F, 54AA or6431 of the Code of an amount determined separately for each maturity of such Series B-2 Bonds at leastequal to the lesser of (i) 100% of the tax credit rate posted by the Internal Revenue Service and applicableto such Series B-2 Bonds or (ii) the interest due on such Series B-2 Bonds on each Interest Date (the“Subsidy Payments”); provided, that any such suspension, reduction or termination of the SubsidyPayments is not due to a failure by the District to comply with the requirements under the Code to receivesuch Subsidy Payments.
“Make-Whole Premium” means, with respect to any Series B-2 Bond to be redeemed, an amountcalculated by an Independent Banking Institution (as defined below) equal to the positive difference, ifany, between:
(a) the sum of the present values, calculated as of the date fixed for redemption of:
(i) each interest payment that, but for the redemption, would have been payable onthe Series B-2 Bond or portion thereof being redeemed on each regularly scheduled Interest Dateoccurring after the date fixed for redemption through the maturity date of such Series B-2 Bond(excluding any accrued interest for the period prior to the date fixed for redemption); plus
(ii) the principal amount that, but for such redemption, would have been payable onthe maturity date (or applicable mandatory sinking fund redemption date or dates) of the SeriesB-2 Bond or portion thereof being redeemed; minus
(b) the principal amount of the Series B-2 Bond or portion thereof being redeemed.
The present values of the interest and principal payments referred to in (a) above will be determined bydiscounting the amount of each such interest and principal payment from the date that each such paymentwould have been payable but for the redemption to the date fixed for redemption on a semiannual basis(assuming a 360-day year consisting of twelve (12) 30-day months) at a discount rate equal to theComparable Treasury Yield (as defined below), plus 100 basis points.
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“Independent Banking Institution” means an investment banking institution of national standingwhich is a primary United States government securities dealer designated by the District (which may bethe Underwriter).
“Comparable Treasury Yield” means the yield which represents the weekly average yield tomaturity for the preceding week appearing in the most recently published statistical release designated“H.15(519) Selected Interest Rates” under the heading “Treasury Constant Maturities,” or any successorpublication selected by the Independent Banking Institution that is published weekly by the Board ofGovernors of the Federal Reserve System and that establishes yields on actively traded United StatesTreasury securities adjusted to constant maturity, for the maturity corresponding to the remaining term tomaturity of the Series B-2 Bond being redeemed. The Comparable Treasury Yield will be determined asof any Business Day that falls not less than three Business Days nor more than 45 calendar daysimmediately preceding the applicable date fixed for redemption. If the H.15(519) statistical release setsforth a weekly average yield for United States Treasury securities that have a constant maturity that is thesame as the remaining term to maturity of the Series B-2 Bond being redeemed, then the ComparableTreasury Yield will be equal to such weekly average yield. In all other cases, the Comparable TreasuryYield will be calculated by interpolation on a straight-line basis, between the weekly average yields onthe United States Treasury securities that have a constant maturity (i) closest to and greater than theremaining term to maturity of the Series B-2 Bond being redeemed; and (ii) closest to and less than theremaining term to maturity of the Series B-2 Bond being redeemed. Any weekly average yields calculatedby interpolation will be rounded to the nearest 1/100th of 1%, with any figure of 1/200th of 1% or abovebeing rounded upward. If, and only if, weekly average yields for United States Treasury securities for thepreceding week are not available in the H.15(519) statistical release or any successor publication, then theComparable Treasury Yield will be the rate of interest per annum equal to the semiannual equivalent yieldto maturity of the Comparable Treasury Issue (expressed as a percentage of its principal amount) at theComparable Treasury Price as of the date fixed for redemption.
“Business Day” means a day other than (a) Saturday or Sunday, (b) a day on which bankinginstitutions in the city or cities in which the principal office of the Paying Agent is located are authorizedor required by law to be closed, and (c) a day on which the New York Stock Exchange is authorized orobligated by law or executive order to be closed.
“Comparable Treasury Price” means, with respect to any date on which a Series B-2 Bond orportion thereof is being redeemed, either (a) the average of five Reference Treasury Dealer quotations forthe date fixed for redemption, after excluding the highest and lowest such quotations, and (b) if theIndependent Banking Institution is unable to obtain five such quotations, the average of the quotationsthat are obtained. The quotations will be the average, as determined by the Independent BankingInstitution, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as apercentage of principal amount) quoted in writing to the Independent Banking Institution, at 5:00 p.m.New York City time on any Business Day that falls not less than three Business Days nor more than 45calendar days immediately preceding the applicable date fixed for redemption.
“Comparable Treasury Issue” means the United States Treasury security selected by theIndependent Banking Institution as having a maturity comparable to the remaining term to maturity of theSeries B-2 Bond being redeemed that would be utilized, at the time of selection and in accordance withcustomary financial practice, in pricing new issues of corporate debt securities of comparable maturity tothe remaining term to maturity of the Series B-2 Bond being redeemed.
“Reference Treasury Dealer” means each of the five firms, specified by the District from time totime, that are primary United States Government securities dealers in the City of New York (each a
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“Primary Treasury Dealer”); provided, however, that if any of them ceases to be a Primary TreasuryDealer, the District will substitute another Primary Treasury Dealer.
Mandatory Sinking Fund Redemption of Series B-1 Bonds. The $1,425,000 term Series B-1Bonds issued as Current Interest Bonds maturing on August 1, 2025, are subject to mandatory sinkingfund redemption on August 1 in each of the years and in the respective principal amounts as set forth inthe following schedule, at a redemption price equal to 100% of the principal amount thereof to beredeemed (without premium), together with interest accrued thereon to the date fixed for redemption:
Mandatory Sinking FundRedemption Date
(August 1)Principal Amountto be Redeemed
2024 $665,0002025† 760,000
____________________† Maturity.
The principal amount to be redeemed in each year shown above will be reduced proportionately,in integral multiples of $5,000, by any portion of such term Series B-1 Bonds optionally redeemed priorto the mandatory sinking fund redemption date.
The $3,105,000 term Series B-1 Bonds issued as Current Interest Bonds maturing on August 1,2027, are subject to mandatory sinking fund redemption on August 1 in each of the years and in therespective principal amounts as set forth in the following schedule, at a redemption price equal to 100%of the principal amount thereof to be redeemed (without premium), together with interest accrued thereonto the date fixed for redemption:
Mandatory Sinking FundRedemption Date
(August 1)Principal Amountto be Redeemed
2026 $1,485,0002027† 1,620,000
____________________† Maturity.
The principal amount to be redeemed in each year shown above will be reduced proportionately,in integral multiples of $5,000, by any portion of such term Series B-1 Bonds optionally redeemed priorto the mandatory sinking fund redemption date.
The $2,614,169.55 Series B-1 Bonds issued as Capital Appreciation Bonds maturing on August1, 2040, are subject to mandatory sinking fund redemption on August 1 in each of the years and in therespective accreted value amounts as set forth in the following schedule, at a redemption price equal to100% of the accreted value amount to be redeemed, without premium:
The $3,553,503.75 Series B-1 Bonds issued as Capital Appreciation Bonds maturing on August1, 2048, are subject to mandatory sinking fund redemption on August 1 in each of the years and in therespective accreted value amounts as set forth in the following schedule, at a redemption price equal to100% of the accreted value amount to be redeemed, without premium:
The $5,861,288.30 Series B-1 Bonds issued as Convertible Capital Appreciation Bonds maturingon August 1, 2050, are subject to mandatory sinking fund redemption on August 1 in each of the yearsand in the respective stated accreted value amounts at the Conversion Date thereof as set forth in thefollowing schedule, at a redemption price equal to 100% of the stated accreted value amount to beredeemed (without premium), together with interest accrued thereon, if any, from the last Interest Date forwhich interest has been paid to the date fixed for redemption:
Mandatory Sinking FundRedemption Date
(August 1)
Stated AccretedValue Amountsto be Redeemed
2048 $ 7,640,0002049 10,200,0002050† 11,630,000
____________________† Maturity.
The stated accreted value amounts at the Conversion Date thereof to be redeemed in each yearshown above will be reduced proportionately, in integral multiples of $5,000, by any portion of such term
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Convertible Capital Appreciation Bonds optionally redeemed prior to the mandatory sinking fundredemption date.
Mandatory Sinking Fund Redemption of Series B-2 Bonds. The $1,220,000 term Series B-2Bonds issued as Current Interest Bonds maturing on August 1, 2018, are subject to mandatory sinkingfund redemption on August 1 in each of the years and in the respective principal amounts as set forth inthe following schedule, at a redemption price equal to 100% of the principal amount thereof to beredeemed (without premium), together with interest accrued thereon to the date fixed for redemption:
The principal amount to be redeemed in each year shown above will be reduced proportionately,in integral multiples of $5,000, by any portion of such term Series B-2 Bonds redeemed prior to themandatory sinking fund redemption date pursuant to the excess proceeds extraordinary mandatoryredemption or optional extraordinary redemption upon occurrence of tax law change provisions set forthabove.
The $1,205,000 term Series B-2 Bonds issued as Current Interest Bonds maturing on August 1,2021, are subject to mandatory sinking fund redemption on August 1 in each of the years and in therespective principal amounts as set forth in the following schedule, at a redemption price equal to 100%of the principal amount thereof to be redeemed (without premium), together with interest accrued thereonto the date fixed for redemption:
Mandatory Sinking FundRedemption Date
(August 1)Principal Amountto be Redeemed
2019 $365,0002020 400,0002021† 440,000
____________________† Maturity.
The principal amount to be redeemed in each year shown above will be reduced proportionately,in integral multiples of $5,000, by any portion of such term Series B-2 Bonds redeemed prior to themandatory sinking fund redemption date pursuant to the excess proceeds extraordinary mandatoryredemption or optional extraordinary redemption upon occurrence of tax law change provisions set forthabove.
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The $2,110,000 term Series B-2 Bonds issued as Current Interest Bonds maturing on August 1,2025, are subject to mandatory sinking fund redemption on August 1 in each of the years and in therespective principal amounts as set forth in the following schedule, at a redemption price equal to 100%of the principal amount thereof to be redeemed (without premium), together with interest accrued thereonto the date fixed for redemption:
The principal amount to be redeemed in each year shown above will be reduced proportionately,in integral multiples of $5,000, by any portion of such term Series B-2 Bonds redeemed prior to themandatory sinking fund redemption date pursuant to the excess proceeds extraordinary mandatoryredemption or optional extraordinary redemption upon occurrence of tax law change provisions set forthabove.
Selection of Bonds for Redemption. If less than all of the Bonds of a series are called forredemption, such Bonds shall be redeemed as directed by the District, and if not so directed in inverseorder of maturity. Whenever less than all of the outstanding Bonds of any one maturity are designated forredemption, the Paying Agent shall select the outstanding Bonds of such maturity to be redeemed by lotin any manner the Paying Agent shall determine. For purposes of such selection, the Bonds to beredeemed in part shall be in denominations of $5,000 principal or Maturity Value or any integral multiplethereof.
Notice of Redemption. Notice of redemption of any Bond will be given at least 30 days, but notmore than 60 days, prior to the redemption date (i) by first class mail, postage prepaid, to the District andthe County and the respective Owners thereof at the addresses appearing on the bond registration books,(ii) by mail, first class postage, to the securities depository for the Bonds (initially, DTC), (iii) by mail,first class postage, to one information service of national recognition which disseminates redemptioninformation with respect to municipal securities, and (iv) as may be further required in accordance withthe Continuing Disclosure Certificate. See Appendix D – “FORM OF CONTINUING DISCLOSURECERTIFICATE.” The Resolution provides that neither failure to receive such notice nor any defect in anynotice so mailed shall affect the sufficiency of the proceedings for the redemption of such Bonds norentitle the Owner thereof to interest beyond the date given for redemption.
Each notice of redemption will contain the following information: (i) that the Bonds or adesignated portion thereof are to be redeemed; (ii) if less than all of the then outstanding Bonds are to becalled for redemption, the numbers and CUSIP® numbers, if any, of the Bonds to be redeemed; (iii) thedate of notice and the date of redemption; (iv) the place or places where the redemption will be made; and(v) descriptive information regarding the Bonds and the specific Bonds to be redeemed, including thedated date, interest rate and stated maturity date of each. The Resolution provides that such redemptionnotice shall further state that on the specified date there shall become due and payable upon each Bond tobe redeemed, the portion of the principal amount of such Bond to be redeemed, together with interest
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accrued or accreted, as applicable, to the date of redemption, and redemption premium, if any, and thatfrom and after such date interest with respect thereto shall cease to accrue or accrete, as applicable.
Effect of Notice of Redemption. When notice of redemption has been given substantially asdescribed above, and the monies for the redemption (including the interest to the applicable date ofredemption) have been set aside in the Interest and Sinking Fund, the Bonds to be redeemed shall becomedue and payable on such date of redemption. If on such redemption date, money for the redemption of allthe Bonds to be redeemed as provided in the Resolution, together with interest to such redemption date,shall be available therefor on such redemption date, and if notice of redemption thereof shall have beengiven as provided in the Resolution, then from and after such redemption date, interest with respect to theBonds to be redeemed shall cease to accrue or accrete, as applicable. All money held for the redemptionof Bonds shall be held in trust for the account of the Owners of the Bonds so to be redeemed.
Contingent Redemption; Rescission of Redemption. The Resolution provides that anyredemption notice may specify that redemption of the Bonds designated for redemption on the specifieddate will be subject to the receipt by the District of monies sufficient to cause such redemption (and willspecify the proposed source of such monies), and provides that neither the District or the County willhave any liability to the Owners of any Bonds, or any other party, as a result of the District’s failure toredeem the Bonds designated for redemption as a result of insufficient monies therefor. Additionally, theResolution provides that the District may rescind any optional redemption of the Bonds, and noticethereof, for any reason on any date prior to the date fixed for such redemption by causing written notice ofthe rescission to be given to the Owners of the Bonds so called for redemption. Notice of rescission ofredemption shall be given in the same manner in which notice of redemption was originally given. TheResolution provides that the actual receipt by the Owner of any Bond of notice of such rescission shall notbe a condition precedent to rescission, and failure to receive such notice or any defect in such notice shallnot affect the validity of the rescission. The Resolution provides that neither the District nor the Countywill have any liability to the Owners of any Bonds, or any other party, as a result of the District’s decisionto rescind a redemption of any Bonds pursuant to the provisions of the Resolution.
Defeasance of Bonds
The District may pay and discharge any or all of the Bonds in the following ways: (i) byirrevocably depositing with a bank or trust company, in escrow, an amount of cash which, together withamounts then on deposit in the Interest and Sinking Fund, is sufficient to pay all (or the designatedoutstanding maturities) of the Bonds, including all principal and interest and premium, if any; or (ii) byirrevocably depositing with a bank or trust company, in escrow, noncallable Defeasance Securities, aspermitted under Section 149(d) of the Internal Revenue Code, together with cash, if required, in such anamount as will, in the opinion of an independent certified public accountant, together with interest toaccrue thereon, be fully sufficient to pay and discharge all (or the designated outstanding maturities) ofthe Bonds, including all principal and interest and premium, if any, at or before their maturity date. TheResolution provides that “Defeasance Securities” means direct and general obligations of the UnitedStates of America (including State and Local Government Series), or obligations that are unconditionallyguaranteed as to principal and interest by the United States of America, including (in the case of directand general obligations of the United States of America) evidence of direct ownership or proportionateinterests in future interest or principal payments of such obligations; provided that investments in suchproportionate interests must be limited to circumstances wherein (i) a bank or trust company acts ascustodian and holds the underlying Defeasance Securities, (ii) the owner of the investment is the realparty in interest and has the right to proceed directly and individually against the obligor of the underlyingDefeasance Securities, and (ii) the underlying Defeasance Securities are held in a special account,segregated from the custodian’s general assets, and are not available to satisfy any claims of thecustodian, any person claiming through the custodian, or any person to whom the custodian may be
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obligated; and provided further that such obligations are rated or assessed “AAA” by Standard & Poor’s ifthe Bonds are then rated by Standard & Poor’s, and “Aaa” by Moody’s Investors Service if the Bonds arethen rated by Moody’s Investors Service.
Unclaimed Monies
The Resolution provides that any monies held by the Paying Agent for the payment of theprincipal or Maturity Value of, redemption premium, if any, or interest on Bonds remaining unclaimed forone year after the corresponding maturity or redemption date for such Bonds shall be returned by thePaying Agent to the County Treasurer, with any and all interest accrued thereon, for deposit into theInterest and Sinking Fund of the District. The Resolution also provides that any monies held in any fundcreated pursuant to the Resolution, or by the Paying Agent in trust, for the payment of the principal orMaturity Value of, redemption premium, if any, or interest on Bonds and remaining unclaimed for oneyear after the principal or Maturity Value of all of the Bonds have become due and payable (whether bymaturity or upon prior redemption) shall be, after written direction of the District, transferred to thegeneral fund of the District to be applied in accordance with law; provided, however, that the PayingAgent or the District, before making such transfer, shall cause notice to be mailed to the Owners of allBonds that have not been paid, by first-class mail at the addresses on the bond register, postage prepaid,not less than 90 days prior to the date of such transfer.
Application and Investment of Bond Proceeds; Plan of Finance
Other than amounts needed to defease the Notes, the proceeds from the sale of the Bonds, to theextent of the principal amount thereof, will be deposited in the County treasury to the credit of thebuilding fund of the District (the “Building Fund”) and shall be accounted for together with the proceedsof other bonds of the District separately from all other District and County funds. Such proceeds shall beapplied solely for the purposes for which the Bonds were authorized.
The District and Zions First National Bank, as escrow bank (the “Escrow Bank”) will enter intothe Escrow Agreement, dated the date of delivery of the Bonds (the “Escrow Agreement”), with respect tothe Notes being defeased, pursuant to which the District will deposit a portion of the proceeds from thesale of the Bonds into a special fund to be held by the Escrow Bank. The amount deposited with theEscrow Bank will be held uninvested and will be sufficient to enable the Escrow Bank to pay theprincipal of and interest due on the Notes being defeased to the maturity date of the Notes (May 1, 2011)in accordance with the schedule set forth in the Escrow Agreement.
The arithmetical accuracy of certain computations included in the schedules provided by theUnderwriter relating to the computation of projected receipts of principal and interest on the governmentobligations, and the projected payments of principal and interest to retire the Notes to be defeased will beverified by Grant Thornton LLP, Minneapolis, Minnesota. Such computations will be based solely onassumptions and information supplied by the District and the Underwriter. Grant Thornton LLP willrestrict its procedures to verifying the arithmetical accuracy of certain computations and will not makeany study to evaluate the assumptions and information on which the computations are based, and willexpress no opinion on the data used, the reasonableness of the assumptions or the achievability of theprojected outcome.
Any premium (other than amounts needed to defease the Notes) or accrued interest received bythe District will be deposited in the Interest and Sinking Fund of the District in the County treasury.Interest and earnings on each fund will accrue to that fund.
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All funds held by the County Treasurer in the Building Fund and the Interest and Sinking Fundare expected to be invested on behalf of the District by the County Treasurer in such investments as areauthorized by Section 53601 and following of the California Government Code, consistent with theinvestment policy of the County. See Appendix E – “SUMMARY OF COUNTY OF ORANGEINVESTMENT POLICY.” See also Appendix F – “ORANGE COUNTY INVESTMENT POLICYSTATEMENT.” The District may direct that certain investments in the Building Fund be deposited with astate or national bank or trust company located within the State or with the Federal Reserve Bank of SanFrancisco or any branch thereof within the State, or with any Federal Reserve bank or with any state ornational bank located in any city designated as a reserve city by the Board of Governors of the FederalReserve System in accordance with Sections 41015 and 41016 of the California Education Code.
Estimated Sources and Uses of Funds
The proceeds of the Bonds are expected to be applied as follows:
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
General Obligation Bonds, 2008 Election, Series B-1and
General Obligation Bonds, 2008 Election, Series B-2(Direct Pay Qualified School Construction Bonds)
Estimated Sources and Uses of Funds
Sources of Funds:
Series B-1Bonds
Series B-2Bonds Total
Par Amount of Bonds $20,139,078.45 $4,535,000.00 $24,674,078.45Plus Net Original Issue Premium 1,444,079.50 - 1,444,079.50
Total Sources of Funds $21,583,157.95 $4,535,000.00 $26,118,157.95
Uses of Funds:Deposit to Building Fund $13,140,436.50 $4,227,888.39 $17,368,324.89Note Defeasance 7,775,093.75 - 7,775,093.75Costs of Issuance(1) 307,438.49 34,012.50 341,450.99Underwriter’s Discount 181,251.71 56,687.50 237,939.21Deposit to Interest and Sinking Fund(2) 178,937.50 216,411.61 395,349.11
Total Uses of Funds $21,583,157.95 307,111.61 $26,118,157.95
_________________(1) Includes Bond Counsel, Disclosure Counsel, District Counsel, Financial Advisor and other consultant fees, rating agency fees, initialPaying Agent fees, printing fees and other miscellaneous fees and expenses required to be paid by the Underwriter.(2) Constitutes capitalized interest on the Bonds.
Debt Service
Debt service on each series of the Bonds, assuming no early redemptions, is as shown in the following table.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
General Obligation Bonds, 2008 Election, Series B-1 and General Obligation Bonds, 2008 Election, Series B-2Debt Service
Series B-1 Bonds Series B-2 Bonds
Current Interest Bonds Capital Appreciation Bonds Convertible Capital Appreciation Bonds Current Interest Bonds
Period EndingAugust 1, Principal Interest Principal
Total $34,381,400.00 $170,384,184.75 $7,331,872.86 $212,097,457.61
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SECURITY AND SOURCE OF PAYMENT FOR THE BONDS
General
In order to provide sufficient funds for repayment of principal and interest when due on theBonds, the Board of Supervisors of the County is empowered and is obligated to levy ad valorem taxesupon all property subject to taxation by the District, without limitation as to rate or amount (except as tocertain personal property which is taxable at limited rates). Such taxes are in addition to other taxes leviedupon property within the District. When collected, the tax revenues will be deposited by the County in theInterest and Sinking Fund of the District, which is required to be maintained by the County and to be usedsolely for the payment of bonds of the District.
The Series B-2 Bonds will be issued as “qualified school construction bonds” as defined inSection 54F of the Code and as “specified tax credit bonds” as defined in Section 6431(f)(2) of the Code.The District expects to receive a cash Subsidy from the Treasury on the Series B-2 Bonds so designatedas set forth herein. See “THE BONDS – Designation of Series B-2 Bonds as Qualified SchoolConstruction Bonds.” The Subsidy does not constitute a full faith and credit guarantee of the UnitedStates with respect to the Series B-2 Bonds, but is required to be paid by the Treasury under the Code.Any Subsidy payments received by the District are required to be deposited into the Interest and SinkingFund of the District within the County treasury. The County is empowered and is obligated to levy advalorem taxes upon all property subject to taxation by the District for the payment of principal andinterest on the Bonds whether or not such Subsidy payments are received and deposited in the Interest andSinking Fund. As a result, the levy of ad valorem property taxes will only take into account amountsactually received from the Treasury and deposited in the Interest and Sinking Fund. The District makes noassurances about future legislative or policy changes or the netting of other tax liabilities against theSubsidy by the Treasury which may affect the amount or receipt of Subsidy payments.
Property Taxation System
Property tax revenues result from the application of the appropriate tax rate to the total assessedvalue of taxable property in the District. School districts receive property taxes for payment of voter-approved bonds as well as for general operating purposes.
Local property taxation is the responsibility of various county officers. School districts whoseboundaries extend into more than one county are treated for property tax purposes as separatejurisdictions in each county in which they are located. For each school district located in a county, thecounty assessor computes the value of locally assessed taxable property. Based on the assessed value ofproperty and the scheduled debt service on outstanding bonds in each year, the county auditor-controllercomputes the rate of tax necessary to pay such debt service, and presents the tax rolls (including rates oftax for all taxing jurisdictions in the county) to the county board of supervisors for approval. The countytreasurer-tax collector prepares and mails tax bills to taxpayers and collects the taxes. In addition, thetreasurer-tax collector, as ex officio treasurer of each school district located in the county, holds schooldistrict funds, including taxes collected for payment of school bonds, and is charged with payment ofprincipal and interest on the bonds when due.
Assessed Valuation of Property Within the District
Taxable property located in the District has a 2010-11 assessed value of $5,020,012,387. Allproperty (real, personal and intangible) is taxable unless an exemption is granted by the CaliforniaConstitution or United States law. Under the State Constitution, exempt classes of property includehousehold and personal effects, intangible personal property (such as bank accounts, stocks and bonds),
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business inventories, and property used for religious, hospital, scientific and charitable purposes. TheState Legislature may create additional exemptions for personal property, but not for real property. Mosttaxable property is assessed by the assessor of the county in which the property is located. Some specialclasses of property are assessed by the State Board of Equalization, as described below under the heading,State-Assessed Property.
