$17,000,000 2019 CERTIFICATES OF PARTICIPATION …...Certificate Insurance. The scheduled payment of...

PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER 28, 2018

NEW ISSUE – BOOK-ENTRY ONLY INSURED RATING: S&P: “AA” UNDERLYING RATING: Moody’s: “A1”

See “RATINGS” herein.

In the opinion of Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation, Irvine, California, Special Counsel, subject, however, to certain qualifications described herein, under existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest evidenced by the Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended. In the further opinion of Special Counsel, interest evidenced by the Certificates is not an item of tax preference for purposes of the federal alternative minimum tax. In the further opinion of Special Counsel, interest evidenced by the Certificates is exempt from State of California personal income taxation. Special Counsel expresses no other opinion regarding or concerning any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest evidenced by, the Certificates. See “TAX MATTERS” herein.

$17,000,000 * 2019 CERTIFICATES OF PARTICIPATION

Evidencing the Direct Fractional Undivided Interests of the Owners Thereof in Lease Payments to be Paid by the PAJARO VALLEY UNIFIED SCHOOL DISTRICT

Dated: Date of Delivery Due: August 1, as shown on inside cover

Purposes. The captioned Certificates of Participation (the “Certificates”) are being executed and delivered (i) to fund the acquisition and improvement of the property and buildings located at 294 Green Valley Road, Watsonville, California, which are currently leased by the Pajaro Valley Unified School District (the “District”), (ii) to acquire a debt service reserve policy in an amount equal to the Reserve Requirement (as defined herein) for the Certificates, and (iii) to pay certain costs incurred in connection with the execution and delivery of the Certificates, including, but not limited to, the premium for a municipal bond insurance policy. See “INTRODUCTION – Purpose” herein.

Security. The Certificates evidence direct fractional undivided interests of the owners thereof in Lease Payments to be paid by the District for the use and occupancy of certain real property and improvements (the “Site”) pursuant to a Lease Agreement, dated as of January 1, 2019 (the “Lease Agreement”), between Public Property Financing Corporation of California (the “Corporation”) and the District.

Interest. Interest represented by the Certificates will be payable on February 1 and August 1 of each year, commencing August 1, 2019. See “THE CERTIFICATES.”

Book-Entry Only. Ownership interests in the Certificates will be in denominations of $5,000 and integral multiples thereof. When executed and delivered, the Certificates will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”). DTC will act as securities depository of the Certificates. Ownership interests in the Certificates may be purchased in book-entry form only. Beneficial owners of Certificates will not receive physical certificates representing the Certificates purchased, but will receive a credit balance on the books of the nominees of such purchasers who are participants of DTC. Principal, premium, if any, and interest due with respect to the Certificates will be paid by U.S. Bank National Association, San Francisco, California, as Trustee, to DTC, which will in turn remit such principal, premium, if any, and interest to its participants for subsequent disbursement to the beneficial owners of the Certificates as described herein. See APPENDIX H – “Book-Entry Only System.”

The Certificates are subject to prepayment prior to their maturity, as described herein. See “THE CERTIFICATES – Prepayment of the Certificates.”

Limited Obligation. The District is required under the Lease Agreement to make semiannual Lease Payments (defined herein), which comprise the interest and principal due on the Certificates. The District has agreed in the Lease Agreement to include the Lease Payments due in each fiscal year in its budget for that fiscal year and to make the necessary appropriations for the Lease Payments. Neither the Certificates nor the obligation of the District to make Lease Payments constitutes an indebtedness of the District, the Corporation, the State of California or any political subdivision thereof, within the meaning of the Constitution of the State of California or otherwise, or an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation. The Lease Payments are subject to abatement as described herein. See ‘SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Abatement.”

Certificate Insurance. The scheduled payment of principal of and interest evidenced by the Certificates when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Certificates by Build America Mutual Assurance Company (“BAM”). See “CERTIFICATE INSURANCE.”

MATURITY SCHEDULE (See inside front cover)

The Certificates are offered when, as and if issued, subject to the approval as to their legality by Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation, Irvine, California, Special Counsel. James F. Anderson Law Firm, A Professional Corporation, Laguna Hills, California, is acting as Disclosure Counsel to the District. Norton Rose Fulbright US LLP, Los Angeles, California, is acting as Underwriter’s counsel. It is anticipated that the Certificates in book-entry form will be available through the facilities of DTC on or about January __, 2019.

Dated: December __, 2018

* Preliminary, subject to change.

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$17,000,000 * 2019 CERTIFICATES OF PARTICIPATION


MATURITY SCHEDULE

Base CUSIP:

Maturity (August 1)

Principal Amount

Interest Rate Yield Price CUSIP No.

$ % %

$__________ _____% Term Certificate due August 1, 20__ Yield: _____%, Price: _____% CUSIP† No. ______ ___

* Preliminary, subject to change. CUSIP® is a registered trademark of the American Bankers Association. CUSIP® data is provided by CUSIP Global Services

(CGS) which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence. CUSIP® data is not intended to create a database and does not serve in any way as a substitute for the CGS database. The District, the Underwriter and the Municipal Advisor are not responsible for the selection, correctness or uses of the CUSIP® numbers, and no representation is made as to their correctness on the Certificates or as set forth herein. CUSIP® numbers have been assigned by an independent company not affiliated with the District, the Underwriter or the Municipal Advisor and CUSIP® numbers are provided for convenience of reference only. The CUSIP number for a specific maturity is subject to being changed after the execution and delivery of the Certificates as a result of various subsequent actions, including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Certificates.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

Use of Official Statement. This Official Statement is submitted in connection with the sale of the Certificates referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not a contract between any certificate owner and the District or the Underwriter.

No Offering Except by This Official Statement. No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriter.

No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sale of the Certificates by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

Information in Official Statement. The information set forth in this Official Statement has been furnished by the District and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness.

Involvement of Underwriter. The Underwriter has provided the following statement for inclusion in this Official Statement: The Underwriter 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 circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

Stabilization of and Changes to Offering Prices. The Underwriter may overallot or take other steps that stabilize or maintain the market price of the Certificates at levels above those that might otherwise prevail in the open market. If commenced, the Underwriter may discontinue such market stabilization at any time. The Underwriter may offer and sell the Certificates to certain securities dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page of this Official Statement, and those public offering prices may be changed from time to time by the Underwriter.

Document Summaries. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents and qualified in their entirety to reference to such documents, and do not purport to be complete statements of any or all of such provisions.

Estimates and Projections. When used in this Official Statement and in any continuing disclosure by the District, in any press release and in any oral statement made with the approval of an authorized officer of the District, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

Certificate Insurance. Build America Mutual Assurance Company (“BAM”) makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading “CERTIFICATE INSURANCE” and APPENDIX I – “Specimen Municipal Bond Insurance Policy.”

Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Certificates will, under any circumstances, give rise to any implication that there has been no change in the affairs of the District, the County of Santa Cruz, the other parties described in this Official Statement, or the condition of the property within the District since the date of this Official Statement.

THE CERTIFICATES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE CERTIFICATES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT COUNTIES OF SANTA CRUZ AND MONTEREY

STATE OF CALIFORNIA

BOARD OF TRUSTEES(1) OF THE DISTRICT

Leslie DeRose, President, Trustee Area V Maria Orozco, Clerk, Trustee Area VI

Georgia Acosta, Trustee, Trustee Area II Karen Osmundson, Trustee, Trustee Area III

Kim DeSerpa, Trustee, Trustee Area I Jeff Ursino, Trustee, Trustee Area VII

Willie Yahiro, Trustee, Trustee Area IV

DISTRICT ADMINISTRATION

Michelle Rodriguez, Ph.D., Superintendent Joe Dominguez, Chief Business Officer

____________________

PROFESSIONAL SERVICES

SPECIAL COUNSEL Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation

Irvine, California

DISCLOSURE COUNSEL James F. Anderson Law Firm, A Professional Corporation

Laguna Hills, California

FINANCIAL ADVISOR Dale Scott & Company, Incorporated

San Francisco, California

UNDERWRITER’S COUNSEL Norton Rose Fulbright US LLP

Los Angeles, California

TRUSTEE U.S. Bank National Association

San Francisco, California

(1) The Santa Cruz County Registrar of Voters indicates the projected November 6, 2018, election results are that Trustee Area IV

is very close between Daniel Dodge, Jr. and Willie Yahiro and the result has not yet been determined, Trustee Area V will be represented by Jennifer Schacher, and Trustee Area VII will be represented by Jennifer Holm. The Board members will be installed and officers will be selected during a Board of Trustees meeting held in December 2018. Kim DeSerpa, representing Trustee Area I, was unopposed.

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TABLE OF CONTENTS

INTRODUCTION ............................................................ 1

THE CERTIFICATES ..................................................... 3 General ......................................................................... 3 Prepayment of the Certificates ..................................... 3

SOURCES AND USES OF FUNDS ............................... 6

LEASE PAYMENT SCHEDULE ................................... 7

THE SITE......................................................................... 8

SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES ..................................................... 8

General ......................................................................... 8 Lease Payments ............................................................ 9 Additional Rental Payments ......................................... 9 Abatement .................................................................. 10 Substitution and Release of Property ......................... 11 Reserve Fund .............................................................. 11 Covenant to Appropriate Funds ................................. 12 Action on Default ....................................................... 12 Rental Interruption Insurance ..................................... 12 Public Liability and Property Damage Insurance ....... 13

CERTIFICATE INSURANCE ....................................... 13 Municipal Bond Insurance Policy .............................. 13 Build America Mutual Assurance Company .............. 13

THE CORPORATION ................................................... 15

THE DISTRICT ............................................................. 15 Employee Relations.................................................... 16 Recent Enrollment Trends .......................................... 18

DISTRICT FINANCIAL INFORMATION ................... 19 Education Funding Generally ..................................... 19 District Accounting Practices ..................................... 21 Financial Statements .................................................. 22 District Budget and Interim Financial Reporting ....... 24 Attendance – Revenue Limit and LCFF Funding ...... 27 Revenue Sources ........................................................ 28 District Retirement Systems ....................................... 29 Pension Reform Act of 2013 (Assembly Bill 340) ..... 33 GASB 67 and 68 ........................................................ 33 Other Post-Employment Benefits ............................... 34 Risk Management – Joint Powers Agreements .......... 35 Charter Schools .......................................................... 36 Long-Term Debt Obligations ..................................... 38 Overlapping Debt Obligations .................................... 39 Ad Valorem Property Taxation ................................... 41 Assessed Valuations ................................................... 41 Alternative Method of Tax Apportionment – “Teeter Plan” ........................................................................... 46 Largest Secured Property Taxpayers in District ......... 49

STATE FUNDING OF EDUCATION AND RECENT STATE BUDGETS ........................................................ 50

State Funding of Education ........................................ 50 Recent State Budgets .................................................. 51 Legal Challenges to State Funding of Education ....... 54

COUNTY INVESTMENT POOL ................................. 54

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ...................................................... 54

Constitutionally Required Funding of Education ....... 54 Article XIIIA of the California Constitution .............. 55 Taxation of State-Assessed Utility Property .............. 56 Article XIIIB of the California Constitution .............. 56 Articles XIIIC and XIIID ........................................... 57 Proposition 98 ............................................................ 58 Proposition 111 .......................................................... 58 Proposition 39 ............................................................ 59 Proposition 30 and Proposition 55 ............................. 60 Jarvis v. Connell ......................................................... 61 Proposition 1A............................................................ 61 Proposition 22 ............................................................ 61 Proposition 62; Statutory Limitations ........................ 62 State Cash Management Legislation .......................... 62 Future Initiatives and Legislation ............................... 62

RISK FACTORS ............................................................ 63 General Considerations – Security for the Certificates ................................................................. 63 Abatement .................................................................. 63 Limited Recourse on Default ..................................... 63 No Acceleration Upon Default ................................... 64 Loss of Tax Exemption .............................................. 64 Internal Revenue Service Audit of Tax-Exempt Issuances .................................................................... 64 No Liability of Corporation to the Owners ................ 65 Absence of Earthquake and Flood Insurance ............. 65 Hazardous Substances ................................................ 65 Risks Regarding Investments in County Pooled Investment Fund ......................................................... 66 Economic Conditions in California ............................ 66 Limitations on Remedies; Bankruptcy ....................... 66 State Law Limitations on Appropriations .................. 66 Change in Law ........................................................... 67 Substitution or Removal of Property .......................... 67 Certificate Insurance Risk Factors .............................. 67

TAX MATTERS .......................................................... 68 Tax Exemption ........................................................... 68 Original Issue Discount; Premium Certificates .......... 69 Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption ........... 69 Backup Withholding .................................................. 70

CERTAIN LEGAL MATTERS ..................................... 70 Continuing Disclosure ................................................ 70 Absence of Material Litigation ................................... 70

RATINGS ...................................................................... 71

UNDERWRITING ......................................................... 71

FINANCIAL INTERESTS ............................................ 72

ADDITIONAL INFORMATION .................................. 72

EXECUTION ................................................................. 73

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APPENDIX A – Summary of Principal Legal Documents ......................................................................................... A-1 APPENDIX B – Audited Financial Statements of the District for Fiscal Year Ended June 30, 2017 ......................... B-1 APPENDIX C – General Information About the City of Watsonville and Santa Cruz County ................................... C-1 APPENDIX D – Form of Opinion of Special Counsel ............................................................................................... D-1 APPENDIX E – Form of Continuing Disclosure Certificate ....................................................................................... E-1 APPENDIF F – Santa Cruz County Policy ................................................................................................................. F-1 APPENDIX G – Quarterly Investment Report ........................................................................................................... G-1 APPENDIX H – Book-Entry Only System ................................................................................................................. H-1 APPENDIX I – Specimen Municipal Bond Insurance Policy ..................................................................................... I-1

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$17,000,000 * 2019 Certificates of Participation


INTRODUCTION

Purpose of Official Statement. The purpose of this Official Statement, which includes the cover page, inside cover page and Appendices hereto (the “Official Statement”), is to provide certain information concerning the sale and delivery of 2019 Certificates of Participation (the “Certificates”), representing direct fractional undivided interests of the owners thereof (the “Owners”) in Lease Payments (defined herein) to be paid by the Pajaro Valley Unified School District (the “District”) as rent for certain real property and facilities located at the Landmark Elementary School and at the Lakeview Middle School (collectively, the “Site”).

The Financing Structure. The Site will be leased by the District from the Public Property Financing Corporation of California, a California nonprofit public benefit corporation (the “Corporation”), pursuant to a Lease Agreement, dated as of January 1, 2019 (the “Lease Agreement”), between the Corporation, as lessor, and the District, as lessee. The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of January 1, 2019 (the “Trust Agreement”), among U.S. Bank National Association, San Francisco, California, as trustee (the “Trustee”), the Corporation and the District. Pursuant to an Assignment Agreement, dated as of January 1, 2019 (the “Assignment Agreement”), between the Corporation and the Trustee, the Corporation has assigned to the Trustee, for the benefit of the Owners, substantially all of its rights under the Lease Agreement, including its rights to receive and collect Lease Payments from the District under the Lease Agreement and such other rights as may be necessary to enforce payment of Lease Payments.

Purpose. The net proceeds of the Certificates will be used (i) to fund the acquisition and improvement of the property and buildings current leased by the District located at 294 Green Valley Road, Watsonville, California (the “Project”), which include District administrative offices, special education program (“SELPA”), an adult education school, an independent study program of a dependent charter school, and nutritional services programs, (ii) to acquire a debt service reserve policy in an amount equal to the Reserve Requirement (as defined herein) for the Certificates, and (iii) to pay certain costs incurred in connection with the execution and delivery of the Certificates, including, but not limited to, the premium for a municipal bond insurance policy.

The District. The Pajaro Valley Unified School District is a unified school district established on June 12, 1964. The District provides public education for grades K through 12, as well as adult education, over a 150-square mile area in southern Santa Cruz County (the “County”), plus a small contiguous part of Monterey County (together, the “Counties”). The District currently operates 16 elementary schools, six middle schools, three high schools, a continuation high school, a community day school, an adult education school, twelve childcare centers, and a migrant education program. In addition, there are four dependent charter schools and two independent charter schools operating within the District’s boundaries. K-12 annual average daily attendance in the District is approximately 17,390.9, excluding charter schools, the community day school, and County Office of Education students and approximately 19,201.1, including charter schools, the community day school and the County Office of Education students for Fiscal Year 2018-19. For demographic information about the City of Watsonville and Santa Cruz County, see APPENDIX C.


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Sources of Payment for the Certificates. The District is required to pay to the Trustee specified Lease Payments (the “Lease Payments”) for use and possession of the Site in amounts designed to be sufficient in both time and amount to pay, when due, the principal and interest represented by the Certificates. The Lease Payments are payable from any source of legally available funds. The District covenants in the Lease Agreement to take such action as may be necessary to include all Total Rent (defined as the Lease Payments, Additional Rent and Reserve Replenishment Rent, as such terms are defined in the Lease Agreement and described herein) in its annual budget, and to make the necessary annual appropriations therefor. The District’s financial ability to pay Lease Payments will depend upon the sufficiency of moneys in its general fund. See “THE DISTRICT” and “DISTRICT FINANCIAL INFORMATION.”

Payment of Lease Payments by the District is dependent upon beneficial use and occupancy by the District of the Site; otherwise, the obligation of the District to pay Lease Payments is subject to full or partial abatement. The obligation of the District to pay the Lease Payments is subject to abatement during any period in which there is substantial interference with the District’s right to use and occupy any portion of the Site. In such event and to the extent of such abatement, Certificate Owners may not receive payment of principal or interest represented by the Certificates. Abatement of Lease Payments under the Lease Agreement, to the extent payment is not made from alternative sources as set forth below, would result in all Certificate Owners receiving less than the full amount of principal and interest represented by the Certificates. To the extent proceeds of rental interruption insurance or condemnation proceeds are available or there are moneys in the Reserve Fund, Lease Payments (or a portion thereof) may be made during such abatement. See “RISK FACTORS – Abatement.”

Neither the Certificates nor the obligation of the District to pay Lease Payments constitutes an obligation of the District for which the District is obligated to levy or pledge, or for which the District has levied or pledged, any form of taxation. Neither the Certificates nor the obligation of the District to pay Lease Payments constitutes a debt of the District, the State of California (the “State”) or any of its political subdivisions within the meaning of any constitutional debt limitation or violates any statutory debt limitation or constitutes a pledge of the faith and credit of the District, the State or any of its political subdivisions.

Certificate Insurance; Reserve Fund Insurance Policy. Concurrently with the delivery of the Certificates, Build America Mutual Assurance Company (“BAM” or “Insurer”) will issue its Municipal Bond Insurance Policy for the Certificates (the “Policy”). The Policy guarantees the scheduled payment of principal and interest evidenced by the Certificates when due as set forth in the form of the Policy included as Appendix I to this Official Statement. Concurrently with the delivery of the Certificates, BAM will also issue a reserve fund insurance policy (the “Reserve Fund Policy”) for the Reserve Fund to satisfy the Reserve Requirement (as defined in the Trust Agreement). See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Reserve Fund” and “CERTIFICATE INSURANCE.”

Summary of Information. A summary of the principal legal documents relating to the Certificates is contained in Appendix A. Such summary is not and does not purport to be comprehensive or complete. The descriptions in this Official Statement of the Trust Agreement, the Assignment Agreement, the Site Lease, the Lease Agreement and other agreements relating to the Certificates are qualified in their entirety by reference to such documents, and the descriptions herein of the Certificates are qualified in their entirety by the form thereof and the provisions with respect thereto included in the aforesaid documents. All terms used herein and not otherwise defined shall have the meanings given such terms in the Trust Agreement and in Appendix A.

This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of documents referred to in this Official Statement and information concerning the Certificates are available from the District from the Superintendent’s Office at 294 Green Valley Road,

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Watsonville, California 95076, Telephone: (831) 786-2100. The District may impose a charge for copying, mailing and handling.

THE CERTIFICATES General

The Certificates evidence direct fractional undivided interests of the Owners thereof in the Lease Payments and any prepayments to be paid by the District pursuant to the Lease Agreement. The Certificates will be issued in registered form, without coupons. The Certificates will be registered in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository for the Certificates. Ownership interests in the Certificates may be purchased in book-entry form only, in denominations of $5,000 or any integral multiple thereof. While DTC acts as securities depository for the Certificates, all payments of principal, premium, if any, and interest represented by the Certificates shall be made to Cede & Co., as nominee of DTC. For information with respect to the payment and transfer of the Certificates, see APPENDIX H – “Book-Entry Only System.”

The Certificates will be dated their date of delivery. Interest represented by each Certificate will accrue on the principal components represented by such Certificate at the applicable interest rate from the date of delivery thereof until its date of maturity or prior prepayment, with interest becoming payable on each February 1 and August 1 (each, an “Interest Payment Date”), commencing August 1, 2019.

Interest will be computed with respect to the Certificates on the basis of a 360-day year comprised of twelve 30-day months. The Certificates will mature on the dates and in the principal amounts set forth on the inside cover of this Official Statement.

Prepayment of the Certificates*

Optional Prepayment. The Certificates maturing prior to August 1, 2019, are not subject to optional prepayment prior to maturity. The Certificates maturing on or after August 1, 2020, are subject to prepayment prior to maturity and may be prepaid at the option of the District from any available moneys on any date on or after August 1, 2019, in whole or in part, in integral multiples of $5,000, as a result of prepayment of Lease Payments, subject to the terms of the Trust Agreement, at prepayment prices equal to the principal amount thereof, together with accrued interest to the date fixed for prepayment, without premium.

Mandatory Sinking Fund Prepayment. The Term Certificates maturing on August 1, 20___, are also subject to mandatory sinking fund prepayment on August 1, in each year on and after August 1, 20___, by lot, at a prepayment price equal to the principal amount thereof, without premium, together with accrued interest to the date of prepayment, from the principal component of the Lease Payments to be paid by the District pursuant to the Lease Agreement with respect to each such prepayment date as follows:

Prepayment Date (August 1)

Principal Amount of Certificates to be Prepaid

20___ $

20___

20___

20___ (maturity)


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Mandatory Prepayment from Net Proceeds of Insurance or Condemnation. The Certificates are subject to prepayment in accordance with the Trust Agreement, in integral multiples of $5,000, in whole, on any date, from and to the extent of any Net Proceeds received with respect to all or a portion of the Site deposited by the Trustee in the Prepayment Fund pursuant to the following subsections, without premium, at the principal amount to be prepaid, together with accrued interest to the date fixed for prepayment:

(i) From the Net Proceeds of any insurance award resulting from damage to or destruction of all or a substantial portion of the Site and deposited by the Trustee in the Prepayment Fund in the event that the District certifies to the Trustee that repair or replacement or improvement of the Site is not economically feasible or in the best interests of the District and directing that the Net Proceeds are to be used to prepay Certificates as specified in the Trust Agreement; provided, however, that no such prepayment will occur unless such Net Proceeds, together with funds then on hand in the Insurance and Condemnation Fund, Lease Payment Account and the Reserve Fund, are sufficient to prepay all of the Outstanding Certificates.

(ii) From the Net Proceeds of a condemnation award resulting from any eminent domain proceedings relating to all or a substantial portion of the Site and deposited by the Trustee in the Prepayment Fund in the event that the District certifies to the Trustee and the Insurer that such eminent domain proceedings have materially affected the operation of the Site or the ability of the District to meet any of its obligations under the Lease Agreement and directing that the Net Proceeds are to be used to prepay Certificates as specified in the Trust Agreement; provided, however, that no such prepayment shall occur without the prior written consent of the Insurer unless such Net Proceeds, together with funds then on hand in the Insurance and Condemnation Fund, Lease Payment Account and the Reserve Fund are sufficient to prepay all of the Certificates.

Notice of Prepayment. When prepayment is authorized or required pursuant to the Trust Agreement, the Trustee will give to the Certificate Owners notice of the prepayment of the Certificates (“Prepayment Notice”) at the expense of the District. Such notice will specify: (i) that the whole or a designated portion of the Certificates is to be prepaid, (ii) the numbers (if less than all the Certificates of a maturity are to be prepaid) and CUSIP® numbers of the Certificates to be prepaid, (iii) the date of notice and the date of prepayment, (iv) the place or places where the prepayment will be made including the name and address of any paying agent; (v) the prepayment price; (vi) descriptive information regarding the Certificates, including the date of delivery, interest rates and stated maturity dates; and (vii) if the Certificates are to be prepaid with the proceeds of obligations to be issued or incurred to accomplish a current or advance refunding, a statement that the prepayment of the Certificates is contingent on such obligations being issued or incurred, and whether the prepayment is contingent upon receipt of funds. Such Prepayment Notice will further state that on the specified prepayment date there will become due and payable upon each Certificate to be prepaid, the principal (or portion) with respect thereto, together with interest accrued to said prepayment date and prepayment premium, if any, and that from and after such prepayment date interest with respect thereto will cease to accrue and be payable. The Prepayment Notice may provide that prepayment is contingent upon receipt of funds sufficient to cause such prepayment, or other circumstances, as set forth in the Trust Agreement, and none of the District, the Trustee or the Corporation will have any liability to any Owner, or any other party, as a result of the failure to prepay the Certificates designated for prepayment as a result of insufficient moneys therefore, or due to such other circumstances.

At least 20 but not more than 45 days prior to the prepayment date, such Prepayment Notice will be given to the respective Certificate Owners designated for prepayment by first class mail, postage prepaid, at their addresses appearing on the Certificate Register as of the close of business on the fifth day before such Prepayment Notice is given. Further notice will be given by the Trustee at least 20 days before the prepayment date by (a) first-class mail, postage prepaid, (b) confirmed facsimile transmission, or (c) overnight delivery service to DTC and upon written request of the District, to any other registered securities depositories then in business of holding substantial amounts of obligations of the type comprising the Certificates, and to Informational Services, or any other information services that disseminate notice of prepayment of obligations such as the Certificates.

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Notice Contingent on Receipt of Moneys to cause Prepayment; Right to Rescind Notice of Prepayment. Any Prepayment Notice may specify that prepayment of the Certificates designated for prepayment on the specified date will be subject to the receipt by the District of moneys sufficient to cause such prepayment, or other circumstances, as set forth in the Trust Agreement, and the District, the Corporation or the Trustee will have no liability to the Owners of any Certificates, or to any other person or entity, as a result of the District’s failure to prepay the Certificates designated for prepayment as a result of insufficient moneys therefor, or due to such other circumstances.

Additionally, the District may rescind any prepayment of the Certificates, and notice thereof, for any reason on any date prior to the date fixed for such prepayment by causing written notice of the rescission to be given to the Owners of the Certificates so called for prepayment. Notice of rescission of prepayment shall be given in the same manner in which the Prepayment Notice was originally given. The actual receipt by the Owner of any Certificate of notice of such rescission, or by any Depository or any of the Informational Services as specified above, will not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission. The District, the Corporation, or the Trustee will have no liability to the Owners of any Certificates, or to any other person or entity, as a result of the District’s decision to rescind a prepayment of any Certificates pursuant to the provisions of the Trust Agreement.

Partial Prepayment of Certificates. Upon surrender of any Certificate prepaid in part only, the Trustee shall execute and deliver to the Owner thereof a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the un-prepaid portion of the Certificate surrendered and of the same interest rate and the same principal payment date.

Effect of Notice of Prepayment. Moneys for the prepayment (including the interest to the applicable date of prepayment) of Certificates having been set aside in the Lease Payment Fund will become due and payable on the date of such prepayment, and, upon presentation and surrender thereof at the Office of the Trustee, said Certificates will be paid at the unpaid principal amount (or applicable portion thereof) represented thereby plus interest accrued and unpaid to said date of prepayment.

If, on said date of prepayment date, moneys for the prepayment of all the Certificates to be prepaid, together with interest represented thereby to said date of prepayment, will be held by the Trustee so as to be available therefore on such prepayment date, and if notice of prepayment thereof has been given as provide in the Trust Agreement, then, from and after said prepayment date, interest with respect to the portion of Certificates to be prepaid will cease to accrue and become payable whether or not any Certificate is presented for prepayment. If said moneys is so available on said prepayment date, interest with respect to such portion of Certificates will continue to be payable until paid at the same rates as would have been payable had such Certificates not been called for prepayment. All moneys held by or on behalf of the Trustee for the prepayment of particular Certificates will be held in trust for the account of the Owners of the Certificates so to be prepaid.

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SOURCES AND USES OF FUNDS

The sources and uses of funds with respect to the Certificates are as follows:

Sources of Funds:

Principal Amount of Certificates $ [Plus/Less Net Original Issue Premium/Discount]

Total Sources $

Uses of Funds:

Deposit to Construction Account $ Deposit to Delivery Costs Account (1)

Total Uses $

(1) Delivery Costs include legal fees, printing costs, Underwriter’s discount, rating agency fee, financial advisor fee, municipal bond insurance premium, and debt service reserve fund insurance policy premium, title insurance premium and other miscellaneous expenses.

[Remainder of Page Intentionally Left Blank]

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LEASE PAYMENT SCHEDULE The aggregate annual amounts of Lease Payments, comprising interest and principal payable to

Certificate Owners, assuming no optional prepayment, are set forth below:

PAJARO VALLEY UNIFIED SCHOOL DISTRICT 2019 Certificates of Participation

Lease Payment Schedule

Year Ending August 1

Principal Component

Interest Component

Total Payments

$ $ $ Total $ $ $


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THE SITE

The District will lease the real property and improvements generally consisting of the Landmark Elementary School located at 124 Ohlone Park Way, Watsonville, California 95076 and the Lakeview Middle School located at 2350 East Lake Avenue, Watsonville, California 95076 (previously defined herein as the “Site”) to the Corporation under the terms of a Site Lease, dated as of January 1, 2019 (the “Site Lease”), and will concurrently lease the Site back from the Corporation under the Lease Agreement.

The Landmark Elementary School is situated on approximately 8.85 acres, and includes classrooms, a multi-purpose room, administrative offices, playgrounds, and a soccer field. The buildings aggregate approximately 47,350 square feet. The estimated replacement cost for buildings and personal property aggregates approximately $9.65 million.

The Lakeview Middle School is situated on approximately 15.8 acres, and includes classrooms, a multipurpose room/gymnasium, a library, a music room, administrative offices, playgrounds, and a sports field. The buildings aggregate approximately 82,700 square feet. The estimated replacement cost for buildings and personal property aggregates approximately $19.1 million.

SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES

Neither the Certificates nor the obligation of the District to pay Lease Payments constitutes an obligation of the District for which the District is obligated to levy or pledge, or for which the District has levied or pledged, any form of taxation. Neither the Certificates nor the obligation of the District to pay Lease Payments constitutes a debt of the District, the State of California or any of its political subdivisions within the meaning of any constitutional debt limitation or violates any statutory debt limitation or constitutes a pledge of the faith and credit of the District, the State of California or any of its political subdivisions.

General

Each Certificate represents a direct fractional undivided interest of the Owner of such Certificate in the Lease Payments and any prepayments thereof to be paid by the District to the Trustee under the Lease Agreement. The District is obligated to pay Lease Payments from any source of legally available funds, and has covenanted in the Lease Agreement to include all Lease Payments coming due in its annual budgets and to make the necessary annual appropriations therefor. The Corporation, pursuant to the Assignment Agreement, has assigned all of its rights, title and interest in, under and to the Site Lease and to the Lease Agreement (excepting only its right to receive payment of its fees and expenses under the Lease Agreement and its right to indemnification under the Lease Agreement), including, without limitation: (i) the Corporation’s rights to receive Lease Payments from the District under the Lease Agreement, and (ii) the right to exercise such rights and remedies as are conferred on the Corporation by the Lease Agreement as may be necessary to enforce payment of such Lease Payments when due, or otherwise protect its interest in the event of a default by the District. On the 15th day of January and July in each year during the term of the Lease Agreement, the District must pay to the Trustee a Lease Payment (to the extent required under the Lease Agreement) which is equal to the amount necessary to pay the principal, if any, and interest due with respect to the Certificates on the next succeeding Interest Payment Date.

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Lease Payments

The Trust Agreement requires that Lease Payments be deposited in the Lease Payment Account maintained by the Trustee. All moneys at any time deposited by the Trustee in the Lease Payment Account shall be held by the Trustee in trust for the benefit of the Owners of the Certificates. Pursuant to the Trust Agreement, on February 1 and August 1 of each year, commencing August 1, 2019, the Trustee will apply such amounts in the Lease Payment Account as are necessary to make principal and interest payments with respect to Certificates as the same shall become due and payable, in the amounts specified by the Lease Agreement, as shown in the annual payment schedule in the table below. The Trustee shall withdraw moneys from the Lease Payment Account on each Payment Date in amounts which equal the Lease Payment due by the District on the Due Date preceding such Payment Date and shall cause all sums withdrawn from the Lease Payment Account to be deposited in the Certificate Payment Account. The Trustee shall withdraw moneys from the Certificate Payment Account on each Payment Date, an amount equal to the Lease Payment due on the Due Date preceding such Payment Date, and shall cause the same to be applied to the payment of principal and interest payments evidenced by the Certificates on such Payment Date. Within the Certificate Payment Account, the Trustee shall establish the “Principal Subaccount,” and the “Interest Subaccount.”

Interest Subaccount. The Trustee, on each Payment Date, shall deposit in the Interest Subaccount that amount of moneys representing the portion of the Lease Payments designated as the interest component coming due on such Payment Date. The Trustee shall use moneys in the Interest Subaccount for the purpose of paying the interest evidenced by the Certificates when due and payable.

Principal Subaccount. The Trustee, on each Payment Date, shall deposit in the Principal Subaccount that amount of moneys representing the portion of the Lease Payments designated as the principal component coming due on such Payment Date. Moneys in the Principal Subaccount shall be used by the Trustee for the purpose of paying the principal evidenced by the Certificates when due and payable on a Payment Date.

The Trustee shall withdraw from the Certificate Payment Account on each Payment Date, an amount equal to the Lease Payments due on the Due Date preceding such Payment Date, and shall cause the same to be applied to the payment of principal and interest payments evidenced by the Certificates on such Payment Date.

Insufficiency to Pay Full Amount of Principal and Interest. If on any Payment Date the amount of funds on hand in the Certificate Payment Account is insufficient to pay the full amount of principal and interest then due and payable evidenced by the Certificates, the Trustee shall apply such funds first to the payment of interest past due, pro rata if necessary, and second to the payment of principal past due, pro rata, if necessary. Additional Rental Payments

The Lease Agreement provides that in addition to the Lease Payments, and as part of the Total Rent during the term of the Lease Agreement, the District agrees to pay when due or on the next Lease Payment Date following receipt of statements therefor or estimates thereof furnished by or on behalf of the Corporation as Additional Rent equal to the sum of the following: (i) all taxes and assessments of any nature whatsoever, including, but not limited to, excise taxes, ad valorem taxes, ad valorem and specific lien special assessments and gross receipts taxes, if any, levied upon the Site, or upon any interest of the Corporation, the Trustee or the Owners therein or in the Lease Agreement; (ii) all fees and expenses (not otherwise paid or provided for out of the proceeds of the sale of the Certificates) of the Trustee in connection with the performance of its duties under the Lease Agreement and under the Trust Agreement that do not otherwise constitute Lease Payments or payments of Reserve Replenishment Rent; (iii) insurance premiums, if any, on all insurance required under the provisions of the Lease Agreement; (iv) all administrative costs of the Corporation related

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to the Project, including, without limiting the generality of the foregoing, fees and charges of auditors, accountants and attorneys, any amounts payable under provisions relating to indemnification, taxes, assessments, governmental charges, utility charges, and all other necessary administrative costs of the Corporation or charges required to be paid by the Corporation in order to comply with the terms of the Certificates or the Trust Agreement and to defend and indemnify the Corporation and its members, officers and directors and assigns; (v) to the extent not satisfied elsewhere under the above clauses, all amounts due to the Insurer as provider of the Policy and/or the Reserve Fund Policy pursuant to the provisions of the Lease Agreement or the terms of the Trust Agreement; and (vi) all other payments required to be paid by the District under the provisions of the Lease Agreement or the terms of the Trust Agreement. Abatement

Lease Payments are paid by the District in each fiscal year for the District’s right of use and possession of the Site for such fiscal year. The obligation of the District to pay all or a portion of the Lease Payments will be subject to abatement during any period in which by reason of material damage to, or destruction or condemnation of, the Site, or any portion of the Site. Total Rent will be abated proportionately, and the District waives the benefits of California Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement will continue in full force and effect. The amount of such abatement will be agreed upon by the District and the Corporation; provided, however, that the Total Rent due for any Rental Period will not exceed the Fair Rental Value of that portion of the Site available for use and occupancy by the District during such Rental Period. The District and the Corporation will calculate such abatement and will provide the Trustee with a certificate setting forth such calculation and the basis therefor. Such abatement will continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Site, ending with the substantial completion of the work of repair or replacement of the Site, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement will be extended as provided in the Lease Agreement, except that the term of the Lease Agreement will in no event be extended more than ten years beyond the Termination Date.

Notwithstanding the foregoing, to the extent moneys are available for the payment of Total Rent in any of the funds and accounts established under the Trust Agreement, Total Rent will not be abated as provided above, but rather, will be payable by the District as a special obligation payable solely from said funds and accounts.

Repair or Replacement. In the event of abatement, the District will use its best efforts to repair or replace the damaged or destroyed portion of the Site, as the case may be, from special funds of the District or from other moneys, the application of which, in the Opinion of Counsel addressed to the Trustee, the District and the Corporation, would not result in the obligations of the District under the Lease Agreement constituting indebtedness of the District in contravention of the State Constitution or the laws of the State.

Termination or Abatement Due to Eminent Domain. If all or any portion of the Site is taken under the power of eminent domain, the Net Proceeds from any award resulting therefrom will be deposited with the Trustee pursuant to the Lease Agreement and the District Representative will file a certificate with the Trustee as provided in the Trust Agreement. If the Site is taken under the power of eminent domain to such extent that the use and possession of the Site as a whole is materially affected, and the Trustee has given notice of prepayment of all Outstanding Certificates, the remaining Lease Payments due under the Lease Agreement will be abated in full and the Lease Agreement will thereupon be terminated, except as provided in the Lease Agreement relating to the application of Net Proceeds. Otherwise, (1) the Lease Agreement will continue in full force and effect and will not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (2) there will be a partial abatement of Lease Payments in order to reflect the crediting, if any, of Net Proceeds from any eminent domain award applied to prepay Certificates

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pursuant to the Trust Agreement, but in no event will the resulting Lease Payments be less than the amount required for the payment of the principal and interest with respect to the principal amount as the same become due and payable. In the Lease Agreement, the District covenants, to the extent it may lawfully do so under the provisions of State and federal law, that so long as any of the Certificates remain Outstanding and unpaid, the District will not exercise its statutory powers of condemnation with respect to the Site except as expressly provided in the following sentence. The District further covenants and agrees, to the extent it may lawfully do so under the provisions of State and federal law, that if for any reason the foregoing covenant is determined to be unenforceable or if the District should fail or refuse to abide by such covenant and condemns the Site (except as expressly provided for in this paragraph), the appraised value of the Site will not be less than the greater of: (i) if such Certificates are then subject to prepayment, the principal and interest components of the Certificates Outstanding through the date of their prepayment, or (ii) if such Certificates are not then subject to prepayment, the amount necessary to defease such Certificates to the first available prepayment date in accordance with the provisions of the Trust Agreement.

The Trustee cannot terminate the Lease Agreement in the event of such substantial interference.

Abatement of Lease Payments is not an event of default under the Lease Agreement and does not permit the Trustee to take any action or avail itself of any remedy against the District. For a description of abatement resulting from condemnation of all or part of the Site, see APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS.”

Substitution and Release of Property

The District has the option at any time and from time to time during the term of the Lease Agreement, to substitute other real property for the Site or any portion thereof, provided that the District comply with certain conditions precedent specified in the Lease Agreement. The District also has the option to release portions of the Site from the Site Lease and the Lease Agreement upon compliance with certain conditions precedent specified in the Lease Agreement. See APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Lease Agreement.” The District is not entitled to any reduction in or abatement of the Lease Payments due from the District under the Lease Agreement as a result of substitution or release. Reserve Fund

General. The Reserve Fund is established by the Trust Agreement to be held by the Trustee in trust for the benefit of the District and the Owners of the Certificates, as a reserve for the payment when due of the Lease Payments on behalf of the District. As defined in the Trust Agreement, “Reserve Requirement” means as of the date of calculation, an amount equal to the least of (i) 125% of average annual aggregate Lease Payments over the remaining term of the Lease Agreement; (ii) the maximum aggregate annual Lease Payments over the remaining term of the Lease Agreement; or (iii) 10% of the net proceeds of the Certificates, less original issue discount, plus original issue premium, as applicable.

If as a result of the payment of principal or interests evidenced by the Certificates or otherwise, the Reserve Requirement is reduced, amounts on deposit in the Reserve Fund in excess of such reduced Reserve Requirement will be transferred to the Lease Payment Account.

If three Business Days prior to any Interest Payment Date the moneys available in the Lease Payment Fund do not equal the amount of the Lease Payment then coming due and payable, the Trustee shall apply the moneys available in the Reserve Fund to make such payments on behalf of the District by transferring the amount necessary for this purpose to the Lease Payment Fund.

The District will acquire the Reserve Fund Policy for the Certificates in an amount equal to the initial Reserve Requirement, which will be credited to the Reserve Fund for the Certificates. Amounts available in the Reserve Fund, including amounts available pursuant to the Reserve Fund Policy, are to be

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used to make delinquent Lease Payments to the extent that the moneys available in the Lease Payment Fund do not equal the amount of the principal and interest evidenced by the Certificates then coming due.

If (i) funds have been withdrawn from the Reserve Fund (including draws on the Reserve Fund Policy) in order to pay interest or principal evidenced by the Certificates or if there shall be a deficiency in the Reserve Fund resulting from a decrease of 10% or more in the market value of the Permitted Investments in the Reserve Fund, determined as provided in the Trust Agreement, (ii) Lease Payments are not in abatement under the Lease Agreement, (iii) the amount of the Lease Payments is less than the fair rental value of the Site, and (iv) the amount on deposit in the Reserve Fund is less than the Reserve Requirement (including as the result of a draw on the Reserve Fund Policy), then the Lease Agreement provides that the District shall pay from its first available moneys after payment of Lease Payments, to the Trustee, Reserve Replenishment Rent consistent with such fair rental value (a) over a one-year period, in substantially equal quarterly payments, including any amounts required to repay all draws and Policy Costs (as defined in the Trust Agreement) under the terms of the Trust Agreement as further provided in the Trust Agreement, or (b) if such payments prescribed in clause (a) are inconsistent with fair rental value, in such maximum amounts as shall be recommended by the appraisal referenced in the Lease Agreement consistent with fair rental value on each Payment Date until the amount on deposit in the Reserve Fund equals the Reserve Requirement; including any amounts required to pay all draws and Policy Costs under the terms of the Trust Agreement.

See APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS” for a further description of the application of funds in the Reserve Fund.

Earnings on Reserve Fund. Interest earned on moneys on deposit in the Reserve Fund, including interest earned on a Reserve Facility, will be retained in such fund, except that any such earnings that cause the balance therein to exceed the Reserve Requirement shall be transferred, by the Trustee, on or prior to each Lease Payment Deposit Date, to the Lease Payment Account. Covenant to Appropriate Funds

The District covenants in the Lease Agreement to take such action as may be necessary to include all Total Rent due under the Lease Agreement in its annual budget and to make the necessary annual appropriations for all such payments of Total Rent. Action on Default

Should the District default under the Lease Agreement, the Trustee, as assignee of the Corporation under the Lease Agreement, may terminate the Lease Agreement and recover certain damages from the District, or may retain the Lease Agreement and hold the District liable for all Lease Payments thereunder on an annual basis. Lease Payments may not be accelerated upon a default under the Lease Agreement. See “RISK FACTORS – Limited Recourse on Default.”

For a description of the events of default and permitted remedies of the Trustee (as assignee of the Corporation) contained in the Lease Agreement and the Trust Agreement, see APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Lease Agreement” and “ – Trust Agreement.” Rental Interruption Insurance

The Lease Agreement requires the District to maintain, or cause to be maintained, rental interruption insurance to cover loss, total or partial, of the use of the Site as a result of fire and other hazards, in an amount sufficient to pay the total Lease Payments under the Lease Agreement for a period of 24 months (using the two highest annual Lease Payments during the Term). In the event the District determines, based on a certification from an Insurance Consultant (as defined in the Lease Agreement), that such insurance is not commercially

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available, the District may under such circumstances (notwithstanding provisions of the Lease Agreement) provide for a cash deposit (held by the Trustee) equal to the 24 months of Lease Payments (using the two highest annual Lease Payments during the Term) to satisfy the requirements of the Lease Agreement. The Net Proceeds of such insurance shall be paid to the Trustee for deposit in the Lease Payment Account to be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable. See APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Lease Agreement.” Public Liability and Property Damage Insurance

The Lease Agreement requires the District to obtain and maintain certain public liability, property damage, fire and extended coverage and rental interruption insurance coverage, which may have certain deductibles and may in some cases be maintained as part of or in conjunction with other insurance carried by the District. The Net Proceeds of any insurance award resulting from any damage to or destruction of the Project by fire or other casualty shall be applied as set forth in the Lease Agreement. See APPENDIX A – “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Lease Agreement.”

CERTIFICATE INSURANCE

Municipal Bond Insurance Policy

Concurrently with the issuance of the Certificates, BAM will issue its Policy. The Policy guarantees the scheduled payment of principal and interest evidenced by the Certificates when due as set forth in the form of the Policy included as Appendix I to this Official Statement.

The Policy is not covered by any insurance security or guaranty fund established under New York or Connecticut insurance law. Build America Mutual Assurance Company

BAM is a New York domiciled mutual insurance corporation and is licensed to conduct financial guaranty insurance business in all fifty states of the United States and the District of Columbia. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM. The address of the principal executive offices of BAM is: 200 Liberty Street, 27th Floor, New York, New York 10281, its telephone number is: 212-235-2500, and its website is located at: www.buildamerica.com.

BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law.

BAM’s financial strength is rated “AA/Stable” by S&P Global Ratings, a business unit of Standard & Poor’s Financial Services LLC (“S&P”). An explanation of the significance of the rating and current reports may be obtained from S&P at www.standardandpoors.com. The rating of BAM should be evaluated independently. The rating reflects the S&P’s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Certificates, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Certificates. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Certificates on the date(s)

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when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the Policy), and BAM does not guarantee the market price or liquidity of the Certificates, nor does it guarantee that the rating on the Certificates will not be revised or withdrawn. Capitalization of BAM

BAM’s total admitted assets, total liabilities, and total capital and surplus, as of September 30, 2018 and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York State Department of Financial Services were $524 million, $104.1 million and $419.9 million, respectively. BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions.

BAM’s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM’s website at www.buildamerica.com, is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published.

BAM makes no representation regarding the Certificates or the advisability of investing in the

Certificates. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading “CERTIFICATE INSURANCE”.

Additional Information Available from BAM

Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM’s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM’s website at buildamerica.com/creditinsights/. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.)

Credit Profiles. Prior to the pricing of certificates that BAM has been selected to insure, BAM may prepare a pre-sale Credit Profile for those certificates. These pre-sale Credit Profiles provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to closing, for any offering that includes certificates insured by BAM, any pre-sale Credit Profile will be updated and superseded by a final Credit Profile to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Credit Profiles are easily accessible on BAM's website at buildamerica.com/obligor/. BAM will produce a Credit Profile for all certificates insured by BAM, whether or not a pre-sale Credit Profile has been prepared for such certificates. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.)

Disclaimers. The Credit Profiles and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Credit Profiles and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Credit Profiles and Credit Insight videos are prepared by BAM;

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they have not been reviewed or approved by the issuer of or the underwriter for the Certificates, and the issuer and underwriter assume no responsibility for their content.

BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Certificates. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Certificates, whether at the initial offering or otherwise.

THE CORPORATION

The Public Property Financing Corporation of California, a nonprofit public benefit corporation, was incorporated pursuant to the Nonprofit Public Benefit Corporation Law of the State (Title 1, Division 2, Part 2 of the California Corporation Code). The Corporation was established in order to facilitate and assist public entities in financing their public facilities and equipment needs.

THE DISTRICT

The District is governed by a seven-member Board of Trustees, each member of which is elected to a four-year term. Elections or appointments for positions to the Board of Trustees are held every two years, alternating between three and four available positions. Current members of the Board of Trustees, together with their office and the date their term expires, are listed below.

BOARD OF TRUSTEES(2)

PAJARO VALLEY UNIFIED SCHOOL DISTRICT

Name Office/Trustee Area Term Expires Leslie DeRose President, Trustee Area V December 2018 Maria Orozco Clerk, Trustee Area VI December 2020

Georgia Acosta Trustee, Trustee Area II December 2020 Kim DeSerpa Trustee, Trustee Area I December 2018

Karen Osmundson Trustee, Trustee Area III December 2020 Jeff Ursino Trustee, Trustee Area VII December 2018

Willie Yahiro Trustee, Trustee Area IV December 2018

Superintendent and Administrative Personnel. The day-to-day operations are managed by a board-appointed Superintendent of the District, and District finances are managed by the Chief Financial Officer. Michelle Rodriguez, Ph.D. is the District Superintendent, and Joe Dominguez is the Chief Business Officer.

(2) The Santa Cruz County Registrar of Voters indicates the projected November 6, 2018, election results are that Trustee Area IV

is very close between Daniel Dodge, Jr. and Willie Yahiro and the result has not yet been determined, Trustee Area V will be represented by Jennifer Schacher, and Trustee Area VII will be represented by Jennifer Holm. The Board members will be installed and officers will be selected during a Board of Trustees meeting held in December 2018. Kim DeSerpa, representing Trustee Area I, was unopposed.

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Employee Relations

As of November 2018, the District has approximately 1,117.3 certificated full-time equivalent (“FTE”) employees, approximately 761.5 classified FTE employees, and approximately 132.63 management/supervisor/confidential FTE employees.

For Fiscal Year 2018-19, the estimated split among the number of certificated, classified and management employees is approximately 55.5% certificated, 37.9% classified, and 6.6% management. Table 1 below sets forth the number of certificated, classified and management employees employed by the District for Fiscal Years 2010-11 through 2018-19.

Table 1 PAJARO VALLEY UNIFIED SCHOOL DISTRICT

Employees Fiscal Years 2010-11 through 2018-19

Fiscal Year

Total FTE* Certificated Employees

Total FTE* Classified Employees

Total FTE* Management Employees

Total FTE* Employees

2010-11 969.33 595.56 121.22 1,686.11 2011-12 965.04 586.24 121.25 1,672.53 2012-13 967.66 600.19 118.63 1,686.48 2013-14 988.74 639.38 121.96 1,750.08 2014-15 1,040.72 671.32 122.94 1,834.98 2015-16 1,043.42 699.73 120.93 1,864.08 2016-17 1,071.85 712.39 125.27 1,909.51 2017-18 (1) 1,096.75 739.90 132.15 1,968.80 2018-19 (2) 1,117.31 761.50 132.63 2,011.44

*FTE: Full-Time Equivalent. (1) Unaudited actuals. (2) Fiscal Year 2018-19 Budget.

Source: Pajaro Valley Unified School District.

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The certificated and classified employees of the District are represented by their respective bargaining units, as set forth in the following table. Management, supervisory and confidential personnel are comprised of certificated and classified personnel who are self-represented.