Taxes are levied for each fiscal year on taxable real and personal property assessed as of thepreceding January 1, at which time the lien attaches. The assessed value is required to be adjusted duringthe course of the year when property changes ownership or new construction is completed. State law alsoaffords an appeal procedure to taxpayers who disagree with the assessed value of any property. Whennecessitated by changes in assessed value during the course of a year, a supplemental assessment isprepared so that taxes can be levied on the new assessed value before the next regular assessment roll iscompleted.
State-Assessed Property. Under the Constitution, the State Board of Equalization assessesproperty of State-regulated transportation and communications utilities, including railways, telephone andtelegraph companies, and companies transmitting or selling gas or electricity. The Board of Equalizationalso is required to assess pipelines, flumes, canals and aqueducts lying within two or more counties. Thevalue of property assessed by the Board of Equalization is allocated by a formula to local jurisdictions inthe county, including school districts, and taxed by the local county tax officials in the same manner as forlocally assessed property. Taxes on privately owned railway cars, however, are levied and collecteddirectly by the Board of Equalization. Property used in the generation of electricity by a company thatdoes not also transmit or sell that electricity is taxed locally instead of by the Board of Equalization. Thus,the reorganization of regulated utilities and the transfer of electricity-generating property to non-utilitycompanies, as often occurred under electric power deregulation in California, affects how those assets areassessed, and which local agencies benefit from the property taxes derived. In general, the transfer ofState-assessed property located in the District to non-utility companies will increase the assessed value ofproperty in the District, since the property’s value will no longer be divided among all taxing jurisdictionsin the County. The transfer of property located and taxed in the District to a State-assessed utility willhave the opposite effect: generally reducing the assessed value in the District, as the value is sharedamong the other jurisdictions in the County. The District is unable to predict future transfers of State-assessed property in the District and the County, the impact of such transfers on its utility property taxrevenues, or whether future legislation or litigation may affect ownership of utility assets, the State’smethods of assessing utility property, or the method by which tax revenues of utility property is allocatedto local taxing agencies, including the District.
Locally taxed property is classified either as “secured” or “unsecured,” and is listed accordinglyon separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containingState-assessed property and property (real or personal) for which there is a lien on real property sufficient,in the opinion of the county assessor, to secure payment of the taxes. All other property is “unsecured,”and is assessed on the “unsecured roll.” Secured property assessed by the State Board of Equalization iscommonly identified for taxation purposes as “utility” property.
Under California law, a city or county can create a redevelopment agency in territory within oneor more school districts. Upon formation of a “project area” of a redevelopment agency, most property taxrevenues attributable to the growth in assessed value of taxable property within the project area (known as“tax increment”) belong to the redevelopment agency, causing a loss of tax revenues to other local taxingagencies, including school districts, from that time forward. However, taxes collected for payment of debtservice on school bonds are not affected or diverted by the operation of a redevelopment agency projectarea. Moreover, some school districts have negotiated “pass-through agreements” with their localredevelopment agencies, entitling the district to receive a portion of the tax increment revenue that would
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otherwise belong to the redevelopment agency (provided such revenue is not pledged and needed to paydebt service on redevelopment agency tax-increment bonds). In some cases the pass-through is mandatedby statute.
Shown in the following table is the assessed valuation of the various classes of property in theDistrict in recent years.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Assessed ValuationsFiscal Years 1991-92 through 2010-11
___________________(1) Special (voter-approved) ad valorem property taxes collected for payment of debt service on school district bonds are based on assessed
valuation before reduction for redevelopment increment and such special ad valorem property taxes are not affected or diverted by theoperation of a redevelopment agency project area.
(2) Information not available.Source: California Municipal Statistics, Inc.
Assessments may be adjusted during the course of the year when real property changes ownershipor new construction is completed. Assessments may also be appealed by taxpayers seeking a reduction asa result of economic and other factors beyond the District’s control, such as a general market decline inland values, reclassification of property to a class exempt from taxation, whether by ownership or use(such as exemptions for property owned by State and local agencies and property used for qualifiededucational, hospital, charitable or religious purposes), or the complete or partial destruction of taxableproperty caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc.When necessitated by changes in assessed value in the course of a year, taxes are pro-rated for eachportion of the tax year.
Appeals of Assessed Valuation; Blanket Reductions of Assessed Values. There are two basictypes of property tax assessment appeals provided for under State law. The first type of appeal, commonlyreferred to as a base year assessment appeal, involves a dispute on the valuation assigned by the assessorimmediately subsequent to an instance of a change in ownership or completion of new construction. If thebase year value assigned by the assessor is reduced, the valuation of the property cannot increase in
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subsequent years more than 2% annually unless and until another change in ownership and/or additionalnew construction activity occurs.
The second type of appeal, commonly referred to as a Proposition 8 appeal, can result if factorsoccur causing a decline in the market value of the property to a level below the property’s then currenttaxable value (escalated base year value). Pursuant to State law, a property owner may apply for aProposition 8 reduction of the property tax assessment for such owner’s property by filing a writtenapplication, in the form prescribed by the State Board of Equalization, with the appropriate county boardof equalization or assessment appeals board. In the County, a property owner desiring a Proposition 8reduction of the assessed value of such owner’s property in any one year must submit an application tothe Orange County Assessment Appeals Board (the “Appeals Board”). Applications for any tax year mustbe submitted by September 15 of such tax year. Following a review of the application by the CountyAssessor’s Office (the “Assessor”), the Assessor may offer to the property owner the opportunity tostipulate to a reduced assessment, or may confirm the assessment. If no stipulation is agreed to, and theapplicant elects to pursue the appeal, the matter is brought before the Appeals Board (or, in some cases, ahearing examiner) for a hearing and decision. The Appeals Board generally is required to determine theoutcome of appeals within two years of each appeal’s filing date. Any reduction in the assessmentultimately granted applies only to the year for which application is made and during which the writtenapplication is filed. The assessed value increases to its pre-reduction level (escalated to the inflation rateof no more than two percent) following the year for which the reduction application is filed. However, theAssessor has the power to grant a reduction not only for the year for which application was originallymade, but also for the then current year and any intervening years as well. In practice, such a reducedassessment may and often does remain in effect beyond the year in which it is granted.
In addition, Article XIIIA of the State Constitution provides that the full cash value base of realproperty used in determining taxable value may be adjusted from year to year to reflect the inflationaryrate, not to exceed a 2% increase for any given year, or may be reduced to reflect a reduction in theconsumer price index or comparable local data. This measure is computed on a calendar year basis.According to representatives of the Assessor, the County has in the past, pursuant to Article XIIIA of theState Constitution, ordered blanket reductions of assessed property values and corresponding property taxbills on single family residential properties when the value of the property has declined below the currentassessed value as calculated by the County.
No assurance can be given that property tax appeals and/or blanket reductions of assessedproperty values will not significantly reduce the assessed valuation of property within the District in thefuture.
See APPENDIX A – “INFORMATION RELATING TO THE DISTRICT’S OPERATIONSAND BUDGET – CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING DISTRICTREVENUES AND APPROPRIATIONS – Article XIIIA of the California Constitution” for a discussionof other limitations on the valuation of real property with respect to ad valorem taxes.
Bonding Capacity. As an elementary school district, the District may issue bonds in an amountup to 1.25% of the assessed valuation of taxable property within its boundaries. The District’s fiscal year2010-11 gross bonding capacity (also commonly referred to as the “bonding limit” or “debt limit”) isapproximately $62.75 million and its net bonding capacity is approximately $46.07 million (taking intoaccount current outstanding debt before issuance of the Bonds). Refunding bonds may be issued withoutregard to this limitation; however, once issued, the outstanding principal of any refunding bonds isincluded when calculating the District’s bonding capacity.
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Assessed Valuation by Land Use. The following table gives a distribution of taxable propertylocated in the District on the 2010-11 tax roll by principal purpose for which the land is used, and theassessed valuation and number of parcels for each use.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
____________________(1) Local secured assessed valuation, excluding tax-exempt property.Source: California Municipal Statistics, Inc.
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Assessed Valuation of Single-Family Homes. The following table shows the assessed valuationof single-family homes in the District for fiscal year 2010-11.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Assessed Valuation of Single Family Homes
Per Parcel 2010-11 Assessed Valuation of Single Family Homes
No. of Parcels2010-11 Assessed
ValuationAverage Assessed
ValuationMedian Assessed
Valuation
Single Family Residential 10,640 $3,115,662,705 $292,825 $270,659
(1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units.
___________________Source: California Municipal Statistics, Inc.
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Largest Taxpayers in District. The twenty taxpayers with the greatest combined ownership oftaxable property in the District on the 2010-11 tax roll, and the assessed valuation of all property ownedby those taxpayers in all taxing jurisdictions within the District, are shown below.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Largest 2010-11 Local Secured Taxpayers
Property OwnerPrimary
Land Use2010-11
Assessed ValuePercent of
Total(1)
1. Warland Investments Co. Industrial $177,992,698 3.73%2. Mitsubishi Motor Sales of America Inc. Industrial 74,955,874 1.573. Rreef America REIT II Portfolio LP Commercial 59,033,338 1.244. Inland American Cypress Katella LLC Commercial 34,015,000 0.715. Los Alamitos Racecourse Commercial 29,446,898 0.626. USA Build LLC Commercial 26,850,000 0.567. Bandai America Incorporated Commercial 24,152,669 0.518. Costco Wholesale Corp. Industrial 21,224,577 0.449. Harry D. Bryan Commercial 21,129,620 0.4410. Apple Eight Hospitality Ownership Inc. Commercial 20,000,000 0.4211. Ushio America Inc. Commercial 19,522,936 0.4112. IA Orchard Hotels Los Alamitos LLC Hotel 19,100,000 0.4013. FWS Realty DE LLC Commercial 17,807,695 0.3714. G&E Healthcare REIT 5995 Plaza Dr. LLC Commercial 17,105,000 0.3615. Buzz Oates LLC Commercial 17,060,807 0.3616. Cypress Crossroads LP Commercial 16,940,000 0.3517. MECG-Cypress I LLC Commercial 15,982,027 0.3318. Hardage Hotels X LLC Commercial 15,500,684 0.3219. H.R. Barros Cypress LP Commercial 15,343,509 0.3220. Donahue Schriber Realty Group Commercial 15,061,962 0.32
$658,225,294 13.78%
____________________(1) 2010-11 Local Secured Assessed Valuation: $4,776,390,482Source: California Municipal Statistics, Inc.
Tax Rates
The State Constitution permits the levy of an ad valorem tax on taxable property not to exceed1% of the full cash value of the property, and State law requires the full 1% tax to be levied. The levy ofspecial ad valorem property taxes in excess of the 1% levy is permitted as necessary to provide for debtservice payments on school bonds and other voter-approved indebtedness.
The rate of tax necessary to pay fixed debt service on the Bonds in a given year depends on theassessed value of taxable property in that year. (The rate of tax imposed on unsecured property forrepayment of the Bonds is based on the prior year’s secured property tax rate.) Economic and otherfactors beyond the District’s control, such as a general market decline in land values, reclassification ofproperty to a class exempt from taxation, whether by ownership or use (such as exemptions for propertyowned by State and local agencies and property used for qualified educational, hospital, charitable orreligious purposes), or the complete or partial destruction of taxable property caused by natural ormanmade disaster, such as earthquake, flood, fire, toxic dumping, etc., could cause a reduction in theassessed value of taxable property within the District and necessitate a corresponding increase in theannual tax rate to be levied to pay the principal of and interest on the Bonds. Issuance of additionalauthorized bonds in the future might also cause the tax rate to increase.
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Typical Tax Rate Area. The following table shows ad valorem property tax rates for the lastseveral years in a typical Tax Rate Area of the District (TRA 19-001) over the five year period from2006-07 through 2010-11. This Tax Rate Area comprises approximately 63.06% of the total assessedvalue of the District.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Typical Total Tax Rates per $100 of Assessed Valuation (TRA 19-001)Fiscal Years 2006-2007 Through 2010-11
2006-07 2007-08 2008-09 2009-10 2010-11
General Tax Rate $1.00000 $1.00000 $1.00000 $1.00000 $1.00000Metropolitan Water District .00470 .00450 .00430 .00430 .00370Anaheim Union High School District .02355 .02516 .02363 .02617 .02745North Orange County Joint Community CollegeDistrict .01444 .01502 .01493 .01662 .01758
Cypress Elementary School District - - - .02195 .02615
Total Tax Rate $1.04269 $1.04468 $1.04286 $1.06904 $1.07488
_________________Source: California Municipal Statistics, Inc.
In accordance with the law which permitted the Bonds to be approved by a 55% popular vote,bonds approved by the District’s voters at the November 4, 2008, election may not be issued unless theDistrict projects that repayment of all outstanding bonds approved at the election will require a tax rate nogreater than $30.00 per $100,000 of assessed value. Based on the assessed value of taxable property in theDistrict at the time of issuance of the Bonds, the District projects that the maximum tax rate required torepay the Bonds and all other outstanding bonds approved at the November 4, 2008, election will bewithin that legal limit. The tax rate test applies only when new bonds are issued, and is not a legallimitation upon the authority of the County Board of Supervisors to levy taxes at such rate as may benecessary to pay debt service on the Bonds in each year.
Tax Charges and Delinquencies
A school district’s share of the 1% countywide tax is based on the actual allocation of propertytax revenues to each taxing jurisdiction in the county in fiscal year 1978-79, as adjusted according to acomplicated statutory scheme enacted since that time. Revenues derived from special ad valorem taxesfor voter-approved indebtedness, including the Bonds, are reserved to the taxing jurisdiction thatapproved and issued the debt, and may only be used to repay that debt.
The County Treasurer prepares the property tax bills. Property taxes on the regular securedassessment roll are due in two equal installments: the first installment is due on November 1, andbecomes delinquent after December 10. The second installment is due on February 1 and becomesdelinquent after April 10. If taxes are not paid by the delinquent date, a 10% penalty attaches and a $23cost is added to unpaid second installments. If taxes remain unpaid by June 30, the tax is deemed to be indefault, and a $15 state redemption fee applies. Interest then begins to accrue at the rate of 1.5% permonth. The property owner has the right to redeem the property by paying the taxes, accrued penalties,and costs within five years of the date the property went into default. If the property is not redeemedwithin five years, it is subject to sale at a public auction by the county treasurer.
Property taxes on the unsecured roll are due in one payment on the lien date, January 1, andbecome delinquent after August 31. A 10% penalty attaches to delinquent taxes on property on theunsecured roll, and an additional penalty of 1.5% per month begins to accrue on November 1. There arealso fees charged for delinquent unsecured property tax bills. To collect unpaid taxes, the County
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Treasurer may obtain a judgment lien upon and cause the sale of all property owned by the taxpayer in thecounty, and may seize and sell personal property, improvements and possessory interests of the taxpayer.The County Treasurer may also bring a civil suit against the taxpayer for payment.
The date on which taxes on supplemental assessments are due depends on when the supplementaltax bill is mailed.
The following table shows real property tax charges and delinquencies in the District for thefiscal years 2005-06 through 2009-10.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Secured Tax Charges and DelinquenciesFiscal Years 2005-06 through 2009-10
____________________(1) 1% General Fund apportionment.Source: California Municipal Statistics, Inc.
Teeter Plan. The County has implemented an alternative method for the distribution of securedproperty taxes to local agencies, known as the “Teeter Plan.” The Teeter Plan provisions are now set forthin Sections 4701 to 4717 of the California Revenue and Taxation Code. Upon adoption andimplementation of this method by a county board of supervisors, local agencies for which the county actsas “bank” and certain other public agencies and taxing areas located in the county receive annually thefull amount of their share of property taxes on the secured roll, including delinquent property taxes whichhave yet to be collected. While a county benefits from the penalties associated with these delinquent taxeswhen they are paid, the Teeter Plan provides participating local agencies with stable cash flow and theelimination of collection risk.
To implement a Teeter Plan, the board of supervisors of a county generally must elect to do so byJuly 15 of the fiscal year in which it is to apply. As a separate election, a county may elect to have theTeeter Plan procedures also apply to assessments on the secured roll. The County Board of Supervisorsadopted the Teeter Plan on June 29, 1993. The County’s Teeter Plan applies to the District.
Upon making a Teeter Plan election, a county must initially provide a participating local agencywith 95% of the estimated amount of the then accumulated tax delinquencies (excluding penalties) forthat agency. In the case of the initial year distribution of special taxes and assessments (if a county haselected to include assessments), 100% of the special tax delinquencies (excluding penalties) are to beapportioned to the participating local agency which levied the special tax. After the initial distribution,each participating local agency receives annually 100% of the secured property tax levies to which it isotherwise entitled, regardless of whether the county has actually collected the levies.
If any tax or assessment which was distributed to a Teeter Plan participant is subsequentlychanged by correction, cancellation or refund, a pro rata adjustment for the amount of the change is madeon the records of the treasurer and auditor of the county. Such adjustment for a decrease in the tax or
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assessment is treated by the County as an interest-free offset against future advances of tax levies underthe Teeter Plan.
Once adopted, a county’s Teeter Plan will remain in effect in perpetuity unless the board ofsupervisors orders its discontinuance or unless prior to the commencement of a fiscal year a petition fordiscontinuance is received and joined in by resolutions of the governing bodies of not less than two-thirdsof the participating districts in the county. An electing county may, however, opt to discontinue the TeeterPlan with respect to any levying agency in the county if the board of supervisors, by action taken not laterthan July 15 of a fiscal year, elects to discontinue the procedure with respect to such levying agency andthe rate of secured tax delinquencies in that agency in any year exceeds 3% of the total of all taxes andassessments levied on the secured roll by that agency. The County has never discontinued the Teeter Planwith respect to any levying agency.
Direct and Overlapping Debt
Set forth below is a schedule of direct and overlapping debt prepared by California MunicipalStatistics Inc. and effective March 1, 2011, for debt issued as of March 8, 2011. The table is included forgeneral information purposes only. The District has not reviewed this table for completeness or accuracyand makes no representations in connection therewith. The first column in the table names each publicagency which has outstanding debt as of the date of the schedule and whose territory overlaps the Districtin whole or in part. Column two shows the percentage of each overlapping agency’s assessed valuelocated within the boundaries of the District. This percentage, multiplied by the total outstanding debt ofeach overlapping agency (which is not shown in the table) produces the amount shown in column three,which is the apportionment of each overlapping agency’s outstanding debt to taxable property in theDistrict.
The schedule generally includes long-term obligations sold in the public credit markets by publicagencies whose boundaries overlap the boundaries of the District. Such long-term obligations generallyare not payable from revenues of the District (except as indicated) nor are they necessarily obligationssecured by land within the District. In many cases, long-term obligations issued by a public agency arepayable only from the general fund or other revenues of such public agency.
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CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Statement Of Direct And Overlapping Bonded DebtAs of March 8, 2011
DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 3/1/11Metropolitan Water District 0.228% $519,088North Orange County Joint Community College District 5.191 11,135,422Anaheim Union High School District 14.327 16,314,722Cypress Elementary School District 100.000 23,677,694(1)
City of Cypress Community Facilities District No. 1 100.000 5,430,000City of Cypress 1915 Act Bonds 100.000 1,555,000
TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $58,631,926
OVERLAPPING GENERAL FUND DEBT:Orange County General Fund Obligations 1.090% $ 3,692,517Orange County Pension Obligations 1.090 596,039Orange County Board of Education Certificates of Participation 1.090 209,607Municipal Water District of Orange County Water Facilities Corporation 1.286 181,583North Orange County Regional Occupation Program Certificates of Participation 5.361 607,937Anaheim Union High School District Certificates of Participation 14.327 5,583,948City of Buena Park General Fund Obligations 2.742 8,774City of Cypress Certificates of Participation 75.203 2,365,134City of Los Alamitos Certificate of Participation 1.740 55,245TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $13,300,784
Less: MWDOC Water Facilities Corporation self-supporting obligations 181,583City of Buena Park self-supporting obligations 3,334
TOTAL NET OVERLAPPING GENERAL FUND DEBT $13,115,867
GROSS COMBINED TOTAL DEBT $71,932,710(2)
NET COMBINED TOTAL DEBT $71,747,793
(1) Excludes the Bonds to be sold, but includes Notes to be defeased.(2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded
capital lease obligations.
Ratios to 2010-11 Assessed Valuation:Direct Debt ($23,677,694) ............................................................... 0.47%Total Direct and Overlapping Tax and Assessment Debt ................ 1.17%
Ratios to Adjusted Assessed Valuation:Gross Combined Total Debt ............................................................ 1.77%Net Combined Total Debt................................................................ 1.76%
STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/10: $0
__________________Source: California Municipal Statistics, Inc.
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TAX MATTERS
Series B-1 Bonds
In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel,subject to certain qualifications described herein, under existing laws, rulings and court decisions, andassuming, among other matters, the accuracy of certain representations and compliance with certaincovenants, interest on the Series B-1 Bonds is excluded from gross income for federal income taxpurposes under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”). In thefurther opinion of Bond Counsel, interest on the Series B-1 Bonds is not an item of tax preference forpurposes of the federal alternative minimum tax imposed on individuals and corporations; although suchinterest is included as an adjustment in the calculation of federal corporate alternative minimum taxableincome and may therefore affect a corporation’s alternative minimum tax liabilities.
The opinions of Bond Counsel set forth in the preceding paragraph are subject to the conditionthat the District comply with all requirements of the Code that must be satisfied subsequent to theissuance of the Series B-1 Bonds in order that such interest be, or continue to be, excluded from grossincome for federal income tax purposes. The District has covenanted to comply with each suchrequirement. Failure to comply with certain of such requirements may cause the inclusion of such interestin gross income for federal income tax purposes to be retroactive to the date of issuance of the Series B-1Bonds.
In the further opinion of Bond Counsel, interest on the Series B-1 Bonds is exempt from State ofCalifornia personal income taxation.
Bond Counsel expresses no opinion regarding other tax consequences arising with respect to theSeries B-1 Bonds.
See APPENDIX C – “PROPOSED FORMS OF OPINIONS OF BOND COUNSEL” for theproposed forms of opinions of Bond Counsel.
Bond Counsel’s engagement with respect to the Series B-1 Bonds ends with the issuance of theSeries B-1 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the District orthe beneficial owners of the Series B-1 Bonds regarding the tax-exempt status of the Series B-1 Bonds inthe event of an audit examination by the Internal Revenue Service. Under current procedures, partiesother than the District and its appointed counsel, including the beneficial owners of the Series B-1 Bonds,would have little, if any, right to participate in the audit examination process. Moreover, becauseachieving judicial review in connection with an audit examination of tax-exempt Series B-1 Bonds isdifficult, obtaining an independent review of Internal Revenue Service positions with which the Districtlegitimately disagrees may not be practicable. Any action of the Internal Revenue Service, including butnot limited to selection of the Series B-1 Bonds for audit, or the course or result of such audit, or an auditof Series B-1 Bonds presenting similar tax issues may affect the market price for, or the marketability of,the Series B-1 Bonds, and may cause the District or the beneficial owners of the Series B-1 Bonds toincur significant expense.
Original Issue Discount; Premium Bonds. The initial public offering price of the CapitalAppreciation Bonds is less than the amount payable with respect to such Capital Appreciation Bonds atmaturity. An amount not less than the difference between the initial public offering price of a CapitalAppreciation Bond and the amount payable at the maturity of such Capital Appreciation Bond constitutesoriginal issue discount. Original issue discount on a tax-exempt obligation, such as the Capital
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Appreciation Bonds, accrues on a compounded basis. The amount of original issue discount that accruesto the owner of a Capital Appreciation Bond issued with original issue discount will be excludable fromsuch owner’s gross income and will increase the owner’s adjusted basis in such Capital AppreciationBond, potentially affecting the amount of gain or loss realized upon the owner’s sale or other dispositionof such Capital Appreciation Bond. The amount of original issue discount that accrues in each year is notincluded as a tax preference for purposes of calculating alternative minimum taxable income and maytherefore affect a taxpayer’s alternative minimum tax liability. Consequently, taxpayers owning theCapital Appreciation Bonds issued with original issue discount should be aware that the accrual oforiginal issue discount in each year may result in an alternative minimum tax liability although thetaxpayer has not received cash attributable to such original issue discount in such year.