Table 2

PAJARO VALLEY UNIFIED SCHOOL DISTRICT Bargaining Units

Number of Employee Employees Contract

Group Representation Represented Expiration Date

Pajaro Valley Teachers Association California School Employees Association

Certificated 1,322 June 30, 2019 Classified 1,032 June 30, 2021

____________________ Source: Pajaro Valley Unified School District.


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Recent Enrollment Trends The following table shows recent enrollment history and, budgeted and projected enrollment for the Fiscal Year 2018-19 and Fiscal Year 2019-20, respectively, for the District, including charter school students.


Annual Enrollment Fiscal Years 2007-08 through 2019-20

School Year Enrollment (1) % Change 2007-08 19,420 -- 2008-09 19,477 0.3% 2009-10 19,381 (0.5) 2010-11 19,545 0.8 2011-12 19,923 1.9 2012-13 20,001 0.4 2013-14 20,362 1.8 2014-15 20,438 0.4 2015-16 20,354 (0.4) 2016-17 20,283 (0.4) 2017-18 20,247 (0.2) 2018-19(2) 20,042 (0.1) 2019-20(3) 20,042 0.0

____________________ (1) Includes charter school students. (2) Budgeted. (3) Projected. Source: California Department of Education for enrollment through 2017-18;

Pajaro Valley Unified School District budget for 2018-19 and 2019-20.


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DISTRICT FINANCIAL INFORMATION

Education Funding Generally

School districts in California receive operating income primarily from two sources: the State funded portion which is derived from the State’s general fund, and a locally funded portion, being the district’s share of the one percent general ad valorem tax levy authorized by the California Constitution. As a result, decreases or deferrals in education funding by the State could significantly affect a school district’s revenues and operations.

From 1973-74 to 2012-13, California school districts operated under general purpose revenue limits established by the State Legislature. In general, revenue limits were calculated for each school district by multiplying (1) the average daily attendance (“ADA”) for such district by (2) a base revenue limit per unit of ADA. The revenue limit calculations were adjusted annually in accordance with a number of factors designated primarily to provide cost of living increases and to equalize revenues among all California school districts of the same type. Funding of the District’s revenue limit was provided by a mix of local property taxes and State apportionments of basic and equalization aid. Generally, the State apportionments amounted to the difference between the District’s revenue limit and its local property tax revenues.

The Fiscal Year 2013-14 State budget package (the “2013-14 State Budget”) replaced the previous K-12 finance system with a new formula known as the Local Control Funding Formula (the “LCFF”). Under the LCFF, revenue limits and most state categorical programs were eliminated. School districts instead receive funding based on the demographic profile of the students they serve and gain greater flexibility to use these funds to improve outcomes of students. The LCFF creates funding targets based on student characteristics. For school districts and charter schools, the LCFF funding targets consist of grade span-specific base grants plus supplemental and concentration grants that reflect student demographic factors. The LCFF includes the following components:

A base grant for each local education agency per unit of ADA, which varies with respect to different grade spans. The Base Grants are based on four uniform, grade-span rates. For Fiscal Year 2018-19, the LCFF provided to school districts and charter schools; (a) a Target Base Grant for each LEA equivalent to $8,235 per A.D.A. for kindergarten through grade 3; (b) a Target Base Grant for each LEA equivalent to $7,571 per A.D.A. for grades 4 through 6; (c) a Target Base Grant for each LEA equivalent to $7,796 per A.D.A. for grades 7 and 8; (d) a Target Base Grant for each LEA equivalent to $9,269 per A.D.A. for grades 9 through 12. However, the amount of actual funding allocated to the Base Grant, Supplemental Grants and Concentration Grants will be subject to the discretion of the State. This amount includes an adjustment of 10.4% to the Base Grant to support lowering class sizes in grades K-3, and an adjustment of 2.6% to reflect the cost of operating career technical education programs in grades 9-12. Further, this amount also includes the higher costs of living adjustment of 3.70% authorized by the 2018-19 State Budget, which is known as “Super COLA.”

A 20% supplemental grant for unduplicated number of English language learners, students from low-income families and foster youth to reflect increased costs associated with educating those students.

An additional concentration grant of up to 50% of a local education agency’s base grant, based on the number of English language learners, students from low-income families and foster youth served by the local agency that comprise more than 55% of enrollment.

An economic recovery target to ensure that is intended to ensure that almost every local education agency receives at least their pre-recession funding level (i.e., the Fiscal Year 2007-

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08 revenue limit per unit of ADA), adjusted for inflation, at full implementation of the LCFF. Upon full implementation, local education agencies would receive the greater of the Base Grant or the economic recover target.

Under LCFF, for community funded districts, local property tax revenues would be used to offset

up to the entire allocation under the new formula. However, community funded districts would continue to receive the same level of State aid as allocation in Fiscal Year 2012-13.

The LCFF was implemented for Fiscal Year 2013-14 and has been phased in gradually. Beginning

in Fiscal Year 2013-14, an annual transition adjustment was required to be calculated for each school district, equal to each district’s proportionate share of the appropriations included in the State budget (based on the percentage of each district’s students who are low-income, English learners, and foster youth (“Targeted Students”), to close the gap between the prior-year funding level and the target allocation at full implementation of LCFF. In each year, districts have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of a district’s funding gap.

Although at the time of implementation in Fiscal Year 2013-14, based on revenue projections, districts were expected to reach what is referred to as “full funding” in Fiscal Year 2020-21, in Fiscal Year 2018-19, LCFF is now fully implemented.

The target LCFF amounts for State school districts and charter schools based on grade levels and Targeted Students for Fiscal Year 2018-19 and projected Fiscal Years 2018-19 LCFF Revenues assuming 100% Funding of targeted students are shown below.


Fiscal Year 2018-19 Grade Span Funding (1)

Average Assuming 100% Targeted Students

Grade Span

ADA

Base Grant

K-3 Class Size

Reduction and 9-12

Adjustments

Supplemental Grants

Concentration Grants

Target TK-3 5,517.54 $7,459 776 1,288 954 $57,807,604 4-6 4,232.02 7,571 1,184 877 40,763,965 7-8 2,590.67 7,796 1,219 904 25,695,661

9-12 5,050.54 9,034 235 1,449 1,074 59,558,887

Total ADA/$ LCFF(2) 17,390.77 $139,019,365 $5,468,488 $22,592,121 $16,746,142 $183,826,116 Amount for home to school transportation 1,088,877 Amount for target instruction improvements block grant 2,673,110 Total LCFF $187,588,103 ____________________ (1) LCFF Calculator 2018-19 Revised at 2017-18 Unaudited Actuals (September 2018). (2) Totals may not add due to rounding. Source: California Department of Education.

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The new legislation includes a “hold harmless” provision which provides that a district or charter school will maintain total revenue limit and categorical funding at least equal to its Fiscal Year 2012-13 level, unadjusted for changes in ADA or cost of living adjustments.

Local Control Accountability Plans. Beginning July 1, 2014, school districts were required to

develop a three-year Local Control and Accountability Plan (each, a “LCAP”). Each LCAP must be developed with input from teachers, parents and the community, and should describe local goals as they pertain to eight areas identified as state priorities, including student achievement, parent engagement and school climate, as well as detail a course of action to attain those goals. Moreover, the LCAPs must be designed to align with the school district’s budget to ensure adequate funding is allocated for the planned actions.

Each school district must submit its LCAP annually on or before July 1 for approval by its county superintendent. The county superintendent then has until August 15 to seek clarification regarding the contents of the LCAP, and the school district must respond in writing. The county superintendent can submit recommendations for amending the LCAP, and such recommendations must be considered, but are not mandatory. A school district’s LCAP must be approved by its county superintendent by October 8 of each year if the superintendent finds (i) the LCAP adheres to the State template, and (ii) the district’s budgeted expenditures are sufficient to implement the strategies outlined in the LCAP.

Performance evaluations are to be conducted to assess progress toward goals and guide future actions. County superintendents are expected to review and provide support to the school districts under their jurisdiction, while the State Superintendent of Public Instruction performs a corresponding role for county offices of education. The California Collaborate for Education Excellence (the “Collaborative”) a newly established body of educational specialist, was created to advise and assist local education agencies in achieving the goals identified in their LCAPs. For local education agencies that continued to struggle in meeting their goals and when the Collaborative indicates that additional intervention is needed, the State Superintendent of Public Instruction would have authority to make changes to a local education agency’s LCAP.

For charter schools, the charter authorizer is required to consider revocation of a charter if the Collaborative finds that the inadequate performance is so persistent and acute as to warrant revocation. The State will continue to measure student achievement through statewide assessments, produce an Academic Performance Index for schools and subgroups of students, determine the contents of the school accountability report card, and establish policies to implement the federal accountability system. District Accounting Practices

The accounting practices of the District conform to generally accepted accounting principles in accordance with policies and procedures of the California School Accounting Manual. This manual, according to Section 41010 of the California Education Code, is to be followed by all California school districts.

District accounting is organized on the basis of fund groups, with each group consisting of a separate set of self-balancing accounts containing assets, liabilities, fund balances, revenues and expenditures. The major fund classification is the general fund which accounts for all financial resources not requiring a special fund placement. The District’s fiscal year begins on July 1 and ends on June 30.

District expenditures are accrued at the end of the fiscal year to reflect the receipt of goods and services in that year. Revenues generally are recorded on a cash basis, except for items that are susceptible to accrual (measurable and/or available to finance operations). Current taxes are considered susceptible to accrual. Revenues from specific state and federally funded projects are recognized when qualified expenditures have

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been incurred. State block grant apportionments are accrued to the extent that they are measurable and predictable. The State Department of Education sends the District updated information from time to time explaining the acceptable accounting treatment of revenue and expenditure categories.

The Governmental Accounting Standards Board (“GASB”) published its Statement No. 34 “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments” on June 30, 1999. Statement No. 34 provides guidelines to auditors, state and local governments and special purpose governments such as school districts and public utilities, on new requirements for financial reporting for all governmental agencies in the United States. Generally, the basic financial statements and required supplementary information should include (i) Management’s Discussion and Analysis; (ii) financial statements prepared using the economic measurement focus and the accrual basis of accounting, (iii) fund financial statements prepared using the current financial resources measurement focus and the modified accrual method of accounting and (iv) required supplementary information. Financial Statements

General. The District’s Audited Financial Statements for the fiscal year ending June 30, 2017, were prepared by Tittle & Company, LLP, Chico, California (the “Auditor”). Audited financial statements for the District for the Fiscal Year ended June 30, 2017 and prior fiscal years are on file with the District and available for public inspection at the Superintendent’s Office. See Appendix B hereto for the Audited Financial Statements for Fiscal Year 2016-17. The District has not requested, and the auditor has not provided, any additional review of such financial statements in connection with their inclusion in the Official Statement. Copies of such financial statements will be mailed to prospective investors and their representatives upon written request to the District.

General Fund Revenues, Expenditures and Changes in Fund Balance. The following table shows the audited income and expense statements for the District for the Fiscal Years 2012-13 through 2016-17. The District expects the auditor to complete the audit of their financial statements for the year ended June 30, 2018, by December 15, 2018, and the District expects the Board to accept the audit in mid-January 2019. The audit will thereafter be posted on EMMA. District officials do not expect that the audit will contain any information that would materially adversely affect the District’s financial condition.


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Table 5 PAJARO VALLEY UNIFIED SCHOOL DISTRICT Revenues, Expenditures and Changes in Fund Balance

Fiscal Years 2012-13 through 2016-17 (Audited)

Revenues

Audited 2012-13

Audited 2013-14

Audited 2014-15

Audited 2015-16

Audited 2016-17

Total Revenue Limit Sources/LCFF (1) $91,760,292 $125,985,092 (2) $140,356,152 $161,908,248 $170,940,569 Federal Revenues 23,859,552 24,537,230 21,675,092 20,373,823 20,040,653 Other State revenues 52,103,053 31,070,624 29,454,110 38,087,423 36,654,688

Other local revenues 3,445,625 2,331,803 3,507,507 4,154,719 3,631,868

Total Revenues $171,168,522 $183,924,749 $194,992,861 $224,524,213 $231,267,778

Expenditures

Instruction $108,102,128 $116,339,183 $122,467,914 $124,404,669 $139,162,337

Instruction-related services:

Supervision of instruction 15,274,895 16,428,877 17,480,180 17,360,021 18,844,039 Library, media and technology 3,345,431 3,808,610 3,767,301 4,571,810 4,119,466

School site administration 9,757,959 10,757,299 11,444,337 11,529,351 12,894,769

Pupil services:

Home-to-school transportation 6,613,748 6,126,007 6,748,749 6,196,280 6,408,179

Food services 18,745 16 0 66 0

All other pupil services 9,961,014 11,754,313 13,323,292 15,026,863 17,706,336

General administration:

Data processing services 1,450,352 1,784,363 2,082,487 2,296,170 2,576,855

All other general administration 5,210,027 5,530,692 8,497,522 6,135,028 6,706,435

Plant services 13,956,330 14,919,812 16,494,721 15,912,332 17,605,724

Facilities acquisition and maintenance 156,063 858,423 849,390 1,927,413 2,468,517

Ancillary services 762,901 1,388,268 1,557,521 1,724,001 2,175,217

Community services 17,427 14,911 24,380 66,793 19,088

Other outgo 56,647 2,708,423 602,632 689,820 654,545 Debt service: principal 289,131 228,733 689,894 574,164 585,318 Debt service: interest 96,369 26,401 18,789 42,152 30,998

Total Expenditures $175,069,167 $192,674,331 $206,049,109 $208,456,933 $231,957,823

Excess of Revenues Over/(Under) Expenditures

($3,900,645) ($8,749,582) ($11,056,248) $16,067,280 ($690,045)

Other Financing Sources (Uses) Operating transfers in $6,279,550 $1,084 $16,356,307(3) $424,805 $0

Operating transfers out (4) (651,792) (1,678,245) (972,594) (608,944) (910,834) Other Sources 759,812 0 2,267,749 0 0

Total Other Fin. Source (Uses) $6,387,570 ($1,677,161) $17,651,462 ($184,139) ($910,834)

Net change in fund balance $2,486,925 ($10,426,743) (2) $6,595,214 $15,883,141 ($1,600,879)

Fund Balance, July 1 $44,648,706 $47,135,631 $36,708,888 $43,304,102 $59,187,243

Fund Balance, June 30 $47,135,631 $36,708,888 $43,304,102 $59,187,243 $57,586,364

____________________ (1) Local Control Funding Formula (“LCFF”) commenced in Fiscal Year 2013-14. (2) The Board approved a 7% salary increase for employees and implemented class size reductions, as well as re-established positions that

had been previously eliminated. (3) The Board authorized a one-time transfer in of an outside fund that the District no longer needed. (4) Contribution to charter school, child development department and Migrant Seasonal Head Start. Source: Pajaro Valley Unified School District Audit Reports.

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District Budget and Interim Financial Reporting

Budgeting – Education Code Requirements. The District is required by provisions of the State Education Code to maintain a balanced budget each year, in which the sum of expenditures and the ending fund balance cannot exceed the sum of revenues and the carry-over fund balance from the previous year. The State Department of Education imposes a uniform budgeting and accounting format for school districts. The budget process for school districts was substantially amended by Assembly Bill 1200 (“AB 1200”), which became State law on October 14, 1991. Portions of AB 1200 are summarized below.

School districts must adopt a budget on or before July 1 of each year. The budget must be submitted to the county superintendent within five days of adoption or by July 1, whichever occurs first. A district must be on a single budget cycle. The single budget is only readopted if it is disapproved by the county office of education, or as needed. The District is on a single budget cycle and adopts its budget on or before July 1.

The county superintendent will examine the adopted budget for compliance with the standards and criteria adopted by the State Board of Trustees and identify technical corrections necessary to bring the budget into compliance, will determine if the budget allows the district to meet its current obligations and will determine if the budget is consistent with a financial plan that will enable the district to meet its multi-year financial commitments. On or before September 15, the county superintendent will approve or disapprove the adopted budget for each school district. Budgets will be disapproved if they fail the above standards. The district board must be notified by September 15 of the county superintendent’s recommendations for revision and reasons for the recommendations. The county superintendent may assign a fiscal advisor or appoint a committee to examine and comment on the superintendent’s recommendations. The committee must report its findings no later than September 20. Any recommendations made by the county superintendent must be made available by the district for public inspection. The law does not provide for conditional approvals; budgets must be either approved or disapproved. No later than November 8, the county superintendent must notify the Superintendent of Public Instruction of all school districts whose budgets have been disapproved.

For districts whose budgets have been disapproved, the district must revise and readopt its budget by September 8, reflecting changes in projected income and expense since July 1, including responding to the county superintendent’s recommendations. The county superintendent must determine if the budget conforms with the standards and criteria applicable to final district budgets and not later than October 8, will approve or disapprove the revised budgets. If the budget is disapproved, the county superintendent will call for the formation of a budget review committee pursuant to Education Code Section 42127.1. Until a district’s budget is approved, the district will operate on the lesser of its proposed budget for the current fiscal year or the last budget adopted and reviewed for the prior fiscal year.

Interim Certifications Regarding Ability to Meet Financial Obligations. Under the provisions of AB 1200, each school district is required to file interim certifications with the county office of education as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent two fiscal years. The Santa Cruz County Superintendent reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that is deemed unable to meet its financial obligations for the remainder of the fiscal year or the subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years.

Under California law, any school district and office of education that has a qualified or negative certification in any fiscal year may not issue, in that fiscal year or in the next succeeding fiscal year, certificates of participation, tax anticipation notes, revenue bonds or any other debt instruments that do not require the approval of the voters of the

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district, unless the applicable county superintendent of schools determines that the district’s repayment of indebtedness is probable.

District’s Budget Approval/Disapproval and Certification History. The following table shows recent certification history for the District.

Table 6 PAJARO VALLEY UNIFIED SCHOOL DISTRICT Recent History of Interim Reporting Certifications

Reporting Period Type of Certification

2011-12 1st Interim Qualified

2011-12 2nd Interim Qualified

2012-13 1st Interim Positive

2012-13 2nd Interim Positive



2014-15 1st Interim Negative

2014-15 2nd Interim Qualified







____________________ Source: Pajaro Valley Unified School District.

As shown in the preceding table, the District has certified certain of its interim reports as qualified. Despite undergoing significant state education funding reductions in Fiscal Years 2011-12 to 2012-13, the District has maintained positive fund balances throughout that time period and has implemented fiscal stabilization and efficiency initiatives which have increased the District’s fiscal stability.

Certain changes to District revenues and/or expenditures could result in declines to general fund reserves in future years. Investors are encouraged to review District’s financial statements and multi-year projections at www.pvusd.net. The reference to this Internet website is shown for reference and convenience only and the information contained on such website is not incorporated by reference into this Official Statement. The information contained on this website may not be current and has not been reviewed by the District or the Underwriter for accuracy or completeness.

Copies of the District’s budget, interim reports and certifications may be obtained upon request from the District Office at Pajaro Valley Unified School District, 294 Green Valley Road, Watsonville, California 95076; phone (831) 786-2100. The District may impose charges for copying, mailing and handling.

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District’s 2018-19 Budget. The following table shows the income and expense statements for the District’s General Fund for Fiscal Years 2015-16 through 2016-17 (Adopted Budget and Audited Actuals), for Fiscal Year 2017-18 (Adopted Budget and Unaudited Actuals) and for Fiscal Year 2018-19 (Adopted Budget). The District expects to approve the first interim budget at their meeting on December 12, 2018. District officials do not expect that the first interim budget will contain any information that would materially adversely affect the District’s financial condition.

Table 7


Revenues, Expenditures and Changes in Fund Balance(1)

Fiscal Years 2015-16 through 2016-17 (Adopted Budget and Audited Actuals),

Fiscal Year 2017-18 (Adopted Budget and Unaudited Actuals), and

Fiscal Year 2018-19 (Adopted Budget)

Adopted Budget

Audited

Actuals Adopted Budget

Audited


Unaudited


Revenues 2015-16 2015-16 2016-17 2016-17 2017-18 2017-18 2018-19 LCFF $158,917,169 $161,908,248 $170,605,902 $170,940,569 $172,928,127 $175,178,455 $187,588,103 Federal Revenues 19,672,138 20,373,823 19,650,687 20,040,653 19,969,624 21,764,362 19,555,673 Other State Revenues 31,668,644 38,087,423 32,159,403 36,654,688 26,419,298 33,233,456 33,600,027 Other Local Revenues 1,721,375 4,154,719 1,261,628 3,631,868 1,002,321 4,502,807 1,413,924 Total Revenues $211,979,326 $224,524,213 $223,677,620 $231,267,778 $220,319,370 $234,679,080 $242,157,727 Expenditures

Certificated Salaries $77,846,039 $78,439,915 $86,724,450 $87,930,343 $84,602,081 $90,442,242 $92,605,646 Classified Salaries 30,380,407 29,723,697 31,565,244 33,018,759 32,889,042 39,419,938 39,885,239 Employee Benefits 66,497,907 68,137,340 77,448,005 78,888,677 80,743,706 81,307,763 86,344,552 Books and Supplies 11,377,249 9,865,766 14,909,848 10,194,089 13,385,122 12,013,222 10,887,004 Contract Services & Operating Exp. 23,103,733 19,873,789 20,174,564 19,263,636 17,642,926 22,944,909 19,095,761 Capital Outlay 2,272,000 2,051,453 17,000 2,443,957 1,682,445 5,435,173 2,277,095 Other Outgo (excluding indirect costs) 1,200,805 (251,343) 1,332,103 (397,954) 1,271,537 1,343,075 1,324,430 Other Outgo – Transfers of Indirect Costs (921,187) 0 (952,922) 0 (1,052,371) (1,147,490) (936,639) Debt Service – principal 0 574,164 585,318 Debt Service - interest 0 42,152 30,998 Total Expenditures $211,756,953 $208,456,933 $231,218,282 $231,957,823 $231,164,488 $251,758,833 $251,482,888 Excess of Revenues Over/(Under) Expenditures $222,373 $16,067,280 ($7,540,662) ($690,045) ($10,845,118) ($17,079,753) ($9,325,161) Other Financing Sources (Uses)

Operating transfers in $0 $424,805 $0 $0 $0 $135,766 $0

Operating transfers out 611,991 (608,944) 930,144 (910,834) 622,294 (683,021) 749,449 Total Other Financing Sources/(Uses) ($611,911) ($184,139) ($930,144) ($910,834) ($622,294) ($547,255) ($749,449) Net change in fund balance ($389,618) $15,883,141 ($8,470,806) ($1,600,879) ($11,467,412) ($17,627,008) ($10,074,610) Fund Balance, July 1 $40,954,403 $43,304,102 $52,305,741 $59,187,243 $53,667,382 $57,584,563 $39,957,556 Fund Balance, June 30 $40,564,785 $59,187,243 $43,834,935 $57,586,364 $42,199,970 $39,957,556 $29,882,946 ____________________

(1) Totals may not sum due to rounding. Source: Pajaro Valley Unified School District.

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District Reserves. In general, the State requires that the California school districts maintain the equivalent of 3% of annual general fund expenditures in reserve to be available during financial crisis. The District’s ending fund balance is the accumulation of surpluses from prior years. This fund balance is used to meet the State’s minimum required reserve of 3% of expenditures, plus any other allocation or reserve which might be approved as an expenditure by the District in the future. The District maintains an unrestricted reserve which meets or exceeds the State’s minimum requirements.

In connection with legislation adopted in connection with the State’s Fiscal Year 2014-15 Budget (“SB 858”), the Education Code was amended to provide that, beginning in Fiscal Year 2015-16, if a district’s proposed budget includes a local reserve above the minimum recommended level, the governing board must provide the information for review at the annual public hearing on its proposed budget. In addition, SB 858 included a provision, which became effective upon the passage of Proposition 2 at the November 4, 2014 statewide election, which limits the amount of reserves which may be maintained at the school district level. Specifically, the legislation, among other things, enacted Education Code Section 42127.01, which became operative December 15, 2014, and provides that in any fiscal year immediately after a fiscal year in which a transfer is made to the State’s Public School System Stabilization Account (the Proposition 98 reserve), a school district may not adopt a budget that contains a reserve for economic uncertainties in excess of twice the applicable minimum recommended reserve for economic uncertainties established by the State Board (for school districts with ADA over 400,000, the limit is three times the amount). Exemptions can be granted by the Santa Cruz County Superintendent under certain circumstances.

Effective January 1, 2018, Senate Bill 751, which was signed by the Governor on October 11, 2017, amends Section 42127.01 of the Education Code to raise the reserve cap to no more than 10% of a school district’s combined assigned or unassigned ending general fund balance. In addition, the amendment provides that the reserve cap will be effective only if there is a minimum balance of 3% in the Proposition 98 reserve referenced in the preceding paragraph. Basic aid school districts and small districts with 2,500 or fewer ADA are exempted from the reserve cap contained in Education Code Section 42127.01. Attendance – Revenue Limit and LCFF Funding

Funding Trends per ADA. As described herein, prior to Fiscal Year 2013-14, school districts in California received State funding based on a formula which considered a revenue limit per unit of ADA. With the implementation of the LCFF, commencing in Fiscal Year 2013-14, school districts receive base funding based on ADA, and may also be entitled to supplemental funding, concentration grants and funding based on an economic recovery target. The following table sets forth recent LCFF funding per ADA for the District. The following table sets forth recent ADA and LCFF funding for the District.

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ADA and LCFF Funding Fiscal Years 2013-14 through 2018 -19 (Budgeted)

Fiscal Year

ADA(1)

Total LCFF Funding

LCFF Funding Per ADA

2013-14 17,540 $125,821,615 $7,173.41 2014-15 17,434 141,201,506 8,099.20 2015-16 17,454 161,502,820 9,253.05 2016-17 17,410 170,912,184 9,816.90 2017-18 (2) 17,428 175,423,346 10,065.60

2018-19 (3) 17,391 187,588,103 10,786.50 ____________________

(1) ADA excludes community day school students, County Office of Education students and dependent and independent charter school students.