Purchasers should consult their personal tax advisors with respect to the determination for federalincome tax purposes of the amount of original issue discount properly accruable with respect to theCapital Appreciation Bonds, other federal income tax consequences of owning tax-exempt obligationswith original issue discount and any state and local consequences of owning the Capital AppreciationBonds.
The Series B-1 Bonds purchased, whether at original issuance or otherwise, for an amount greaterthan their principal amount payable at maturity (or, in some case, at their earlier call date) (“PremiumBonds”) will be treated as having amortizable bond premium. No deduction is allowable for theamortizable bond premium in the case of Series B-1 Bonds, like the Premium Bonds, the interest onwhich is excluded from gross income for federal income tax purposes. However a purchaser’s basis in aPremium Bond, and under Treasury Regulations, the amount of tax exempt interest received will bereduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners ofPremium Bonds should consult their own tax advisors with respect to the proper treatment of amortizablebond premium in their particular circumstances.
Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on TaxExemption. Future legislative proposals, if enacted into law, clarification of the Code or court decisionsmay cause interest on the Series B-1 Bonds to be subject, directly or indirectly, to federal income taxationor to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners of theSeries B-1 Bonds from realizing the full current benefit of the tax status of such interest. The introductionor enactment of any such future legislative proposals, clarification of the Code or court decisions mayalso affect the market price for, or marketability of, the Series B-1 Bonds. Prospective purchasers of theSeries B-1 Bonds should consult their own tax advisors regarding any pending or proposed federal orstate tax legislation, regulations or litigation as to which Bond Counsel expresses no opinion.
Internal Revenue Service Audits of Tax-Exempt Securities Issues. The Internal RevenueService has initiated an expanded program for the auditing of tax-exempt securities issues, including bothrandom and target audits. It is possible that the Series B-1 Bonds will be selected for audit by the InternalRevenue Service. It is also possible that the market value of the Series B-1 Bonds might be affected as aresult of such an audit of the Series B-1 Bonds (or by an audit of similar securities).
Series B-2 Bonds
In the opinion of Bowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel,subject to certain qualifications described herein under existing law, interest on the Series B-2 Bonds isnot excluded from gross income for federal tax purposes. Bond Counsel provides no opinion to owners orholders of the Series B-2 Bonds as to any other federal income tax consequences relating to ownership ordisposition of, or the accrual or receipt of interest on, the Series B-2 Bonds.
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In general, if original issue discount (“OID”) on a Series B-2 Bond is greater than a statutorilydefined de minimis amount, a holder of a Series B-2 Bond must include in federal gross income (for eachday of the taxable year, or portion of the taxable year, in which such holder holds such Series B-2 Bond)the daily portion of OID, as it accrues (generally on a constant yield method) and regardless of theholder’s method of accounting. “OID” is the excess of (i) the “‘stated redemption price at maturity” over(ii) the “issue price.” For purposes of the foregoing: “issue price” means the first price at which asubstantial amount of the Series B-2 Bond is sold to the public (excluding bond houses, brokers, orsimilar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers);“stated redemption price at maturity” means the sum of all payments, other than ‘‘qualified slatedinterest” provided by such Series B-2 Bond; “qualified stated interest” is stated interest that isunconditionally payable in cash or property (other than debt instruments of the issuer) at least annually ata single fixed rate; and “de minimis amount” is an amount equal to 0.25 percent of the Series B-2 Bond’sstated redemption price at maturity multiplied by the number of complete years to its maturity. A holdermay irrevocably elect to include in gross income all interest that accrues on a Series B-2 Bond using theconstant-yield method, subject to certain modifications.
As part of federal legislation, certain provisions were added to the Code which permit state andlocal governments to obtain certain tax advantages when issuing certain taxable obligations, referred to as“qualified school construction bonds” (as defined in Section 54F of the Code) and as “specified tax creditbonds” (as specified in Section 6431(f)(2) of the Code) (See “THE BONDS – Designation of Series B-2Bonds as Qualified School Construction Bonds”). Such taxable bonds must satisfy certain requirements,including, but not limited to, that interest paid on such securities would be, but for the issuer’s election totreat such securities as “qualified school construction bonds” and “specified tax credit bonds”, excludablefrom gross income under Section 103 of the Code. The District has made an irrevocable election to treatthe Series B-2 Bonds issued as “qualified school construction bonds” and “specified tax credit bonds” assuch. As a result of such election, interest on the Series B-2 Bonds will be includable in gross income forthe holders thereof for federal tax purposes and the holders of the Series B-2 Bonds will not be entitled toany tax credits as a result of the ownership of such Series B-2 Bonds of the receipt of any interestpayments on such Series B-2 Bonds.
In the further opinion of Bond Counsel, interest on the Series B-2 Bonds is exempt from State ofCalifornia personal income taxation.
Bond Counsel expresses no opinion regarding other tax consequences arising with respect to theSeries B-2 Bonds.
See APPENDIX C – “PROPOSED FORMS OF OPINIONS OF BOND COUNSEL” for theproposed forms of opinions of Bond Counsel.
Circular 230 Statement: The foregoing discussion of tax matters was not intended orwritten by Bond Counsel to be used, and it cannot be used, for the purpose of avoiding penaltiesthat may be imposed on an owner of the Bonds. The foregoing discussion of tax matters was writtento support the promotion or marketing of the Bonds. Each prospective owner of the Bonds shouldseek advice based upon the prospective owner’s particular circumstances from an independent taxadvisor.
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OTHER LEGAL MATTERS
Legal Opinion
The validity of the Bonds and certain other legal matters are subject to the approving opinion ofBowie, Arneson, Wiles & Giannone, Newport Beach, California, Bond Counsel. Bond Counsel expects todeliver its opinions with respect to the Bonds at the time of issuance of the Bonds substantially in theforms set forth in Appendix C hereto. Bond Counsel undertakes no responsibility for the accuracy,completeness or fairness of this Official Statement.
Continuing Disclosure
The District has covenanted for the benefit of the holders and beneficial owners of the Bonds toprovide certain financial information and operating data relating to the District (the “Annual Report”) bynot later than eight months following the end of the District’s fiscal year (currently ending June 30),commencing with the report for the 2010-11 fiscal year (which is due no later than March 1, 2012) and toprovide notices of the occurrence of certain enumerated events (“Notice Events”) in a timely manner notin excess of ten business days after the occurrence of such a Notice Event. The Annual Report will befiled with the Municipal Securities Rulemaking Board through its Municipal Market Access System, orsuch other electronic system designated by the Municipal Securities Rulemaking Board (the “EMMASystem”). The specific nature of the information to be contained in the Annual Report or the notices ofmaterial events is set forth in Appendix D – “FORM OF CONTINUING DISCLOSURECERTIFICATE.” These covenants have been made in order to assist the Underwriter in complying withSecurities and Exchange Commission Rule 15c2-12(b)(5) (the “Rule”). The District has never failed tocomply in all material respects with any previous undertakings with regard to the Rule to provide annualreports or notices of Notice Events.
No Litigation
No litigation is pending or threatened concerning or contesting the validity of the Bonds or theDistrict’s ability to receive ad valorem taxes and to collect other revenues, or contesting the District’sability to issue and retire the Bonds. The District is not aware of any litigation pending or threatenedquestioning the political existence of the District or contesting the title to their offices of District officerswho will execute the Bonds or District or County officials who will sign certifications relating to theBonds, or the powers of those offices. A certificate (or certificates) to that effect will be furnished to theUnderwriter at the time of the original delivery of the Bonds.
The District is occasionally subject to lawsuits and claims. In the opinion of the District, theaggregate amount of the uninsured liabilities of the District under these lawsuits and claims will notmaterially affect the financial position or operations of the District.
MISCELLANEOUS
Ratings
Fitch Ratings (“Fitch”) and Standard & Poor’s Rating Services (“S&P”) have assigned theirrespective ratings of “AA” and “A+” to the Bonds. Rating agencies generally base their ratings on theirown investigations, studies and assumptions. The ratings reflect only the view of the rating agencyfurnishing the same, and any explanation of the significance of such ratings should be obtained only fromthe rating agency providing the same. Such ratings are not a recommendation to buy, sell or hold theBonds. There is no assurance that any ratings will continue for any given period of time or that they will
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not be revised downward or withdrawn entirely by the rating agency providing the same, if, in thejudgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal ofa rating may have an adverse effect on the market price of the Bonds. Neither the Underwriter nor theDistrict has undertaken any responsibility after the offering of the Bonds to assure the maintenance of theratings or to oppose any such revision or withdrawal.
Professionals Involved in the Offering
Bowie, Arneson, Wiles & Giannone, Newport Beach, California, is acting as Bond Counsel to theDistrict with respect to the Bonds, and will receive compensation from the District contingent upon thesale and delivery of the Bonds. Certain legal matters will be passed on for the District by Rutan & Tucker,LLP, Costa Mesa, California, and by Orrick, Herrington & Sutcliffe LLP, as Disclosure Counsel to theDistrict. Dolinka Group, LLC, Irvine, California, serves as the District’s Financial Advisor. Payment ofthe fees and expenses of Disclosure Counsel and the Financial Advisor are also contingent upon theissuance and delivery of the Bonds. From time to time, Disclosure Counsel represents the Underwriter onmatters unrelated to the Bonds.
Underwriting
The Bonds are being purchased for reoffering to the public by Stone & Youngberg LLC (the“Underwriter”) pursuant to the terms of a bond purchase agreement executed on April 6, 2011, by andbetween the Underwriter and the District (the “Purchase Agreement”). The Underwriter has agreed topurchase the Bonds at a price of $25,538,767.75. The Purchase Agreement provides that the Underwriterwill purchase all of the Bonds, subject to certain terms and conditions set forth in the PurchaseAgreement, including the approval of certain legal matters by counsel.
The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower thanthe public offering prices shown on the inside front cover page of this Official Statement. The offeringprices may be changed from time to time by the Underwriter.
The District has duly authorized the delivery of this Official Statement.
INFORMATION RELATING TO THE DISTRICT’S OPERATIONS AND BUDGET
The information in this appendix concerning the operations of the Cypress Elementary SchoolDistrict (the “District”), the District’s finances, and State of California (the “State”) funding ofeducation, is provided as supplementary information only, and it should not be inferred from theinclusion of this information in this Official Statement that the principal of or interest on the Bonds ispayable from the General Fund of the District or from State revenues. The Bonds are payable from theproceeds of an ad valorem tax approved by the voters of the District pursuant to all applicable laws andConstitutional requirements and required to be levied by the County on property within the District in anamount sufficient for the timely payment of principal and interest on the Bonds. See “SECURITY ANDSOURCE OF PAYMENT FOR THE BONDS” in the front portion of this Official Statement.
THE DISTRICT
Introduction
The District was established in 1895 and is located in an area of approximately six square mileslocated in northern Orange County, California, and includes the City of Cypress and portions of the citiesof La Palma and Buena Park. The District provides public education for kindergarten through 6th grade,including special education classes. The District currently operates six elementary schools and estimatesthat total current enrollment is approximately 3,971 students.
Board of Trustees
The governing board of the District is the Board of Trustees of the Cypress Elementary SchoolDistrict (the “Board”). The Board consists of five members who are elected at large to overlapping four-year terms at elections held every two years. If a vacancy arises during any term, the vacancy is filled byan appointment by the majority vote of the remaining board members and if there is no majority by aspecial election. Each December, the Board elects a President, a Vice President and a Clerk to serve one-year terms. The name, office and the month and year of the expiration of the current term of each memberof the Board is described below.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Board of Trustees
Name Office Term Expires
Valeri Peters Wagner President December, 2014Donna Erickson Vice President December, 2012Brian Nakamura Clerk December, 2012Stephen Blount Member December, 2014David Giese Member December, 2014
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Superintendent and Administrative Personnel
The Superintendent of the District is appointed by the Board and reports to the Board. TheSuperintendent is responsible for management of the District’s day-to-day operations and supervises thework of other key District administrators. Information concerning the Superintendent and certain otherkey administrative personnel is set forth below.
Sheri Loewenstein, Superintendent. Ms. Loewenstein began her public education career in 1975,as a teacher. She became a high school administrator in 1984, and then became a special educationadministrator in 1986. She served as an Elementary Principal, a Middle School Principal, an AssistantSuperintendent of Personnel, and Superintendent in the Westminster School District from 1990-2006. Ms.Loewenstein was selected to serve as the Superintendent of the District in 2006. She received a Bachelorof Arts Degree from California State University, Dominguez Hills and received a Master of Arts Degreein Administration from Pepperdine University.
Ms. Loewenstein is retiring from public education and is expected to leave the District in June of2011. The Board of Trustees is expected to start interviewing replacement candidates for the position ofSuperintendent in April of 2011.
Timothy McLellan, Ed.D., Assistant Superintendent, Business Services. Dr. McLellan began hispublic education career in 1991 as a Vocational Education teacher. In 1993, he became a school-to-careercoordinator/instructor at a continuation high school in the Torrance Unified School District. In 1999, hebecame a middle school administrator. He served as an assistant principal at the middle school and highschool level and a principal in the Torrance Unified School District from 1999-2007. From 2007-2010,Dr. McLellan served the Magnolia Elementary School District as their Executive Director of HumanResources and Technology. Dr. McLellan was selected to serve as the Assistant Superintendent, BusinessServices of the District in 2010. He received a Bachelor of Arts Degree in Vocational Education fromCalifornia State University, Long Beach, a Masters of Science Degree in Administration from PepperdineUniversity, and a Doctorate of Education Degree from the University of Southern California. In addition,Dr. McLellan has completed course work for the University of Southern California School BusinessManagement Certificate Program.
DISTRICT FINANCIAL MATTERS
State Funding of Education; State Budget Process
General. As is true for all school districts in California, the District’s operating income consistsprimarily of two components: a State portion funded from the State’s general fund and a local portionderived from the District’s share of the 1% local ad valorem tax authorized by the State Constitution. Inaddition, school districts may be eligible for other special categorical funding from State and federalgovernment programs. The District receives approximately 34.9% of its general fund revenues from Statefunds, budgeted at approximately $6.8 million in fiscal year 2010-11. As a result, decreases or deferrals inState revenues, or in State legislative appropriations made to fund education, may significantly affectDistrict operations.
Under Proposition 98, a constitutional and statutory amendment adopted by the State’s voters in1988 and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of theConstitution), 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. Recentyears have seen frequent disruptions in State personal income taxes, sales and use taxes, and corporatetaxes, making it increasingly difficult for the State to meet its Proposition 98 funding mandate, which
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normally commands about 45% of all State general fund revenues, while providing for other fixed Statecosts and priority programs and services. Because education funding constitutes such a large part of theState’s general fund expenditures, it is generally at the center of annual budget negotiations andadjustments.
State Budget Process. According to the State Constitution, the Governor must propose a budgetto the State Legislature no later than January 10 of each year, and a final budget must be adopted no laterthan June 15. Historically, the budget required a two-thirds vote of each house of the Legislature forpassage. However, on November 2, 2010, the State’s voters approved Proposition 25, which amends theState Constitution to lower the vote requirement necessary for each house of the Legislature to pass abudget bill and send it to the Governor. Specifically, the vote requirement was lowered from two–thirds toa simple majority (50% plus one) of each house of the Legislature. The lower vote requirement alsowould apply to trailer bills that appropriate funds and are identified by the Legislature “as related to thebudget in the budget bill.” The budget becomes law upon the signature of the Governor, who may vetospecific items of expenditure. Under Proposition 25, a two–thirds vote of the Legislature is still requiredto override any veto by the Governor. School district budgets must generally be adopted by July 1, andrevised by the school board within 45 days after the Governor signs the budget act to reflect any changesin budgeted revenues and expenditures made necessary by the adopted State budget. The Governor signedthe 2010-11 Budget on October 8, 2010, the latest budget approval in State history.
When the State budget is not adopted on time, basic appropriations and the categorical fundingportion of each school district’s State funding are affected differently. Under the rule of White v. Davis(also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is noconstitutional mandate for appropriations to school districts without an adopted budget or emergencyappropriation, 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 bythe Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federallaw (such as payments to State workers at no more than minimum wage). The State Controller hasconsistently stated that basic State funding for schools is continuously appropriated by statute, but thatspecial and categorical funds may not be appropriated without an adopted budget. Should the Legislaturefail to pass a budget or emergency appropriation before the start of any fiscal year, the District mightexperience delays in receiving certain expected revenues. The District is authorized to borrow temporaryfunds to cover its annual cash flow deficits, and as a result of the White v. Davis decision, the Districtmight find it necessary to increase the size or frequency of its cash flow borrowings, or to borrow earlierin the fiscal year. The District does not expect the White v. Davis decision to have any long-term effect onits operating budgets.
Aggregate State Education Funding. The Proposition 98 guaranteed amount for education isbased on prior-year funding, as adjusted through various formulas and tests that take into account Stateproceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and otherfactors. The State’s share of the guaranteed amount is based on State general fund tax proceeds and is notbased on the general fund in total or on the State budget. The local share of the guaranteed amount isfunded from local property taxes. The total guaranteed amount varies from year to year and throughoutthe stages of any given fiscal year’s budget, from the Governor’s initial budget proposal to actualexpenditures to post-year-end revisions, as better information regarding the various factors becomesavailable. Over the long run, the guaranteed amount will increase as enrollment and per capita personalincome grow.
If, at year-end, the guaranteed amount is calculated to be higher than the amount actuallyappropriated in that year, the difference becomes an additional education funding obligation, referred toas “settle-up.” If the amount appropriated is higher than the guaranteed amount in any year, that higher
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funding level permanently increases the base guaranteed amount in future years. The Proposition 98guaranteed 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, insubsequent years when State general fund revenues grow faster than personal income (or sooner, as theLegislature may determine), the funding level must be restored to the guaranteed amount, the obligationto do so being referred to as “maintenance factor.”
In recent years, the State’s response to fiscal difficulties has had a significant impact onProposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-upamounts when funding has lagged the guaranteed amount. In response, teachers’ unions, the StateSuperintendent and others sued the State or Governor in 1995, 2005 and 2009 to force them to fundschools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted inover $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down theobligations through additional education funding over time, including the Quality Education InvestmentAct of 2006 (QEIA), have also become part of annual budget negotiations, resulting in repeatedadjustments and deferrals of the settle-up amounts. The State has also sought to preserve general fundcash while avoiding increases in the base guaranteed amount through various mechanisms: by treatingany excess appropriations as advances against subsequent years’ Proposition 98 minimum funding levelsrather than current year increases; by temporarily deferring apportionments of Proposition 98 funds fromone fiscal year to the next; by permanently deferring the year-end apportionment from June 30 to July 2;by suspending Proposition 98; and by proposing to amend the Constitution’s definition of the guaranteedamount and settle-up requirement under certain circumstances.
The District cannot predict how State income or State education funding will vary over the termto maturity of the Bonds, and the District takes no responsibility for informing owners of the Bonds as toactions 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 variousState-maintained websites. Text of proposed and adopted budgets may be found at the website of theDepartment of Finance, www.dof.ca.gov, under the heading “California Budget.” An impartial analysisof the budget is posted by the Office of the Legislative Analyst at www.lao.ca.gov. In addition, variousState of California official statements, many of which contain a summary of the current and past Statebudgets and the impact of those budgets on school districts in the State, may be found at the website ofthe State Treasurer, www.treasurer.ca.gov. The information referred to is prepared by the respectiveState agency maintaining each website and not by the District, and the District can take no responsibilityfor the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness ofinformation posted there, and such information is not incorporated herein by these references.
Legal Challenge to State Funding Education. On May 20, 2010, a plaintiff class of numerouscurrent California public school students and the Alameda Unified School District, the Alpine UnionSchool District, the Norte County Unified School District, the Folsom Cordova Unified School District,the Hemet Unified School District, the Porterville Unified School District, the Riverside Unified SchoolDistrict, the San Francisco Unified School District and the Santa Ana Unified School District, togetherwith the California Congress of Parents, Teachers & Students, the Association of California SchoolAdministrators and the California School Boards Association filed suit in Alameda County SuperiorCourt challenging the system of financing for public schools in California as unconstitutional. In Robles-Wong, et al. v. State of California (“Robles-Wong”), the plaintiffs seek declaratory and injunctive relief,including a permanent injunction compelling the State to abandon the existing system of public schoolfunding and replace it with a system that is based on what is needed to meet the State’s programrequirements and the needs of individual students. The District cannot predict the outcome of the Robles-Wong litigation, however, if successful, the lawsuit could result in a change in how school funding ofeducation is implemented in the State.
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Prohibitions on Diverting Local Revenues for State Purposes. Beginning in 1992-93, the Statesatisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwisebelonging to cities, counties, special districts, and redevelopment agencies, to school and college districtsthrough 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 intendedto eliminate the practice. In response, the Legislature proposed an amendment to the State Constitution,which the State’s voters approved as Proposition 1A at the November 2004 election. That measure wasgenerally superseded by the passage of a new initiative constitutional amendment at the November 2010election, known as “Proposition 22.”
The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscalhardship, from delaying the distribution of tax revenues for transportation, redevelopment, or localgovernment projects and services. It prevents the State from redirecting redevelopment agency propertytax increment to any other local government, including school districts, or from temporarily shiftingproperty taxes from cities, counties and special districts to schools, as in the ERAF program. This isintended to, among other things, stabilize local government revenue sources by restricting the State’scontrol over local property taxes. One effect of this amendment will be to deprive the State of fuel taxrevenues to pay debt service on most State bonds for transportation projects, reducing the amount of Stategeneral fund resources available for other purposes, including education.
Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billionin local property tax revenues in 2009-10 from cities, counties, and special districts to the State to offsetState general fund spending for education and other programs, and included another diversion in theadopted 2009-10 State budget of $1.7 billion in local property tax revenues from local redevelopmentagencies. The lawsuit was decided against the CRA on May 1, 2010. Redevelopment agencies had suedthe State over this latter diversion. Because Proposition 22 reduces the State’s authority to use or shiftcertain revenue sources, fees and taxes for State general fund purposes, the State will have to take otheractions to balance its budget in some years—such as reducing State spending or increasing State taxes,and school and college districts that receive Proposition 98 or other funding from the State will be moredirectly dependent upon the State’s general fund.
2010-11 State Budget. The following information is adapted from a report on the adopted Statebudget prepared by the Legislative Analyst. The State’s fiscal year 2010-11 budget projects $89 billion ofresources available, and $86 billion of expenditures, with an ending general fund balance of $1.3 billion.To achieve balance, the state budget includes $7.8 billion in expenditure cuts, including a reduction of$1.8 billion in State employee payroll, benefit and related costs, primarily derived from future unionagreements or other administrative actions, $450 million in savings from reduced general funddepartmental hiring, and $130 million in savings from reduced departmental operating costs related to theworkforce cap. The budget also assumes the State will receive $5.4 billion of new federal funding (mostof which has yet to be approved by Congress), assumes $3.3 billion of increased revenue, including $1.4billion in higher assumed baseline State revenues, and assumes the State will be authorized and able tomake $2.7 billion of largely one-time loans, transfers and funding shifts.
The spending cuts described above include a $3.4 billion reduction in education costs due tosuspension of the Proposition 98 minimum guarantee. Despite suspension of Proposition 98, ongoingProposition 98 funding is budgeted to increase $115 million from the estimated fiscal year 2009-10funding level to $49.7 billion, of which the State expects to contribute $36.2 billion, with local propertytaxes contributing $13.4 billion. However, had the Legislature not suspended Proposition 98, theestimated guaranteed amount would have been $53.8 billion.
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The adopted 2010-11 State budget projects that fiscal year 2009-10 spending for education didnot fully fund that year’s minimum guaranteed amount, creating a new settle-up obligation estimated at$1.8 billion. The adopted 2010-11 State budget provides $300 million toward this obligation, which willbe provided in the form of $90 million for annual education mandate costs, and $210 million for schooldistricts’ and community colleges’ unpaid prior-year mandate claims, to be distributed on an equal per-student basis.
State Proposition 98 funding for K-12 schools is budgeted to be $32.2 billion, or about 1.9%higher than the $31.6 billion spent in 2009-10. Local property tax revenue, however, is expected todecline about 4.8% from the 2009-10 level of $12.1 billion to contribute $11.5 billion to K-12 schools in2010-11. K-12 education is also slated to receive $1.5 billion in special one-time federal funding, $1.2billion of which is from recent federal grants provided to help retain teaching jobs, and $272 million isfrom the last round of federal stabilization funding from the 2009 federal stimulus package.