(2) Unaudited Actuals. (3) Budgeted. Source: Pajaro Valley Unified School District.

District’s Unduplicated Student Count. Under LCFF, school districts are entitled to supplemental funding based on the unduplicated count of targeted students. The District’s percentage of unduplicated students for Fiscal Year 2018-19 is approximately 78.18% for purposes of calculating supplemental and concentration grant funding under LCFF.

Revenue Sources

The District categorizes its general fund revenues into four sources, being LCFF, Federal Revenues, Other State Revenues and Local Revenues. Each of these revenue sources is described below.

LCFF Sources. District funding is provided by a mix of (1) local property taxes and (2) State apportionments of funding under the LCFF. Generally, the State apportionments will amount to the difference between the District’s LCFF funding entitlement and its local property tax revenues.

Beginning in Fiscal Year 1978-79, Proposition 13 and its implementing legislation provided for each county to levy (except for levies to support prior voter-approved indebtedness) and collect all property taxes, and prescribed how levies on county-wide property values are to be shared with local taxing entities within each county.

The principal component of local revenues is the school district’s property tax revenues, i.e., the district’s share of the local 1% property tax, received pursuant to Sections 75 and following and Sections 95 and following of the California Revenue and Taxation Code. California Education Code Section 42238(h) itemizes the local revenues that are counted towards the base revenue limit before calculating how much the State must provide in equalization aid. Historically, the more local property taxes a district received, the less State equalization aid it is entitled to.

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For school districts which were Community Supported Districts prior to implementation of the LCFF, provided that the per pupil funding targets under LCFF, including economic recovery targets, are met or exceeded by local property tax revenues, such districts are entitled to retain their status as Community Supported and keep their full local property tax revenue entitlement. The threshold for Basic Aid status under the LCFF, however, is higher than under the prior funding formula, resulting in some districts falling out of Community Supported status as the result of the implementation of the LCFF. Accountability measures contained in the LCFF must be implemented by all districts, including Community Supported Districts.

Federal Revenues. The federal government provides funding for several District programs, including special education programs, programs under Every Student Succeeds Act, the Individuals With Disabilities Education Act, and specialized programs such as Drug Free Schools.

Other State Revenues. As discussed above, the District receives State apportionment of basic and equalization aid in an amount equal to the difference between the District’s revenue limit and its property tax revenues. In addition to such apportionment revenue, the District receives other State revenues.

The District receives State aid from the California State Lottery (the “Lottery”), which was established by a constitutional amendment approved in the November 1984 general election. Lottery revenues must be used for the education of students and cannot be used for non-instructional purposes such as real property acquisition, facility construction, or the financing of research. Moreover, State Proposition 20 approved in March 2000 requires that 50% of the increase in Lottery revenues over 1997-98 levels must be restricted to use on instruction material.

For additional discussion of State aid to school districts, see “ – Education Funding Generally.” Other Local Revenues. In addition to local property taxes, the District receives additional local

revenues from items such as interest earnings and other local sources. District Retirement Systems

The information set forth below regarding the STRS and PERS programs, other than the information provided by the District regarding its annual contributions thereto, has been obtained from publicly available sources which are believed to be reliable but are not guaranteed as to accuracy or completeness, and should not to be construed as a representation by either the District or the Underwriter.

STRS. The District participates in the State of California Teachers’ Retirement System (“STRS”),

which provides benefits to full-time certificated personnel. STRS provides retirement, disability and survivor benefits to plan members and beneficiaries. In order to receive STRS benefits, an employee must be at least 55 years of age and have provided five years of service to State public schools or, if the member is pre-PEPRA, an employee must be at least 50 years of age and have provided 30 years of service to State public schools. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers’ Retirement Law.

The District also participates in the State of California Public Employees’ Retirement System (“PERS”) which provides benefits to full-time classified personnel and part-time employees who are employed more than 1,000 hours during the year as well as certain certificated employees. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by the State statutes, as legislatively amended, with the Public Employees’ Retirement Laws.

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The District’s contributions in recent years, and budgeted contributions in Fiscal Year 2018-19, are set forth below:


District Contributions to STRS and PERS Fiscal Years 2012-13 through 2018-19

Fiscal Year STRS PERS

2012-13 $5,386,740 $4,187,460 2013-14 5,951,285 4,723,301 2014-15 10,373,390 4,969,296 2015-16 13,329,798 5,002,183 2016-17 (1) 18,290,590 5,833,383

2017-18 (2) 19,192,622 5,682,839

2018-19 (3) 20,584,796 7,182,803

(1) Increase in Fiscal Years 2016-7 and thereafter attributed to increase in contribution rates and modified accounting reporting requirements, which include reporting the District’s proportionate share of the plan’s net pension liability and recognizing on-behalf STRS contributions in governmental funds.

(2) Unaudited actuals. (3) Fiscal Year 2018-19 budget.

Source: Pajaro Valley Unified School District.

STRS. In order to receive STRS benefits, an employee must be at least 55 years old and have

provided five years of service to State public schools. The District contribution rates are established by State statutes. In addition, participants are required to contribute to STRS. Participant contribution rates and benefits differ depending on whether an employee was hired on or before December 31, 2012 or on or after January 1, 2013 (see “ – Pension Reform Act of 2013 (Assembly Bill 340)” herein). Employer contribution rates, including those of the District, will increase through Fiscal Year 2020-21, as shown in the following table. Beginning Fiscal Year 2021-22, employer contribution rates will be set each year by the Governing Board of the State Teachers’ Retirement System (the “STRS Board”) to reflect the contribution required to eliminate unfunded liabilities by June 30, 2046.


Overview of STRS Contribution Rates

A.B. 1469 Increases – Employer Rates STRS Participant

Effective Date Prior Rate Increase Total

Required Contributions (Hired on or Before 12/31/2012 (Classic Members); 2% at 60 members)

Required Contributions (Hired on or After 1/1/2013 (New Members); 2% at 62 members)

July 1, 2017 8.25% 6.18% 14.43% 10.25% 9.205% July 1, 2018 8.25 8.03 16.28 10.25 10.205 July 1, 2019 8.25 9.88 18.13 10.25 10.205(1) July 1, 2020 8.25 10.85 19.10 10.25 10.205(1) (1) Projected, subject to change. Source: STRS Employer Directive 2018-02.

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The State also contributes to STRS. The State’s contributions are set pursuant to the California Education Code. The State’s contribution reflects a base contribution and a supplemental contribution that will vary from year to year based on statutory criteria. For Fiscal Year 2017-18, the State contributed 6.828% of members’ annual earnings to the defined benefit plan. For Fiscal Year 2018-19, the State will contribute 7.328% of members’ annual earnings to the defined benefit plan. The State also contributes an amount based on a percentage of annual member earnings into the STRS Supplemental Benefits Maintenance Account, which is used to maintain the purchasing power of benefits.

Interested persons may review the STRS website for details regarding its programs – http://www.calstrs.com. (This reference is for convenience of reference only and not considered to be incorporated as part of this Official Statement.) PERS. The District also participates in PERS. Classified employees working four or more hours per day are members of the Public Employees’ Retirement System (defined above as “PERS”). PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by the State statutes, as legislatively amended, with the Public Employees’ Retirement Laws. School districts are currently required to contribute to PERS at an actuarially determined rate. The information in the table below is derived from the PERS’ Schools Pool Actuarial Valuation dated as of June 30, 2017. See “ – Pension Reform Act of 2013 (Assembly Bill 340)” herein.


Overview of PERS Contribution Rates

Effective Date

PERS District Statutory

Contribution Rates

PERS Participant Required

Contributions (Hired on or Before 12/31/2012;

2% at 55 members)

PERS Participant Contributions

(Hired on or After 1/1/2013

(New Members); 2% at 62 members)

July 1, 2015(1) 11.847% 7.0% 6.00% July 1, 2016(1) 13.888 7.0 6.00 July 1, 2017(1) 15.531 7.0 6.50 July 1, 2018(1) 18.062 7.0 7.00 July 1, 2019(2) 20.700 7.0 7.00 July 1, 2020(2) 23.400 7.0 7.00

____________________ (1) Source: PERS’ Schools Pool Actuarial Valuation as of June 30, 2017. (2) Subject to change.

Source: PERS’ Schools Pool Actuarial Valuation as of June 30, 2017.

Interested persons may review the PERS website for details regarding its programs – http://www.calpers.ca.gov. (This reference is for convenience of reference only and not considered to be incorporated as part of this Official Statement.) Contribution rates to STRS and PERS vary annually depending on changes in actuarial assumptions and other factors, such as changes in retirement benefits. The contribution rates are based on state-wide rates set by the STRS and PERS retirement boards. STRS has a substantial State-wide unfunded liability. Since this liability has not been broken down by each school district, it is impossible to determine the District’s share. The District is unable to predict what the amounts of liabilities will be in the future, or the amount of future contributions that the District may be required to pay. See APPENDIX B – “AUDITED FINANCIAL STATEMENTS OF THE PAJARO VALLEY UNIFIED SCHOOL DISTRICT FOR

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FISCAL YEAR ENDING JUNE 30, 2017” for additional information concerning STRS and PERS contained in the notes to the financial statements. Actuarial Valuations – STRS. The governing board of STRS adopts a valuation of its defined benefit plan and its defined benefit supplemental plan each year. Due to the financial market declines which occurred during the Fiscal Year 2008-09 period, STRS investments lost substantial value at that time. STRS uses an averaging process that recognizes gains and losses over a three-year period, as a result of which the fund is still being affected by losses incurred during the market downturn. Due to the revised actuarial assumptions, among other factors, in May 2018, STRS announced that the funded status declined to 62.6% on a smoothed actuarial basis as of June 30, 2017, from 63.7% as of June 30, 2016, with the unfunded actuarial obligation increasing to $107.3 billion as of June 30, 2017 from $96.7 billion as of June 30, 2016. Contributions to STRS are generally adjusted by State law. The information herein has been obtained from the information published by STRS and is believed to be reliable but is not guaranteed as to accuracy or completeness.

On February 1, 2017, the STRS Board voted to adopt revised actuarial assumptions reflecting members’ increasing life expectancies and current economic trends. The revised assumptions include a decrease from 7.50% to a 7.25% investment rate of return for the June 30, 2016, actuarial valuation, a decrease from 7.25% to a 7.00% investment rate of return for the June 30, 2017, actuarial valuation, a decrease from 3.75% to a 3.50% projected wage growth, and a decrease from 3.00% to a 2.75% price inflation factor. Due to the revised actuarial assumptions, among other factors, as noted in the preceding paragraph the funded status declined to 62.6% on a smoothed actuarial basis as of June 30, 2017. Changes to the unfunded actuarial obligation affect the contributions by school districts, plan participants and the State in different ways.

In 2014, the Governor signed into law a comprehensive funding strategy to address the unfunded liability at STRS. Consistent with this strategy, the 2018-19 Budget (defined below) includes $3.1 billion State general fund in 2018-19 for STRS. The 2018-19 Budget indicates that the funding strategy positions STRS on a sustainable path forward, eliminating the unfunded liability in about 30 years.

Actuarial Valuations – PERS. The governing board of the PERS adopts a valuation of its defined benefit plan each year. Due to the financial market declines which occurred during the Fiscal Year 2008-09 period, PERS investments lost substantial value at that time. In December 2009, the Governing Board of the Public Employees’ Retirement System (the “PERS Board”) adopted changes to its asset smoothing method in order to phase in over a three-year period the impact of the 24% investment loss experience by PERS in Fiscal Year 2008-09. Recent years have seen positive investment returns, however, the valuation for the 12-month period that ended June 30, 2017, indicated an 11.2% return on investments for the 12-month period that ended June 30, 2017. The valuation for the period ending June 30, 2017, identified the level of funding for the PERS defined benefit program for schools at 72.1% of full funding. The market value of assets increased from $55,784,854,423 to $60,865,459,800, the accrued liability increased from $77,543,827,270 to $84,416,060,617, and the unfunded accrued liability increased from $21,758,972,847 to $23,550,600,817. PERS has adopted policies regarding contribution rates for the various plans and such plans are subject to modification as the PERS Board determines how to address the unfunded actuarial obligations. At its April 17, 2013, meeting, the PERS Board approved a change to the PERS amortization and smoothing policies. Beginning with the June 30, 2015, valuation, the newly adopted direct smoothing method would be used to set the 2015-16 rates for the State and Schools defined benefit plans. Under this new direct rate smoothing method, all gains and losses will be paid over a fixed 30-year period with the increases or decreases in the rate spread over a 5-year period. The PERS Board periodically adopts new assumptions regarding the longer life expectancy of state retirees. The June 30, 2016, valuation notes that the changes to the demographic assumptions approved by the Board would be used to set the Fiscal Year 2016-17

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contribution rate for School employers. The increase in liability due to the new actuarial assumptions is calculated in the 2016 actuarial valuation and amortized over a 20-year period with a 5-year ramp-up/ramp-down in accordance with Board policy. On December 21, 2016, the PERS Board voted to lower the discount rate from 7.5% to 7.0% incrementally over the next three years (7.375% in 2017-18, 7.25% in 2018-19, and 7.0% in 2019-20). Lowering the discount rate, means employers that contract with PERS to administer their pension plans will see increases in their normal costs and unfunded actuarial liabilities. At its February 13, 2018 meeting, the PERS Board approved a recommendation to change the PERS amortization policy. Prior to this change, PERS employed an amortization and smoothing policy which spread investment returns over a 30-year period with the increases or decreases in the rate spread directly over a 5-year period. After this change, PERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 20-year period rather than a 30-year period. The new amortization policy will be used for the first time in the June 30, 2019, actuarial valuations.

In April 2018, the PERS Board approved increased school employer contribution rates for Fiscal Year 2018-19 to address the lowering of the discount rate and the continued phase-in of the effect of investment losses during the two-year period ending June 30, 2016 and various demographic changes. The information herein has been obtained from the information published by PERS and is believed to be reliable but is not guaranteed as to accuracy or completeness. Pension Reform Act of 2013 (Assembly Bill 340)

On August 28, 2012, Governor Brown and the State Legislature reached agreement on a new law

that reforms pensions for State and local government employees. AB 340, which was signed into law on September 12, 2012, established the California Public Employees’ Pension Reform Act of 2012 (“PEPRA”) which governs pensions for public employers and public pension plans on and after January 1, 2013 (the “Implementation Date”). For new employees, PEPRA, among other things, caps pensionable salaries at the Social Security contribution and wage base, which was $121,388 for 2018, or 120% of that amount for employees not covered by Social Security, increases the retirement age by two years or more for all new public employees while adjusting the retirement formulas, requires state employees to pay at least half of their pension costs, and also requires the calculation of benefits on regular, recurring pay to stop income spiking. For all employees, changes required by PEPRA include the prohibition of retroactive pension increases, pension holidays and purchases of service credit. PEPRA applies to all State and local public retirement systems, including county and school district retirement systems. PEPRA only exempts the University of California system and charter cities and counties whose pension plans are not governed by State law. Although the District anticipates that PEPRA would not increase the District’s future pension obligations, the District is unable to determine the extent of any impact PEPRA would have on the District’s pension obligations at this time. Additionally, the District cannot predict if PEPRA will be challenged in court and, if so, whether any challenge would be successful.

GASB 67 and 68

On June 25, 2012, the Governmental Accounting Standards Board (“GASB”) voted to approve two

new standards that aimed to improve the accounting and financial reporting of public employee pensions by state and local governments. Statement No. 67, Financial Reporting for Pension Plans (“Statement No. 67”), revised existing guidance for the financial reports of most pension plans. Statement No. 68, Accounting and Financial Reporting for Pensions (“Statement No. 68”), revised and established new financial reporting requirements for most governments that provide their employees with pension benefits.

Statement No. 67 replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans and Statement 50, Pension Disclosures as they relate to pension plans that are administered through trusts or similar arrangements

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meeting certain criteria. Statement No. 67 builds upon the existing framework for financial reports of defined benefit pension plans, which includes a statement of fiduciary net position (the amount held in a trust for paying retirement benefits) and a statement of changes in fiduciary net position. Statement No. 67 enhances note disclosures and required supplementary information for both defined benefit and defined contribution pension plans. Statement No. 67 also requires the presentation of new information about annual money-weighted rates of return in the notes to the financial statements and in 10-year required supplementary information schedules.

Statement No. 68 replaces the requirements of Statement No. 27, Accounting for Pensions by State

and Local Governmental Employers and Statement No. 50, Pension Disclosures, as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria. Statement No. 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. Statement No. 68 also enhances accountability and transparency through revised and new note disclosures and required supplementary information.

The provisions in Statement No. 67 became effective for financial statements for periods beginning

after June 15, 2013. The provisions in Statement No. 68 became effective for fiscal years beginning after June 15, 2014.

At Fiscal Year 2017-18 year end, the District had an outstanding pension liability of $64,834,201

with respect to STRS and $163,703,335 with respect to PERS, as a result of the adoption of GASB No. 68, Accounting Reporting for Pensions. For information regarding Fiscal Year 2016-17 employee retirement systems, see APPENDIX B – “AUDITED FINANCIAL STATEMENTS OF THE PAJARO VALLEY UNIFIED SCHOOL DISTRICT FOR FISCAL YEAR ENDING JUNE 30, 2017 – Note 15” attached hereto. Other Post-Employment Benefits

Other Post-Employment Benefits. In June 2015, GASB issued Statement No. 75, Accounting and

Financial Reporting for Postemployment Benefits Other Than Pensions (“Statement No. 75”). OPEB (meaning other than pension benefits) generally include post-employment health benefits (medical, dental, vision, prescription drug and mental health), life insurance, disability benefits and long-term care benefits. The objective of Statement No. 75 is to improve accounting and financial reporting by the State and local governments for OPEB by requiring the recognition of entire OPEB liability, a more comprehensive measure of OPEB expense, new note disclosures and certain required supplementary information. In addition, Statement No. 75 sets forth additional accounting methods to improve the usefulness of information about OPEB included in the general purpose external financial reports of State and local governmental OPEB plans for making decisions and assessing accountability. Statement No. 75 results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. Statement No. 75 replaces GASB Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans.

Plan Description. The Postemployment Benefit Plan (the “Plan”) is a single-employer defined benefit healthcare plan administered by the District. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Membership of the plan consists of 214 retirees and beneficiaries currently receiving benefits and 2,341 active plan members.

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Contribution Information. The contribution requirements of plan members and the District are established and may be amended by the District and the Teachers Association (“PVFT”), the local California Service Employees Association (“CSEA”), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined annually through the agreements between the District, PVFT, CSEA and the unrepresented groups. For Fiscal Year 2017-18, the District contributed $3,087,448 to the plan, all of which was used for current premiums (approximately 100% percent of total premiums incurred by retirees plus one eligible dependent).

Actuarial Methods and Assumptions.

Pursuant to Statement No. 75, the District retained Total Compensation Systems, Inc. to assess the District’s liabilities in connection with Statement No. 75. A report was prepared on November 1, 2017, with a June 30, 2017, valuation date (the “2017 Actuarial Study”) and a report dated November 6, 2018, was prepared with a June 30, 2018 valuation date (the “2018 Actuarial Study,” and each an “Actuarial Study”). The respective Actuarial Studies concluded that for current employees, the value of benefits accrued in the year beginning July 1, 2017, (the service cost) was $6,849,653 and in the year beginning July 1, 2018, was $6,849,653, respectively. The respective Actuarial Studies noted that had the District begun accruing retiree health benefits when each current employee and retiree was hired, a substantial liability would have accumulated. The respective Actuarial Studies estimate the amount that would have accumulated at June 30, 2017 to be $74,847,015 and at June 30, 2018, to be $79,921,315, respectively. The amount is called the “Total OPEB Liability” (“TOL”). The District has set aside funds to cover retiree health liabilities in a GASB No. 75 qualifying trust. The fiduciary net position of the trust at June 30, 2017 was $2,835,184 and at June 30, 2018, was $2,977,044, respectively. The Net OPEB Lability (“NOL”) at June 30, 2017, was $72,011,831 and at June 30, 2018, was $76,944,271, respectively.

For more information regarding the District’s OPEB and assumptions used in the 2017 Actuarial Study, see Note 12 in the District’s 2016-17 Audit in APPENDIX B hereto. More information regarding the District’s OPEB and assumptions used in the 2018 Actuarial Study will be included in Note 12 of the District’s 2017-18 audit once it is available. Risk Management – Joint Powers Agreements

The District is exposed to various risks of loss related to torts, theft or destruction of assets, errors and omissions, and natural disasters. The District manages these risks through participation in public entity risk pools.

The District is associated with Schools Association For Excess Risk (“SAFER”), Protection Insurance Programs for Schools (“PIPS”), and public entity risk pools Benefit Liability Excess Fund (“BeLiEF”) that provides insurance coverage to the District. These organization do not meet criteria for inclusion as component units, so they are not component units of the District for financial reporting purposes.

The District also participates in the Henry J. Mello Center for the Performing Arts

Administration (the “JPA”), through a joint powers authority with the City of Watsonville and the District. Each member’s board appoints three directors. The JPA was established for the purpose of administering all functions necessary for the operation and maintenance of the Performing Arts Center (the “Center”). On August 2, 1994, the JPA entered into a management, operation and maintenance agreement with the Pajaro Valley Performing Arts Association (“PVPAA”), a tax exempt, nonprofit public benefit corporation. The agreement was for a period of ten years and has been reviewed and continued annually, whereby; PVPAA shall operate the Center and perform all services reasonably

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required in connection with the management and operation of the Center. PVPAA shall pay costs and operating expenses of every kind pertaining to the Center’s operation.

Charter Schools

Charter schools are largely independent schools operating as part of the public school system created pursuant to Part 26.8 (beginning with Section 47600) of Division 4 of Title 2 of the State Education Code (the “Charter School Law”). A charter school is usually created or organized by a group of teachers, parents and community leaders, or a community-based organization, and may be approved by an existing local public school district, a county board of education or the State Board of Education.

A charter school is generally exempt from the laws governing school districts, except where specifically noted in the law. The Charter School Law acknowledges that among its intended purposes are: (i) to provide parents and students with expanded choices in the types of educational opportunities that are available within the public school system; (ii) to hold schools accountable for meeting measurable pupil outcomes and provide schools a way to shift from a rule-based to a performance-based system of accountability; and (iii) to provide competition within the public school system to stimulate improvements in all public schools.

Dependent Charter Schools

The District approved a petition to establish a dependent charter school within the boundaries of the District, known as the Alianza Charter School, which opened in Fiscal Year 1980-81 (“Alianza Charter School”). Approximately 670 students were estimated to be enrolled in Alianza Charter School in Fiscal Year 2017-18 and approximately 678 students are estimated to be enrolled in Alianza Charter School in Fiscal Year 2018-19. The District currently has limited information about Alianza Charter School’s enrollment, and can provide no representation as to future enrollment or transfers of students from the District to Alianza Charter School.

The District approved a petition to establish a dependent charter school within the boundaries of

the District, known as the Diamond Technology Institute, which opened in Fiscal Year 1999-2000 (“Diamond Technology Institute”). Approximately 66 students were estimated to be- enrolled in Diamond Technology Institute in Fiscal Year 2017-18 and approximately 75 students are estimated to be enrolled in Diamond Technology Institute in Fiscal Year 2018-19. The District currently has limited information about Diamond Technology Institute’s enrollment, and can provide no representation as to future enrollment or transfers of students from the District to Diamond Technology Institute.


the District, known as the Pacific Coast Charter School, which opened in Fiscal Year 1999-2000 (“Pacific Coast Charter School”). Approximately 184 students were estimated to be enrolled in Pacific Coast Charter School in Fiscal Year 2017-18 and approximately 214 students are estimated to be enrolled in Pacific Coast Charter School in Fiscal Year 2018-19. The District currently has limited information about Pacific Coast Charter School’s enrollment, and can provide no representation as to future enrollment or transfers of students from the District to Pacific Coast Charter School.


the District, known as the Watsonville Charter School of the Arts, which opened in Fiscal Year 2001-02 (“Watsonville Charter School of the Arts”). Approximately 349 students were estimated to be enrolled in Watsonville Charter School of the Arts in Fiscal Year 2017-18 and approximately 381 students are estimated to be enrolled in Watsonville Charter School of the Arts in Fiscal Year 2018-19. The District currently has limited information about Watsonville Charter School of the Arts’ enrollment, and can provide

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no representation as to future enrollment or transfers of students from the District to Watsonville Charter School of the Arts.

Independent Charter Schools

The District approved a petition to establish an independent charter school within the boundaries of the District, known as the Ceiba College Preparatory Academy, which opened in Fiscal Year 2008-09 (“Ceiba College Preparatory Academy”). Approximately 513 students were estimated to be enrolled in Ceiba College Preparatory Academy in Fiscal Year 2017-18 and approximately 521 students are estimated to be enrolled in Ceiba College Preparatory Academy in Fiscal Year 2018-19. The District currently has limited information about Ceiba College Preparatory Academy’s enrollment, and can provide no representation as to future enrollment or transfers of students from the District to Ceiba College Preparatory Academy.

The District approved a petition to establish an independent charter school operating within the

boundaries of the District, known as the Linscott Charter School, which opened in Fiscal Year 1994-95 (“Linscott Charter School”). Approximately 277 students were estimated to be enrolled in Linscott Charter School in Fiscal Year 2017-18 and approximately 278 students are estimated to be enrolled in Linscott Charter School in Fiscal Year 2018-19. The District currently has limited information about Linscott Charter School’s enrollment, and can provide no representation as to future enrollment or transfers of students from the District to Linscott Charter School.

In addition, a charter school, Navigator, has sought approval to operate within the District’s

boundaries. The District and the County Office of Education have each denied the charter request. The District’s understanding is that Navigator will appeal to the State in the near future.

The District can make no representations as to whether additional charter schools will be established within the boundaries of the District, the amount of any future transfers of students from the District to charters schools and the corresponding financing impact on the District.


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Long-Term Debt Obligations

General Obligation Bonds. The District has seven series of general obligation or refunding general obligation bonds currently outstanding, as summarized in the following table. Each of these bonds are described in more detail below.


General Obligation Bonds/General Obligation Refunding Bonds

Dated Date Series Amount of Original

Issue

Outstanding as of June 30, 2018

4/22/2003 General Obligation Bonds, Election of 2002, Series A $39,995,541.75 $770,541.755/19/2005 General Obligation Bonds, Election of 2002, Series B 18,254,287.55 14,664,287.55 2/07/2013 2013 General Obligation Refunding Bonds, Series A 9,765,000.00 7,195,000.00 2/07/2013 2013 General Obligation Refunding Bonds, Series B 19,675,000.00 13,885,000.00 4/30/2013 General Obligation Bonds, Election of 2012, Series A 68,540,000.00 63,320,000.00 4/30/2013 General Obligation Bonds, Election of 2012, Series B 11,460, 000.00 11,260,000.00 2/23/2016 General Obligation Bonds, Election of 2012, Series C 40,000,000.00 38,615,000.00

11/09/2017 General Obligation Bonds, Election of 2012, Series D 30,000,000.00 30,000,000.00 Total $237,689,829.30 $179,709,829.30

____________________ Source: Pajaro Valley Unified School District’s Audits; the Municipal Advisor.

On May 19, 2005, the District issued its $18,254,287.55 Election of 2002 General Obligation Bonds, Series B (the “2002 Series B Bonds”), outstanding as of June 30, 2018, in the aggregate principal amount of $14,664,287.55 (not including accreted interest).

On February 7, 2013, the District issued its $9,765,000 2013 General Obligation Refunding Bonds, Series A (Federally Tax-Exempt) (the “2013A Refunding Bonds”), currently outstanding in the aggregate principal amount of $7,195,000. Simultaneously with the issuance of the 2013A Refunding Bonds, the District issued its $19,675,000 2013 General Obligation Refunding Bonds, Series B (Federally Taxable) (the “2013B Refunding Bonds”), outstanding as of June 30, 2018, in the aggregate principal amount of $13,885,000.

The District received authorization at an election held on November 6, 2012 (the “2012 Authorization”) to issue $150,000,000 of general obligation bonds. On April 30, 2013, the District issued its $68,540,000 Election of 2012 General Obligation Bonds, Series A (Federally Tax-Exempt) (the “Series A Bonds”), currently outstanding in the aggregate principal amount of $63,320,000. Simultaneously with the issuance of the Series A Bonds, the District issued its $11,460,000 Election of 2012 General Obligation Bonds, Series B Bonds (Federally Taxable) (the “Series B Bonds”), outstanding as of June 30, 2018, in the aggregate principal amount of $11,260,000. On February 23, 2016, the District issued its $40,000,000 Election of 2012 General Obligation Bonds, Series C (the “Series C Bonds”), outstanding as of June 30, 2018,in the aggregate principal amount of $38,615,000. On November 9, 2017, the District issued its $30,000,000 Election of 2012 General Obligation Bonds, Series D (the “Series D Bonds”), outstanding as of June 30, 2018, in the aggregate principal amount of $30,000,000. The Series D Bonds were the fourth and final series of bonds issued pursuant to the 2012 Authorization.

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Overlapping Debt Obligations

Set forth below is a direct and overlapping debt report as of September 1, 2018 (the “Debt Report”) prepared by California Municipal Statistics, Inc. and dated September 6, 2018. The Debt Report is included for general information purposes only. The District has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith.

The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District in whole or in part. Such long-term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency.


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Table 13 PAJARO VALLEY UNIFIED SCHOOL DISTRICT Statement of Direct and Overlapping Bonded Debt

September 6, 2018 2018-19 Assessed Valuation: $15,878,031,066 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 9/1/18 Cabrillo Joint Community College District 34.539% $ 35,003,735 Pajaro Valley Unified School District 100.000 174,154,830 (1)

Santa Cruz Libraries Facilities Community Facilities District No. 2016-1 25.778 5,392,758 City of Watsonville 1915 Act Bonds 100.000 98,000 County and Special District 1915 Act Bonds 100.000 5,562,000 Monterey County Water Resources Agency Benefit Assessment District, Zone 2C 0.078 17,051 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $220,228,374 OVERLAPPING GENERAL FUND DEBT: Santa Cruz County Certificates of Participation 32.513% $22,359,162 Santa Cruz County Office of Education Certificates of Participation 32.513 2,881,370 Monterey County General Fund and Judgment Obligations 1.469 2,443,655 Monterey County Office of Education Certificates of Participation 1.469 21,962 City of Watsonville General Fund Obligations 100.000 560,388 Pajaro Sunny Mesa Community Service Area General Fund Obligations 71.435 214,305 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $28,480,842 Less: Monterey County supported obligations 534,716 TOTAL NET OVERLAPPING GENERAL FUND DEBT $27,946,126 OVERLAPPING TAX INCREMENT DEBT: Watsonville Redevelopment Agency (Successor Agency) 100.000% $10,700,000 TOTAL OVERLAPPING TAX INCREMENT DEBT $10,700,000 GROSS COMBINED TOTAL DEBT $259,409,216 (2) NET COMBINED TOTAL DEBT $258,874,500 Ratios to 2018-19 Assessed Valuation: Direct Debt ($174,154,830) ........................................................ 1.10% Total Direct and Overlapping Tax and Assessment Debt ............. 1.39% Gross Combined Total Debt .......................................................... 1.63% Net Combined Total Debt ............................................................. 1.63% Ratios to Redevelopment Incremental Valuation ($1,033,179,327): Total Overlapping Tax Increment Debt ........................................ 1.04% ____________________ (1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc.

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Ad Valorem Property Taxation

Taxes are levied by the applicable County for each fiscal year on taxable real and personal property which is situated in the District as of the preceding January 1. For assessment and collection purposes, property is classified either as “secured” or “unsecured” and is listed accordingly on separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containing State-assessed public utilities property and real property having a tax lien which is sufficient, in the opinion of the applicable County Assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.”

Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10 percent penalty attaches to any delinquent payment. Property on the secured roll with respect to which taxes are delinquent becomes tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of a penalty of 1.5 percent per month to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is subject to sale by the applicable Treasurer.

Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A 10 percent penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1.5 percent attaches to them on the first day of each month until paid. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) bringing a civil action against the taxpayer; (2) filing a certificate in the office of the applicable County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the applicable County Clerk and applicable County Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements, or possessory interests belonging or assessed to the assessee. Assessed Valuations

The assessed valuation of property in the District is established by the applicable County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the “full value” of the property, as defined in Article XIIIA of the California Constitution. The full value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area, or to reflect declines in property value caused by substantial damage, destruction or other factors, including assessment appeals filed by property owners. For a discussion of how properties currently are assessed, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.”

Certain classes of property, such as churches, colleges, not-for-profit hospitals, and charitable institutions, are exempt from property taxation and do not appear on the tax rolls.


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Assessed Valuation History. The table following shows a recent history of the District’s assessed valuation.

Table 14

PAJARO VALLEY UNIFIED SCHOOL DISTRICT Assessed Valuations

Fiscal Years 2011-12 through 2018-19

Fiscal Year Local Secured Utility Unsecured Total % Change

Santa Cruz County Portion

2011-12 $10,627,499,849 $210,791 $291,329,497 $10,919,040,137 2012-13 10,502,410,477 430,497 296,801,595 10,799,642,569 (1.1%)

2013-14 10,948,803,901 123,397 297,244,100 11,246,171,398 4.1

2014-15 11,766,157,632 123,397 316,703,948 12,082,984,977 7.4

2015-16 12,432,918,028 123,397 322,411,457 12,755,482,882 5.6

2016-17 13,034,338,540 123,397 316,883,054 13,351,344,991 4.7 2017-18 13,715,182,209 123,397 355,061,332 14,070,366,938 5.4

2018-19 14,535,167,257 9,732 362,598,537 14,897,775,526 5.9

Monterey County Portion

2011-12 $679,519,529 $1,643,544 $40,502,647 $721,665,720

2012-13 684,389,062 2,124,427 41,224,288 727,737,777 0.8%

2013-14 703,049,891 2,124,427 42,228,973 747,403,291 2.7

2014-15 734,159,222 2,124,427 44,957,602 781,241,251 4.5

2015-16 788,875,427 2,124,427 46,227,216 837,227,070 7.2

2016-17 835,288,229 2,095,023 47,215,758 884,599,010 5.7

2017-18 879,317,909 2,095,023 57,531,817 938,944,749 6.1

2018-19 921,077,481 2,095,023 57,083,036 980,255,540 4.4

Total District

2011-12 $11,307,019,378 $1,854,335 $331,832,144 $11,640,705,857

2012-13 11,186,799,539 2,554,924 338,025,883 11,527,380,346 (1.0%)

2013-14 11,651,853,792 2,247,824 339,473,073 11,993,573,689 4.0

2014-15 12,500,316,854 2,247,824 361,661,550 12,864,226,228 7.3

2015-16 13,221,793,455 2,247,824 368,668,673 13,592,709,952 5.7

2016-17 13,869,626,769 2,218,420 364,098,812 14,235,944,001 4.7

2017-18 14,594,500,118 2,218,420 412,593,149 15,009,311,687 5.4

2018-19 15,456,244,738 2,104,755 419,681,573 15,878,031,066 5.8 _____________________ Source: California Municipal Statistics, Inc.

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Assessed Value by Jurisdiction. As shown in the table below, approximately 26.56% of the District’s assessed valuation lies in the City of Watsonville, while approximately 6.27% lies in the unincorporated Monterey County and 67.27% lies in unincorporated San Cruz County.


2018-19 Assessed Valuation by Jurisdiction

Assessed Valuation % of Assessed Valuation % of Jurisdiction Jurisdiction: in School District School District of Jurisdiction in School District City of Watsonville $ 4,217,056,152 26.56% $4,217,056,152 100.00% Unincorporated Monterey County 980,255,540 6.17 33,338,499,036 2.94 Unincorporated Santa Cruz County 10,680,719,374 67.27 26,480,602,928 40.33 Total District $15,878,031,066 100.00% Summary by County: Monterey County $ 980,255,540 6.17% $66,729,286,211 1.47% Santa Cruz County 14,897,775,526 93.83 45,820,424,327 32.51 Total District $15,878,031,066 100.00% ____________________

Source: California Municipal Statistics, Inc.


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Assessed Valuation by Land Use. The following table shows the land use of parcels in the District as measured by assessed value and number of parcels, according to each County’s records for Fiscal Year 2018-19. As shown, residential purposes account for a majority of the District’s assessed value and parcels.


Assessed Valuation and Parcels by Land Use Fiscal Year 2018-19

2018-19 % of No. of % of Non-Residential: Assessed Valuation (1) Total Parcels Total Agricultural/Rural $ 824,238,007 5.33% 2,565 5.84% Commercial 762,525,891 4.93 980 2.23 Vacant Commercial 34,319,388 0.22 114 0.26 Industrial 506,363,576 3.28 322 0.73 Vacant Industrial 23,739,839 0.15 75 0.17 Recreational 37,116,457 0.24 66 0.15 Hotel/Motel 66,440,279 0.43 76 0.17 Government/Social/Institutional 57,259,650 0.37 485 1.11 Miscellaneous 3,591,163 0.02 695 1.58 Subtotal Non-Residential $2,315,594,250 14.98% 5,378 12.25% Residential: Single Family Residence $10,680,141,347 69.10% 31,370 71.48% Condominium/Townhouse 1,497,970,396 9.69 3,722 8.48 Mobile Home 166,402,706 1.08 891 2.03 Mobile Home Park 37,015,899 0.24 37 0.08 2-3 Residential Units 412,080,036 2.67 1,172 2.67 4+ Residential Units/Apartments 254,989,154 1.65 260 0.59 Miscellaneous Residential 1,142,175 0.01 34 0.08 Vacant Residential 90,908,775 0.59 1,021 2.33 Subtotal Residential $13,140,650,488 85.02% 38,507 87.75% Total $15,456,244,738 100.00% 43,885 100.00% ____________________ (1) Local Secured Assessed Valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc.

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Assessed Valuation of Single Family Residential Parcels. The following table shows a breakdown of the assessed valuations of improved single-family residential parcels in the District, according to Fiscal Year 2018-19 assessed valuation.


Per Parcel 2018-19 Assessed Valuation of Single Family Homes

No. of 2018-19 Average Median Parcels Assessed Valuation Assessed Valuation Assessed Valuation Single Family Residential 21,370 $10,680,141,347 $499,773 $391,496 2018-19 No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels (1) Total % of Total Valuation Total % of Total $0 - $49,999 542 2.536% 2.536% $ 20,376,141 0.191% 0.191% $50,000 - $99,999 1,546 7.234 9.771 113,574,123 1.063 1.254 $100,000 - $149,999 1,339 6.266 16.036 166,235,604 1.556 2.811 $150,000 - $199,999 1,291 6.041 22.078 226,070,112 2.117 4.927 $200,000 - $249,999 1,408 6.589 28.666 317,853,174 2.976 7.904 $250,000 - $299,999 1,694 7.927 36.593 466,585,775 4.369 12.272 $300,000 - $349,999 1,676 7.843 44.436 542,978,084 5.084 17.356 $350,000 - $399,999 1,431 6.696 51.132 535,836,035 5.017 22.373 $400,000 - $449,999 1,318 6.168 57.300 559,669,999 5.240 27.614 $450,000 - $499,999 1,224 5.728 63.028 580,846,997 5.439 33.052 $500,000 - $549,999 1,028 4.810 67.838 538,089,576 5.038 38.090 $550,000 - $599,999 889 4.160 71.998 510,490,735 4.780 42.870 $600,000 - $649,999 812 3.800 75.798 507,381,803 4.751 47.621 $650,000 - $699,999 693 3.243 79.041 467,393,652 4.376 51.997 $700,000 - $749,999 594 2.780 81.820 430,266,780 4.029 56.026 $750,000 - $799,999 491 2.298 84.118 380,634,544 3.564 59.590 $800,000 - $849,999 476 2.227 86.345 392,210,310 3.672 63.262 $850,000 - $899,999 420 1.965 88.311 366,776,306 3.434 66.696 $900,000 - $949,999 329 1.540 89.850 304,951,169 2.855 69.552 $950,000 - $999,999 261 1.221 91.072 254,338,136 2.381 71.933 $1,000,000 and greater 1,908 8.928 100.000 2,997,582,292 28.067 100.000 Total 21,370 100.000% $10,680,141,347 100.000% ____________________ (1) Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc.

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Tax Rates. The table below summarizes the total ad valorem tax rates levied by all taxing entities in a representative tax rate area in the District during Fiscal Years 2014-15 through 2018-19. Tax Rates for Fiscal Year 2018-19 will be available at a later time.


Typical Total Tax Rates (TRA 69-273) (1) Per $100 Assessed Value

Fiscal Year 2014-15 through 2018-19

2014-15 2015-16 2016-17 2017-18 2018-19

General Tax Rate 1.000000% 1.000000% 1.000000% 1.000000% 1.000000% Cabrillo Community College District

.036941 .036693 .032597 .024250 .021023

Pajaro Valley Unified School District

.061674 .064225 .053824 .069962 .059568

Total Tax Rate 1.098615% 1.100918% 1.086421% 1.094212% 1.080591% ____________________ (1) 2018-19 assessed valuation of TRA 69-273 is $3,175,489,394. Source: California Municipal Statistics, Inc.

Alternative Method of Tax Apportionment – “Teeter Plan”

The Board of Supervisors of the County adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the “Teeter Plan”), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. This alternative method is used for distribution of the ad valorem property tax revenues.

The County is responsible for determining the amount of the ad valorem tax levy on each parcel in the District, which is entered onto the secured real property tax roll. Upon completion of the secured real property tax roll, the County auditor determines the total amount of taxes (excluding levies for bonded debt and assessments) actually extended on the roll for each fund for which a tax levy has been included, and apportions 100 percent of the tax levies to that fund’s credit. Such moneys may thereafter be drawn against by the taxing agency in the same manner as if the amount credited had been collected.

Under the Teeter Plan, the County establishes the Tax Loss Reserve Fund. The County determines which moneys in the County treasury (including those credited to the Tax Loss Reserve Fund) shall be available to be drawn on to the extent of the amount of uncollected taxes credited to each fund for which a levy has been included. When amounts are received on the secured tax roll for the current year, or for redemption of tax-defaulted property, Teeter Plan moneys are distributed to the apportioned tax resources accounts. The tax losses reserve fund is used exclusively to cover lost income occurring as a result of tax-defaulted property. Moneys in this fund are derived from several sources. While amounts collected as costs are distributed to the County’s general fund, delinquent penalty collections are distributed to the tax losses reserve fund.

When tax-defaulted property is sold, the taxes and assessments which constitute the amount required to redeem the property are prorated between apportioned (Teeter) levies and unapportioned (or non-Teeter) levies. The pro rata share for apportioned levies is distributed to the tax losses reserve fund. The pro rata share for unapportioned levies is prorated between tax levies and assessment levies and then distributed to the applicable funds. If the tax losses reserve fund exceeds one percent (1%) of the total taxes and assessments levied on the secured roll for that year, the amounts coming in after it reaches one percent (1%) are credited to the County’s general fund. Upon adoption of a resolution by the Board of Supervisors

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of the County by September 1 of any fiscal year, the one percent (1%) tax losses reserve fund threshold may be reduced to twenty-five percent (25%) of the total delinquent taxes and assessments for the previous year.

The Teeter Plan is to remain in effect unless the Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the Board of Supervisors shall receive a petition for its discontinuance joined in by resolutions adopted by two thirds of the participating revenue districts in the County, in which event the Board of Supervisors is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year.

So long as the Teeter Plan remains in effect, the District’s receipt of revenues with respect to the levy of ad valorem property taxes on the secured roll will not be dependent upon actual collections of the ad valorem property taxes by the County. However, under the statute creating the Teeter Plan, the Board of Supervisors could under certain circumstances terminate the Teeter Plan in its entirety or terminate the Teeter Plan as to the District if the delinquency rate for all ad valorem property taxes levied within the District in any year exceeds 3 percent.

The Board of Supervisors of Monterey County has not adopted a Teeter Plan.


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The table below shows the secured tax charge and delinquency rate for Fiscal Years 2005-06 through 2017-18.


Secured Tax Charges and Delinquency Rates Fiscal Years 2005-06 through 2017-18

Fiscal Year Secured

Tax Charge (1) Amt. Del. June 30

% Del. June 30

Santa Cruz County Portion (2) 2005-06 $41,202,955 (2) (2)

2006-07 44,153,952 (2) (2)

2007-08 45,007,338 (2) (2)

2008-09 42,695,867 (2) (2)

2009-10 42,461,917 (2) (2)

2010-11 42,627,685 (2) (2)

2011-12 42,134,597 (2) (2)

2012-13 43,959,592 (2) (2)

2013-14 47,247,220 (2) (2)

2014-15 49,908,858 (2) (2)

2015-16 52,252,328 (2) (2)

2016-17 54,989,421 (2) (2)

2017-18 58,247,261 (2) (2)

Monterey County Portion

2005-06 $2,588,808 $51,993.17 2.01% 2006-07 2,854,199 91,254.75 3.20 2007-08 3,049,185 153,435.41 5.03 2008-09 3,024,453 119,402.85 3.95 2009-10 2,865,525 86,503.68 3.02 2010-11 2,722,315 63,350.23 2.33 2011-12 2,783,868 46,881.41 1.68 2012-13 2,791,777 42,599.21 1.53 2013-14 2,858,119 31,716.61 1.11 2014-15 2,995,384 30,657.37 1.02 2015-16 3,223,953 29,021.83 0.90 2016-17 3,735,730 34,671.19 0.93 2017-18 3,968,564 34,502.04 0.87 ____________________

(1) 1% General Fund apportionment. (2) Santa Cruz County utilizes the Teeter Plan for assessment levy and distribution. This method guarantees

distribution of 100% of the assessments levied to the taxing entity, with the County retaining all penalties and interest.


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Largest Secured Property Taxpayers in District

The following table shows the 20 largest secured property taxpayers in the District as determined by secured assessed valuation in Fiscal Year 2018-19.


Largest Secured Taxpayers Fiscal Year 2018-19

2018-19 % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Watsonville Hospital Corporation Hospital $53,878,275 0.35% 2. Rancho Del Mar Center LLC Shopping Center 53,740,236 0.35 3. Ow Family – Lee Road LLC Industrial 28,751,250 0.19 4. Lakeside Organic Gardens LLC Agricultural 25,441,044 0.16 5. Freedom Associates LLC Industrial 25,079,926 0.16 6. Granite Construction Company Office Building 24,564,772 0.16 7. William J. & Neva J. Hansen, Co- Trustees Commercial 22,583,367 0.15 8. Harvest Drive Properties LLC Industrial 20,677,401 0.13 9. Kitayama Bros. Inc. Agricultural 20,604,041 0.13 10. HD Development of Maryland Inc. Commercial 20,585,518 0.13 11. John Charles Adams Shopping Center 20,226,164 0.13 12. TKG III Watsonville LLC Industrial 20,079,719 0.13 13. Nokina Aptos LP Rest Home 19,749,471 0.13 14. WRI Freedom Center LP Shopping Center 18,159,885 0.12 15. George Ow Jr., Trustee Industrial 17,475,450 0.11 16. Falcon Trading Company Inc. Food Processing 17,289,071 0.11 17. Terminal Freezers LLC Industrial 17,113,169 0.11 18. Carl E. Best Shopping Center 16,789,804 0.11 19. V.R. Walker Co. Agricultural 16,268,500 0.11 20. Meadows Mobile Manor LLC Mobile Home Park 15,519,752 0.10 $474,576,815 3.07% ____________________ (1) 2018-19 local secured assessed valuation: $15,456,244,738



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STATE FUNDING OF EDUCATION AND RECENT STATE BUDGETS State Funding of Education

General. The State requires that from all State revenues there first shall be set apart the moneys to be applied for support of the public school system and public institutions of higher education. Public school districts in California are dependent on revenues from the State for a large portion of their operating budgets. California school districts receive an average of about 55% of their operating revenues from various State sources. The primary source of funding for school districts is funding under the LCFF, which is a combination of State funds and local property taxes (see “DISTRICT FINANCIAL INFORMATION – Education Funding Generally” above). State funds typically make up the majority of a district’s LCFF entitlement.

The availability of State funds for public education is a function of constitutional provisions affecting school district revenues and expenditures (see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS” below), the condition of the State economy (which affects total revenue available to the State general fund), and the annual State budget process. Decreases in State revenues may significantly affect appropriations made by the legislature to school districts.

The following information concerning the State’s budgets for the current and most recent preceding years has been compiled from publicly-available information provided by the State. None of the District, the Corporation, or the Underwriter are responsible for the information relating to the State’s budgets provided in this section. Further information is available from the Public Finance Division of the State Treasurer’s Office.

The Budget Process. The State’s fiscal year begins on July 1 and ends on June 30. The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the “Governor’s Budget”). Under State law, the annual proposed Governor’s Budget cannot provide for projected expenditures in excess of projected revenues and balances available from prior fiscal years. Following the submission of the Governor’s Budget, the Legislature takes up the proposal.

Under the State Constitution, money may be drawn from the State Treasury only through an appropriation made by law. The primary source of the annual expenditure authorizations is the Budget Act as approved by the Legislature and signed by the Governor. The Budget Act must be approved by a majority vote of each House of the Legislature. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each House of the Legislature.

Appropriations also may be included in legislation other than the Budget Act. Bills containing appropriations (including for K-14 education) must be approved by a majority vote in each House of the Legislature, unless such appropriations require tax increases, in which case they must be approved by a two-thirds vote of each House of the Legislature, and be signed by the Governor. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution.

Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt.

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Recent State Budgets

Certain information about the State budgeting process and the State Budget is available through several State of California sources. A convenient source of information is the State’s website, where recent official statements for State bonds are posted. The references to internet websites shown below are shown for reference and convenience only, the information contained within the websites may not be current and has not been reviewed by the District or the Underwriter and is not incorporated herein by reference.

The California State Treasurer internet home page at www.treasurer.ca.gov, under the heading “Bond Information,” posts various State of California Official Statements, many of which contain a summary of the current State budget, past State budgets, and the impact of those budgets on school districts in the State.

The California State Treasurer’s Office Internet home page at www.treasurer.ca.gov, under the heading “Financial Information,” posts the State’s audited financial statements. In addition, the Financial Information section includes the State’s Rule 15c2-12 filings for State bond issues. The Financial Information section also includes the Overview of the State Economy and Government, State Finances, State Indebtedness, Litigation from the State’s most current Official Statement, which discusses the State budget and its impact on school districts.

The California Department of Finance’s Internet home page at www.dof.ca.gov, under the heading “California Budget,” includes the text of proposed and adopted State Budgets.

The State Legislative Analyst’s Office prepares analyses of the proposed and adopted State budgets. The analyses are accessible on the Legislative Analyst’s Internet home page at www.lao.ca.gov under the heading “Subject Area – Budget (State).”