The reliance on one-time solutions in fiscal year 2009-10 has resulted in the need for fiscal year2010-11 reductions. These reductions are mostly treated as deferrals of payments rather than cuts. Theadopted State budget defers $1.7 billion of funding from spring of 2011 to July of 2011 (the next fiscalyear). Virtually all other K-12 reductions are technical adjustments designed to align appropriations withanticipated program costs, such as for the K-3 Class Size Reduction program.
State Cash Management Legislation. On March 1, 2010, the Governor signed a bill (and onMarch 4, 2010, subsequently signed a clean-up bill to clarify certain provisions of such bill) to provideadditional cash management flexibility to State fiscal officials (the “Cash Management Bill”). The CashManagement Bill authorizes deferral of certain payments during the 2010-11 fiscal year for schooldistricts (not to exceed $2.5 billion in the aggregate at any one time, and a maximum of three deferralsduring the fiscal year). The Cash Management Bill permits deferrals of payments to K-12 schools in July2010, October 2010 and March 2011, for not to exceed 60, 90 and 30 days, respectively, but dependingon actual cash flow conditions at the time, the State Controller, Treasurer and Director of Finance mayeither accelerate or delay the deferrals up to 30 days, or reduce the amounts deferred. The CashManagement Bill also permits the State to move a planned deferral to the prior month or to a subsequentmonth upon 30 days written notice by the State Department of Finance to the Legislative BudgetCommittee, except that the Cash Management Bill provides that the deferral planned for March 2011must be paid prior to April 30. The Cash Management Bill provides for exceptions to the deferrals forschool districts that can demonstrate hardship. The Cash Management Bill made it necessary for manyschool districts (and other affected local agencies) to increase the size and/or frequency of their cash flowborrowings during fiscal year 2010-11. Similar legislation has been enacted for fiscal year 2011-12. Thelegislation, however, sets forth a specific deferral plan for K-12 education payments. In the legislation,both the July 2011 and August 2011 K-12 payments of $1.4 billion are deferred and the October 2011payment of $2.4 billion is deferred. In September 2011, $700 million of the July deferral is to be paid, inJanuary 2012, $4.5 billion from the remaining July, August and October deferrals are paid, and in March2012, $1.4 billion is to be deferred and paid in April 2012. The District is authorized to borrow temporaryfunds to cover its annual cash flow deficits and, as a result of this legislation, the District might find itnecessary to increase the size or frequency of its cash flow borrowings in fiscal year 2011-12.
Proposed 2011-12 State Budget. The Governor released his proposed fiscal year 2011-12 Statebudget (the “2011-12 Proposed State Budget”) on January 10, 2011. The 2011-12 Proposed State Budgetprojects that the State will face a budget gap of $25.4 billion in fiscal year 2011-12 as a result of ashortfall of $8.2 billion attributable to fiscal year 2010-11 and a shortfall of $17.2 billion attributable tofiscal year 2011-12. The 2011-12 Proposed State Budget provides that the 2010-11 State budget relied, inpart, on unrealistic assumptions, including the receipt of $3.6 billion in federal funds and $1.7 billion inreductions that were not achieved, and indicates that $26.4 billion in cuts, taxes and other budget
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measures will be necessary to close the fiscal year 2011-12 budget gap and provide for a reserve of $1billion.
The 2011-12 Proposed State Budget recognizes that fiscal year 2010-11 revenues are $3.1 billionlower than were projected at the time of approval of the 2010-11 State budget, in part due to the recentlyenacted federal tax relief, unemployment insurance reauthorization, and the Job Creation Act of 2010, aswell as the passage of Proposition 22, which prohibits the use of certain transportation funds to pay fordebt service or from being loaned to the General Fund, creating an additional budget shortfall of $1.6billion. The 2011-12 Proposed State Budget also anticipates that other workload adjustments includingpopulation and caseload changes will add $2.1 billion to the budget gap. The 2011-12 Proposed StateBudget reduces spending by $12.5 billion, including substantial cuts to most major programs, such as$1.7 billion to Medi-Cal, $1.5 billion to California’s welfare-to-work program, $1 billion to theUniversity of California and California State University, $750 million to the Department ofDevelopmental Services and $580 million to State operations and employee compensation. The 2011-12Proposed State Budget proposes a total of $14 billion in new revenues.
The 2011-12 Proposed State Budget calls for an accelerated timeline to restore balance to theState’s finances and assumes that all necessary statutory changes to implement budget measures will beadopted by the State Legislature and signed by the Governor by March of 2011 to allow certain ballotmeasures to be placed before the voters at a special statewide election to be called for June 2011.
The 2011-12 Proposed State Budget includes some one-time savings and borrowing, including$1.8 billion in borrowing from special funds, $1.7 billion in property tax shifts, $1.0 billion from theProposition 10 reserve to fund children’s programs, and $0.9 billion from Proposition 63 moneys to fundcommunity mental health services. $8.2 billion of the budget gap is expected to be one-time in nature.
The 2011-12 Proposed State Budget projects the State will have sufficient cash to repay the entire$10 billion of State revenue anticipation notes as scheduled in May and June 2011. However, absentcorrective action, the State will face substantial challenges in meeting all General Fund cash needsbeginning in July of 2011 so that, in addition to the current budget proposals, the State will need to obtainexternal financing early in the 2011-12 fiscal year. Such legislation made it necessary for many schooldistricts (and other affected local agencies) to increase the size and/or frequency of their cash flowborrowings during fiscal year 2010-11. The Governor proposed that legislation similar to the CashManagement Bill enacted for fiscal year 2010-11 be enacted for fiscal year 2011-12 and, on March 24,2011, the Governor signed such legislation into law as part of a budget trailer bill. The legislation setsforth a specific deferral plan for K-12 education payments. See “−State Cash Management Legislation” above.
The 2011-12 Proposed State Budget plan includes $2.2 billion in new inter-year deferrals from2011-12 to 2012-13, $2.1 billion of which will derive from K-12 revenue limit payments and $129million from community colleges apportionment payments. Such deferrals are in addition to the $1.7billion of deferrals that were part of the 2010-11 State budget.
The 2011-12 Proposed State Budget recognizes that school funding has been disproportionatelyreduced since fiscal year 2007-08 and maintains Proposition 98 funding for K-12 programs at the samelevel for fiscal year 2011-12 as is in effect for fiscal year 2010-11. In an effort to maintain funding forschools, fund public safety services at the local level and to balance the budget, the 2011-12 ProposedState Budget anticipates that current tax rates will be continued for another five years and also proposes toapply the single sales factor income allocation rules uniformly to certain corporate taxpayers and toeliminate an ineffective tax expenditure program. These proposals are expected to generate revenues of$12 billion. The Governor proposes to place a ballot measure before the voters in a special election to be
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held in June of 2011 calling for a constitutional measure to extend the four temporary tax increasesadopted in February 2009. In the event the voters do not approve the extension of these tax increases,further reductions in spending could be made which would likely impact funding for K-12 education.
As it relates to K-12 education, the 2011-12 Proposed State Budget slightly lowers Proposition 98programmatic funding for fiscal year 2011-12 ($49.3 billion) from fiscal year 2010 11 ($49.7 billion) andextends flexibility reforms (discussed below) adopted in 2009 to assist school districts to maintain theircore services. Total funding for K-12 education is projected to be $63.8 billion in fiscal year 2011-12,$59.5 billion of which is State, federal and local property tax funding accounted for in the 2011-12Proposed State Budget. Total per-pupil expenditures from all sources are projected to be $11,154 in fiscalyear 2010-11 and $10,703 in fiscal year 2011-12, including funds provided for prior year “settle-up”obligations. K-12 Proposition 98 per-pupil expenditures in the 2011-12 Proposed State Budget are $7,344in 2011-12, down slightly from $7,358 per-pupil provided in fiscal year 2010-11.
Major workload adjustments for K-12 education included in the 2011-12 Proposed State Budgetinclude the following:
• Cost-of-Living Adjustment Increases. The 2011-12 Proposed State Budget does notprovide a cost-of-living-adjustment (“COLA”) for any K-14 program in fiscal year 2011-12. The projected COLA for 2011-12 is 1.67%, which would have provided an increaseof $964.5 million overall, to the extent Proposition 98 resources were sufficient toprovide that adjustment.
• Property Tax. A decrease of $47.9 million for school district and county office ofeducation revenue limits is made in fiscal year 2010-11 as a result of higher offsets ofproperty tax revenues. An increase of $155.7 million for school district and county officeof education revenue limits in fiscal year 2011-12 as a result of reduced offsets of localproperty tax revenues.
• Average Daily Attendance. An increase of $81.4 million in fiscal year 2010-11 for schooldistrict and county office of education revenue limits is made as a result of an increase inprojected ADA and an increase of $357.5 million in fiscal year 2011-12 for schooldistrict and county office of education revenue limits as a result of continued projectedgrowth in ADA for fiscal year 2011-12.
• Unemployment Insurance. An increase of $351.8 million in fiscal year 2011-12 is madeto fully fund the additional costs of unemployment insurance for local school districts andcounty offices of education.
• K-14 Mandates Funding. Ongoing funding of $89.9 million is provided for K-14mandates to provide level funding relative to fiscal year 2010-11, for reimbursement ofstate mandated local costs. Current law suspends for three additional years thoseprograms that were suspended during fiscal year 2010-11.
Some significant non-General Fund workload adjustments are as follows:
• School Construction Program. The workload budget includes a $316 million decrease infiscal year 2009-10 actual expenditures, a $2.07 billion increase in fiscal year 2010-11estimated expenditures and a $1.97 billion decrease in fiscal year 2011-12 estimatedexpenditures for school facilities. These amounts are largely attributable to theanticipated allocation of remaining funds from the 1998, 2002, and 2004 bonds. No
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proposal was made by the Governor to place a school construction bond on the ballot forthe 2012 election cycle.
• Child Nutrition Program. An increase of $36.1 million in fiscal year 2011-12 to the StateDepartment of Education (“SDE”) local assistance from federal funds to reflect growth ofnutrition programs at schools and other participating agencies and an increase of $12.0million in fiscal year 2011-12 to the SDE local assistance from federal funds for theFresh Fruit and Vegetable Program, which provides an additional free fresh fruit orvegetable snack to students during the school day.
The 2011-12 Proposed State Budget also proposes to extend various flexibility options for schooldistricts for two additional years. Specifically, it extends authority in the following areas:
• Categorical flexibility. For fiscal years 2008-09 through 2012-13, local educationalagencies were given broad flexibility to spend funds for approximately 40 K-12categorical programs for any educational purpose. Under categorical flexibility, adistrict’s allocation for each program is based on its share of total program funding eitherin fiscal year 2007-08 or 2008-09, with the earlier year being used for certainparticipation-driven programs.
• Routine Maintenance Contributions. Local educational agencies were proposed to reducethe amount that districts must deposit into a restricted routine maintenance account forthe 2008-09 through 2012-13 fiscal years, from 3% of General Fund expenditures to 1%.
• Deferred Maintenance Requirement. The requirement that districts set aside ½% of theirrevenue limit funding for deferred maintenance was suspended for the 2008-09 to 2012-13 fiscal years.
The complete 2011-12 Proposed State Budget is available from the California Department ofFinance website at www.dof.ca.gov. The District can take no responsibility for the continued accuracy ofthis internet address or for the accuracy, completeness or timeliness of information posted there, and suchinformation is not incorporated herein by such reference.
LAO Overview of 2011-12 Proposed State Budget. The Legislative Analyst’s Office (“LAO”), anonpartisan State office which provides fiscal and policy information and advice to the Legislature,released its report on the 2010-11 Proposed State Budget entitled “2011-12 Budget: Overview of theGovernor’s Budget” on January 12, 2011 (the “2011-12 Budget Overview”) in which the LAO agreedthat the $25.4 billion State budget shortfall estimated in the 2011-12 Proposed State Budget was areasonable estimate. In the 2011-12 Budget Overview, the LAO concurs with the Governor that the majorreasons for the current State budget shortfall include the inability of the State to achieve certain previousbudget measures, the expiration of various one-time and temporary budget measures approved in recentyears, and the failure of the State to obtain significant additional federal funding for key programs.Generally, the 2011-12 Budget Overview recognizes that the 2011-12 Proposed State Budget includesproposals impacting nearly every area of the fiscal year 2011-12 State budget and that the 2011-12Proposed State Budget is a good starting point for legislative deliberations, recognizing that the focus onmultiyear and ongoing measures are necessary to make substantial improvements in the State’s budgetarysituation. The 2011-12 Budget Overview supports the extension of the four temporary tax increasesadopted in February 2009 to voters in a June 2011 special election and to the restructuring of the statelocal relationship in the delivery of services by shifting funding and responsibility to local governmentsfor those services. The 2011-12 Budget Overview responds favorably to the 2011-12 Proposed StateBudget proposals to “realign” state and local program responsibilities and to the proposed changes in
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local economic development efforts. Nonetheless, the LAO believes there are significant risks in the2011-12 Proposed State Budget, especially in the context of the realignment and redevelopment proposalswhich involve many unresolved legal, financial and policy issues. The 2011-12 Budget Overviewconcludes that the State Legislature will have to make difficult decisions on both its spending and taxcommitment and that the 2011-12 Proposed State Budget also presents an opportunity to reorder state andlocal government functions to improve the delivery of public services.
The 2011-12 Budget Overview recognizes that, while the 2011-12 Proposed State Budgetincludes revenue proposals resulting in a $2 billion increase in the Proposition 98 minimum fundingguarantee for schools above its current-law level, the 2011-12 Proposed State Budget would result in asmall programmatic funding decline for K-12 schools and significant reductions for community collegesand child care programs. The 2011-12 Budget Overview also suggests that $128 million of the anticipatedProposition 98 savings included in the 2011-12 Proposed State Budget cannot be realized and that theassumed $74 million in savings due to the sunset of the Special Disabilities Adjustment program couldviolate federal maintenance of effort requirements. In addition, the 2011-12 Budget Overviewrecommends that the State Legislature could consider a different combination of policy changes to realizechild care savings. With respect to community college funding, the 2011-12 Budget Overview supportsthe 2011-12 Proposed State Budget proposal to increase community college fees.
The 2011-12 Budget Overview is available on the LAO website at www.lao.ca.gov. The Districtcan take no responsibility for the continued accuracy of this internet address or for the accuracy,completeness or timeliness of information posted there, and such information is not incorporated hereinby such reference.
Enacted Budget Trailer Bills. On March 24, 2011, the Governor signed into law several budgettrailer bills, even though the fiscal year 2011-12 State budget is yet to be finalized. One bill signed intolaw, Senate Bill No. 70 (Chapter 7, Statutes of 2011), provides certain statutory changes in the area ofeducation in order to enact modifications to the fiscal year 2010-11 State budget and fiscal year 2011-12State budget. Among other things Senate Bill No. 70:
• Provides a revenue limit deficit factor of 19.892% for fiscal years 2011-12 and 2012-13to reflect a $106.6 million deficit for county offices of education (COEs). Provides arevenue limit deficit factor of 19.608% for fiscal year 2011-12 to reflect a deficit of $7.7billion for school districts.
• Defers an additional $2.1 billion in K-12 funds from fiscal year 2011-12 to fiscal year2012-13. Specifically, Senate Bill No. 70 shifts $1.3 billion in March 2012 payments and$763 million in April 2012 payments to August 2012. This schedule is shorter than the 13month deferral proposed in the 2011-12 Proposed State Budget.
• Extends various flexibility options to school districts for an additional two years (to fiscalyear 2014-15), including categorical flexibility, instructional materials purchase andadoption requirements, routine and deferred maintenance requirements, surplus property,class size reduction, instructional minutes and local budget reserve requirements.
• Extends until fiscal year 2014-15, authorization for new schools, the majority of whichare charter schools, to access flexible categorical program funding on par with existingschools.
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• Appropriates $5 million from the State General Fund to augment the Charter SchoolRevolving Loan Fund, which makes low-interest, start-up loans to new charter schools inorder to meet the purposes of their charters.
• Establishes a zero percent cost-of-living adjustment (COLA) for K-12 programs in fiscalyear 2010-11. Though the actual COLA of 1.67% is not provided, it is applied to thedeficit factors established in the bill.
• Provides $2.3 million in federal funds ($1.5 million in Title VI and $781,000 in Title II)for fiscal year 2010-11 for the California Longitudinal Pupil Achievement Data System(CALPADS).
• Applies an 8.9% reduction to categorical programs for basic aid districts in fiscal year2010-11 and fiscal year 2011-12 commensurate to the revenue limit reduction rate forother school districts in fiscal year 2010-11 and fiscal year 2011-12. Specifies the intentto restore these reductions at the same time, and in direct proportion to restoration ofrevenue limit reductions.
• Authorizes a statutory appropriation for the K-3 Class Size Reduction program for fiscalyear 2011-12. The statute authorizes the Superintendent of Public Instruction to certifythe funding needed for the program in fiscal year 2011-12 to ensure full funding for theprogram.
• Reduces ongoing Proposition 98 funding for special education by about $13.1 million infiscal year 2011-12 and backfills with one-time Proposition 98 savings from variousprograms to cover fiscal year 2010-11 program adjustments.
• Suspends the statutory division of Proposition 98 funding among K-12 educationalagencies, community colleges, and other state agencies, and instead conforms thedivision of funding based upon actual budget appropriations in fiscal year 2011-12.
• Requires the state to adjust the Proposition 98 calculation so that any shift in localproperty taxes previously received by redevelopment agencies has no effect on theProposition 98 minimum guarantee in fiscal year 2011-12.
Changes in State Budget. The final fiscal year 2011-12 State budget, which requires approval bya majority vote of each house of the State Legislature, may differ substantially from the Governor’sbudget proposals. Accordingly, the District cannot predict the impact that the 2011-12 Proposed StateBudget, or subsequent budgets, will have on its finances and operations. The State Budget will be affectedby national and State economic conditions and other factors.
Future Budgets and Budgetary Actions. The District cannot predict what actions will be taken inthe future by the State Legislature and the Governor to address changing State revenues and expendituresor the impact such actions will have on State revenues available in the current or future years foreducation. The State budget will be affected by national and State economic conditions and other factorsover which the District will have no control. Certain actions could result in a significant shortfall ofrevenue and cash, and could impair the State’s ability to fund schools during fiscal year 2010-11 and infuture fiscal years. Continued State budget shortfalls in fiscal year 2010-11 and future fiscal years couldhave a material adverse financial impact on the District.
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Allocation of State Funding to School Districts. Under Education Code Section 42238 andfollowing, each school district is determined to have a target funding level: a “base revenue limit” perstudent multiplied by the district’s student enrollment measured in units of average daily attendance(“A.D.A.”). The base revenue limit is calculated from the district’s prior-year funding level, as adjustedfor a number of factors, such as inflation, special or increased instructional needs and costs, employeeretirement costs, especially low enrollment, increased pupil transportation costs, etc. Generally, theamount of State funding allocated to each school district is the amount needed to reach that district’s baserevenue limit after taking into account certain other revenues, in particular, locally generated propertytaxes. This is referred to as State “equalization aid.” To the extent local tax revenues increase due togrowth in local property assessed valuation, the additional revenue is offset by a decline in the State’scontribution.
Enrollment can fluctuate due to factors such as population growth or decline, competition fromprivate, parochial, and public charter schools, inter-district transfers in or out, and other causes. Losses inenrollment will cause a school district to lose operating revenues ,without necessarily permitting thedistrict to make adjustments in fixed operating costs.
The following table sets forth (i) the District’s actual A.D.A., enrollment and base revenue limitper unit of A.D.A. for fiscal years 2006-07 through 2009-10, and (ii) the District’s projected A.D.A.,enrollment and base revenue limit per unit of A.D.A. for fiscal year 2010-11, for kindergarten throughgrade 6 (“K-6”), including special education.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Average Daily Attendance, Enrollment And Base Revenue LimitFiscal Years 2006-07 Through 2010-11
____________________(1) A.D.A. for the second period of attendance, typically in mid-April of each school year.(2) The District had a 7.844% base revenue limit deficit factor in fiscal year 2008-09, resulting in a funded base revenue limit of
$5,386. A deficit factor is applied to the base revenue limit if provided in the State Budget for a given fiscal year whenappropriation of funds in the State Budget for such is not sufficient to pay all claims for State aid. The deficit factor is appliedto reduce the allocation of State aid to the amount appropriated.
(3) The District had a 18.35% base revenue limit deficit factor in fiscal year 2009-10, resulting in a funded base revenue limit of$4,976.
(4) Figures are projections. The District also expects a 17.963% base revenue limit deficit factor and a negative 0.39% cost ofliving adjustment in fiscal year 2010-11, which results in a funded base revenue limit of $4,956.
Source: The District.
In its fiscal year 2010-11 second interim report, the District projects that it will receiveapproximately $19.5 million in aggregate revenue limit income in fiscal year 2010-11, or approximately64.3% of its general fund revenues. This amount represents an increase of approximately 5.0% from the$18.7 million the District received in fiscal year 2009-10. This change is due to the fiscal year 2009-10State budget reversing a decision to cut base revenue limit reduction by $254.00 per A.D.A. The Districtalso expects to receive a small portion of its budget from State lottery funds, which may not be used fornon-instructional purposes, such as the construction of facilities. School districts receive lottery funds
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proportional to their total A.D.A. The District’s State lottery revenue is currently budgeted at $500,856for fiscal year 2010-11.
Local Sources of Education Funding
The principal component of local revenues is a school district’s property tax revenues, i.e., eachdistrict’s share of the local 1% property tax, received pursuant to Sections 75 and following and Sections95 and following of the California Revenue and Taxation Code. Education Code Section 42238(h)itemizes the local revenues that are counted towards the base revenue limit before calculating how muchthe State must provide in State aid. The more local property taxes a district receives, the less State aid it isentitled to; ultimately, a school district whose local property tax revenues exceed its base revenue limit isentitled to receive no State aid, and receives only its special categorical aid which is deemed to includethe “basic aid” of $120 per student per year guaranteed by Article IX, Section 6 of the Constitution. Suchdistricts are known as “basic aid districts.” Districts that receive some State aid are commonly referred toas “revenue limit districts.”
The District is not a “basic aid district.” Local property tax revenues account for approximately64% of the District’s aggregate revenue limit income, and are budgeted to be $12.6 million in fiscal year2010-11. For a discussion of legal limitations on the ability of the District to raise revenues through localproperty taxes, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES ANDAPPROPRIATIONS” below.
Developer Fees
The District collects statutory developer fees on new residential and commercial/industrialdevelopment to finance essential school facilities within the District. The following table of developer feerevenues reflects the collection of fees from fiscal years 2006-07 through fiscal year 2010-11.
CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Developer FeesFiscal Years 2006-07 through 2010-11
____________________(1) Projected.Source: The District.
Significant Accounting Policies and Audited Financial Reports
The State Department of Education imposes by law uniform financial reporting and budgetingrequirements for K through 12 school districts. Financial transactions are accounted for in accordancewith the Department of Education’s California School Accounting Manual. This manual, according toSection 41010 of the Education Code, is to be followed by all California school districts, including theDistrict. Significant accounting policies followed by the District are explained in Note 1 to the District’saudited financial statements for the fiscal year ended June 30, 2010, which are included as Appendix B.
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Independently audited financial reports are prepared annually in conformity with generallyaccepted accounting principles for educational institutions. The annual audit report is generally availableabout six months after the June 30 close of each fiscal year. The following tables contain data abstractedfrom financial statements prepared by the District’s independent auditor, Nigro Nigro & White, aProfessional Accountancy Corporation, Murrieta, California for fiscal years 2005-06 through 2009-10.Nigro Nigro & White has not been requested to consent to the use or to the inclusion of its report in thisOfficial Statement, and it has neither audited nor reviewed this Official Statement. The District is requiredby law to adopt its audited financial statements after a public meeting to be conducted no later thanJanuary 31 following the close of each fiscal year.
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CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
Statement of General Fund Revenues, Expenditures and Changes in Fund BalanceFiscal Years 2005-2006 through 2009-10
2005-06Actuals
2006-07Actuals
2007-08Actuals
2008-09Actuals
2009-10Actuals
REVENUESGeneral Revenues:
Property taxes $ 13,090,243 $ 12,628,583 $ 13,300,057 $ 13,835,920 $ 13,735,987Federal and state aid not restricted
to specific purpose 12,082,573 13,509,149 13,111,412 11,466,912 9,553,623Interest and investment earnings 193,515 316,161 263,372 96,697 70,324Miscellaneous 1,351,356 1,461,091 1,168,333 933,656 1,150,310
Program Revenues:Charges for services 673,416 491,808 794,995 610,900 504,101Operating grants and contributions 5,462,736 6,336,573 6,071,289 6,945,970 5,411,381
Total revenues 32,853,839 34,743,365 34,709,458 33,890,055 30,425,726
Total Fund Balances 3,577,572 4,080,805 3,829,953 4,247,304 4,048,536
Total Liabilities and Fund Balances $ 5,743,131 $ 7,003,749 $ 6,015,981 $ 6,287,565 $ 6,437,799
________________________Source: District Audited Financial Reports for fiscal years 2005-06 through 2009-10.
District Budget Process and County Review
State law requires school districts to maintain a balanced budget in each fiscal year. The StateDepartment of Education imposes a uniform budgeting and accounting format for school districts.
Under current law, a school district governing board must adopt and file with the countysuperintendent of schools a tentative budget by July 1 in each fiscal year. The District is under thejurisdiction of the Orange County Superintendent of Schools.
The County Superintendent must review and approve or disapprove the budget no later thanAugust 15. The County Superintendent is required to examine the adopted budget for compliance with thestandards and criteria adopted by the State Board of Education and identify technical correctionsnecessary to bring the budget into compliance with the established standards. If the budget is disapproved,it is returned to the District with recommendations for revision. The District is then required to revise thebudget, hold a public hearing thereon, adopt the revised budget, and file it with the CountySuperintendent no later than September 8. Pursuant to State law, the County Superintendent has available
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various remedies by which to impose and enforce a budget that complies with State criteria, depending onthe circumstances, if a budget is disapproved. After approval of an adopted budget, the school district’sadministration may submit budget revisions for governing board approval.
Subsequent to approval, the County Superintendent will monitor each district under itsjurisdiction throughout the fiscal year pursuant to its adopted budget to determine on an ongoing basis ifthe district can meet its current or subsequent year financial obligations. If the County Superintendentdetermines that a district cannot meet its current or subsequent year’s obligations, the CountySuperintendent will notify the district’s governing board of the determination and may then do either orboth of the following: (a) assign a fiscal advisor to enable the district to meet those obligations, or (b) if astudy and recommendations are made and a district fails to take appropriate action to meet its financialobligations, the County Superintendent will so notify the State Superintendent of Public Instruction, andthen may do any or all of the following for the remainder of the fiscal year: (i) request additionalinformation regarding the district’s budget and operations; (ii) develop and impose, after also consultingwith the district’s governing board, revisions to the budget that will enable the district to meet its financialobligations; and (iii) stay or rescind any action inconsistent with such revisions. However, the CountySuperintendent may not abrogate any provision of a collective bargaining agreement that was entered intoprior to the date upon which the County Superintendent assumed authority.
A State law adopted in 1991 (known as “A.B. 1200”) imposed additional financial reportingrequirements on school districts, and established guidelines for emergency State aid apportionments.Under the provisions of A.B. 1200, each school district is required to file interim certifications with theCounty Superintendent (on December 15, for the period ended October 31, and by mid-March for theperiod ended January 31) as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The CountySuperintendent reviews the certification and issues either a positive, negative or qualified certification. Apositive certification is assigned to any school district that will meet its financial obligations for thecurrent fiscal year and subsequent two fiscal years. A negative certification is assigned to any schooldistrict that is deemed unable to meet its financial obligations for the remainder of the fiscal year orsubsequent fiscal year. A qualified certification is assigned to any school district that may not meet itsfinancial obligations for the current fiscal year or two subsequent fiscal years. A school district thatreceives a qualified or negative certification may not issue tax and revenue anticipation notes orcertificates of participation without approval by the County Superintendent. The District has neverreceived a qualified or negative certification.
The following table summarizes the District’s adopted General Fund Budgets for fiscal years2008-09 and 2009-10, unaudited actuals for fiscal years 2008-09 and 2009-10 and the second interimreport for fiscal year 2010-11.
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CYPRESS ELEMENTARY SCHOOL DISTRICT(Orange County, California)
General Fund Budgets for Fiscal Years 2008-09 and 2009-10,Unaudited Actuals for Fiscal Years 2008-09 and 2009-10
Source: District Adopted General Fund Budgets for fiscal years 2008-09 through 2009-10; unaudited actuals for fiscal years 2008-09 and 2009-10; and second interim report for fiscal year 2010-11.
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District Debt Structure
A schedule of changes in the District’s long-term obligations for the year ended June 30, 2010,consisted of the following:
BalanceJuly 1, 2009 Additions Deductions
BalanceJune 30, 2010
Amount DueWithin
One Year
General obligation bonds:Bond principal $ 16,999,052 $ - $ - $16,999,052 $320,000Accreted interest – GO Bond - 103,217 - 103,217 -Bond anticipation notes
Total $25,460,572 $493,861 $ 349,087 $25,605,346 $7,623,788
General Obligation Bonds. On November 4, 2008, the voters of the District approved MeasureM, which authorized the District to issue and sell general obligation bonds of up to $53,600,000. Proceedsfrom the sale of the bonds will be used for the construction, reconstruction, rehabilitation or replacementof school facilities, including the furnishing and equipping of school facilities.
On April 22, 2009, the County, on behalf of the District, issued $16,999,052 aggregate initialprincipal amount of the Cypress Elementary School District General Obligation Bonds, 2008 Election,Series A (the “Series A Bonds”). The Series A Bonds were issued as: a) serial bonds of $7,485,000 withinterest rates ranging between 2.0% and 5.0% and maturing from August 1, 2010 through August 1, 2024;b) term bonds of $2,625,000 and $5,240,000 with an interest rate of 5.0%, maturing August 1, 2026 andAugust 1, 2029, respectively; and c) capital appreciation bonds of $1,649,052 with an accretion of 7.74%and maturing between August 1, 2030 and May 1, 2034. The Series A Bonds were issued at a premium of$724,027. The outstanding principal balance on the Series A Bonds as of June 30, 2010, was$16,999,052.
See also “THE BONDS—Aggregate Debt Service” in the front portion of this Official Statementfor the annual debt service requirements for these bonds.
Bond Anticipation Notes. On May 5, 2009, the District issued its 2009 General Obligation BondAnticipation Notes (the “Notes”) in the amount of $6,998,642. The Notes were issued in anticipation ofthe sale of the Bonds. The outstanding principal balance on the Notes as of June 30, 2010, was$6,998,642. The amounts required to amortize outstanding Notes as of June 30, 2010, were as follows:
Year EndingJune 30, Principal Interest Total
2010-11 $6,998,642 $881,546 $7,880,188
A portion of the proceeds of the Bonds will be used to defease the Notes. See “THE BONDS—Application and Investment of Bond Proceeds; Plan of Finance” in the front portion of this OfficialStatement
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Employment
As of June 30, 2010, the District employed 399 employees, consisting of 210 non-managementcertificated employees, 11 certificated management employees, 175 classified non-managementemployees, and 3 classified management employees. For the year ended June 30, 2010, the totalcertificated and classified payrolls are estimated to be approximately $16.6 million and $4.8 million,respectively.
District employees are represented by the employee bargaining units as follows:
Name of Bargaining Unit
Number ofEmployees
Represented(Full time equivalent)
Current ContractExpiration Date
California School Employees Association 175 June 30, 2011California Teachers Association 210 June 30, 2011
_____________________Source: The District.
Retirement Benefits
The District participates in retirement plans with the State Teachers’ Retirement System(“CalSTRS”), which covers all full-time certificated District employees, and the State Public Employees’Retirement System (“CalPERS”), which covers certain classified employees. Classified school personnelwho are employed four or more hours per day may participate in CalPERS.
CalSTRS. Contributions to CalSTRS are fixed in statute. Teachers contribute 8% of salary toCalSTRS, while school districts contribute 8.25%. In addition to the teacher and school contributions, theState contributes 4.517% of teacher payroll to CalSTRS (calculated on payroll data from two fiscal yearsago). Unlike typical defined benefit programs, however, neither the CalSTRS employer nor the Statecontribution rate varies annually to make up funding shortfalls or assess credits for actuarial surpluses.The State does pay a surcharge when the teacher and school district contributions are not sufficient tofully fund the basic defined benefit pension (generally consisting of 2% of salary for each year of serviceat age 60 referred to herein as “pre-enhancement benefits”) within a 30-year period. However, thissurcharge does not apply to systemwide unfunded liability resulting from recent benefit enhancements.
Because of the downturn in the stock market, an actuarial valuation as of June 30, 2003 showed a$118 million shortfall in the baseline benefits—one-tenth of 1% of accrued liability. Consequently, thesurcharge kicked in for the first time in the fiscal year 2004-05 at 0.524% for three quarterly payments,which amounted to an additional $92 million from the State’s general fund in fiscal year 2004-05.However, in addition to the small shortfall in pre-enhancement benefits (triggering the surcharge), theJune 30, 2003, valuation also showed a substantial $23 billion unfunded liability for the entire system,including enhanced benefits. As indicated above, there is no required contribution from teachers, schooldistricts or the State to fund this unfunded liability.
As of June 30, 2009, an actuarial valuation for the entire system, including enhanced benefits,showed an estimated unfunded actuarial liability of $40.5 billion, an increase of $18 billion from the June30, 2008 valuation. Future estimates of the actuarial unfunded liability may change due to marketperformance, legislative actions and other experience that may differ from the actuarial assumptions.
CalSTRS has developed options to address the shortfall but most would require legislative action.In addition, in the Governor’s 2005–06 Proposed State Budget and the 2005-06 May Revise of the 2005-
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06 Proposed Budget, the Governor proposed increasing the fixed contribution rate from 8.25% to 10.25%for school districts. Subsequently, the final 2005-06 State Budget was adopted with a contribution rate of8.25%. In addition to the proposal by the Governor to increase the fixed contribution rate for schooldistricts, other proposals have been suggested that would modify the District’s obligation to makecontributions to CalSTRS to closely parallel the full cost of the retirement benefits provided by CalSTRS,which proposals would include components for unfunded liability. If these proposals were adopted, theDistrict’s annual obligations to CalSTRS would likely increase substantially.
The District’s employer contributions to CalSTRS for fiscal years 2007-08, 2008-09 and 2009-10were $1,503,463, $1,427,593 and $1,358,103, respectively, and were equal to 100% of the requiredcontributions for each year. The District projects that its employer contributions to CalSTRS for fiscalyear 2010-11 will be approximately $1,234,370.
CalPERS. All qualifying classified employees of K through 12 school districts in the State aremembers in CalPERS, and all of such districts participate in the same plan. As such, all such districtsshare the same contribution rate in each year. However, unlike school districts’ participating in CalSTRS,the school districts’ contributions to CalPERS fluctuate each year and include a normal cost componentand a component equal to an amortized amount of the unfunded liability.
According to the CalPERS State and Schools Actuarial Valuation as of June 30, 2010, theCalPERS Plan for Schools had a funded ratio of 65% on a market value of assets basis. The funded ratioas of June 30, 2009 and June 30, 2008 was 93.8% and 107.8%, respectively. In June 2009, the CalPERSBoard of Administration adopted a new employer rate smoothing methodology for local governments andschool employer rates. It was designed to ease the impact of the investment losses which were thenexpected in fiscal year 2008-09 on affiliated public employers while strengthening the long-term financialhealth of the pension fund. Under the new methodology, investment losses will be amortized and paid offover a fixed and declining 30-year period instead of a rolling 30-year amortization period.
The District’s employer contributions to CalPERS for fiscal years 2007-08, 2008-09 and 2009-10were $381,921, $388,420 and $396,681, respectively, and were equal to 100% of the requiredcontributions for each year. The District projects that its employer contributions to CalPERS for fiscalyear 2010-11 will be approximately $310,632.
The District is unable to predict what the amount of State pension liabilities will be in the future,or the amount of the contributions which the District may be required to make. CalSTRS and CalPERSare more fully described in Appendix B – “FINANCIAL STATEMENTS OF THE DISTRICT FOR THEFISCAL YEAR ENDED JUNE 30, 2010, Note 12.”
Other Post Employment Benefits (OPEBs)
In addition to the retirement plan benefits with CalSTRS and CalPERS, the District providescertain post retirement healthcare benefits, in accordance with District employment contracts, to eligibleemployees who retire from the District on or after attaining age 55 with at least 10 years of service. Thebenefits consist of health insurance benefits (medical, dental and vision) and are provided to eligibleretirees up to age 65. As of June 30, 2010, 35 retirees met these eligibility requirements and werereceiving benefits.
The Governmental Accounting Standards Board (“GASB”) released its Statement Number 45(“Statement Number 45”), which requires municipalities to account for other post-employment benefits(meaning other than pension benefits) liabilities much like municipalities are required to account forpension benefits. The District implemented the Statement Number 45 requirements in fiscal year 2008-09.
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See Note 14 to the District’s financial statements attached hereto as Appendix B – “FINANCIALSTATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2010.”
The District’s current funding policy is to contribute an amount sufficient to pay the currentyear’s retiree claim costs and plan expenses. The District has not established an irrevocable trust toprefund its OPEB liability, and no prefunding of benefits has been made by the District. The District’sprevious contributions, on a pay-as-you-go basis, for these benefits for fiscal years 2006-07, 2007-08,2008-09 and 2009-10 were $373,350, $363,050, $379,162 and $308,250, respectively.
Total Compensation Systems, Inc., Agoura Hills, California (the “Actuary”), has prepared theDistrict’s most recent actuarial valuation of the District’s retiree health insurance benefits and reports that,as of October 1, 2010, the District had an unfunded actuarial accrued liability of $2,640,199. As of thevaluation date, the District had not identified any funds as plan assets under Statement Number 45. TheDistrict’s previous actuarial valuation of the District’s retiree health insurance benefits, which was alsoprepared by the Actuary, indicated that, as of May 1, 2008, the District had an unfunded actuarial accruedliability of $3,112,152. Since the District’s most recent actuarial valuation was finalized after the end ofits 2009-10 fiscal year, information about the District’s previous actuarial report is included in theDistrict’s fiscal year 2009-10 financial statements. See Note 14 to the District’s financial statementsattached hereto as APPENDIX B − “FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2010.” Based on the new actuarial report, the District’s annualrequired contribution for 2010-11 is $305,608.
Capital Financing Plan
The District has adopted a capital facilities financing plan to modernize and renovate existingfacilities over a six-year period. The total capital facilities costs are expected to exceed $64 million. Thesecosts are expected to be funded from a variety of sources, including $53.6 million in general obligationbonds authorized in November, 2008, more than $10 million in State modernization funds to be requestedby the District under the state building program, developer fees and deferred maintenance funds. Statemodernization funds depend upon the sale of general obligation bonds by the State, and no assurance canbe given that the full amount requested by the District will be funded. The State currently has no bondfunds available to fund the District’s modernization applications and the funding of the District’sapplications is dependent upon future State bond authorizations being approved by the voters. The plan isto renovate the District’s six schools and certain support facilities.
Insurance, Risk Pooling and Joint Powers Agreements and Joint Ventures
The District participates in two joint ventures under joint powers agreements (“JPAs”): NorthOrange County Self-Funded Workers’ Compensation Agency (NOCSFWCA) and the North OrangeCounty Liability and Property Self-Insurance Authority (NOCLPSIA).
North Orange County Self-Funded Workers’ Compensation Agency. NOCSFWCA is a jointpowers agency that provides worker compensation insurance coverage for its members.
North Orange County Liability and Property Self-Insurance Authority. NOCLPSIA is a jointpowers agency that provides property and liability insurance coverage for its members.
The relationships between the District and the JPAs are such that the JPAs are not a componentunit of the District for financial reporting purposes. The JPAs are governed by a board consisting of arepresentative from each member district. The governing board controls the operations of its JPAsindependent of any influence by the member districts beyond their representation on the governing board.
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Each member district pays a premium commensurate with the level of coverage requested and sharessurpluses and deficits proportionately to its participation in the JPAs.
CONSTITUTIONAL AND STATUTORY PROVISIONSAFFECTING DISTRICT REVENUES AND APPROPRIATIONS
Article XIIIA of the California Constitution
On June 6, 1978, California voters approved Proposition 13 (“Proposition 13”), which addedArticle XIIIA to the State Constitution (“Article XIIIA”). Article XIIIA limits the amount of any advalorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxesmay be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii)bonded indebtedness for the acquisition or improvement of real property which has been approved on orafter July 1, 1978 by two-thirds of the voters on such indebtedness, and (iii) bonded indebtedness incurredby a school district or community college district for the construction, reconstruction, rehabilitation orreplacement of school facilities or the acquisition or lease of real property for school facilities, approvedby 55% of the voters of the district, but only if certain accountability measures are included in theproposition. Article XIIIA defines full cash value to mean “the county assessor’s valuation of realproperty as shown on the 1975-76 tax bill under full cash value, or thereafter, the appraised value of realproperty when purchased, newly constructed, or a change in ownership have occurred after the 1975assessment.” This full cash value may be increased at a rate not to exceed 2% per year to account forinflation.
Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base inthe event of declining property values caused by damage, destruction or other factors, to provide thatthere would be no increase in the “full cash value” base in the event of reconstruction of propertydamaged or destroyed in a disaster and in other minor or technical ways.
County of Orange v. Orange County Assessment Appeals Board No. 3. Section 51 of theRevenue and Taxation Code permits county assessors who have reduced the assessed valuation of aproperty as a result of natural disasters, economic downturns or other factors, to subsequently “recapture”such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending onthe assessor’s measure of the restoration of value of the damaged property. The constitutionality of thisprocedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court, and insimilar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new“base year value” for purposes of Proposition 13 and that subsequent increases in the assessed value of aproperty by more than 2% in a single year violate Article XIIIA. On appeal, the California Court ofAppeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling,leaving the recapture law in place.
Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number oftimes since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted tolevy directly any property tax (except to pay voter-approved indebtedness). The 1% property tax isautomatically levied by the county and distributed according to a formula among taxing agencies. Theformula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989.
Increases of assessed valuation resulting from reappraisals of property due to new construction,change in ownership or from the 2% annual adjustment are allocated among the various jurisdictions inthe “taxing area” based upon their respective “situs.” Any such allocation made to a local agencycontinues as part of its allocation in future years.
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Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values ontax rolls at the assessed value of 25% of market value which was expressed as $4 per $100 assessed value.All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate isexpressed as $1 per $100 of taxable value. All taxable property value included in this Official Statementis shown at 100% of market value (unless noted differently) and all tax rates reflect the $1 per $100 oftaxable value.
Article XIIIB of the California Constitution
An initiative to amend the State Constitution entitled “Limitation of Government Appropriations”was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution (“ArticleXIIIB”). Under Article XIIIB state and local governmental entities have an annual “appropriations limit”and are not permitted to spend certain monies which are called “appropriations subject to limitation”(consisting of tax revenues, state subventions and certain other funds) in an amount higher than the“appropriations limit.” Article XIIIB does not affect the appropriation of monies which are excluded fromthe definition of “appropriations subject to limitation,” including debt service on indebtedness existing orauthorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In generalterms, the appropriations limit” is to be based on certain 1978-79 expenditures, and is to be adjustedannually to reflect changes in consumer prices, populations, and services provided by these entities.Among other provisions of Article XIIIB, if these entities’ revenues in any year exceed the amountspermitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over thesubsequent two years.
The District’s budgeted appropriations from “proceeds of taxes” (sometimes referred to as the“Gann limit”) for the 2008-09 fiscal year are equal to the allowable limit of $22,704,190, and estimates anappropriations limit for the 2009-10 fiscal year of $22,863,008. Any proceeds of taxes received by theDistrict in excess of the allowable limit are absorbed into the State’s allowable limit.
Article XIIIC and Article XIIID of the California Constitution
On November 5, 1996, the voters of the State of California approved Proposition 218, popularlyknown as the “Right to Vote on Taxes Act.” Proposition 218 added to the California Constitution ArticlesXIIIC and XIIID (“Article XIIIC” and “Article XIIID,” respectively), which contain a number ofprovisions affecting the ability of local agencies, including school districts, to levy and collect bothexisting and future taxes, assessments, fees and charges.
According to the “Title and Summary” of Proposition 218 prepared by the California AttorneyGeneral, Proposition 218 limits “the authority of local governments to impose taxes and property-relatedassessments, 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 specificpurposes), prohibits special purpose government agencies such as school districts from levying generaltaxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond itsmaximum authorized rate without a two-thirds vote; and also provides that the initiative power will not belimited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIICfurther provides that no tax may be assessed on property other than ad valorem property taxes imposed inaccordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by atwo-thirds vote under Article XIIIA, Section 4. Article XIIID deals with assessments and property-relatedfees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affectexisting laws relating to the imposition of fees or charges as a condition of property development.
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The District does not impose any taxes, assessments, or property-related fees or charges whichare subject to the provisions of Proposition 218. It does, however, receive a portion of the basic 1% advalorem property tax levied and collected by the County pursuant to Article XIIIA of the CaliforniaConstitution. The provisions of Proposition 218 may have an indirect effect on the District, such as bylimiting or reducing the revenues otherwise available to other local governments whose boundariesencompass property located within the District thereby causing such local governments to reduce servicelevels and possibly adversely affecting the value of property within the District.
Statutory Limitations
On November 4, 1986, State voters approved Proposition 62, an initiative statute limiting theimposition of new or higher taxes by local agencies. The statute (a) requires new or higher general taxesto be approved by two-thirds of the local agency’s governing body and a majority of its voters; (b)requires the inclusion of specific information in all local ordinances or resolutions proposing new orhigher general or special taxes; (c) penalizes local agencies that fail to comply with the foregoing; and (d)required local agencies to stop collecting any new or higher general tax adopted after July 31, 1985,unless a majority of the voters approved the tax by November 1, 1988.
Appellate court decisions following the approval of Proposition 62 determined that certainprovisions of Proposition 62 were unconstitutional. However, the California Supreme Court upheldProposition 62 in its decision on September 28, 1995 in Santa Clara County Transportation Authority v.Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regardingProposition 62 were not addressed in the Supreme Court’s decision, such as whether the decision appliesretroactively, what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62,and whether the decision applies to charter cities.
Proposition 98 and Proposition 111
On November 8, 1988, voters approved Proposition 98, a combined initiative constitutionalamendment and statute called the “Classroom Instructional Improvement and Accountability Act” (the“Accountability Act”). The Accountability Act changed State funding of public education below theuniversity level, and the operation of the State’s Appropriations Limit. The Accountability Act guaranteesState funding for K through 12 school districts and community college districts (collectively, “K-14districts”) at a level equal to the greater of (a) the same percentage of general fund revenues as thepercentage appropriated to such districts in 1986-87, which percentage is equal to 40.9%, or (b) theamount actually appropriated to such districts from the general fund in the previous fiscal year, adjustedfor growth in enrollment and inflation.
Since the Accountability Act is unclear in some details, there can be no assurance that theLegislature or a court might not interpret the Accountability Act to require a different percentage ofgeneral fund revenues to be allocated to K-14 districts than the 40.9% percentage, or to apply the relevantpercentage to the State’s budgets in a different way than is proposed in the Governor’s Budget. In anyevent, the Governor and other fiscal observers expect the Accountability Act to place increasing pressureon 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 suchother programs by raising taxes.
The Accountability Act also changes how tax revenues in excess of the State AppropriationsLimit are distributed. Any excess State tax revenues up to a specified amount would, instead of beingreturned to taxpayers, be transferred to K-14 districts. Such transfer would be excluded from theAppropriations Limit for K-14 districts and the K-14 school Appropriations Limits for the next year
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would automatically be increased by the amount of such transfer. These additional monies would enterthe base funding calculation for K-14 districts for subsequent years, creating further pressure on otherportions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus.The maximum amount of excess tax revenues which could be transferred to schools is 4% of theminimum State spending for education mandated by the Accountability Act, as described above.
On June 5, 1990, California voters approved Proposition 111 (Senate Constitutional Amendment1), which further modified the Constitution to alter the spending limit and education funding provisions ofProposition 98. Most significantly, Proposition 111 (1) liberalized the annual adjustments to the spendinglimit by measuring the “change in the cost of living” by the change in State per capita personal incomerather than the Consumer Price Index, and specified that a portion of the State’s spending limit would beadjusted to reflect changes in school attendance; (2) provided that 50% of the “excess” tax revenues,determined based on a two-year cycle, would be transferred to K-14 school districts with the balancereturned to taxpayers (rather than the previous 100% but only up to a cap of 4% of the districts’ minimumfunding level), and that any such transfer to K-14 school districts would not be built into the schooldistricts’ base expenditures for calculating their entitlement for State aid in the following year and wouldnot increase the State’s appropriations limit; (3) excluded from the calculation of appropriations that aresubject to the limit appropriations for certain “qualified capital outlay projects” and certain increases ingasoline taxes, sales and use taxes, and receipts from vehicle weight fees; (4) provided that theAppropriations Limit for each unit of government, including the State, would be recalculated beginning inthe 1990-91 fiscal year, based on the actual limit for fiscal year 1986-87, adjusted forward to 1990-91 asif Senate Constitutional Amendment 1 had been in effect; and (5) adjusted the Proposition 98 formula thatguarantees 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 fundrevenues (the “first test”) or (b) the amount appropriated in the prior year adjusted for changes in the costof 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 percapita general fund revenues from the prior year was less than the annual growth in State per capitapersonal income. Under the third test, school districts would receive the amount appropriated in the prioryear adjusted for change in enrollment and per capita general fund revenues, plus an additional smalladjustment factor. If the third test were used in any year, the difference between the third test and thesecond test would become a “credit” to be paid in future years when general fund revenue growth exceedspersonal income growth.