Prior Years’ Budgeting Techniques. Declining revenues and fiscal difficulties which arose in the State commencing in Fiscal Year 2008-09 led the State to undertake a number of budgeting strategies, which had subsequent impacts on local agencies within the State. These techniques included the issuance of IOUs in lieu of warrants (checks), the enactment of statutes deferring amounts owed to public schools, until a later date in the fiscal year, or even into the following fiscal year (known as statutory deferrals), trigger reductions, which were budget cutting measures which were implemented or could have been implemented if certain State budgeting goals were not met, among others, and the dissolution of local redevelopment agencies in part to make available additional funding for local agencies. Although the Fiscal Year 2018-19 State Budget is balanced and projects a balanced budget for the foreseeable future, largely attributable to the additional revenues generated due to the passage of Proposition 55 at the November 8, 2016 statewide election, there can be no certainty that budget-cutting strategies such as those used in recent years will not be used in the future should the State Budget again be stressed and if projections included in such budget do not materialize. 2018-19 State Budget. On June 27, 2018, the Governor signed into law the State budget for Fiscal Year 2018-19 (the “2018-19 State Budget”). The following information is drawn from the Department of Finance’s summary of the 2018-19 State Budget. To protect against potential future economic recessions, the 2018-19 State Budget fully funds the Budget Stabilization Account (“BSA”) with a total deposit of over $4.35 billion and adds two additional reserves to State law: the Budget Deficit Savings Account, intended to facilitate supplemental payments to continue to fully fund the BSA; and the Safety Net Reserve Fund, intended to protect against potential future cuts to certain health and welfare programs.

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For Fiscal Year 2017-18, the 2018-19 State Budget projects total general fund revenues and transfers of $129.8 billion and total expenditures of $127.0 billion. The State is projected to end the 2017-18 fiscal year with total available general fund reserves of $16.7 billion, including $7.3 billion in the special fund for economic uncertainties and $9.4 billion in the BSA. For Fiscal Year 2018-19, the 2018-19 State Budget projects total general fund revenues of $133.3 billion and authorizes expenditures of $138.7 billion. The State is projected to end Fiscal Year 2018-19 with total available general fund reserves of $15.9 billion, including $2.0 billion in the traditional general fund reserve and $13.8 billion in the BSA. The projected ending balance in the BSA at the end of Fiscal Year 2018-19 is expected to equal the BSA’s current constitutional maximum of 10 percent of the estimated general fund revenues for Fiscal Year 2018-19. For Fiscal Year 2018-19, the 2018-19 State Budget sets the minimum funding guarantee at $78.4 billion, reflecting a year-to-year increase of $2.8 billion. With respect to K-12 education, ongoing Proposition 98 per-pupil expenditures in Fiscal Year 2018-19 are set at $11,645. Other significant features with respect to K-12 education funding include the following:

Local Control Funding Formula – An increase of $3.7 billion in Proposition 98 funding for the LCFF fully implementing the school district and charter school formula two years earlier than scheduled, including both a 2.71% cost of living adjustment and an additional $570 million above the cost of living adjustment as an ongoing increase to the formula.

Low-Performing Students Block Grant – $300 million in one-time Proposition 98 funding to

provide resources to local education agencies with students who (1) perform at the lowest levels on the State’s academic assessments, and (2) do not generate supplemental LCFF funds or State or federal special education resources.

State System of Support – An increase of $57.8 million in Proposition 98 funding for county

offices of education to provide technical assistance to local educational agencies.

Multi-Tiered Systems of Support (MTSS) – $15 million in one-time Proposition 98 funding to expand the State’s MTSS framework to foster positive school climate in both academic and behavioral areas.

California Collaborative for Educational Excellence – $13.3 million in one-time Proposition 98 funding for the Collaborative and a co-lead county office of education to help build capacity for community engagement in the LCAP process, as well as $11.5 million in Proposition 98 funding to support the Collaborative in its role within the statewide system of support.

Special Education Local Plan Area (SELPA) Technical Assistance – $10 million in Proposition 98 funding for SELPAs to assist county offices of education in providing technical assistance to school districts identified for differentiated assistance within the Statewide system of support.

Career Technical Education (CTE) – $164 million in ongoing Proposition 98 funding to create

a new K-12 CTE program funded through the Strong Workforce Program, which is administrated by the California Community College Chancellor’s Office, in consultation with the State Department of Education, as well as $150 million in ongoing Proposition 98 funding to make permanent the State’s Career Technical Education Incentive Grant Program.

One-Time Discretionary Funding – An increase of $1.1 billion in one-time Proposition 98 funding for school districts, charter schools and county offices of education to use at local discretion. Similar to features included in prior State budgets, these funds would offset any applicable mandate reimbursement claims for these entities.

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Special Education, Bilingual, and STEM Teachers – $75 million in one-time Proposition 98 funding to support locally sponsored, one-year intensive, mentored, clinical teacher preparation programs with $50 million aimed at preparing and retaining special education teachers and $25 million aimed at bilingual and STEM teachers; and $50 million in onetime Proposition 98 funding to provide one-time competitive grants to local educational agencies to develop and implement new, or expand existing, locally identified solutions that address a local need for special education teachers.

Classified School Employee Summer Assistance Program – $50 million one-time Proposition 98 funding to provide state matching funds to classified school employees that elect to have a portion of their monthly paychecks withheld during the school year and then paid during the summer recess period.

Classified School Employee Professional Development Block Grant Program – $50 million one-time Proposition 98 funding for professional development opportunities for classified staff, with a priority on professional development for the implementation of school safety plans.

Charter School Facility Grant Program – $21.1 million one-time and $24.8 million ongoing

Proposition 98 funding to reflect increases in programmatic costs.

Kids Code After School Program – $15 million one-time Proposition 98 funding to increase opportunities for students in after-school programs to access computer coding education.

Fire-Related Support – $4.4 million Proposition 98 funding over two years in property tax relief

to schools impacted by the fires in Northern and Southern California in 2017, and an additional $25 million Proposition 98 funding relief through the LCFF. The 2018-19 State Budget also holds harmless the ADA used in calculating the LCFF for these counties for three years.

Fiscal Crisis and Management Assistance Team (FCMAT) – $972,000 Proposition 98 funding

to allow FCMAT to coordinate with county offices of education to offer more proactive and preventive services to fiscally distressed school districts, specifically those with a qualified interim budget status.

For additional information regarding the 2018-19 State Budget, see the State Department of Finance website at www.dof.ca.gov. The information presented on such website is not incorporated herein by reference.

Future Budget Impacts. The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures. The District also cannot predict the impact such actions will have on State revenues available in the current or future years for education. The State Budget will be affected by national and State economic conditions and other factors. The District cannot predict how State income or State education funding will vary over the term to maturity of the Certificates, and the District takes no responsibility for informing owners of the Certificates as to actions the State Legislature or Governor may take affecting a budget after its adoption. Certain actions or results could produce a significant shortfall of revenue and cash, and could consequently impair the State’s ability to fund schools. State budget shortfalls in future fiscal years may also have an adverse financial impact on the financial condition of the District. Information about the State budget and State spending for education is regularly available at various State-maintained websites. See the introductory portion of this Section captioned, “ – Recent State Budgets” above.

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To the extent negatively impacted by actions taken by the Governor and the State Legislature to address changing State revenues generally or by State revenues available for education specifically, the District may need to develop and implement different or additional budgetary adjustments to contend with its projected spending in the future.

Disclaimer Regarding State Budgets. The State has not entered into any contractual commitment with the District, the County, or the Owners of the Certificates to provide State budget information to the District or the owners of the Certificates. Although they believe the State sources of information listed above are reliable, neither the District nor the Underwriter assumes any responsibility for the accuracy of the State budget information set forth or referred to in this Official Statement or incorporated herein. Legal Challenges to State Funding of Education

The application of Proposition 98 and other statutory regulations has been the subject of various legal challenges in the past. The District cannot predict if or when there will be changes to education funding or legal challenges which may arise relating thereto.

COUNTY INVESTMENT POOL

The Education Code provides that the funds of school districts, except as otherwise set forth below, shall be deposited into the County Treasury to the credit of the proper fund of the school district. The Education Code provides that certain moneys not required for the immediate necessities of a school district may be invested in investments specified in Section 16430 or 53601 of the Government Code. Accordingly, all funds of school and community college districts not subject to the exception, including cash receipts and other moneys received by each district for deposit to the general fund of such district, are deposited with the County Treasury, to remain on deposit therein and generally available for the payment of current expenses and other obligations of such school district.

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS

Principal of and interest evidenced by the Certificates is payable from Lease Payments. Under the Lease Agreement, the Lease Payments are payable from any source of available funds of the District, subject to the provisions of the Lease regarding abatement as described herein. The District covenants in the Lease to take all actions required to include the Lease Payments in each of its budgets during the Term of the Lease and to make the necessary appropriations for all Lease Payments, Additional Rent and Reserve Replenishment Rent. Articles XIIIA, XIIIB, XIIIC and XIIID of the Constitution, Propositions 39, 98, 111 and 218, and certain other provisions of law discussed below, are included in this section to describe the potential effect of these constitutional and statutory measures on the ability of the District to spend tax proceeds for operating and other purposes. Constitutionally Required Funding of Education

The State Constitution requires that from all State revenues, there shall be first set apart the moneys to be applied by the State for the support of the public school system and public institutions of higher education. School districts receive a significant portion of their funding from State appropriations. As a result, decreases and increases in State revenues can significantly affect appropriations made by the State Legislature to school districts.

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Article XIIIA of the California Constitution

Basic Property Tax Levy. On June 6, 1978, California voters approved Proposition 13 (“Proposition 13”), which added Article XIIIA to the State Constitution (“Article XIIIA”). Article XIIIA limits the amount of any ad valorem tax on real property to 1% of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii) (as a result of an amendment to Article XIIIA approved by State voters on June 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-third of the voters on such indebtedness, and (iii) as a result of an amendment to Article XIIIA approved by State voters on November 7, 2000, bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district voting on the proposition, but only if certain accountability measures are included in the proposition as provided by Proposition 39 (the general obligation bonds issued pursuant to the District’s 2004 Authorization and 2012 Authorization were approved 55% of the voters of the District). Article XIIIA defines full cash value to mean “the county assessor’s valuation of real property as shown on the 1975-76 tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership have occurred after the 1975 assessment.” This full cash value may be increased at a rate not to exceed 2% per year to account for inflation.

Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, including a general economic downturn, to provide that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster and in other minor or technical ways.

Both the United States Supreme Court and the California State Supreme Court have upheld the general validity of Article XIIIA.

Legislation Implementing Article XIIIA. Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The 1% property tax is automatically levied by the relevant county and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1979.

That portion of annual property tax revenues generated by increases in assessed valuations within each tax rate area within a county, subject to redevelopment agency or successor agency claims on tax increment, if any, and subject to changes in organizations, if any, of affected jurisdictions, is allocated to each jurisdiction within the tax rate area in the same proportion that the total property tax revenue from the tax rate area for the prior year was allocated to such jurisdictions.

Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the annual adjustment not to exceed 2% are allocated among the various jurisdictions in the “taxing area” based upon their respective “situs.” Any such allocation made to a local agency continues as part of its allocation in future years.

All taxable property is shown at 100% of assessed value on the tax rolls. Consequently, the tax rate is expressed as $1 per $100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of taxable value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value.

Inflationary Adjustment of Assessed Valuation. As described above, the assessed value of a property may be increased at a rate not to exceed 2% per year to account for inflation. Section 51 of the

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Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently “recapture” such value (up to the pre-decline value of the property, adjusted for inflation) at an annual rate higher than 2%, depending on the assessor’s measure of the restoration of value of the damaged property. On December 27, 2001, the Orange County Superior Court, in County of Orange v. Orange County Assessment Appeals Board No. 3, held that where a home’s taxable value did not increase for two years, due to a flat real estate market, the Orange County assessor violated the 2% inflation adjustment provision of Article XIIIA, when the assessor tried to “recapture” the tax value of the property by increasing its assessed value by 4% in a single year. The assessors in most California counties, including the County, use a similar methodology in raising the taxable values of property beyond 2% in a single year. The State Board of Equalization has approved this methodology for increasing assessed values. On appeal, the Appellate Court held that the trial court erred in ruling that assessments are always limited to no more than 2% of the previous year’s assessment. On May 10, 2004, a petition for review was filed with the California Supreme Court. The petition has been denied by the California Supreme Court. As a result of this litigation, the “recapture” provision described above may continue to be employed in determining the full cash value of property for property tax purposes. Taxation of State-Assessed Utility Property

A portion of property tax revenue of the District is derived from utility property subject to assessment by the SBE. State-assessed property, or “unitary property,” is property of a utility system with components located in many taxing jurisdictions that are assessed as part of a “going concern” rather than as individual pieces of real or personal property. The assessed value of unitary and certain other state-assessed property is allocated to the counties by the SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year.

Changes in the California electric utility industry structure and in the way in which components of the industry are regulated and owned, including the sale of electric generation assets to largely unregulated, non-utility companies, may affect how utility assets are assessed in the future, and which local agencies are to receive the property taxes. The District is unable to predict the impact of these changes on its utility property tax revenues, or whether legislation or litigation may affect ownership of utility assets or the State’s methods of assessing utility property and the allocation of assessed value to local taxing agencies, including the District. Because the District is not a basic aid district, taxes lost through any reduction in assessed valuation will be compensated by the State as aid under the State’s school financing formula. 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 (“Article XIIIB”). Under Article XIIIB, state and local governmental entities have an annual “appropriations limit” and are not permitted to spend certain moneys which are called “appropriations subject to limitation” (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the “appropriations limit”. Article XIIIB does not affect the appropriation of moneys which are excluded from the definition of “appropriations subject to limitation,” including appropriations for debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the “appropriations limit” is based on certain 1978-79 expenditures, and adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities’ revenues in any two consecutive years exceed the combined appropriations limits for those two years, a portion of the excess is transferred to the State School Fund for elementary, secondary and community college education and a portion of the excess may have to be returned by revising tax rates or fee schedules over the subsequent two years. The District’s budgeted appropriations from “proceeds of taxes” (sometimes referred to as the “Gann

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limit”) are generally within the allowable limit. Any proceeds of taxes received by the District in excess of the allowable limit are absorbed into the State’s allowable limit. Articles XIIIC and XIIID

On November 5, 1996, the voters of the State of California approved Proposition 218, popularly known as the “Right to Vote on Taxes Act.” Proposition 218 added to the California Constitution Articles XIIIC and XIIID (respectively, “Article XIIIC” and “Article XIIID”), which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges.

According to the “Title and Summary” of Proposition 218 prepared by the California Attorney General, Proposition 218 limits “the authority of local governments to impose taxes and property-related assessments, fees and charges.” Among other things, Article XIIIC establishes that every tax is either a “general tax” (imposed for general governmental purposes) or a “special tax” (imposed for specific purposes), prohibits special purpose government agencies such as school districts from levying general taxes, and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote; and also provides that the initiative power will not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIIC further provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4.

On November 2, 2010, Proposition 26 was approved by State voters, which amended Article XIIIC to expand the definition of “tax” to include “any levy, charge, or exaction of any kind imposed by a local government” except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.

Article XIIID deals with assessments and property-related fees and charges, and explicitly provides that nothing in Article XIIIC or XIIID will be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development.

The School District does not impose any taxes, assessments, or property-related fees or charges which are subject to the provisions of Proposition 218. It does, however, receive a portion of the basic one percent ad valorem property tax levied and collected by the County pursuant to Article XIIIA of the California Constitution. While the provisions of Proposition 218 may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District (thereby causing such local governments to

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reduce service levels and possibly adversely affecting the value of property within the District), the District does not believe that Proposition 218 will directly impact the revenues available to pay debt service on the Certificates. Proposition 98

On November 8, 1988, California voters approved Proposition 98, a combined initiative constitutional amendment and statute called the “Classroom Instructional Improvement and Accountability Act” (the “Accountability Act”). Certain provisions of the Accountability Act have, however, been modified by Proposition 111, discussed below, the provisions of which became effective on July 1, 1990. The Accountability Act changed State funding of public education below the university level and the operation of the State’s appropriations limit. The Accountability Act guarantees State funding for K-12 school districts and community college districts (hereinafter referred to collectively as “K-14 school districts”) at a level equal to the greater of (a) the same percentage of general fund revenues as the percentage appropriated to such districts in 1986-87, and (b) the amount actually appropriated to such districts from the general fund in the previous fiscal year, adjusted for increases in enrollment and changes in the cost of living. The Accountability Act permits the Legislature to suspend this formula for a one-year period.

The Accountability Act also changed how tax revenues in excess of the State appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to taxpayers, be transferred to K-14 school districts. Any such transfer to K-14 school districts would be excluded from the appropriations limit for K-14 school districts and the K-14 school district appropriations limit for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K 14 school districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to K 14 school districts is 4% of the minimum State spending for education mandated by the Accountability Act. Proposition 111

On June 5, 1990, the voters approved Proposition 111 (Senate Constitutional Amendment No. 1) called the “Traffic Congestion Relief and Spending Limit Act of 1990” (“Proposition 111”) which further modified Article XIIIB and Sections 8 and 8.5 of Article XVI of the State Constitution with respect to appropriations limitations and school funding priority and allocation.

The most significant provisions of Proposition 111 are summarized as follows:

Annual Adjustments to Spending Limit. The annual adjustments to the Article XIIIB spending limit were liberalized to be more closely linked to the rate of economic growth. Instead of being tied to the Consumer Price Index, the “change in the cost of living” is now measured by the change in California per capita personal income. The definition of “change in population” specifies that a portion of the State’s spending limit is to be adjusted to reflect changes in school attendance.

Treatment of Excess Tax Revenues. “Excess” tax revenues with respect to Article XIIIB are now determined based on a two-year cycle, so that the State can avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year are under its limit. In addition, the Proposition 98 provision regarding excess tax revenues was modified. After any two-year period, if there are excess State tax revenues, 50% of the excess is to be transferred to K-14 school districts with the balance returned to taxpayers; under prior law, 100% of excess State tax revenues went to K-14 school districts, but only up to a maximum of 4% of the schools’ minimum funding level. Also, reversing prior law, any excess State tax revenues transferred to K-14 school districts are not built into the school districts’ base expenditures

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for calculating their entitlement for State aid in the next year, and the State’s appropriations limit is not to be increased by this amount.

Exclusions from Spending Limit. Two exceptions were added to the calculation of appropriations which are subject to the Article XIIIB spending limit. First, there are excluded all appropriations for “qualified capital outlay projects” as defined by the Legislature. Second, there are excluded any increases in gasoline taxes above the 1990 level (then nine cents per gallon), sales and use taxes on such increment in gasoline taxes, and increases in receipts from vehicle weight fees above the levels in effect on January 1, 1990. These latter provisions were necessary to make effective the transportation funding package approved by the Legislature and the Governor, which expected to raise over $15 billion in additional taxes from 1990 through 2000 to fund transportation programs.

Recalculation of Appropriations Limit. The Article XIIIB appropriations limit for each unit of government, including the State, was recalculated beginning in Fiscal Year 1990-91. It is based on the actual limit for Fiscal Year 1986-87, adjusted forward to 1990-91 as if Proposition 111 had been in effect.

School Funding Guarantee. There is a complex adjustment in the formula enacted in Proposition 98 which guarantees K-14 school districts a certain amount of State general fund revenues. Under prior law, K-14 school districts were guaranteed the greater of (1) a certain percentage of State general fund revenues (the “first test”) or (2) the amount appropriated in the prior year adjusted for changes in the cost of living (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the “second test”). Under Proposition 111, school districts will receive the greater of (1) the first test, (2) the second test, or (3) a third test (defined below), which will replace the second test in any year when growth in per capita State general fund revenues from the prior year is less than the annual growth in California per capita personal income. Under the third test, school districts will receive the amount appropriated in the prior year adjusted for change in enrollment and per capita State general fund revenues, plus an additional small adjustment factor (the “third test”). If the third test is used in any year, the difference between the third test and the second test will become a “credit” to school districts which will be paid in future years when State general fund revenue growth exceeds personal income growth. Proposition 39

On November 7, 2000, California voters approved an amendment (commonly known as “Proposition 39”) to the California Constitution. Upon passage of Proposition 39, implementing legislation entitled “Strict Accountability in Local School Construction Bonds Act of 2000” (the “Strict Accountability in Local School Construction Bonds Act”) became operative. This amendment (1) allows school facilities bond measures to be approved by 55% (rather than two-thirds) of the voters in local elections and permits property taxes to exceed the current 1% limit in order to repay the bonds and (2) changes existing statutory law regarding charter school facilities. As adopted, the constitutional amendments may be changed only with another Statewide vote of the people. The statutory provisions of the Strict Accountability in Local School Construction Bonds Act, as amended could be changed by a majority vote of both houses of the Legislature and approval by the Governor, but only to further the purposes of the proposition. The local school jurisdictions affected by this proposition and implementing legislation are K-12 school districts, including the District, community college districts, and county offices of education. As noted above, the California Constitution previously limited property taxes to 1% of the value of property. Prior to the approval of Proposition 39, property taxes could only exceed this limit to pay for (1) any local government debts approved by the voters prior to July 1, 1978 or (2) bonds to acquire or improve real property that receive two-thirds voter approval after July 1, 1978.

The 55% vote requirement authorized by Proposition 39 applies only if the local bond measure presented to the voters includes: (1) a requirement that the bond funds can be used only for construction, rehabilitation, equipping of school facilities, or the acquisition or lease of real property for school facilities; (2) a specific list of school projects to be funded and certification that the school board has evaluated safety,

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class size reduction, and information technology needs in developing the list; and (3) a requirement that the school board conduct annual, independent financial and performance audits until all bond funds have been spent to ensure that the bond funds have been used only for the projects listed in the measure. The Strict Accountability in Local School Construction Bonds Act approved in June 2000, as amended, places certain limitations on local school bonds to be approved by 55% of the voters. These provisions require that the tax rate levied as the result of any single election be no more than (i) $60 for a unified school district, (ii) $30 for an elementary school district or high school district, or (iii) $25 for a community college district, per $100,000 of taxable property value. These requirements are statutory provisions and are not part of the Proposition 39 changes to the State Constitution. The Strict Accountability in Local School Construction Bonds Act statutory provisions can be changed with a majority vote of both houses of the Legislature and approval by the Governor. Proposition 30 and Proposition 55

Proposition 30, the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment, appeared on the November 6, 2012, statewide ballot as an initiated constitutional amendment (“Proposition 30”), and it was approved by State voters. Proposition 30 increased the State sales tax from 7.25 percent to 7.50 percent, increased personal income tax rates on higher income brackets for seven years, and temporarily imposed an additional tax on all retailers, at the rate of 0.25% of gross receipts from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, 2016. Proposition 30 also imposed an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013 and before January 1, 2017. This excise tax is levied at a rate of 0.25% of the sales price of the property so purchased. For personal income taxes imposed beginning in the taxable year commencing January 1, 2012 and ending December 31, 2018, Proposition 30 increased the marginal personal income tax rate by: (i) 1% for taxable income over $250,000 but less than $300,000 for single filers (over $500,000 but less than $600,000 for joint filers and over, $340,000 but less than $408,000 for head-of-household filers), (ii) 2% for taxable income over $300,000 but less than $500,000 for single filers (over $600,000 but less than $1,000,000 for joint filers and over $408,000 but less than $680,000 for head-of-household filers), and (iii) 3% for taxable income over $500,000 for single filers (over $1,000,000 for joint filers and over $680,000 for head-of-household filers).

The revenues generated from the temporary tax increases are included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. See “ – Proposition 98” and “ – Proposition 111” above. From an accounting perspective, the revenues generated from the temporary tax increases will be deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the “EPA”). Pursuant to Proposition 30, funds in the EPA will be allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. The funds will be distributed to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs.

The California Children’s Education and Health Care Protection Act of 2016, also known as Proposition 55 (“Proposition 55”), is a constitutional amendment initiative that has qualified for the November 8, 2016 general election ballot in California. Proposition 55 extends the increases to personal income tax rates for high-income taxpayers that were approved as part of Proposition 30 through 2030, instead of the scheduled expiration date of December 31, 2018. Tax revenue received under Proposition 55 would be allocated 89% to K-12 schools and 11% to community colleges.

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Jarvis v. Connell

On May 29, 2002, the California Court of Appeal for the Second District decided the case of Howard Jarvis Taxpayers Association, et. al., v. Kathleen Connell (as Controller of the State of California). The Court of Appeal held that a final budget bill, an emergency appropriation, a self-executing authorization pursuant to State statutes (such as continuing appropriations) or the State Constitution or a federal mandate is necessary for the State Controller to disburse funds. The foregoing requirement could apply to amounts budgeted by the District as being received from the State. To the extent the holding in such case would apply to State payments reflected in the District’s budget, the requirement that there be either a final budget bill or an emergency appropriation may result in the delay of such payments to the District if such required legislative action is delayed, unless the payments are self-executing authorization or are subject to a federal mandate. On May 1, 2003, the California Supreme Court upheld the holding of the Court of Appeal, stating that the Controller is not authorized under State law to disburse funds prior to the enactment of a budget or other proper appropriation, but under federal law, the Controller is required, notwithstanding a budget impasse and the limitations imposed by State law, to timely pay those State employees who are subject to the minimum wage and overtime compensation provisions of the federal Fair Labor Standards Act. Proposition 1A

On November 2, 2004, California voters approved Proposition 1A (“Proposition 1A”), which amended the State Constitution to significantly reduce the State’s authority over major local government revenue sources. Under Proposition 1A, the State cannot (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-thirds approval of both houses of the State Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Under Proposition 1A, beginning, in 2008-09, the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (i) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (ii) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also amended the State Constitution to require the State to suspend certain State laws creating mandates in any year that the State does not fully reimburse local governments for their costs to comply with the mandates. This provision does not apply to mandates relating to schools or community colleges or to those mandates relating to employee rights. Proposition 22

Proposition 22 (“Proposition 22”), a constitutional initiative entitled the “Local Taxpayer, Public Safety, and Transportation Protection Act of 2010,” approved on November 2, 2010, superseded many of the provision of Proposition 1A. This initiative amends the State constitution to prohibit the legislature from diverting or shifting revenues that are dedicated to funding services provided by local government or funds dedicated to transportation improvement projects and services. Under this proposition, the State is not allowed to take revenue derived from locally imposed taxes, such as hotel taxes, parcel taxes, utility taxes and sales taxes, and local public transit and transportation funds. Further, in the event that a local governmental agency sues the State alleging a violation of these provisions and wins, then the State must automatically appropriate the funds needed to pay that local government. This Proposition was intended to, among other things, stabilize local government revenue sources by restricting the State’s control over local property taxes. Proposition 22 did not prevent the California State Legislature from dissolving State redevelopment agencies pursuant to AB 1X26, as confirmed by the decision of the California Supreme Court decision in California Redevelopment Association v. Matosantos (2011).