Applications of Constitutional and Statutory Provisions
The application of Proposition 98 and other statutory regulations has become increasinglydifficult to predict accurately in recent years. For a discussion of how the provisions of Proposition 98have been applied to school funding see “DISTRICT HISTORY, OPERATION AND FINANCIALINFORMATION — State Funding of Education; State Budget Process.”
Future Initiatives
Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, as well as Propositions 98 and 111,were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. Fromtime to time other initiative measures could be adopted, further affecting District revenues or theDistrict’s ability to expend revenues.
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APPENDIX B
FINANCIAL STATEMENTS OF THE DISTRICTFOR THE FISCAL YEAR ENDED JUNE 30, 2010
Management’s Discussion and Analysis .............................................................................................................. 3
FINANCIAL SECTION
Financial Statements:
Government‐wide Financial Statements
Statement of Net Assets ............................................................................................................................. 12
Statement of Activities ............................................................................................................................... 13
Reconciliation of the Governmental Funds Balance Sheet to the
Statement of Net Assets ......................................................................................................................... 15
Statement of Revenues, Expenditures, and Changes in Fund Balances ............................................. 16
Reconciliation of the Governmental Funds Statement of Revenues,
Expenditures, and Changes in Fund Balances to the Statement of Activities ................................ 17
Proprietary Fund Financial Statements
Statement of Net Assets ............................................................................................................................. 18
Statement of Revenues, Expenses, and Changes in Net Assets ........................................................... 19
Statement of Cash Flows ........................................................................................................................... 20
Fiduciary Fund Financial Statement
Statement of Net Assets ........................................................................................................................... 21
Notes to Financial Statements ............................................................................................................................... 22
REQUIRED SUPPLEMENTARY INFORMATION
Budgetary Comparison Schedule – General Fund ............................................................................................. 47
Budgetary Comparison Schedule – Cafeteria Fund ........................................................................................... 48
Schedule of Funding Progress ............................................................................................................................... 49
CYPRESS SCHOOL DISTRICT
AUDIT REPORT
For the Fiscal Year Ended June 30, 2010
Table of Contents (continued)
SUPPLEMENTARY INFORMATION
Page
Local Educational Agency Organization Structure ............................................................................................ 50
Schedule of Average Daily Attendance ............................................................................................................... 51
Schedule of Instructional Time ............................................................................................................................. 52
Schedule of Financial Trends and Analysis ........................................................................................................ 53
Schedule of Expenditures of Federal Awards ..................................................................................................... 54
Reconciliation of Annual Financial and Budget Report with Audited Financial Statements ...................... 55
Note to the Supplementary Information ............................................................................................................. 56
OTHER INDEPENDENT AUDITORS’ REPORTS
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 ....................................................................................................................... 57
Report on Compliance with Requirements That Could Have a Direct and Material Effect
on Each Major Program and on Internal Control over Compliance in Accordance with
Auditors’ Report on State Compliance ................................................................................................................ 61
FINDINGS AND QUESTIONED COSTS
Schedule of Audit Findings and Questioned Costs
Summary of Auditors’ Results ...................................................................................................................... 63
Current Year Audit Findings and Questioned Costs ................................................................................. 64
Summary Schedule of Prior Audit Findings ............................................................................................... 68
Management Letter ................................................................................................................................................ 69
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1
Board of Trustees
Cypress School District
Cypress, California
INDEPENDENT AUDITORS’ REPORT
We have audited the accompanying financial statements of the governmental activities, each major fund,
and the aggregate remaining fund information of Cypress School District as of and for the year ended
June 30, 2010, which collectively comprise the District’s basic financial statements as listed in the table of
contents. These financial statements are the responsibility of Cypress School Districtʹs 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 Cypress School District as of June 30, 2010 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 December 10,
2010 on our consideration of Cypress School Districtʹs 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.
2
The management’s discussion and analysis on pages 3 through 11 and the required supplementary
information on pages 47 through 49 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, consisting principally of inquiries of management
regarding the methods of measurement and presentation of the required supplementary information.
However, we did not audit the information and express no opinion on it.
Our audit was conducted for the purpose of forming an opinion on the financial statements of Cypress
School District, taken as a whole. The accompanying financial and statistical information listed in the
table of contents, including the Schedule of Expenditures of Federal Awards, which is required by U.S.
Office of Management and Budget Circular A‐133, Audits of States, Local Governments, and Non‐Profit
Organizations, is presented for purposes of additional analysis and is not a required part of the financial
statements of Cypress School District. Such information has been subjected to the auditing procedures
applied in the audit of the financial statements and, in our opinion, is fairly stated, in all material respects,
in relation to the financial statements taken as a whole.
December 10, 2010
Management’s Discussion and Analysis
3
CYPRESS SCHOOL DISTRICT
Management’s Discussion and Analysis (Unaudited)
For the Fiscal Year Ended June 30, 2010
This discussion and analysis of Cypress School District’s financial performance provides an overview of
the District’s financial activities for the fiscal year ended June 30, 2010. Please read it in conjunction with
the District’s financial statements, which immediately follow this section.
FINANCIAL HIGHLIGHTS
The District’s overall financial status declined from last year, as the net assets decreased by 16.0% to
$13.6 million.
Total governmental revenues were $33.4 million, about $2.6 million less than expenses.
The total cost of basic programs was $36.0 million. Because a portion of these costs were paid for
with charges, fees, and intergovernmental aid, the net cost that required taxpayer funding was only
$28.6 million.
Second period average daily attendance (grades K‐6) reduced by 90, a decrease of 2.3%.
OVERVIEW OF THE FINANCIAL STATEMENTS
This annual report consists of three parts – management discussion and analysis (this section), the basic
financial statements, and required supplementary information. The basic financial statements include
two kinds of statements that present different views of the District:
The first two statements are district‐wide financial statements that provide both short‐term and long‐
term information about the District’s overall financial status.
The remaining statements are fund financial statements that focus on individual parts of the District,
reporting the District’s operations in more detail than the district‐wide statements.
The governmental funds statements tell how basic services like regular and special education were
financed in the short term as well as what remains for future spending.
Short and long‐term financial information about the activities of the District that operate like
businesses (self‐insurance funds) are provided in the proprietary funds statements.
4
CYPRESS SCHOOL DISTRICT
Management’s Discussion and Analysis (Unaudited)
For the Fiscal Year Ended June 30, 2010
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.
Management’s
Discussion and
Analysis
Figure A‐1. Organization of Cypress School District’s Annual
Financial Report
Basic
Financial
Information
Required
Supplementary
Information
Fund
Financial
Statements
District‐Wide
Financial
Statements
Notes to
Financial
Statements
SUMMARY DETAIL
5
CYPRESS SCHOOL DISTRICT
Management’s Discussion and Analysis (Unaudited)
For the Fiscal Year Ended June 30, 2010
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
Program Identification: Title I, Part A, Low Income and Neglected (CFDA No. 84.010)
Criteria: Per OMB A‐133 Compliance Supplement: “In a targeted assistance school, funds available under
Part A may be used only for programs that are designed to help participating children meet the State’s
student academic achievement standards expected of all children.”
Condition: The District charged unallowable expenditures to Title I funds. Expenditures charged appear
to be for the benefit of all of the students in the school, not just the targeted assistance students.
Questioned Costs: The sum of inappropriate expenditures was $2,225.
Context: Seven out of our total sampled expenditures tested.
Effect: The District will be required to return those funds to the Title I program in 2010‐11.
Cause: Lack of controls and procedures to ensure Title I funds are used for only the targeted students.
Recommendation: Assure that the appropriate procedures and policies are in place to ensure only the
targeted students are receiving the benefits of the federal funds.
District Response: The District has developed a procedure to ensure only targeted students are receiving
the benefits of Title I funds.
67
CYPRESS SCHOOL DISTRICT
Schedule of Audit Findings and Questioned Costs
For the Fiscal Year Ended June 30, 2010
Section IV – State Award Findings and Questioned Costs
This section identifies the audit findings pertaining to noncompliance with state program rules and
regulations.
There were no state award findings or questioned costs in 2009‐10.
68
CYPRESS SCHOOL DISTRICT
Schedule of Audit Findings and Questioned Costs
For the Fiscal Year Ended June 30, 2010
There were no findings or questioned costs in 2008‐09.
69
To the Board of Trustees of
Cypress School District
Cypress, California
Our audit of the financial statements of Cypress School District (the District) as of and for the year ended
June 30, 2010 was planned and performed in accordance with auditing standards generally accepted in
the United States of America. As such, we considered the District’s internal control over financial
reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing
our opinion on the financial statements. However, our auditing procedures were not designed for the
purpose of expressing an opinion on the effectiveness of the District’s internal control. Our consideration
of internal control was limited to procedures performed to evaluate the design of controls relevant to an
audit of financial statements and to determine whether they have been implemented. Therefore, our
procedures did not include testing the operating effectiveness of such controls and was not designed to
discover significant deficiencies in internal control and, accordingly, we do not express an opinion on the
effectiveness of the District’s internal control.
As our consideration on internal control was for the limited purpose of expressing our opinion on the
financial statement described in this letter, we would not necessarily identify all deficiencies in internal
control that might be significant deficiencies or material weaknesses as those terms are defined by
professional standards. Also, because of the inherent limitations in internal control, including the
possibility of management override of controls, misstatements due to error or fraud may occur and not be
detected by these controls.
As defined by professional standards, 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
responsibilities, to prevent or detect misstatements on a timely basis. A significant deficiency is a control
deficiency, or a combination of control deficiencies, that adversely affects the 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 District’s
financial statements that is more than inconsequential will not be prevented or detected by the District’s
internal control.
During the course of performing our procedures, we noted matters that are opportunities for
strengthening internal controls and operating efficiency. The following items represent conditions noted
by our audit that we consider important enough to bring to your attention. This letter does not affect our
report dated December 10, 2010, on the financial statements of Cypress School District.
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To the Board of Trustees of
Cypress School District
INSTRUCTIONAL TIME
During our review of instructional time calculated by the District Office, we noted that at all
sites sampled, the calculation during our site testing did not match the District’s calculations
for each site. The District calculation did not include changes throughout the year to the bell
schedule and/or calendar that were made at each site level. The District was in compliance
with the minimum requirement for instructional time established in Education Code 46201.
Recommendation: Modifications to the bell schedule and/or school calendar should not be made at the
site level without the District’s preapproval. The District should closely monitor the regular and
minimum days offered for all sites in order to ensure the instructional time calculation is accurate and
in accordance with Education Code 46201.
CAFETERIA
For the Cafeteria Fund, we noted four out of ten expenditures tested did not have purchase
orders or requisitions and three out of ten expenditures had purchase orders which were
generated after the invoice date. This could lead to expenditures incurred without proper
approvals.
Recommendation: All expenditures should have a preapproved purchase order and or requisition to
support the expenditure. This will ensure that proper authorizations are obtained before the
expenditures are incurred.
This communication is intended solely for the information and use of the Board of Trustees of
Cypress School District and management of Cypress School District and is not intended to be and
should not be used by anyone other than these specified parties.
December 10, 2010
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APPENDIX C
PROPOSED FORMS OF OPINIONS OF BOND COUNSEL
SERIES B-1 BONDS
Upon delivery of the Series B-1 Bonds, Bowie, Arneson, Wiles & Giannone, Newport Beach,California, Bond Counsel to the Cypress Elementary School District, proposes to render their finalapproving opinion with respect to the Series B-1 Bonds in substantially the following form:
Board of Trustees of theCypress Elementary School District9470 Moody StreetCypress, CA 90630
Re: $20,139, 078.45 Cypress Elementary School DistrictGeneral Obligation Bonds, 2008 Election, Series B-1Final Opinion
Ladies and Gentlemen:
We have acted as Bond Counsel for the Cypress Elementary School District (“District”) inconnection with the proceedings for the issuance and sale by the District of $20,139,078.45 principalamount of Cypress Elementary School District General Obligation Bonds, 2008 Election, Series B-1(“Bonds”). The Bonds are being issued pursuant to the Resolution of the Board of Trustees of theDistrict, adopted on March 10, 2011 (Resolution No. 101-12A) (the “Bond Resolution”), in accordancewith the provisions of the California Constitution, the provisions of California Government Code Section53506 et seq., and, to the extent applicable, California Education Code Sections 15264, 15266(b) and asapplicable, the statutory authority set forth in Title 1, Division 1, Part 10, Chapter 1 of the State ofCalifornia Education Code, commencing with Section 15100 and related California law.
As Bond Counsel, we have examined copies certified to us as being true and complete copies ofthe proceedings in connection with the issuance of the Bonds. In this connection, we have also examinedsuch certificates of public officials and officers of the District, the County of Orange (“County”) and thepurchaser of the Bonds, including certificates as to factual matters, including, but not limited to the TaxCertificate, as we have deemed necessary to render this opinion.
Attention is called to the fact the we have not been requested to examine, and have not examined,any documents or information relating to the District or the County other than the record of proceedingshereinabove referred to, and no opinion is expressed as to any financial or other information, or theadequacy thereof, which has been, or may be supplied to any purchaser of the Bonds.
We have not been engaged or undertaken to review the accuracy, completeness or sufficiency ofthe Official Statement or other offering material relating to the Bonds (except to the extent, if any, statedin the Official Statement) and we express no opinion relating thereto (excepting only matters set forth asour opinion in the Official Statement).
The opinions expressed herein are based on an analysis of existing laws, regulations, rulings andcourt decisions. The opinions may be affected by actions or events occurring after the date hereof. We
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have not undertaken to determine, or to inform any person, whether such actions or events occur. As toquestions of fact material to our opinions, we have relied upon the documents and matters referred toabove, and we have not undertaken by independent investigation to verify the authenticity of signatures orthe accuracy of the factual matters represented, warranted or certified therein. Furthermore, we haveassumed compliance with all covenants contained in the Bond Resolution and in certain other documents,including, without limitation, covenants compliance with which is necessary to assure that future actionsor events will not cause the interest on the Bonds to be included in gross income for federal income taxpurposes retroactive to the date of original issuance of the Bonds.
The Bond Resolution and other related documents refer to certain requirements and procedureswhich may be changed and certain actions which may be taken, in circumstances and subject to terms andconditions set forth in such documents, upon the advice or with an approving opinion of nationallyrecognized bond counsel. No opinion is expressed herein as to any Bond or the interest thereon if anysuch change is made or action is taken upon the advice or approval of counsel other than ourselves.
Based on the foregoing, we are of the following opinions:
1. The Bonds are valid and binding general obligations of the District.
2. All taxable property in the territory of the District is subject to ad valorem taxationwithout limitation as to rate or amount (except as to certain classes of personal propertywhich is taxable at limited rates) to pay the Bonds. The County of Orange is required bylaw to include in its annual tax levy the principal and interest coming due on the Bonds tothe extent necessary funds are not provided from other sources.
3. Interest on the Bonds is excluded from gross income for federal income tax purposesunder Section 103 of the Internal Revenue Code of 1986, as amended, and is exemptfrom State of California personal income taxes. Interest on the Bonds is not an item oftax preference for purposes of the federal alternative minimum taxes imposed onindividuals and corporations; although, it should be noted that, with respect tocorporations, such interest will be included as an adjustment in the calculation ofalternative minimum taxable income which may affect the alternative minimum taxliability of such corporations. We express no opinion regarding other tax consequencesarising with respect to the Bonds.
It is understood that the rights of the holders of the Bonds and the enforceability thereof may besubject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditor'srights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcementmay also be subject to exercise of judicial discretion in appropriate cases.
Very truly yours,
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SERIES B-2 BONDS
Upon delivery of the Series B-2 Bonds, Bowie, Arneson, Wiles & Giannone, Newport Beach,California, Bond Counsel to the Cypress Elementary School District, proposes to render their finalapproving opinion with respect to the Series B-2 Bonds in substantially the following form:
Board of Trustees of theCypress Elementary School District9470 Moody StreetCypress, CA 90630
Re: $4,535,000 Cypress Elementary School DistrictGeneral Obligation Bonds, 2008 Election, Series B-2(Direct Pay Qualified School Construction Bonds)Final Opinion
Ladies and Gentlemen:
We have acted as Bond Counsel for the Cypress Elementary School District (“District”) inconnection with the proceedings for the issuance and sale by the District of $4,535,000 principal amountof Cypress Elementary School District General Obligation Bonds, 2008 Election, Series B-2 (Direct PayQualified School Construction Bonds) (“Bonds”). The Bonds are being issued pursuant to the Resolutionof the Board of Trustees of the District, adopted on March 10, 2011 (Resolution No. 101-12A) (the “BondResolution”), in accordance with the provisions of the California Constitution, the provisions ofCalifornia Government Code Section 53506 et seq., and, to the extent applicable, California EducationCode Sections 15264, 15266(b) and as applicable, the statutory authority set forth in Title 1, Division 1,Part 10, Chapter 1 of the State of California Education Code, commencing with Section 15100 and relatedCalifornia law.
As Bond Counsel, we have examined copies certified to us as being true and complete copies ofthe proceedings in connection with the issuance of the Bonds. In this connection, we have also examinedsuch certificates of public officials and officers of the District, the County of Orange (“County”) and thepurchaser of the Bonds, including certificates as to factual matters, including, but not limited to the TaxCertificate, as we have deemed necessary to render this opinion.
Attention is called to the fact the we have not been requested to examine, and have not examined,any documents or information relating to the District or the County other than the record of proceedingshereinabove referred to, and no opinion is expressed as to any financial or other information, or theadequacy thereof, which has been, or may be supplied to any purchaser of the Bonds.
We have not been engaged or undertaken to review the accuracy, completeness or sufficiency ofthe Official Statement or other offering material relating to the Bonds (except to the extent, if any, statedin the Official Statement) and we express no opinion relating thereto (excepting only matters set forth asour opinion in the Official Statement).
The opinions expressed herein are based on an analysis of existing laws, regulations, rulings andcourt decisions. The opinions may be affected by actions or events occurring after the date hereof. We
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have not undertaken to determine, or to inform any person, whether such actions or events occur. As toquestions of fact material to our opinions, we have relied upon the documents and matters referred toabove, and we have not undertaken by independent investigation to verify the authenticity of signatures orthe accuracy of the factual matters represented, warranted or certified therein. Furthermore, we haveassumed compliance with all covenants contained in the Bond Resolution and in certain other documents,including, without limitation, covenants compliance with which is necessary to assure that future actionsor events will not cause the interest on the Bonds to be included in gross income for federal income taxpurposes retroactive to the date of original issuance of the Bonds.
The Bond Resolution and other related documents refer to certain requirements and procedureswhich may be changed and certain actions which may be taken, in circumstances and subject to terms andconditions set forth in such documents, upon the advice or with an approving opinion of nationallyrecognized bond counsel. No opinion is expressed herein as to any Bond or the interest thereon if anysuch change is made or action is taken upon the advice or approval of counsel other than ourselves.
Based on the foregoing, we are of the following opinions:
1. The Bonds are valid and binding general obligations of the District.
2. All taxable property in the territory of the District is subject to ad valorem taxationwithout limitation as to rate or amount (except as to certain classes of personal propertywhich is taxable at limited rates) to pay the Bonds. The County of Orange is required bylaw to include in its annual tax levy the principal and interest coming due on the Bonds tothe extent necessary funds are not provided from other sources.
3. Interest on the Bonds is not excluded from gross income for federal income tax purposesbut is exempt from State of California personal income taxes. Bond Counsel provides noopinion as to any federal income tax consequences relating to the ownership ordisposition of, or the accrual or receipt of interest on, the Bonds. The opinion providedherein by us in our role as Bond Counsel with respect to the Bonds issued as “qualifiedschool construction bonds” (as defined in Section 54F of the Internal Revenue Code of1986, as amended), and “specified tax credit bonds” (as defined in Section 6431(f)(2) ofthe Internal Revenue Code of 1986, as amended) is not intended or written by BondCounsel to be used, and it cannot be used, by any purchaser or owner of such Bonds forthe purpose of avoiding penalties that may be imposed on such purchaser or owner. Theopinion provided in this paragraph is provided to support the promotion or marketing ofthe Bonds issued as “qualified school construction bonds” and “specified tax creditbonds”. Purchasers or owners of the Bonds issued as “qualified school constructionbonds” and “specified tax credit bonds” should seek advice based on their particularcircumstances from an independent tax advisor concerning the tax consequences of theownership of such Bonds.
It is understood that the rights of the holders of the Bonds and the enforceability thereof may besubject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditor'srights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcementmay also be subject to exercise of judicial discretion in appropriate cases.
Very truly yours,
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APPENDIX D
FORM OF CONTINUING DISCLOSURE CERTIFICATE
THIS CONTINUING DISCLOSURE CERTIFICATE (this “Disclosure Certificate”) isexecuted and delivered by the Cypress Elementary School District (the “District”) in connection with theissuance of $20,139,078.45 aggregate principal amount of Cypress Elementary School District GeneralObligation Bonds, 2008 Election, Series B-1 (the “Series B-1 Bonds”) and $4,535,000 aggregate principalamount of Cypress Elementary School District General Obligation Bonds, 2008 Election, Series B-2(Direct Pay Qualified School Construction Bonds) (the “Series B-2 Bonds” and together with the SeriesB-1 Bonds, the “Bonds”). The Bonds are being issued pursuant to a resolution of the Board of Trusteesof the District by its resolution (the “Resolution”) adopted on March 10, 2011. The District covenantsand agrees as follows:
Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is beingexecuted and delivered by the District for the benefit of the Holders and Beneficial Owners of the Bondsand in order to assist the Participating Underwriters in complying with Securities and ExchangeCommission Rule 15c2-12(b)(5).
Section 2. Definitions. In addition to the definitions set forth in the Resolution, which apply toany capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, thefollowing capitalized terms shall have the following meanings:
“Annual Report” shall mean any Annual Report provided by the District pursuant to, and asdescribed in, Sections 3 and 4 hereof.
“Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly,to make investment decisions concerning ownership of any Bonds (including persons holding Bondsthrough nominees, depositories or other intermediaries).
“Dissemination Agent” shall mean Dolinka Group, LLC, acting in the capacity as DisseminationAgent hereunder, or any successor Dissemination Agent designated in writing by the District and whichhas filed with the District a written acceptance of such designation.
“Holder” shall mean the person in whose name any Bond shall be registered.
“Listed Events” shall mean any of the events listed in Section 5(a) or (b) hereof.
“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designatedor authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Untilotherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRBare to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB,currently located at http://emma.msrb.org.
“Official Statement” shall mean the Official Statement, dated April 6, 2011 (including allexhibits or appendices thereto), relating to the offer and sale of Bonds.
“Participating Underwriter” shall mean any of the original underwriters of the Bonds requiredto comply with the Rule in connection with offering of the Bonds.
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“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commissionunder the Securities Exchange Act of 1934, as the same may be amended from time to time.
Section 3. Provision of Annual Reports. (a) The District shall, or shall cause theDissemination Agent to, not later than eight months after the end of the District’s fiscal year (which duedate shall be March 1 of each year, so long as the fiscal year ends on June 30), commencing with thereport for the 2010-2011 Fiscal Year (which is due not later than March 1, 2012), provide to the MSRBan Annual Report which is consistent with the requirements of Section 4 hereof. The Annual Report mustbe submitted in electronic format, accompanied by such identifying information as is prescribed by theMSRB, and may cross-reference other information as provided in Section 4 hereof; provided, however,that the audited financial statements of the District may be submitted separately from the balance of theAnnual Report and later than the date required above for the filing of the Annual Report if they are notavailable by that date. If the District’s fiscal year changes, it shall give notice of such change in the samemanner as for a Listed Event under Section 5(e) hereof. The Annual Report shall be submitted on astandard form in use by industry participants or other appropriate form and shall identify the Bonds byname and CUSIP number.
(b) Not later than 15 business days prior to the date specified in subsection (a), the Districtshall provide the Annual Report to the Dissemination Agent (if other than the District). If the District isunable to provide to the MSRB an Annual Report by the date required in subsection (a), the District shallsend a notice to the MSRB, in substantially the form attached as Exhibit A.
(c) The Dissemination Agent shall:
(i) (if the Dissemination Agent is other than the District), provide anyAnnual Report received by it to the MSRB as provided herein; and
(ii) (if the Dissemination Agent is other than the District), file a report withthe District certifying that the Annual Report has been provided to the MSRB pursuant tothis Disclosure Certificate, stating the date it was provided to the MSRB.
Section 4. Content of Annual Reports. The District’s Annual Report shall contain or includeby reference the following:
(a) Audited financial statements of the District for the preceding fiscal year, prepared inaccordance with the laws of the State of California and including all statements and informationprescribed for inclusion therein by the Controller of the State of California. If the District’s auditedfinancial statements are not available by the time the Annual Report is required to be provided to theMSRB pursuant to Section 3(a) hereof, the Annual Report shall contain unaudited financial statements ina format similar to the financial statements contained in the final Official Statement, and the auditedfinancial statements shall be provided to the MSRB in the same manner as the Annual Report when theybecome available.
(b) To the extent not included in the audited financial statements of the District, the AnnualReport shall also include the following:
(i) The adopted budget of the District for the then current fiscal year.
(ii) The District’s average daily attendance.
(iii) The District’s outstanding debt.
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(iv) Information regarding total assessed valuation of taxable propertieswithin the District, if and to the extent provided to the District by the County.
(v) Information regarding total secured tax charges and delinquencies ontaxable properties within the District, if and to the extent provided to the District by theCounty.
(c) In addition to any of the information expressly required to be provided undersubsections (a) and (b), the District shall provide such further information, if any, as may be necessary tomake the specifically required statements, in light of the circumstances under which they are made, notmisleading.
Any or all of the items listed above may be set forth in one or a set of documents or may beincluded by specific reference to other documents, including official statements of debt issues of theDistrict or related public entities, which have been made available to the public on the MSRB’s website.The District shall clearly identify each such other document so included by reference.
Section 5. Reporting of Significant Events. (a) The District shall give, or cause to be given,notice of the occurrence of any of the following events with respect to the Bonds not later than tenbusiness days after the occurrence of the event:
(i) principal and interest payment delinquencies;
(ii) unscheduled draws on debt service reserves reflecting financialdifficulties;
(iii) unscheduled draws on credit enhancements reflecting financialdifficulties;
(iv) substitution of the credit or liquidity providers or their failure to perform;
(v) issuance by the Internal Revenue Service of proposed or finaldetermination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB);
(vi) tender offers;
(vii) defeasances;
(viii) rating changes; or
(ix) bankruptcy, insolvency, receivership or similar event of the obligatedperson.
For the purposes of the event identified in subparagraph (ix), the event is considered to occurwhen any of the following occur: the appointment of a receiver, fiscal agent or similar officer for anobligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under stateor federal law in which a court or governmental authority has assumed jurisdiction over substantially allof the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving theexisting governmental body and officials or officers in possession but subject to the supervision andorders of a court or governmental authority, or the entry of an order confirming a plan of reorganization,
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arrangement or liquidation by a court or governmental authority having supervision or jurisdiction oversubstantially all of the assets or business of the obligated person.
(b) The District shall give, or cause to be given, notice of the occurrence of any of thefollowing events with respect to the Bonds, if material, not later than ten business days after theoccurrence of the event:
(i) unless described in paragraph 5(a)(v) hereof, adverse tax opinions orother material notices or determinations by the Internal Revenue Service with respect tothe tax status of the Bonds or other material events affecting the tax status of the Bonds;
(ii) modifications to rights of Bond Holders;
(iii) optional, unscheduled or contingent Bond calls;
(iv) release, substitution, or sale of property securing repayment of theBonds;
(v) non-payment related defaults;
(vi) the consummation of a merger, consolidation, or acquisition involving anobligated person or the sale of all or substantially all of the assets of the obligated person,other than in the ordinary course of business, the entry into a definitive agreement toundertake such an action or the termination of a definitive agreement relating to any suchactions, other than pursuant to its terms; or
(vii) appointment of a successor or additional paying agent or the change ofname of a paying agent.
(c) The District shall give, or cause to be given, in a timely manner, notice of a failure toprovide the annual financial information on or before the date specified in Section 4 hereof, as provided inSection 4(b) hereof.
(d) Whenever the District obtains knowledge of the occurrence of a Listed Event describedin Section 5(b) hereof, the District shall determine if such event would be material under applicablefederal securities laws.
(e) If the District learns of the occurrence of a Listed Event described in Section 5(a) hereof,or determines that knowledge of a Listed Event described in Section 5(b) hereof would be material underapplicable federal securities laws, the District shall within ten business days of occurrence file a notice ofsuch occurrence with the MSRB in electronic format, accompanied by such identifying information as isprescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described insubsections (a)(vii) or (b)(iii) need not be given under this subsection any earlier than the notice (if any)of the underlying event is given to Holders of affected Bonds pursuant to the Resolution.
Section 6. Termination of Reporting Obligation. The District’s obligations under thisDisclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of allof the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall givenotice of such termination in the same manner as for a Listed Event under Section 5(e) hereof.
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Section 7. Dissemination Agent. The District may, from time to time, appoint or engage aDissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and maydischarge any such Dissemination Agent, with or without appointing a successor Dissemination Agent.The Dissemination Agent shall not be responsible in any manner for the content of any notice or reportprepared by the District pursuant to this Disclosure Certificate. The initial Dissemination Agent shall beDolinka Group, LLC. If at any time there is not any other designated Dissemination Agent, the Districtshall be the Dissemination Agent.
Section 8. Amendment; Waiver. Notwithstanding any other provision of this DisclosureCertificate, the District may amend this Disclosure Certificate, and any provision of this DisclosureCertificate may be waived, provided that the following conditions are satisfied:
(a) if the amendment or waiver relates to the provisions of Section 3(a) hereof,Section 4 hereof, or Section 5(a) or (b) hereof, it may only be made in connection with a changein circumstances that arises from a change in legal requirements, change in law, or change in theidentity, nature or status of an obligated person with respect to the Bonds, or the type of businessconducted;
(b) the undertaking, as amended or taking into account such waiver, would, in theopinion of nationally recognized bond counsel, have complied with the requirements of the Ruleat the time of the original issuance of the Bonds, after taking into account any amendments orinterpretations of the Rule, as well as any change in circumstances; and
(c) the proposed amendment or waiver either (i) is approved by the Holders in thesame manner as provided in the Resolution for amendments to the Resolution with the consent ofHolders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impairthe interests of the Holders or Beneficial Owners of the Bonds.
In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Districtshall describe such amendment in the next Annual Report, and shall include, as applicable, a narrativeexplanation of the reason for the amendment or waiver and its impact on the type (or in the case of achange of accounting principles, on the presentation) of financial information or operating data beingpresented by the District. In addition, if the amendment relates to the accounting principles to be followedin preparing financial statements, (i) notice of such change shall be given in the same manner as for aListed Event under Section 5(e) hereof, and (ii) the Annual Report for the year in which the change ismade should present a comparison (in narrative form and also, if feasible, in quantitative form) betweenthe financial statements as prepared on the basis of the new accounting principles and those prepared onthe basis of the former accounting principles.
Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed toprevent the District from disseminating any other information, using the means of dissemination set forthin this Disclosure Certificate or any other means of communication, or including any other information inany Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by thisDisclosure Certificate. If the District chooses to include any information in any Annual Report or noticeof occurrence of a Listed Event in addition to that which is specifically required by this DisclosureCertificate, the District shall have no obligation under this Certificate to update such information orinclude it in any future Annual Report or notice of occurrence of a Listed Event.
Section 10. Default. In the event of a failure of the District to comply with any provision ofthis Disclosure Certificate, any Holder or Beneficial Owner of the Bonds may take such actions as may benecessary and appropriate, including seeking mandate or specific performance by court order, to cause the
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District to comply with its obligations under this Disclosure Certificate; provided, that any such actionmay be instituted only in Superior Court of the State of California in and for the County of Orange or inU.S. District Court in or nearest to the County of Orange. A default under this Disclosure Certificateshall not be deemed an event of default under the Resolution, and the sole remedy under this DisclosureCertificate in the event of any failure of the District to comply with this Disclosure Certificate shall be anaction to compel performance.
Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The DisseminationAgent shall have only such duties as are specifically set forth in this Disclosure Certificate, and (if theDissemination Agent is other than the District), the District agrees to indemnify and save theDissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense andliabilities which it may incur arising out of or in the exercise or performance of its powers and dutieshereunder, including the costs and expenses (including attorneys fees) of defending against any claim ofliability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. Theobligations of the District under this Section shall survive resignation or removal of the DisseminationAgent and payment of the Bonds.
Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of theDistrict, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners fromtime to time of the Bonds, and shall create no rights in any other person or entity.
Dated: April 21, 2011CYPRESS ELEMENTARY SCHOOLDISTRICT
By:Assistant Superintendent,
Business Services
ACCEPTED AND AGREED TO:
DOLINKA GROUP, LLC, ASDISSEMINATION AGENT
By:Authorized Signatory
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EXHIBIT A
NOTICE TO THE MUNICIPAL SECURITIES RULEMAKING BOARDOF FAILURE TO FILE ANNUAL REPORT
Name of Issuer: CYPRESS ELEMENTARY SCHOOL DISTRICT
Name of Issue: Cypress Elementary School District General Obligation Bonds, 2008Election, Series B-1
Cypress Elementary School District General Obligation Bonds, 2008Election, Series B-2 (Direct Pay Qualified School Construction Bonds)
Date of Issuance: April 21, 2011
NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to theabove-named Bonds as required by Section 4 of the Continuing Disclosure Certificate of the District,dated April 21, 2011. [The District anticipates that the Annual Report will be filed by _____________.]
Dated: ____________
Dolinka Group, LLC, as Dissemination Agent,on behalf of the Cypress Elementary SchoolDistrict
cc: Cypress Elementary School District
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APPENDIX E
SUMMARY OF COUNTY OF ORANGE INVESTMENT POLICY
The information in this section has been provided by the County Treasurer. Neither the Districtnor the Underwriter has independently verified this information and neither guarantees the completenessor accuracy thereof.
The County Board approved the current County Investment Policy Statement (the “InvestmentPolicy”) on December 7, 2010 (see Appendix F – ORANGE COUNTY INVESTMENT POLICYSTATEMENT”). The Investment Policy applies to all funds managed by the Treasurer as delegated bythe Board of Supervisors (the “Board”) including, the Orange County Investment Pool, the OrangeCounty Educational Investment Pool, the John Wayne Airport Investment Pool and various other smallnon-Pooled investment funds. The Treasurer-Tax Collector is a fiduciary of public funds and the primaryobjective is to safeguard principal and then meet the pool participants’ liquidity needs through prudentfiscal investment management. The main investing objectives, in order of priority are: Safety, Liquidityand Yield.
Oversight of the investments is conducted in several ways. First, the Board established theCounty Treasury Oversight Committee (the “Committee”) on December 19, 1995, pursuant to CaliforniaGovernment Code Section 27130 et. seq. The County Treasurer nominates and the Board confirms themembers of the Committee, which is normally comprised of the County Executive Officer, the CountyAuditor-Controller, the County Superintendent of Schools or designee, a public member and arepresentative of special districts. Next, the Auditor-Controller’s Internal Audit Division monitors/auditsthe portfolio on a monthly, quarterly and annual basis. In addition, an audit is also conducted annually asrequired by Sections 27130 through 27137 of California Government Code and the Investment Policy. Allreports, including the monthly Treasurer’s Investment Report are available on-line athttp://egov.ocgov.com/ocgov/Treas/investmentreports/ (The information posted at such internetaddress is not incorporated herein by such reference).
The majority of the District’s operating funds are invested in the Orange County EducationalInvestment Pool (the “Pool”) which pools all of the school district operating funds. As of February 28,2011, the balance in the District’s funds was $19,310,683. Over 93% of the Pool was invested insecurities rated in the two highest rating categories. As of February 28, 2011, the Pool has a weightedaverage maturity of 329 days and the year-to-date yield is .49%.
The following represents the composition of the Orange County Educational Investment Pool asof February 28, 2011:
Type of InvestmentAmount
(In thousands)% ofPool
Municipal Debt $ 81,285 2.65%U.S. Government Agencies 1,959,981 63.89%Commercial Paper 157,071 5.12%U.S. Treasuries 173,077 5.64%Repurchase Agreements 15,298 0.50%Certificates of Deposit 331,325 10.80%Medium-Term Notes 336,103 10.95%Money Market MutualFunds 13,719 0.45%
Total $ 3,067,859 100.00%
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Neither the District nor the Underwriter has made an independent investigation of theinvestments in the Pools and neither has made an assessment of the current County InvestmentPolicy. The value of the various investments in the Pools will fluctuate on a daily basis as a result ofa 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 Pools will notvary significantly from the values described herein.
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APPENDIX F
ORANGE COUNTY INVESTMENT POLICY STATEMENT
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1
Orange CountyTreasurer
Investment PolicyStatement
(APPROVED BY B.O.S. 12/07/2010)
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Page No.TABLE OF CONTENTS
I. Policy Statement ...............................................................................................................3
II. Scope.................................................................................................................................3
III. Prudence............................................................................................................................5
IV. Delegation of Authority ....................................................................................................5
V. Objectives .........................................................................................................................5
VI. Authorized Investments ....................................................................................................6
VII. Investment Restrictions...................................................................................................10
VIII. Diversification and Maturity Restrictions.......................................................................12
IX. Prohibited Transactions ..................................................................................................15
X. Ethics and Conflict of Interest ........................................................................................16
XI. Authorized Financial Dealers and Qualified Institutions................................................17
XII. Performance Evaluation..................................................................................................17
XIII. Safekeeping.....................................................................................................................17
XIV. Maintaining Public Trust ................................................................................................17
XV. Internal Controls .............................................................................................................18
XVI. Compensation Agreement...............................................................................................18
XVII. Voluntary Participants ....................................................................................................19
XVIII. Withdrawal......................................................................................................................19
XIX. Performance Standards ...................................................................................................19
XX. Investment Policy Review ..............................................................................................20
XXIII. Disaster Recovery Program ............................................................................................20
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ORANGE COUNTY TREASURERINVESTMENT POLICY STATEMENT
INTRODUCTION
The Orange County Treasurer's Investment Policy Statement is filed annually with the CountyBoard of Supervisors as required by California Government Code Section 53646 (a) (1) and theTreasury Oversight Committee, pursuant to the requirements of California Government CodeSection 27133.
I. POLICY STATEMENT
It is the policy of the Orange County Treasurer (“the Treasurer") to invest public funds in amanner which will provide the maximum security of principal invested with secondaryemphasis on providing adequate liquidity to pool participants, achieving the highest possibleyield while conforming to all applicable statutes and resolutions governing the investment ofpublic funds.
The Orange County Investment Funds (“the Funds”) are designed to meet both theinvestment and cash requirements of our participants. The Treasurer shall determine on acash flow basis what percent of available cash will be invested in each Fund.
II. SCOPE
The scope of this Investment Policy Statement applies to the Orange County InvestmentFunds, which are comprised of the Extended Fund and the Money Market Fund, and aremanaged by the Orange County Treasurer’s office. Each fund will be reviewed separately forpurposes of determining compliance with the Investment Policy Statement.
The Extended Fund will be utilized for investment requirements between one andfive years. It will be invested primarily in high grade securities commensurate withachieving a higher yield, while also considering preservation of capital. This fund isbased on California Government Code Section 53601 and 53635.Extended Fund B – The Extended Fund B was created by the Treasurer specificallyfor its Whistlejacket holdings. The Treasurer’s holdings in Whistlejacket CapitalLLC and the related notes in the restructured company, Serpentine Funding Limited,are specifically exempt from the application of the provisions of this InvestmentPolicy Statement and will be excluded from all compliance computations.
The Money Market Fund is comprised of three separate Pools:
1. The Orange County Investment Pool2. The Orange County Educational Investment Pool3. John Wayne Airport Investment Pool
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The Money Market Fund will be utilized for shorter-term investment requirementsand providing liquidity for immediate cash needs. It will be invested primarily incash-equivalent securities, commensurate with safety and liquidity. This fund isbased on the investment guidelines detailed in California Government Code Section53601.7, which parallels SEC Rule 2a-7.
Specific Investments
From time to time, the Treasurer may be authorized by a participant’s governingboard to manage other “specific investments” or to manage bond proceeds issued by alocal city or agency. This may include deposits that are set aside for future needs of along-term nature and may be appropriately invested in longer term securities. Noinvestment will be made in any security with a remaining maturity in excess of fiveyears at the time of purchase unless the Board of Supervisors gives authority to makethat investment, either specifically or as part of an investment program approved bythe Board of Supervisors.
Strategies for such deposits may include, but are not limited to, matching maturitieswith long-term liabilities. Participating agencies will sign a written agreementacknowledging that there may be risk to principal should they desire to redeem fundsearly, thereby forcing an early sale of securities rather than holding investments tomaturity. This agreement will be reviewed with the participating agency on an annualbasis.
While the management of “specific investments” will be within the scope of thisInvestment Policy, bond proceeds will be managed outside this scope in accordancewith the bond’s official documents.
III. PRUDENCE
When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing publicfunds, the Treasurer shall act with care, skill, prudence, and diligence under thecircumstances then prevailing, specifically including, but not limited to, the generaleconomic conditions and the anticipated needs of the County and other depositors that aprudent person acting in a like capacity and familiarity with those matters would use in theconduct of funds of a like character and with like aims, to safeguard the principal andmaintain the liquidity needs of the County and the other depositors.
As outlined in Government Code Section 27000.3, the standard of prudence to be used byCounty investment officers shall be the "prudent investor" standard and shall be applied inthe context of managing an overall portfolio. Investment officers shall act in accordance withwritten procedures and investment policy, exercise due diligence, report in a timely fashionand implement appropriate controls to mitigate adverse developments.
IV. DELEGATION OF AUTHORITY
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By County Resolution #08-561, effective December 16, 2008, the County Board ofSupervisors has delegated to the Treasurer authority to invest and reinvest the funds ofthe County and other depositors as specified in California Government Code Sections27000.1, 53607 and 53608. Such delegation is conditioned upon the Treasurersubmitting any and all investment policies and amendments thereto to the Board forreview and approval. The Treasurer may further delegate investment authority to suchpersons within the Treasurer’s Department as deemed appropriate.
V. OBJECTIVES
The primary objectives of the Treasurer's investment activities shall be:
1. SAFETY OF PRINCIPAL and LIQUIDITYSafety of principal and liquidity shall be the foremost objectives of the Treasurer.The Treasurer shall seek to preserve principal and minimize capital losses by mitigatingcredit risk and market risk as follows:
Credit Risk: Defined as an issuer(s) ability and willingness to repay interest andprincipal. Credit risk shall be mitigated by diversifying the fund among issuesand issuers so that the failure of any one issue or issuer would not result in asignificant loss of income or principal to participants.
Market Risk: Defined as the risk of market value fluctuations due to changes inthe general level of interest rates. Because longer-term securities generally havegreater market risk than shorter-term securities, market risk will be mitigated byestablishing a maximum weighted average maturity for the portfolio. Occasionalmarket losses on individual securities are inevitable with active portfoliomanagement and must be considered within the context of the overall investmentreturn.
Liquidity refers to the recurring maturity of a portion of the investment portfolio, as wellas the ability to sell an investment at any given moment with a minimal chance ofprincipal loss. The Money Market Fund’s investments will be substantially liquid for thepurpose of meeting all operating requirements and reasonably anticipated cash flowneeds.
2. YIELDYield refers to the objective of attaining a competitive rate of return commensurate withthe risk profile and cash flow characteristics of the portfolio throughout budgetary andeconomic cycles. Although the Treasurer may employ certain indices to gauge theFunds’ rate of return, such indices shall be used solely for comparative purposes and donot constitute a warranty or guarantee of actual Fund performance.
3. MARK-TO-MARKET
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To the extent reasonably possible and consistent with the Treasurer’s trust and fiduciaryduty, the Money Market Fund will attempt to stabilize at a $1.00 net asset value (NAV).If the ratio of the market value of the Money Market Fund divided by the book value ofthe Money Market Fund is less than $.995 or greater than $1.005, holdings may be soldas necessary to maintain the ratio between $.995 and $1.005.
The Treasurer will act on a "best efforts" basis to stabilize the Money Market Fundwithin the $.995 to $1.005 range, however, the $1.00 NAV is not guaranteed or insuredby the Treasurer.
VI. AUTHORIZED INVESTMENTS
Consistent with the requirements of law and this Investment Policy, the Treasurer mayplace orders for the execution of transactions with or through such broker/dealers, banksor counterparties as may be selected from time to time in his/her discretion. All securitiesmust be U.S. dollar denominated.
To the extent consistent with the objectives stated above, the investment restrictionsoutlined below, and the investment limitations specified in Section VII and VIII, theFunds may invest in the following areas. Any investment types not specificallyauthorized under this section must be approved by the Treasury Oversight Committee andthe Orange County Board of Supervisors prior to the Treasurer executing transactions.
1. U. S. TREASURY SECURITIESUnited States Treasury bills, notes, bonds, or certificates of indebtedness, for whichthe full faith and credit of the United States are pledged for the payment of principaland interest.
2. U. S. GOVERNMENT AGENCY SECURITIESObligations, participations, or other instruments of, or issued by, a federal agency or aUnited States government-sponsored enterprise.
3. COMMERCIAL PAPEREligible commercial paper shall not exceed 270 days maturity. For Asset-backedcommercial paper, the Liquidity Provider must also be an approved issuer andsubject to the issuer diversification requirements.
o Requirements for the Extended Fund:Issuers must be a corporation with total assets in excess of five hundredmillion dollars ($500,000,000), or be organized within the United States as aspecial purpose corporation, trust, or limited liability company, havingprogram-wide credit enhancements such as over-collateralization, letters ofcredit or a surety bond.
o Requirements for the Money Market Fund:
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Issuers must be organized and operating in the United States as a generalcorporation and have total assets in excess of five hundred million dollars($500,000,000).
4. NEGOTIABLE CERTIFICATES OF DEPOSITNegotiable certificates of deposit issued by a U.S. national or state-chartered bank orstate or federal association (as defined by Section 5102 of the California FinancialCode) or by a state-licensed branch of a foreign bank. The Money Market Fund isauthorized to purchase U.S. Dollar denominated certificates of deposit issued fromthe London, England branch of foreign and U.S. domestic banks (Euro certificates ofdeposit). Eligible foreign banks must have branches or agencies in the U.S.
5. REPURCHASE AGREEMENTSInvestments in repurchase agreements may be made on any securities authorizedherein. Agreements are subject to California Government Code Section 53601.7 andmust comply with the delivery requirements and the maturity provision from Section53601.
Investments in repurchase agreements for the purpose of this policy (as defined bysection 53601 and 53601.7(e) (8) of the California Government Code) means apurchase of securities by the Treasurer pursuant to an agreement by which the sellerwill repurchase the securities on or before a specified date and for a specified amountand will deliver the underlying securities to the Treasurer by book entry, physicaldelivery, or by third party custodial agreement. The final maturity of repurchaseagreements shall not exceed one year. The term "securities," for the purpose ofrepurchase agreements, shall mean securities of the same issuer, description, issuedate, and maturity.
To participate in repurchase agreements, a Securities Industry Association (SIA)agreement must be completed and signed by all parties involved. The Treasurer willmaintain a signed copy of the agreement. Repurchase agreements are required to becollateralized by securities or cash authorized under California Government CodeSection 53601.7(e). In order to anticipate market changes and provide a level ofsecurity for all repurchase agreement transactions, the collateralization level will be aminimum of 102% of market value of the principal and accrued interest and shall beadjusted no less frequently than weekly. Since the market value of the underlyingsecurities is subject to daily market fluctuations, the investments in repurchaseagreements shall be in compliance if the value of the underlying securities is broughtback up to 102% no later than the next business day.
Collateral will be limited to US Treasury and US Government Agency securities.For compliance purposes, the investment restrictions from Section VIII.2 hereinconsider U.S. Treasury and/or US Government Agency collateral exempt from issuerlimits. Collateral will be held by an independent third party with whom the Treasurerhas a current custodial agreement. A clearly marked evidence of ownership
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(safekeeping/custody receipt) must be supplied to the Treasurer and retained. TheTreasurer retains the right to substitute or grant substitutions of collateral.