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Because Proposition 22 reduces the State’s authority to use or reallocate certain revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget, such as reducing State spending or increasing State taxes, and school and college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State’s general fund. Proposition 62; Statutory Limitations On November 4, 1986, State voters approved Proposition 62 (“Proposition 62”), an initiative statute limiting the imposition of new or higher taxes by local agencies. The statute (a) requires new or higher general taxes to be approved by two-thirds of the local agency’s governing body and a majority of its voters; (b) requires the inclusion of specific information in all local ordinances or resolutions proposing new or higher general or special taxes; (c) penalizes local agencies that fail to comply with the foregoing; and (d) required local agencies to stop collecting any new or higher general tax adopted after July 31, 1985, unless a majority of the voters approved the tax by November 1, 1988. Appellate court decisions following the approval of Proposition 62 determined that certain provisions of Proposition 62 were unconstitutional. However, the State Supreme Court upheld Proposition 62 in its decision on September 28, 1995 in Santa Clara County Transportation Authority v. Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regarding Proposition 62 were not addressed in the Supreme Court’s decision, such as whether the decision applies retroactively, what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62, and whether the decision applies to charter cities. State Cash Management Legislation

Since 2002, the State engaged in the practice of deferring certain apportionments to school districts

in order to manage the State’s cash flow. This practice included deferring certain apportionments from one fiscal year to the next. These “cross-year” deferrals were codified. In recent years, the State has paid down the deferrals. However, in the 2017-18 Proposed Budget, the Governor proposed deferring $859.1 million in LCFF expenditures from June 2017, to July 2017, to maintain Fiscal Year 2016-17 programmatic expenditure levels in light of a reduction to Proposition 98 funding for Fiscal Year 2016-17 compared to the 2016-17 Budget. The 2017-18 Proposed Budget proposed to immediately repay the deferral in Fiscal Year 2017-18. While the final budget for Fiscal Year 2017-18 did not defer apportionments to school districts, the District cannot predict whether the State will engage in the practice of deferring certain apportionments to Districts in the future. Future Initiatives and Legislation Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID and Propositions 26, 30, 39 (approved in 2000 authorizing a 55% approval of school bonds), 98, 111 and 218 were each adopted pursuant to a measure qualified for the ballot pursuant to the State’s constitutional initiative process, Propositions 1A and 39 (approved in 2012 relating to a State grant program for energy efficiency projects) were each legislatively-referred constitutional amendments which were approved by the electorate, and the State Legislature has in the past enacted legislation which has altered the spending limitations or established minimum funding provisions for particular activities. From time to time, other initiative measures could be adopted by State voters or legislation enacted by the State Legislature. The adoption of any such initiative or enactment of legislation might place limitations on the ability of the State, the County, any city whose students are served by the District, the District or local districts to increase revenues, to increase appropriations, or affect the timing of issuance and/or the structure of future series of school district general obligation bonds.

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RISK FACTORS

The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating purchase of the Certificates. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Certificates. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks. General Considerations – Security for the Certificates

The obligation of the District to make the Lease Payments does not constitute a debt of the District or of the State or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction, and does not constitute an obligation for which the District or the State is obligated to levy or pledge any form of taxation or for which the District or the State has levied or pledged any form of taxation.

Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the District, the District is obligated under the Lease Agreement to pay the Total Rent from any source of legally available funds and the District has covenanted in the Lease Agreement that it will take such action as may be necessary to include the Total Rent in its annual budgets and to make necessary annual appropriations therefor. The District is currently liable for, and may become liable on, other obligations payable from general revenues, some of which may have a priority over the Lease Payments.

The District has the capacity to enter into other obligations which may constitute additional charges against its revenues. To the extent that additional obligations are incurred by the District, the funds available to pay Lease Payments may be decreased. In the event the District’s revenue sources are less than its total obligations, the District could choose to fund other activities before making Lease Payments and other payments due under the Lease Agreement. The District’s ability to collect, budget and appropriate various revenues is subject to current and future State laws and constitutional provisions, and it is possible that the interpretation and application of these provisions could result in an inability of the District to pay Lease Payments when due. Abatement

In the event of substantial interference with the District’s right to use and possession of any portion of the Site by reason of damage to, or destruction or condemnation of, the Site, or any defect in title to the Site, Lease Payments will be subject to abatement. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Abatement.” In the event that such portion of the Site, if damaged or destroyed by an insured casualty, could not be replaced during the period of time in which proceeds of the District’s rental interruption insurance will be available in lieu of Lease Payments, plus the period for which funds are available from the Reserve Fund or other funds and accounts established under the Trust Agreement, or in the event that casualty insurance proceeds or condemnation proceeds are insufficient to provide for complete repair or replacement of such portion of the Site or prepayment of the Certificates, there could be insufficient funds to make payments to Owners in full. Limited Recourse on Default

If the District defaults on its obligations to pay Lease Payments, the Trustee, as assignee of the Corporation, may (subject to the restrictions described below) retain the Lease Agreement and hold the District liable for all Lease Payments on an annual basis and will have the right to re-enter and re-let the Site. In the event such re-letting occurs, the District would be liable for any resulting deficiency in Lease Payments.

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Alternatively, the Trustee may (subject to the restrictions described below) terminate the Lease Agreement with respect to the Site and proceed against the District to recover damages pursuant to the Lease Agreement.

The Lease Agreement provides that if a Policy is obtained, so long as the bond insurer is not in default under the Policy, the bond insurer will control all remedies upon an event of default under provisions of the Lease Agreement and the Trust Agreement.

Due to the specialized nature of the Site, no assurance can be given that the Trustee will be able to re-let any portion of the Site so as to provide rental income sufficient to make principal and interest payments with respect to the Certificates in a timely manner, and the Trustee is not empowered to sell the Site for the benefit of the Owners of the Certificates. In addition, due to the governmental function of the Site, it is not certain whether a court would permit the exercise of the remedies of repossession and re-letting with respect thereto. Any suit for money damages would be subject to limitations on legal remedies against school districts in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Moreover, there can be no assurance that such reletting will not adversely affect the exclusion of any interest component of Lease Payments from federal or State income taxation. No Acceleration Upon Default

In the event of a default, there is no available remedy of acceleration of the Lease Payments due over the term of the Lease Agreement. The District will only be liable for Lease Payments on an annual basis, and the Trustee would be required to seek a separate judgment in each fiscal year for that fiscal year’s Lease Payments. In addition, any such suit for money damages could be subject to limitations on legal remedies against public agencies in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest and a limitation on enforcement of judgments against funds of a fiscal year other than the fiscal year in which the Lease Payments were due. Loss of Tax Exemption

As discussed under the heading “TAX MATTERS,” certain acts or omissions of the District in violation of its covenants in the Trust Agreement and the Lease Agreement could result in the interest represented by the Certificates being includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Certificates. Should such an event of taxability occur, the Certificates would not be subject to a special prepayment and would remain outstanding until maturity or until redeemed under other provisions set forth in the Trust Agreement. Internal Revenue Service Audit of Tax-Exempt Issuances

The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax-exempt issuances, including both random and target audits. It is possible that the Certificates will be selected for audit by the IRS. Special Counsel’s engagement with respect to the Certificates ends with the execution and delivery of the Certificates, and, unless separately engaged, Special Counsel is not obligated to defend the District or the Owners regarding the tax-exempt status of the interest evidenced by the Certificates in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its appointed counsel, including the Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt status of the interest evidenced by the Certificates is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the Certificates for audit, or the course or result of such audit, or an audit of tax-exempt obligations presenting similar tax issues may affect the market price for, or the marketability of, the Certificates, and may cause the District or the Owners to incur significant expense.

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No Liability of Corporation to the Owners

Except as expressly provided in the Trust Agreement, the Corporation will not have any obligation or liability to the Owners of the Certificates with respect to the payment when due of the Lease Payments by the District, or with respect to the performance by the District of other agreements and covenants required to be performed by it contained in the Lease Agreement or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. Absence of Earthquake and Flood Insurance

The District, like much of California, is subject to seismic activity that could result in interference with its right to use and possession of the Site. If any portion of the Site is destroyed or rendered useless by a natural hazard such as an earthquake or flood, an abatement could occur and result in the Trustee having inadequate funds to pay the principal and interest represented by the Certificates as and when due. The Lease Agreement does not require the District to obtain earthquake or flood insurance on the Site.

All building components of the Site were constructed under the standards of the “Field Act”

(California State Building Code, Title 24). The Field Act requires substantially higher construction standards for public schools and hospitals than are required for other types of construction. The Field Act requires that building systems be capable of withstanding seismic forces from the “most credible” earthquake likely to occur in the vicinity of the building system being constructed.

Hazardous Substances

Discovery of hazardous substances on the Site could impact the lease of the Site and the District’s ability to pay Lease Payments. The District is not aware of any hazardous substances with respect to the Site.

In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act” is the most well-known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance.

The effect, therefore, should the Site or any substantial amount of property within the District be affected by a hazardous substance, would be to reduce the marketability and value of the property by the costs of, and any liability incurred by, remedying the condition, since the purchaser, upon becoming an owner, will become obligated to remedy the condition just as is the seller. Such reduction in the value of the Site could adversely impact the fair rental value of the Site and potentially result in abatement of the Lease Payments.

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Risks Regarding Investments in County Pooled Investment Fund While the Certificate proceeds, Lease Payments and any other funds paid to the Trustee pursuant to the Lease will be entirely held in trust by the Trustee pursuant to the Trust Agreement, the School District’s general operating fund is held and invested by the Treasurer-Tax Collector of Santa Cruz County, California (the “County Treasurer”) in the County Pooled Investment Fund. See APPENDIX F – “SANTA CRUZ COUNTY POLICY” and APPENDIX G – “QUARTERLY INVESTMENT REPORT.”

Economic Conditions in California

The State of California, upon which the District relies for a substantial portion of its revenues, experienced budget shortfalls in recent fiscal years, although the economic outlook in the State has been much improved in recent years due to increases in tax revenues from an improving economy and temporary revenues provided by the passage of Proposition 30 approved by State voters in November 2012. See “STATE FUNDING OF EDUCATION AND RECENT STATE BUDGETS.” Any future decreases in State revenues may significantly affect appropriations made by the State to school districts, and the timing of payment to school districts by the State may depend upon the ability of the State to access the credit markets with respect to its own cash flow borrowings. In the event that State moneys are not available to meet obligations in a timely manner, school funding along with certain other services, are given priority under the State Constitution. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.” Limitations on Remedies; Bankruptcy

The rights of the owners of the Certificates are subject to the limitations on legal remedies against municipalities in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Additionally, enforceability of the rights and remedies of the owners of the Certificates, and enforcement of the District’s obligations under the Lease Agreement, may become subject to the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditor’s rights generally, now or hereafter in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the United States of America of the powers delegated to it by the Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose and the limitations on remedies against cities in the State.

Bankruptcy proceedings under Chapter 9 of the Bankruptcy Code (Title 11, United States Code), which governs the bankruptcy proceedings for public agencies such as the District, or the exercise of powers by the federal or State government, if initiated, could subject the owners of the Certificates to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. See “ – Limited Recourse on Default” above. State Law Limitations on Appropriations Article XIIIB of the California Constitution limits the amount that local governments can appropriate annually. The ability of the District to make Lease Payments may be affected if the District should exceed its appropriations limit. State aid to a local agency counts against the appropriation limit of cities in the State. The District’s budgeted appropriations from “proceeds of taxes” (sometimes referred to as the “Gann limit”) are generally within the allowable limit. Any proceeds of taxes received by the District in excess of the allowable limit are absorbed into the State’s allowable limit. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS – Article XIIIB of the State Constitution” herein.

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Change in Law No assurance can be given that the State or the District electorate will not at some future time adopt

initiatives, or that the State Legislature will not enact legislation that will amend the laws of the State, in a manner that could result in a reduction of the District’s revenues and therefore a reduction of the funds legally available to the District to make Lease Payments. See, for example, “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS – Articles XIIIC and XIIID.”

Substitution or Removal of Property

The Lease provides that, upon the satisfaction of the other conditions specified therein, the District

may substitute other public facilities or real property for all or any portion of the Site or release all or a portion of the Site from the leasehold of the Lease. The Lease requires (a) that any project which will comprise the Site after such a substitution or removal, in each lease year during the remaining term of the Lease must have an annual fair rental value at least equal to the maximum annual Lease Payments payable under the Lease attributable to the Site prior to the substitution or removal, as determined by the District on the basis of commercially reasonable evidence of the annual fair rental value of the Lease Property after the substitution or removal and (b) that the useful life of the Lease Property after substitution or removal equals or exceeds the remaining term of the Lease. Such a substitution or removal could have an adverse impact on the security for the Certificates, particularly if an event requiring abatement of Lease Payments were to occur subsequent to such substitution or removal.

Certificate Insurance Risk Factors

The District has acquired the Policy to guarantee the scheduled payment of principal and interest evidenced by the Certificates. The following are risk factors relating to the municipal bond insurance policy.

In the event of default of the payment of principal or interest with respect to the Certificates when all or a portion becomes due, any Owner of the Certificates shall have a claim under the Policy for such payments. The Policy does not insure against redemption premium. The payment of principal and interest in connection with mandatory or optional prepayment of the Certificates by the District which is recovered by the District from the Owner as a voidable preference under applicable bankruptcy law is covered by the Policy; however, such payments will be made by the Insurer at such time and in such amounts as would have been due absent such prepayment by the District unless the Insurer chooses to pay such amounts at an earlier date.

Under most circumstances, default of payment of principal and interest evidenced by the Certificates does not obligate acceleration of the obligations of the Insurer without appropriate consent. The Insurer may direct and must consent to any remedies and the Insurer’s consent may be required in connection with amendments to any applicable legal documents.

In the event the Insurer is unable to make payment of principal and interest evidenced by the Certificates as such payments become due under the Policy, the Certificates are payable solely from the moneys received pursuant to the applicable legal documents. In the event the Insurer becomes obligated to make payments with respect to the Certificates, no assurance is given that such event will not adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates.

The long-term ratings on the Certificates are dependent in part on the financial strength of the Insurer and its claims-paying ability. The Insurer’s financial strength and claims-paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Insurer and of the ratings on the Certificates due to the Policy by the Insurer will not be

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subject to downgrade and such event could adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates. See description of “RATINGS” herein.

The obligations of the Insurer are contractual obligations and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or state law related to insolvency of insurance companies.

Neither the District or the Underwriter has made independent investigation into the claims-paying ability of the Insurer and no assurance or representation regarding the financial strength or projected financial strength of the Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the District to pay principal and interest evidenced by the Certificates and the claims-paying ability of the Insurer, particularly over the life of the investment. See “CERTIFICATE INSURANCE” for further information provided by the Insurer regarding the Insurer and the Policy and for instructions for obtaining current financial information concerning the Insurer.

TAX MATTERS

Tax Exemption

In the opinion of Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation, Irvine, California, Special Counsel, subject, however, to certain qualifications described herein, based upon an analysis of existing statutes, regulations, rulings, and court decisions and assuming, among other things, compliance with certain covenants, interest evidenced by the Certificates is excluded from gross income for federal income tax purposes. In the opinion of Special Counsel, such interest is not an item of tax preference for purposes of the federal alternative minimum tax.

The opinions of Special Counsel set forth in the preceding paragraph are subject to the condition that the District complies with all requirements of the Code that must be satisfied subsequent to the execution and delivery of the Certificates in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted in the Trust Agreement to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of execution and delivery of the Certificates. The Trust Agreement and other related documents refer to certain requirements, covenants and procedures which may be changed and certain actions that may be taken, upon the advice or with an opinion of nationally recognized special counsel. No opinion is expressed by Special Counsel as to the effect on any Certificate or the interest evidenced thereby if any such change is made or action is taken upon the advice or approval of counsel other than Special Counsel. Special Counsel expresses no opinion regarding other tax consequences arising with respect to the Certificates.

In the further opinion of Special Counsel, interest evidenced by the Certificates is exempt from State personal income taxation.

Owners of the Certificates should also be aware that the ownership or disposition of, or the accrual or receipt of interest evidenced by, the Certificates may have federal or State tax consequences other than as described above. Special Counsel expresses no opinion regarding any federal or State tax consequences arising with respect to the Certificates other than as expressly described above.

See APPENDIX D for the proposed form of the opinion of Special Counsel.

Special Counsel’s engagement with respect to the Certificates ends with the execution and delivery of the Certificates, and, unless separately engaged, Special Counsel is not obligated to defend the District,

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or the Beneficial Owners regarding the tax-exempt status of the Certificates in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its respective appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt obligations is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the Certificates for audit, or the course or result of such audit, or an audit of Certificates presenting similar tax issues may affect the market price for, or the marketability of, the Certificates, and may cause the District or the Beneficial Owners to incur significant expense. Original Issue Discount; Premium Certificates

To the extent the issue price of any maturity of the Certificates is less than the amount to be paid at maturity of such Certificates (excluding amounts stated to be interest and payable at least annually over the term of such Certificates), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Owner thereof, is treated as interest evidenced by the Certificates which is excluded from gross income for federal income tax purposes and State personal income taxes. For this purpose, the issue price of a particular maturity of the Certificates is the first price at which a substantial amount of such maturity of the Certificates is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Certificates accrues daily over the term to maturity of such Certificates on the basis of a constant interest rate compounded semi-annually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Certificates to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Certificates. Owners of the Certificates should consult their own tax advisors with respect to the tax consequences of ownership of the Certificates with original issue discount, including the treatment of purchasers who do not purchase such Certificates in the original offering to the public at the first price at which a substantial amount of such Certificates is sold to the public.

The Certificates purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Certificates”) will be treated as having amortizable Certificate premium. No deduction is allowable for the amortizable certificate premium in the case of certificates, like the Premium Certificates, the interest evidenced by which is excluded from gross income for federal income tax purposes. However, a purchaser’s basis in a Premium Certificate, and under Treasury Regulations the amount of tax exempt interest received, will be reduced by the amount of amortizable certificate premium properly allocable to such purchaser. Owners of Premium Certificates should consult their own tax advisors with respect to the proper treatment of amortizable certificate premium in their particular circumstances. Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption

Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest evidenced by the Certificates to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Owners of the Certificates from realizing the full current benefit of the tax status of such interest.

The introduction or enactment of any such or future legislative proposals, clarification of the Code or court decisions may also affect the market price for, liquidity of, or marketability of, the Certificates. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation.

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As discussed above under “ – Tax Exemption,” interest evidenced by the Certificates could become includable in gross income for purposes of federal income taxation retroactive to the date the Certificates were executed and delivered as a result of future acts or omissions of the District in violation of its covenants in the Trust Agreement. Should such an event of taxability occur, the Certificates are not subject to special prepayment or acceleration and will remain outstanding until maturity or until redeemed under one of the other prepayment provisions contained in the Trust Agreement. Backup Withholding

Interest paid with respect to tax-exempt obligations such as the Certificates is subject to information reporting to the IRS in a manner similar to interest paid on taxable obligations. In addition, interest evidenced by the Certificates may be subject to backup withholding if such interest is paid to a registered owner that (a) fails to provide certain identifying information (such as the registered owner’s taxpayer identification number) in the manner required by the IRS or (b) has been identified by the IRS as being subject to backup withholding.

A copy of the proposed form of opinion of Special Counsel is attached hereto as Appendix D.

CERTAIN LEGAL MATTERS Continuing Disclosure

The District has covenanted, for the benefit of owners and beneficial owners of the Certificates to provide certain financial information and operating data relating to the District to the Municipal Securities Rulemaking Board on an annual basis (an “Annual Report”) not later than nine months after the end of the District’s fiscal year (which currently would be March 31), commencing March 31, 2019, with the report for the 2017-18 Fiscal Year, and to provide notices of the occurrence of certain enumerated events. The Annual Report and other required notices will be filed by the District with the Municipal Securities Rulemaking Board (the “MSRB”) in the manner prescribed by the Securities Exchange Commission. The form of Continuing Disclosure Certificate is attached as APPENDIX E. These covenants have been made in order to assist the Underwriter in complying with SECURITIES AND EXCHANGE COMMISSION Rule 15c2-12(b)(5) (the “Rule”).

Within the past five years, the District has failed to file the annual reports and audits for Fiscal Years 2012-13 and 2013-14 in a timely manner and operating data and certain notices of listed events as required by its existing continuing disclosure undertakings.

In order to assist it in complying with its disclosure undertakings for its outstanding bonds and the Certificates, the District has engaged Dale Scott & Company, as dissemination agent, with respect to each of its disclosure undertakings, including the Continuing Disclosure Certificate to be executed in connection with the Certificates. Absence of Material Litigation

No litigation is pending or threatened, to the knowledge of the District, concerning the validity of the Certificates, and a certificate to that effect will be furnished to purchasers at the time of the original delivery of the Certificates. The District is not aware of any litigation pending or threatened that (i) questions the political existence of the District, (ii) contests the District’s ability to receive ad valorem taxes or to collect other revenues or (iii) contests the District’s ability to execute and deliver the Certificates.

The District is routinely subject to lawsuits and claims. In the opinion of the District, the aggregate

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amount of the uninsured liabilities of the District under these lawsuits and claims will not materially affect the financial position or operations of the District.

RATINGS

S&P Global Ratings, a business unit of Standard & Poor’s Financial Services LLC (“S&P”), is expected to assign a rating of “AA” to the Certificates, based on the understanding that BAM will deliver its Policy with respect to the Certificates upon delivery. See “CERTIFICATE INSURANCE.”

In addition, Moody’s has assigned an underlying rating of “A1” to the Certificates. Such ratings reflect only the views of S&P and Moody’s, respectively, and an explanation of the significance of such ratings may be obtained from S&P and Moody’s, respectively. There is no assurance that such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by S&P and/or Moody’s if in their respective judgment circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Certificates.

UNDERWRITING

The Certificates are being purchased by RBC Capital Markets, LLC (the “Underwriter”). The Underwriter has agreed to purchase the Certificates at a price of $__________ (which price is equal to the aggregate principal amount of the Certificates, plus net original issue premium of $__________ and less an Underwriter’s discount of $__________). The Purchase Contract pursuant to which the Underwriter has agreed to purchase the Certificates provides that the Underwriter will purchase all of the Certificates if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the Purchase Contract, including the approval of certain legal matters by counsel and certain other conditions.

The Underwriter intends to offer the Certificates to the public at the offering prices set forth on the inside cover page of this Official Statement. The Underwriter may offer and sell to certain dealers and others at a price lower than the offering prices stated on the inside cover page hereof. The offering price may be changed from time to time by the Underwriter.

The Underwriter and its respective affiliates are full-service financial institutions engaged in various activities that may include securities trading, commercial and investment banking, municipal advisory, brokerage, and asset management. In the ordinary course of business, the Underwriter and its respective affiliates may actively trade debt and, if applicable, equity securities (or related derivative securities) and provide financial instruments (which may include bank loans, credit support or interest rate swaps). The Underwriter and its respective affiliates may engage in transactions for their own accounts involving the securities and instruments made the subject of this securities offering or other offering of the District. The Underwriter and its respective affiliates may make a market in credit default swaps with respect to municipal securities in the future. The Underwriter and its respective affiliates may also communicate independent investment recommendations, market color or trading ideas and publish independent research views in respect of this securities offering or other offerings of the District.

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FINANCIAL INTERESTS

Fees payable to certain professionals, including the Underwriter, Norton Rose Fulbright US LLP, as Underwriter’s Counsel, James F. Anderson Law Firm, A Professional Corporation, as Disclosure Counsel, Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation, as Special Counsel, Dale Scott & Company, as Municipal Advisor, and U.S. Bank National Association, as the Trustee, are contingent upon the issuance of the Certificates. From time to time, Disclosure Counsel represents the Underwriter on matters unrelated to the Certificates.

ADDITIONAL INFORMATION

The reference herein to the Trust Agreement, the Lease Agreement, the Site Lease and the Continuing Disclosure Certificate and other legal documents are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and for full and complete statements of such provisions reference is made to said documents. Copies of the documents are available from the Underwriter prior to initial sale of the Certificates and following delivery of the Certificates will be on file at the offices of the Trustee in San Francisco, California.

References are also made herein to certain documents and reports relating to the District; such references are brief summaries and do not purport to be complete or definitive. Copies of such documents are available from upon written request to the District.

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Certificates.

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EXECUTION

The execution and delivery of this Official Statement have been duly authorized by the District.


By: Michelle Rodriguez, Ph.D., Superintendent

A-1

APPENDIX A

SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS

__________________________

2019 CERTIFICATES OF PARTICIPATION Evidencing the Direct Fractional Undivided Interests of the

Owners Thereof in Lease Payments to be Paid by the PAJARO VALLEY UNIFIED SCHOOL DISTRICT

__________________________

The following is a brief summary of certain provisions of the Site Lease, the Lease Agreement, the Trust Agreement and the Assignment Agreement relative to the above-referenced Certificates of Participation. This summary is not intended to be definitive and is qualified in its entirety by reference to such documents for the complete terms thereof. Copies of such documents are available upon request from the Pajaro Valley Unified School District. DEFINITIONS

The following are summaries of definitions of certain terms used in this Appendix A. All capitalized terms not defined here or elsewhere in the Preliminary Official Statement have the meanings set forth in the Lease Agreement or the Trust Agreement, as appropriate.

“Additional Rent” means the amounts specified as such in the Lease Agreement. “Assignment Agreement” means the Assignment Agreement, dated as of January 1, 2019, by and

between the Trustee and the Lessor and any duly authorized and executed amendment thereto, pursuant to which the Lessor assigns certain of its rights and remedies under the Lease Agreement to the Trustee.