6. BANKERS ACCEPTANCESPrimarily used to finance international trade, banker’s acceptances are time drafts(bills of exchange) drawn on and accepted by a commercial bank. Purchases ofbankers’ acceptances shall not exceed 180 days maturity. Issuing banks must be ratedby at least two of the nationally recognized rating agencies.
7. MONEY MARKET MUTUAL FUNDSShares of beneficial interest issued by diversified management companies, alsoknown as mutual funds, invest in the securities and obligations authorized byCalifornia Government Code Sections 53601(k) (for the Extended Fund) or53601.7(e) (10) (for the Money Market Fund). Mutual funds are not required toconform to the restrictions detailed in this Investment Policy Statement. At aminimum, approved mutual funds will be registered with the Securities and ExchangeCommission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, etseq.) and shall have met either of the following criteria:
a. Attained the highest ranking or the highest letter and numerical ratingprovided by no less than two Nationally Recognized Statistical RatingAgencies (NRSRO).
b. Retained an investment advisor registered or exempt from registrationwith the Securities and Exchange Commission with not less than fiveyears experience investing in the securities and obligations authorized byCalifornia Government Code Section 53601 subdivisions (a) to (j) and (m)to (n) and with assets under management in excess of $500,000,000.
8. MUNICIPAL DEBTSuch instruments are defined as being issued by a local or state agency, including:
a. Bonds payable solely out of the revenues from a revenue-producing propertyowned, controlled, or operated by the local agency or by a department, board,agency or authority of the local agency.
b. Registered state warrants or treasury notes or bonds, including bonds payablesolely out of the revenues from a revenue-producing property owned,controlled, or operated by the state or by a department, board, agency, orauthority of a state.
c. Bonds, notes, warrants, or other evidences of indebtedness of any local agencywithin a state, including bonds payable solely out of the revenues from arevenue-producing property owned, controlled, or operated by the localagency, or by a department, board, agency, or authority of the local agency.
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9. ASSET-BACKED SECURITIESSecurities eligible for investment under this section shall be issued by an issuer whoseunsecured debt is rated no less than “A,” and the issue must be rated “AAA” by atleast two NRSROs. Securities shall have a maximum remaining maturity of fiveyears.
The allowable types of Asset-backed securities include the following:U.S. Government Agency Mortgage pass-through securitiesCollateralized Mortgage Obligations (CMO)Private label mortgage-backed or other pass-through securityEquipment lease-backed certificatesConsumer receivable-backed bondsAuto Loan receivable-backed bonds
10. MEDIUM-TERM NOTESMedium-term notes, defined as all corporate and depository institution debt securitieswith a maximum remaining maturity of not more than 397 days for the MoneyMarket Fund and five years for the Extended Fund. Medium-term notes must beissued by corporations organized and operating within the United States or bydepository institutions licensed by the United States or any state and operating withinthe United States.
11. FUNDING AGREEMENTSContracts issued by insurance companies provide the holder with the right to receivea fixed or variable rate of interest and the full return of principal at the maturity date.Only the Money Market Fund may invest in Funding Agreements.
VII. INVESTMENT RESTRICTIONS
1. CREDIT RATINGS:Credit ratings will be applied at the time of purchase of a security. In the event ofsplit-rated securities, the lowest ratings will be used. A subsequent downgrade ina security’s credit rating will not constitute a violation of the Investment Policy.Securities which are downgraded below the minimum acceptable rating levelsmust be reviewed for possible sale within a reasonable amount of time.
Municipal debt issued by a local agency located in the County of Orange,California is exempt from the credit rating requirements listed below. Asprovided for in Government Code section 53600, “local agency” means county,city, city and county, including a chartered city or county, school district,community college district, public district, county board of education, countysuperintendent of school, or any public or municipal corporation.
The credit ratings referred to below must be assigned by a Nationally RecognizedStatistical Rating Organization (NRSRO).
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a. Short-term debt – (two of the following)“A-1” or “SP-1” Standard & Poor’s Corporation (S&P)“P-1” or “MIG 1/VMIG 1” Moody’s Investors Service, Inc. (Moody’s)“F1” Fitch Ratings (Fitch)An issuer of short-term debt must have no less than an “A” on long-term debt,if any.
b. Long-term debtMoney Market Fund - shall be rated no less than “A” by at least twoNRSROs.Extended Fund - shall be rated no less than “AA” by at least twoNRSROs.
“AAA” up to 100% of the par value of assets may be invested in securitieswith this rating
“AA” up to 50% of the par value of assets may be invested in securitieswith at least one of this rating
These ratios will be determined based on the month-end portfolio marketvalue.If an issuer of long-term debt has a short-term rating, then it may not beless than A-1/SP-1 or P-1/MIG1/VMIG1 or F1.
c. CounterpartiesRepurchase Agreement counterparties shall have a minimum short-termrating, or counterparty rating, of no less than A-1 or equivalent by aNationally Recognized Statistical Rating Agency (NRSRO) and havecapital of no less than $500 million.
d. Credit WatchAny issuer that has been placed on “Credit Watch-Negative” by aNRSRO will be removed from our approved list unless the followingcriteria are met:
The issuer has (a) an A-1+ or F1+ short-term rating; or (b) at least aAA or Aa2 long-term rating.
VIII. DIVERSIFICATION AND MATURITY RESTRICTIONS
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It is the policy of the Treasurer to diversify the Funds’ portfolios. Investments arediversified to minimize the risk of loss resulting in over concentration of assets in aspecific maturity, specific issuer, or a specific class of securities. Diversificationstrategies shall be established by the Treasurer’s Investment Committee and periodicallyreviewed.
1. AUTHORIZED INVESTMENTS:% of Market Value:
2. ISSUER CONCENTRATION:
No more than 5% of the Fund’s market value may be invested in securities ofany one issuer. U.S. Treasury securities are exempt from this restriction.
No more than 30% of the Fund’s market value may be invested in securities ofany one U.S. Government Agency, or U.S. government-sponsored enterprise.
At the time of purchase, a fund may invest up to twelve and a half percent(12.5%) of its market value in a single issuer for a period up to three businessdays. The fund may not invest in the securities of more than one issuer underthis provision at any time.
No more than 10% may be invested in any one Money Market Mutual Fund.
1. U.S. Treasuries and securities havingprincipal and/or interest guaranteed bythe U.S. Government
100%
2. U.S. Government agencies, andgovernment sponsored enterprises
100%
3. Commercial Paper – Money MarketFundsCommercial Paper – Extended Fund
no more than 45%
no more than 40%4. Negotiable Certificates of Deposit no more than 30%5. Repurchase Agreements no more than 50%6. Bankers' Acceptances no more than 40%7. Money Market Funds no more than 20%8. Municipal Debt no more than 30%9. Asset-Backed Securities no more than 10%10. Medium-Term Notes no more than 30%11. Funding Agreements and Other no more than 10%
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3. MATURITY:
The weighted average maturity (WAM) of the Money Market Funds, on adollar-weighted basis, shall not exceed 60 days
The maximum maturity of any portfolio instrument purchased by theFunds will be:
Money Market Fund 13 months (397 days)Extended Fund 5 years
For purposes of calculating final maturity, the earlier of final maturity date ormandatory put or tender option date may be used.
For purposes of calculating the weighted average maturity of the portfolio, thematurity of a variable-rate security may be considered its next interest ratereset date, if there is a reasonable expectation that the security will maintainan approximate value of par upon each adjustment of the security’s interestrate at any time until final maturity.
The Treasurer may not invest over the maximum maturity criteria or weightedaverage maturity limitations. The Treasurer’s monthly management reportwill specify any investing under the above provision.
4. DURATION:
The Extended Fund shall have a duration not to exceed a leading 1-3 Yearindex +25%.
5. OTHER:
The Money Market Fund is authorized to purchase an additional 5% of totalassets in any authorized investment type except commercial paper, for a periodnot to exceed 30 business days.
IX. PROHIBITED TRANSACTIONS
At the time of purchase, all permitted investments shall conform in all respects with thisInvestment Policy Statement and with California Government Code Sections 53601,53601.1, 53601.2, 53601.6, 53601.7, 53631.5, and 53635 as may be amended from timeto time. No investment prohibited by California Government Code shall be permittedherein.
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Any investment transactions, credit risk criterion, percentage limitations or marketvaluation that are not in compliance with this Investment Policy Statement at time ofpurchase must be documented and approved by the Treasurer in writing. Thereafter,action shall be taken by the Treasurer to correct such matter as soon as practical. If apercentage restriction is adhered to at the time of purchase, a later increase or decrease inpercentage resulting from a change in values or assets will not constitute a violation ofthat restriction.
The following transactions are prohibited:
1. Borrowing for investment purposes ("Leverage).
2. Reverse Repurchase Agreements, as defined by California Government Code Section53601.7(e) (8) or otherwise.
3. Structured Notes (e.g. inverse floaters, leveraged floaters, structured certificates ofdeposit, equity-linked securities, event-linked securities, structured investmentvehicles (SIV)). This includes all floating-rate, adjustable-rate or variable-ratesecurities in which a change in interest rates or other variables that can reasonably beforeseen to occur during their term would result in their market value not returning topar at the time of each interest rate adjustment.
Simple “floating rate notes,” whose periodic coupon adjustment is based on a short-term (one-year or less) rate index (such as Treasury bills, federal funds, prime rate orLIBOR) and which have a reasonable expectation of maintaining a value of par ateach interest rate adjustment through final maturity, are exempt from this definition.Additionally, U.S. Treasury and Agency zero coupon bonds, U.S. Treasury andAgency strips, Resolution Funding Corporation (REFCORP) strips or other callablesecurities which otherwise meet the quality, maturity and percent limitations assignedto their respective security category, are exempt from this section.
The Treasurer and all investment personnel shall refrain from personal business activitywhich could create a conflict with proper execution of the investment program, or whichcould impair the ability to execute impartial investment decisions. The Treasurer and allinvestment personnel shall disclose to the Treasury Oversight Committee any materialfinancial interests in financial institutions which conduct business with the County ofOrange and shall disclose any material financial investment positions which could berelated in a conflicting manner to the performance of the County of Orange's investmentportfolio.
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On May 10, 1993, the Orange County Board of Supervisors passed the "Orange CountyGift Ban Ordinance" (see Exhibit B attached). This ordinance prohibits the receipt ofspecified gifts to "designated employees" including members of the Treasury OversightCommittee. All designated employees shall complete on an annual basis the State ofCalifornia Form 700, Statement of Economic Interests Disclosure. In addition, designatedemployees are subject to the State Gift Ban restrictions. Should any conflicts bedisclosed, the Treasurer will resolve such matters as soon as practical.
For the purposes of this section, “designated employees” include the following employeesof the Treasurer’s office: the Treasurer-Tax Collector, the Assistant Treasurer-TaxCollector, the Deputy Treasurer, all Investment Officers, all Financial Analysts, all CashManagers, and all Accounting and Compliance Officers. The Treasurer will review thislist annually and he shall submit any proposed changes to the Treasury OversightCommittee (TOC) for concurrence and adoption.
XI. AUTHORIZED FINANCIAL DEALERS AND QUALIFIED INSTITUTIONS
A list of broker/dealers (Qualified Institutions) authorized to provide investment productsto the Treasurer shall be maintained. Any permitted investment, not purchased directlyfrom the issuer, shall be purchased either from a “primary” or regional broker/dealerqualifying under SEC Rule 15c3-1(uniform net capital rule) or a “well capitalized”financial institution, as defined in Title 12 of the Code of Federal Regulations (CFR) Part6.4. Qualified institutions must comply with the limitations contained in Rule G-37 of theMunicipal Securities Rulemaking Board (Section 27133(c)). A detailed questionnaire isrequired to be completed by securities dealers and financial institutions wishing to beapproved (see attached Exhibit A). The Treasurer shall make a best effort to conduct anannual review of each Qualified Institution’s financial condition and registrations todetermine whether it should remain on the approved list.
XII. PERFORMANCE EVALUATION
The Treasurer shall submit monthly, quarterly and annual reports (in compliance withGovernment Code Sections 53607, 53646, and 27134) to the Treasury OversightCommittee, the Pool participants, the Chief Executive Officer, the Internal Audit Director,the Auditor-Controller and the Board of Supervisors. These reports shall containsufficient information to permit an informed outside reader to evaluate the performance ofthe investment program and shall be in compliance with Government Code. In accordancewith GASB Statements 31 and 40, the Treasurer shall provide financial information on thetreasury for the County’s Comprehensive Annual Financial Report.
XIII. SAFEKEEPING
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All security transactions, including collateral for repurchase agreements, entered into bythe Treasurer shall be conducted on a delivery-versus-payment (DVP) basis.
All securities shall be held by a third party custodian designated by the Treasurer andapproved by the Treasury Oversight Committee. The third party custodian shall berequired to issue a safekeeping statement to the Treasurer listing the specific instrument,rate, maturity and other pertinent information.
XIV. MAINTAINING THE PUBLIC TRUST
All participants in the investment process shall act as custodians of the public trust. Theoverall program shall be designed and managed with a degree of professionalism that isworthy of the public trust.
XV. INTERNAL CONTROLS
The Treasurer shall establish a system of written internal controls, which will be reviewedannually with the County's independent (external) auditor. The controls shall be designedto prevent loss of public funds due to fraud, employee error, and misrepresentation bythird parties, unanticipated market changes or imprudent actions by employees of theTreasurer's Office. The Treasurer shall evaluate any audit reports in a timely manner withthe Treasury Oversight Committee. The quarterly audit reports of the Treasury shall beprovided as required by California Government Code Section 26920-26923. Dailycompliance of the investment portfolio shall be performed by the Treasurer’s ComplianceDivision.
The Treasurer shall develop and maintain written administrative procedures for theoperation of the investment program which are consistent with this investment policy.Procedures will include reference to safekeeping, Securities Industry Association MasterRepurchase Agreements, wire transfer agreements, collateral and depository agreements,banking service contracts, and other investment and banking related activities. Suchprocedures shall include explicit delegation of authority to personnel responsible forinvestment transactions.
The Treasurer shall designate a staff person as a liaison/deputy in the event circumstancesrequire timely action and the County Treasurer is not present. No investment personnelmay engage in an investment transaction except as provided under terms of this policy andthe procedures established by the County Treasurer. The Treasurer shall be responsible forall transactions undertaken and shall establish a system of controls to regulate theactivities of Treasury personnel.
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XVI. COMPENSATION AGREEMENT
As authorized by California Government Code Section 27013, the Treasurer will chargeall pool participants for administrative and overhead costs. Costs include, but are notlimited to, portfolio management, bank and custodial fees, software maintenance fees, andother indirect costs incurred from handling or managing funds. In addition, the costs ofcompliance with the Treasury Oversight provisions of Government Code §27130-27137shall be included as administrative costs. The Treasurer shall annually prepare a proposedbudget revenue estimate, providing a detailed itemization of all estimated costs whichcomprise the administrative fee charged in accordance with California Government CodeSection 27013.
The administrative fee will be subject to change; the administrative and overhead fees willbe reviewed by the Treasury Oversight Committee on an annual basis.
Investment earnings and the above fee charge will be allocated to the pool participants ona monthly basis. As of the first working day of the next month, the pool participants'account will reflect the gross investment earnings and the monthly administrative andoverhead costs.
NOTE: The current administrative fee range is estimated to be between ten and twentybasis points. Please consult the monthly Summary of Apportionment Yields for the mostrecent charge.
XVII. VOLUNTARY PARTICIPANTS
Should a local agency within Orange County, or a Joint Powers Agency (JPA) consistingof at least one public agency from within Orange County, not required by California lawto deposit monies with the Treasurer desire entry into the Treasurer's Investment Pool, theagency shall comply with the requirements of Section 53684 of the CaliforniaGovernment Code and provide to the Treasurer a resolution adopted by its governingboard stating that excess funds are available for the purpose of investment. The resolutionshall specify that the local agency authorizes the investment of excess funds pursuant toSection 53684, those persons authorized at the agency to coordinate the transactions, theagency's willingness to be bound by the withdrawal provisions of California GovernmentCode Section 27136, and the agency's understanding that administrative charges will bededucted by the Treasurer as permitted by Sections 53684(b) and 27013. Subject to theapproval/disapproval of the County Board of Supervisors, the Treasurer shall approve ordisapprove such agency’s request in writing.
Monies deposited by local agencies approved for entry into the Treasurer’s InvestmentPool will be invested in the Money Market Fund. To participate in the Extended Fund, thelocal agency must sign a waiver indicating their understanding of the possible NAV riskinvolved.
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XVIII. WITHDRAWAL
Withdrawal of participant funds for the purpose of investing or depositing these fundsoutside the County treasury shall require prior written approval from the Treasurer. TheTreasurer shall thereafter review the withdrawal request consistent with his/her trust andfiduciary duties. Prior to approving or disapproving the withdrawal request, the Treasurershall make a finding of the effect on the stability and predictability of the investments andon the interests of the other depositors in the County treasury. (California GovernmentCode Sections 27000.3, 27133(h), 27136, 53684(c).)
XIX. PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a rate of returnthroughout budgetary and economic cycles, commensurate with the investment riskconstraints and the cash flow needs.
The Treasurer's investment strategy is active. Given this strategy, the basis used by theTreasurer to determine whether market yields are being achieved shall be the indices mostcomparable to the Fund, such as money rate data published in Barron's, The Wall StreetJournal, Bloomberg, etc. he standards enumerated herein do not constitute a guarantee ofthe Fund’s performance.
XX. INVESTMENT POLICY REVIEW
The Treasurer's investment policy shall be presented to and annually reviewed andapproved by the Board of Supervisors in an open session. The Board of Supervisors alsoreviews and approves any changes to the investment policy. The policy shall also bereviewed on an annual basis by the Treasury Oversight Committee.
XXI. FINANCIAL REPORTING
The monthly Treasurer’s Management Report and any Audit Report shall be provided tothe Orange County Board of Supervisors, Chief Executive Officer, Chief FinancialOfficer, Internal Audit Director, Auditor-Controller, Treasury Oversight Committee andthe director or director executive officer of any local agency who has investments in theCounty’s Investment Funds as required by California Government Code Sections 53646and 53686.
All reports filed by the Treasurer in accordance with California Government Code Section53646 shall, among other matters, state compliance of the portfolio with the InvestmentPolicy Statement, or the manner in which the portfolio is not in compliance. A statementwill also be filed by the Treasurer in accordance with California Government Code 53646(b) denoting the ability of each pool to meet its expenditure requirements for the next sixmonths or provide an explanation of why sufficient money may not be available.
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XXII. LEGISLATIVE CHANGES
Any State of California legislative action that further restricts allowable maturities,investment type or percentage allocations, will, upon effectiveness, be incorporated intothe Orange County Treasurer’s Investment Policy Statement and supersede any and allprevious applicable language.
XXIII.DISASTER RECOVERY PROGRAM
The County of Orange Treasurer-Tax Collector’s Disaster Plan includes critical phonenumbers and addresses of key personnel, as well as, active bankers and broker/dealers.Three copies of the Disaster Plan for home, office and car have been distributed todepartment officers including the Investment Officer. The plan provides for an offsitelocation to be communicated at the time of readiness if our offices are uninhabitable.
In the event the Investment Officer is unable to invest the portfolio, the Bank of New YorkCash Reserve Account will automatically sweep all uninvested cash with the custody bankinto an interest-bearing account. Until normal operations of the Treasurer’s office havebeen restored, the limitations on the size of an Individual issuer and the percentagerestrictions by investment type would be allowed to exceed those approved in thisInvestment Policy Statement.
OFFICE OF THE TREASURER-TAX COLLECTOR
HALL OF FINANCE & RECORDS
11 CIVIC CENTER PLAZA, SUITE G76POST OFFICE BOX 4515SANTA ANA, CA 92701
The information in this appendix has been provided by DTC for use in securities offeringdocuments, and the District takes no responsibility for the accuracy or completeness thereof. The Districtcannot and does not give any assurances that DTC, DTC Participants or Indirect Participants willdistribute the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respectto the Bonds or (b) certificates representing ownership interest in or other confirmation of ownershipinterest in the Bonds, or that they will so do on a timely basis or that DTC, DTC Direct Participants orDTC Indirect Participants will act in the manner described in this Official Statement.
1. The Depository Trust Company (“DTC”), New York, New York, will act as securitiesdepository for the Bonds (the “Securities”). The Securities will be issued as fully-registered securitiesregistered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may berequested by an authorized representative of DTC. One fully-registered Security certificate will be issuedfor each maturity of the Securities, in the aggregate principal amount of such issue, and will be depositedwith DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificatewill be issued with respect to each $500 million of principal amount, and an additional certificate will beissued with respect to any remaining principal amount of such issue.
2. DTC, the world’s largest securities depository, is a limited-purpose trust companyorganized under the New York Banking Law, a “banking organization” within the meaning of the NewYork Banking Law, a member of the Federal Reserve System, a “clearing corporation” within themeaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to theprovisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides assetservicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debtissues, and money market instruments (from over 100 countries) that DTC’s participants (“DirectParticipants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participantsof 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 physicalmovement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokersand dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is awholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is theholding company for DTC, National Securities Clearing Corporation and Fixed Income ClearingCorporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulatedsubsidiaries. 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 ormaintain a custodial relationship with a Direct Participant, either directly or indirectly (“IndirectParticipants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to itsParticipants are on file with the Securities and Exchange Commission. More information about DTC canbe found at www.dtcc.com and www.dtc.org.
3. Purchases of Securities under the DTC system must be made by or through DirectParticipants, which will receive a credit for the Securities on DTC’s records. The ownership interest ofeach actual purchaser of each Security (“Beneficial Owner”)is in turn to be recorded on the Direct andIndirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of theirpurchase. Beneficial Owners are, however, expected to receive written confirmations providing details ofthe transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participantthrough which the Beneficial Owner entered into the transaction. Transfers of ownership interests in theSecurities are to be accomplished by entries made on the books of Direct and Indirect Participants acting
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on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing theirownership interests in Securities, except in the event that use of the book-entry system for the Securities isdiscontinued.
4. To facilitate subsequent transfers, all Securities deposited by Direct Participants withDTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as maybe requested by an authorized representative of DTC. The deposit of Securities with DTC and theirregistration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficialownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s recordsreflect only the identity of the Direct Participants to whose accounts such Securities are credited, whichmay or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsiblefor keeping account of their holdings on behalf of their customers.
5. Conveyance of notices and other communications by DTC to Direct Participants, byDirect Participants to Indirect Participants, and by Direct Participants and Indirect Participants toBeneficial Owners will be governed by arrangements among them, subject to any statutory or regulatoryrequirements as may be in effect from time to time. Beneficial Owners of Securities may wish to takecertain steps to augment the transmission to them of notices of significant events with respect to theSecurities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents.For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding theSecurities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In thealternative, Beneficial Owners may wish to provide their names and addresses to the registrar and requestthat copies of notices be provided directly to them.
6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issueare being redeemed, DTC’s practice is to determine by lot the amount of the interest of each DirectParticipant in such issue to be redeemed.
7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote withrespect to the Securities unless authorized by a Direct Participant in accordance with DTC’s MMIProcedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possibleafter the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to thoseDirect Participants to whose accounts the Securities are credited on the record date (identified in a listingattached to the Omnibus Proxy).
8. Redemption proceeds, distributions, and dividend payments on the Securities will bemade 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 correspondingdetail information from the District or the Paying Agent, on payable date in accordance with theirrespective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will begoverned by standing instructions and customary practices, as is the case with securities held for theaccounts of customers in bearer form or registered in “street name,” and will be the responsibility of suchParticipant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatoryrequirements as may be in effect from time to time. Payment of redemption proceeds, distributions, anddividend payments to Cede & Co. (or such other nominee as may be requested by an authorizedrepresentative of DTC) is the responsibility of the District or the Paying Agent, disbursement of suchpayments to Direct Participants will be the responsibility of DTC, and disbursement of such payments tothe Beneficial Owners will be the responsibility of Direct and Indirect Participants.
9. DTC may discontinue providing its services as depository with respect to the Securities atany time by giving reasonable notice to the District or the Paying Agent. Under such circumstances, in the
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event that a successor depository is not obtained, Security certificates are required to be printed anddelivered.
10. The District may decide to discontinue use of the system of book-entry-only transfersthrough DTC (or a successor securities depository). In that event, Security certificates will be printed anddelivered to DTC.
11. The information in this section concerning DTC and DTC’s book-entry system has beenobtained from sources that the District believes to be reliable, but the District takes no responsibility forthe accuracy thereof.
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APPENDIX H
TABLE OF ACCRETED VALUES FOR CAPITAL APPRECIATION BONDS