“Beneficial Owners” means those individuals, partnerships, corporations or other entities for

which the Participants have caused the Depository to hold book-entry Certificates pursuant to the Trust Agreement

“Board” or “District Board” means the Board of Trustees of the District. “Business Day” means a day which is not a Saturday or Sunday or a day on which banking

institutions are authorized or required by law or executive order to be closed in California and New York for commercial banking purposes and on which the Federal Reserve system is not closed. “Certificate Payment Account” means the account of that name established under, and held by the Trustee pursuant to the Trust Agreement.

“Certificate Register” means the Certificate Register kept by the Trustee as provided in the Trust Agreement.

“Certificate Year” means the 12-month period commencing on the day after expiration of the previous Certificate Year, except the first Certificate Year shall commence on the Delivery Date and end on August 1, 2019. The first full Certificate Year shall begin on August 2, 2019.

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“Certificates” or “2019 Certificates” means the fully-registered Pajaro Valley Unified School District 2019 Certificates of Participation as executed and delivered by the Trustee pursuant to the Trust Agreement.

“Closing Date,” “Delivery Date” or “Dated Date” means the date when the Certificates, duly

executed by the Trustee, are delivered to, or upon the order of, RBC Capital Markets, LLC, together with any successor in interest thereof, as the original purchaser thereof.

“Code” means the Internal Revenue Code of 1986, as amended, and the applicable Treasury Regulations.

“Completion Date” means the date of substantial completion of the acquisition, construction, delivery and installation of the Project, as evidenced by the filing with the Trustee of a Certificate of Completion as set forth in the Trust Agreement. “Construction Account” means the account of that name established under, and held by the Trustee pursuant to the Trust Agreement. “Construction Costs” means the costs of the acquisition, construction, installation, delivery and financing of the Project, and shall, subject to the proviso below, include, without limitation, the cost of any taxes or assessments paid or to be paid in connection with the transfer of any property; the cost of any indemnity and surety bonds; and fees and expenses of attorneys, accountants, financial advisors and consultants; and such other costs, whether or not specified in the Trust Agreement, as may be necessary or incidental to the acquisition, installation, delivery and financing of the Project and the placing of the same in operation and subsequent to placing the same in operation; provided, however, that Construction Costs shall include only those costs that the Lessor, if it paid federal income taxes, would, pursuant to the Code, be (i) required to charge to a capital account, (ii) permitted to elect to charge to a capital account instead of deducting from income, or (iii) permitted to deduct from income instead of charging to a capital account.

“Continuing Disclosure Certificate” means that certain Continuing Disclosure Certificate executed by the District and dated the date of execution and delivery of the Certificates, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

“Corporation” or “Lessor” means the Public Property Financing Corporation of California, a

California non-profit public benefit corporation, and its successors and assigns. “County” means the County of Santa Cruz, California. “Defeasance Securities” means direct and general obligations of the United States of America

(including State and Local Government Series), or obligations that are unconditionally guaranteed as to principal and interest by the United States of America, including (in the case of direct and general obligations of the United States of America) evidence of direct ownership or proportionate interests in future interest or principal payments of such obligations. In the case of investments in such proportionate interests, such proportionate interests shall be limited to circumstances wherein (a) a bank or trust company acts as custodian and holds the underlying Defeasance Obligations; (b) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying Defeasance Obligations; and (c) the underlying Defeasance Obligations are held in a special account, segregated from the custodian’s general assets, and are not available to satisfy any claim of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated; provided that such obligations are rated or assessed at the highest then-prevailing United States Treasury securities rate.

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“Delivery Costs” means all items of expense directly or indirectly payable by or reimbursable to the District or the Lessor relating to the financing of the Project, including but not limited to filing and recording costs, fees and expenses incurred in connection with the preparation of the Certificates; the costs of execution and delivery of the Certificates, including expenses relating to registering or qualifying the Certificates for distribution in any jurisdiction of the United States; commissions, financing charges, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee, including its first annual administration fee, financing discounts, legal fees and charges, financial and other professional consultant fees and the costs of rating agencies for credit ratings (if any) and the costs for the Insurance Policy, and any reserve facilities or reserve surety bonds.

“Delivery Costs Account” means the account of that name established under, and held by the

Trustee pursuant to the Trust Agreement.

“Depository” means the securities depository acting as Depository pursuant to the Trust Agreement, and in accordance with then-current guidelines of the Securities and Exchange Commission, such other securities depositories as the District may designate in a certificate delivered to the Trustee.

“District” or “Lessee” means the Pajaro Valley Unified School District, a public school district

duly organized and existing under the Constitution and the laws of the State of California and located in the County of Santa Cruz.

“District Representative” shall mean the District’s Superintendent, Chief Business Officer or other officer(s) or District employees designated in writing by the Board or the District’s Superintendent.

“DTC” means The Depository Trust Company, a limited purpose trust company organized under

the laws of the State of New York, in its capacity as securities depository for the 2019 Certificates of Participation.

“Due Dates” means a date at least 15 days prior to each Payment Date so long as any of the

Certificates are Outstanding, commencing at least 15 days prior to August 1, 2019.

“Event of Default” is defined in the Trust Agreement. “Fair Rental Value” means, with respect to the Site, the fair rental value thereof, as set forth in

the Lease Agreement. “Fiscal Year” means the fiscal year of the District, commencing July 1 and ending June 30 of the

following year. “Hazardous Substance” means any hazardous substance, pollutant or contaminant included in

such (or similar) term under any state, federal or local statute, ordinance, rule or regulation now in effect or enacted or amended after the Delivery Date.

“Informational Services” means the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access (EMMA) system, and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds as the District may designate in a written request of the District delivered to the Paying Agent.

“Insurance and Condemnation Fund” means the fund of that name established under, and held

by the Trustee pursuant to the Trust Agreement.

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“Insurance Policy” or “Policy” means the insurance policy on the Certificates issued by the Certificate Insurer guaranteeing the scheduled payment of principal and interest when due. “Insured Certificates” means the Certificates maturing on August 1 of the years 20___ through 20___, inclusive, and the Term Certificate(s). “Insurer” or “Certificate Insurer” means Build America Mutual Assurance Company, or any successor or assignee thereof.

“Independent Appraiser” means a certified real estate appraiser, or certified real estate appraisal

firm or company, appointed and paid by the District and who, or each of whom: (1) is independent from the District; and (2) does not have any substantial interest, direct or indirect, with the District or the Certificates. “Lease Agreement” means the Lease Agreement for the lease of the Project, by and between the

Lessor and the District, dated as of January 1, 2019, and any authorized and executed amendment thereto.

“Lease Payment Account” means the account of that name established under, and held by the Trustee pursuant to the Trust Agreement.

“Lease Payment Date” means the fifteenth day preceding each Payment Date.

“Lease Payments” means any amounts due from the District to the Lessor under the Lease

Agreement as such amounts may be adjusted from time to time in accordance with the Lease Agreement and the Trust Agreement.

“Lessor Representative” means the President, Secretary or Treasurer of the Lessor, or any other

person authorized to act on behalf of the Lessor under or with respect to the Lease Agreement. “Moody’s” means Moody’s Investors Services, Inc., a corporation organized and existing under

the laws of the State of Delaware, its successors and assigns, except that if such corporation shall no longer perform the function of a securities rating agency for any reason, the term “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency selected by the District.

“Net Proceeds” means the amount remaining from the gross proceeds of any insurance claim or

condemnation award paid with respect to the Site or any component or components thereof, after deducting all expenses (including attorneys’ fees) incurred in the collection of such claim or award.

“Nominee” means the nominee of the Depository, which may be the Depository, as determined

from time to time pursuant to the Trust Agreement. “Opinion of Counsel” means a written opinion of counsel of recognized national standing in the

field of law relating to municipal bonds, appointed and paid by the District.

“Outstanding” when used with reference to the Certificates, and as of any particular date, means all Certificates theretofore delivered (subject to provisions in the Trust Agreement regarding disqualified Certificates) except: (a) any Certificate canceled by the Trustee at or before said date; (b) Certificates (or portions of Certificates) for the payment or prepayment of which moneys or securities shall be held in trust under the Trust Agreement and set aside for such payment or prepayment; (c) any Certificate in lieu of or

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in substitution for which another Certificate shall have been delivered pursuant to the Trust Agreement; or (d) Certificates deemed to have been paid as provided in the Trust Agreement.

“Owner” or “Certificate Owner” or any similar term, when used with respect to the Certificates, means any person who shall be the registered owner of any Outstanding Certificate.

“Payment Dates” means February 1 and August 1 of each year, commencing August 1, 2019. “Permitted Encumbrances” means, as of any particular time: (i) liens for general ad valorem

taxes and governmental assessments, if any, not then delinquent, or which the District may, pursuant to the provisions of the Lease Agreement, permit to remain unpaid; (ii) the Assignment Agreement, as it may be amended from time to time; (iii) the Lease Agreement and the Site Lease, as they may be amended from time to time; (iv) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law as normally exist with respect to properties similar to the Site for the purposes for which it was acquired or is held by the District; (v) easement, rights-of-way, licenses, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Delivery Date which the District certifies in writing will not affect the intended use of the Site or impair the security granted to the Trustee for the benefit of the Owners of the Certificates by the Trust Agreement and the Assignment Agreement; (vi) easements, rights-of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and which the District certifies in writing will not affect the intended use of the Site or impair the security granted to the Trustee for the benefit of the Owners of the Certificates, including, but not limited to, the Insurer, by the Trust Agreement and the Assignment Agreement and to which the Lessor and the Insurer consent in writing; and (vii) any non-recorded lease providing for the use of up to three classrooms located on the Site for childcare services (or equivalent services), as such lease may be amended or renewed from time to time, provided that any such lease shall not cause the District to be in violation of any representation, covenant, or warranty set forth in the Lease Agreement and in the Trust Agreement.

“Permitted Investments” mean and include any of the following if and to the extent then permitted

and the same are legal for investments for the District’s funds under the general laws of the State applicable to investments by school districts: (1) (a) Direct obligations (other than an obligation subject to variation in principal

repayment) of the United States of America (“United States Treasury Obligations”), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated (collectively “United States Obligations”). These include, but are not necessarily limited to:

- U.S. Treasury obligations All direct or fully guaranteed obligations - Farmers Home Administration Certificates of beneficial ownership - General Services Administration

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Participation certificates - U.S. Maritime Administration Guaranteed Title XI financing - Small Business Administration Guaranteed participation certificates - Guaranteed pool certificates - Government National Mortgage Association (GNMA) GNMA-guaranteed mortgage-backed securities GNMA-guaranteed participation certificates - U.S. Department of Housing & Urban Development Local authority bonds - Washington Metropolitan Area Transit Authority Guaranteed transit bonds (2) Federal Housing Administration debentures. (3) The listed obligations of government-sponsored agencies which are not backed by the full

faith and credit of the United States of America: - Federal Home Loan Mortgage Corporation (FHLMC) Participation

certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts)

Senior debt obligations - Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate

Credit Banks and Banks for Cooperatives) Consolidated systemwide bonds and notes

- Federal Home Loan Banks (FHL Banks) Consolidated debt obligations - Federal National Mortgage Association (FNMA) Senior debt obligations Mortgage-backed securities (excluded are stripped mortgages securities

which are purchased at prices exceeding their principal amounts) - Student Loan Marketing Association (SLMA) Senior debt obligations (excluded are securities that do not have a fixed

par value and/or whose terms do not promise a fixed dollar amount at maturity or call date)

- Financing Corporation (FICO) Debt obligations - Resolution Funding Corporation (REFCORP) Debt obligations (4) Unsecured certificates of deposit, time deposits, and bankers’ acceptances (having

maturities of not more than 30 days) of any bank the short-term obligations of which are rated “A-1” or better by S&P.

(5) Deposits in the aggregate amount of which are fully insured by the Federal Deposit

Insurance Corporation (FDIC), in banks which have capital and surplus of at least $5 million.

(6) Commercial paper (having original maturities of not more than 270 days) rated “A-1+” by

S&P and “Prime-1” by Moody’s.

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(7) Money market funds rated “Aam” or “Aam-G” by S&P, or better.

(8) Repurchase agreements: A. With (i) any domestic bank, or domestic branch of a foreign bank, the long term

debt of which is rated at least “AA” by S&P and “Aa” by Moody’s; (ii) any broker-dealer with “retail customers” or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least “A” by S&P and Moody’s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corp. (SIPC); or (iii) any other entity rated “AA” or better by S&P and “Aa” or better by Moody’s, provided that:

a. The market value of the collateral is maintained at levels and upon such

conditions as would be acceptable to S&P and Moody’s to maintain an “AA” and “Aa”, respectively, rating in an “AA” and “Aa,” respectively, rated structured financing (with a market value approach);

b. The Trustee or a third party acting solely as agent therefor or for the

District (“Holder of the Collateral”) has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor’s books);

c. The repurchase agreement shall state, and an opinion of counsel is

rendered at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession);

d. All other requirements of S&P in respect of repurchase agreements shall

be met; e. The repurchase agreement shall provide that if during its term the

provider’s rating by either S&P or Moody’s is withdrawn or suspended or falls below “A-” or “A3” respectively, the provider must, at the direction of the District or the Trustee, within 10 days of receipt of such direction, repurchase all collateral and terminate the agreement, with no penalty or premium to the District or Trustee. Notwithstanding the above, if a repurchase agreement has a term of 270 days or less (with no evergreen provision), collateral levels need not be as specified in (a) above, so long as such collateral levels are 103% or better and the provider is rated at least “A” by S&P and Moody’s, respectively.

(9) State Obligations, which means (a) Direct general obligations of any state of the United States or any subdivision or

agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated “A3” by Moody’s and “A” by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated.

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(b) Direct, general short-term obligations of any state agency or subdivision described in (a) above and rated “A-1+” by S&P and “Prime-1” by Moody’s.

(c) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any

state, state agency or subdivision described in (a) above and rated “AA” or better by S&P and “Aa” or

better by Moody’s.

(10) Investment agreements with a domestic or foreign bank or corporation (other than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least “AA” by S&P and “Aa” by Moody’s; provided, that, by the terms of the investment agreement:

(a) interest payments are to be made to the Trustee at times and in amounts as

necessary to pay debt service on the Certificates; (b) the invested funds are available for withdrawal without penalty or premium, at any

time upon not more than seven days’ prior notice; the Trustee and the District hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;

(c) the investment agreement shall state that it is the unconditional and general

obligation of, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors;

(d) the Trustee or the District receive the opinion of domestic counsel that such

investment agreement is legal, valid and binding and enforceable against the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the District;

(e) the investment agreement shall provide that if during its term (i) the provider’s

rating by either Moody’s or S&P falls below “AA-” or “Aa3”, respectively, the provider shall, at its option, within 10 days of receipt of publication of such downgrade, either (A) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the Trustee, the District or a Holder of the Collateral, collateral free and clear of any third-party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody’s to maintain an “A” rating in an “A” rated structured financing (with a market value approach); or (B) repay the principal of and accrued but unpaid interest, on the investment, and (ii) the provider’s rating by either Moody’s or S&P is withdrawn or suspended or falls below “A3” or “A,” respectively, the provider must, at the direction of the District or the Trustee, within 10 days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the District or Trustee; and

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(f) the investment agreement shall state, and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Holder of Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of Collateral is in possession); and

(g) the investment agreement must provide that if during its term (i) the provider shall

default in its payment obligations, the provider’s obligations under the investment agreement shall, at the direction of the District or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate.

(11) Pre-refunded municipal obligations rated “AAA” by S&P and “Aaa” by Moody’s meeting

the following requirements: (a) the municipal obligations are (i) not subject to redemption prior to maturity or (ii)

the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions;

(b) the municipal obligations are secured by cash or United States Treasury

Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations;

(c) the principal of and interest on the United States Treasury Obligations (plus any

cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations (“Verification”);

(d) the cash or United States Treasury Obligations serving as security for the

municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations;

(e) no substitution of a United States Treasury Obligation shall be permitted except

with another United States Treasury Obligation and upon delivery of a new Verification; and

(f) the cash or the United States Treasury Obligations are not available to satisfy any

other claims, including those by or against the trustee or escrow agent. (12) The Local Agency Investment Fund referred to in Section 16429.1 of the Government

Code of the State of California to the extent the Trustee may deposit and withdraw funds directly.

(13) The Santa Cruz County Investment Pool provided the District may statutorily invest funds

in such Investment Pool.

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(14) The California Asset Management Program (CAMP). “Person” means an individual, corporation, limited liability company, firm, association,

partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency

or political subdivision thereof.

“Prepayment Fund” means the fund of that name established under, and held by the Trustee pursuant to the Trust Agreement.

“Principal Office” means the main or principal corporate trust office of the Trustee in Los Angeles, California, or such other offices as the Trustee may designate from time to time, except that with respect to presentation of Certificates for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted.

“Project” means those capital projects described in the Trust Agreement.

“Project Trust Fund” means the fund of that name established under, and held by the Trustee

pursuant to the Trust Agreement. “Rebate Fund” means the fund of that name established under, and held by the Trustee pursuant to the Trust Agreement.

“Record Date” means the close of business on the 15th day of the month immediately preceding any Payment Date (whether or not such day is a Business Day).

“Rental Period” means the period from the Delivery Date through August 1, 2019 and thereafter,

the twelve-month period commencing on August 2 of each year during the term of the Lease Agreement. “Requisition” means a certificate executed by the District Representative and filed with the Trustee

requesting disbursement from the Construction Account or the Delivery Costs Account in substantially the form set forth in the Trust Agreement.

“Reserve Facility” means any line of credit, letter of credit, insurance policy (including the

Reserve Fund Policy), surety bond or other credit source deposited with the Trustee pursuant to the Trust Agreement.

“Reserve Fund” means the fund of that name established under, and held by the Trustee pursuant

to the Trust Agreement. “Reserve Fund Policy” means a reserve fund surety bond or policy provided by the Insurer to be

deposited into the Reserve Fund to satisfy the Reserve Requirement.

“Reserve Replenishment Rent” means the rental payments made by the District pursuant to the Lease Agreement.

“Reserve Requirement” means, as of the date of calculation, an amount equal to the least of: (i) 125% of average annual aggregate Lease Payments over the remaining term of the Lease Agreement; (ii) the maximum aggregate annual Lease Payments over the remaining term of the Lease Agreement; or (iii) 10% of the net proceeds of the Certificates, less original issue discount, if any, plus original issue premium, if any, as applicable.

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“Responsible Officer” means any officer of the Trustee assigned to administer the trusts created under the Trust Agreement. The Trustee shall, at all times, have at least one Responsible Officer which shall be identified to the District in writing.

“S&P” or “Standard & Poor’s” means S&P Global Ratings, a Standard & Poor’s Financial

Services LLC business, a corporation organized and existing under the laws of the State of New York, its successors and assigns, except that if such entity shall no longer perform the functions of a securities rating agency for any reason, then the terms “S&P” and “Standard & Poor’s” shall be deemed to refer to any other nationally recognized securities rating agency selected by the District.

“Site” means those certain parcels of real property situated in the County of Santa Cruz, State of California and as described in the Lease Agreement, together with the improvements and fixtures thereon.

“Special Counsel” means a firm of nationally recognized bond attorneys, initially Atkinson, Andelson, Loya, Ruud & Romo, a Professional Law Corporation.

“State” refers to the State of California.

“Tax Certificate” means that Tax Certificate delivered by the District on the Dated Date relating to the Certificates.

“Term” means the time during which the Lease Agreement is in effect, as provided in the Lease

Agreement. “Term Certificates” means those Certificates maturing on August 1, 20___. “Total Rent” means, collectively, the Lease Payments, Additional Rent and Reserve

Replenishment Rent. “Treasury Regulations” means any temporary, proposed or final regulations of the United States

Department of Treasury with respect to obligations issues pursuant to Section 103 and Sections 141 to 150 of the Code.

“Trust Agreement” means the Trust Agreement, dated as of January 1, 2019, by and among the Trustee, the Lessor and the District, and any duly authorized and executed amendments thereto.

“Trustee” means U.S. Bank National Association, a national banking association organized and existing under the laws of the United States of America, or its successor in interest acting as Trustee under the Trust Agreement. “Yield” means that yield which, when used in computing the present worth of all payments of principal and interest (or other payments in the case of Non-purpose Investments (as defined in the Tax Certificate) which require payments in a form not characterized as principal and interest) on a Non-Purpose Investment or evidenced by the Certificates produces an amount equal to the Purchase Price of such Non-purpose Investment or the Certificates, as the case may be, all computed as prescribed in the applicable Treasury Regulations.

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THE SITE LEASE

Pursuant to the Site Lease, the District will lease the Site to the Lessor, subject only to Permitted Encumbrances, as of the date of commencement of the Term of the Lease Agreement. The Site Lease will remain in full force and effect from such date to and including August 1, 20__, unless such term is extended or sooner terminated as provided below. If on August 1, 20__, the Certificates shall not be fully paid, or the Trust Agreement shall not be discharged by its terms, or if the Total Rent payable under the Lease Agreement shall have been abated at any time, then the term of the Site Lease will be automatically extended until the date upon which the Certificates shall be fully paid or provision made in accordance with the Trust Agreement, and the Trust Agreement shall be discharged by its terms, except that the Site Lease shall in no event be extended more than ten years. If, prior to August 1, 20__, all Certificates shall be fully paid, or provisions therefor made in accordance with the Trust Agreement and Total Rent payable under the Lease Agreement shall have been paid, and the Trust Agreement shall be discharged by its terms, the term of the Site Lease shall end simultaneously therewith.

The Lessor shall pay the Site Lease Payment to the District as and for rental of the Site. Upon

termination of the Site Lease, title to all improvements and structures existing upon the Site at the time of the termination of the Site Lease shall remain thereon and title thereto shall vest in the District.

Assignment; Sublease

The Site Lease may be assigned or sold, and the Site may be subleased, as a whole or in part, by

the Lessor, without the necessity of obtaining the consent of the District, if an event of default occurs under the Lease Agreement. The Lessor shall, within 30 days after such an assignment, sale or sublease, furnish or cause to be furnished to the District a true and correct copy of such assignment, sublease or sale, as the case may be.

Upon the execution and delivery of the Assignment Agreement (which is occurring simultaneously with the execution and delivery of the Site Lease), all right, title and interest of the Lessor in and to the Site Lease will be sold, assigned and transferred to the Trustee for the benefit of the Owners of the Certificates. See “ASSIGNMENT AGREEMENT,” below.

Amendment and Modification

The Site Lease is subject to amendment or modification in accordance with the provisions of the

Lease Agreement, and the District may substitute other real property for the Site, or release portions of the Site, as provided for in the Lease Agreement. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Substitution and Release of Property”; see also “THE LEASE AGREEMENT – Substitution of the Site” below. Amendments or modifications to the Site Lease are subject to the consent of the Insurer.

The Trustee and the Insurer are third-party beneficiaries of the Site Lease.

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THE LEASE AGREEMENT

Lease of the Site

The Corporation agrees to lease the Site to the District, and the District agrees to lease the Site from the Corporation. See “INTRODUCTION” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – General.”

Leasehold Interest

During the Term, the Corporation will hold a leasehold interest in the Site pursuant to the Site Lease. See “INTRODUCTION,” “THE SITE” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – General”. Upon the expiration of the Term and upon payment of all Total Rent, the title and interest of the Corporation in and to the Site shall revert to the District. See “THE SITE LEASE” above.

Term of the Lease Agreement

The Term of the Lease Agreement commences as of January 1, 2019, and ends on August 1, 20__

(“Termination Date”), unless on such date any Certificates remain Outstanding under the Trust Agreement, in which case the Lease Agreement shall remain in full force and effect until all Certificates have been fully paid, or any amounts remain payable under the Lease Agreement, except that the Term shall in no event be extended beyond August 1, 20__, or unless terminated prior to such date upon the earliest of any of the following events: (a) the payment or prepayment or provision therefor by the District of all Lease Payments, payments of Additional Rent, and other amounts due during the Term of the Lease Agreement (See “THE LEASE AGREEMENT – Lease Payments” below); (b) the occurrence of an event of default pursuant to the Lease Agreement, and the termination of the Lease Agreement by the Corporation or its successors and assigns pursuant to the Lease Agreement (See “THE LEASE AGREEMENT – Events of Default” and “THE LEASE AGREEMENT – Remedies” below); or (c) the Site is destroyed or damaged or is taken under the power of eminent domain to such extent that the operation of the Site is materially affected and the Trustee has given notice of prepayment of all Outstanding Certificates (See “THE LEASE AGREEMENT – “Prepayment - Insurance or Condemnation Proceeds - Mandatory Prepayment from Net Proceeds” below). The District takes possession of the Site on the Delivery Date.

Notwithstanding anything in the Lease Agreement to the contrary, the Lease Agreement shall not

terminate, or be terminated, while any of the Insured Certificates issued pursuant to the terms of the Trust Agreement remain outstanding or there is any outstanding liability of the District to the Insurer without the prior written consent of the Insurer.

Lease Payments The District agrees to pay to the Lessor and its successors and assigns, as “base rental” for the use

of possession of the Site, the Lease Payments set forth in the schedule contained in the Lease Agreement, and to pay Additional Rent and any Reserve Replenishment Rent required under the terms of the Lease Agreement. See “INTRODUCTION” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – General,” “ – Lease Payments,” “ – Additional Rental Payments” and “ – Covenant to Appropriate Funds.”

Certain amounts held in the Lease Payment Account, or the Certificate Payment Account, and its

subaccounts, on any Lease Payment Date are credited towards the Lease Payments then due and payable. Notwithstanding any dispute between the Lessor and the District pursuant to the Lease Agreement, the District must make all Lease Payments when due and shall not withhold any payments pending the final

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resolution of such dispute. Any Lease Payment not paid when due continues as an obligation of the District until paid.

The parties to the Lease Agreement have agreed and determined the Fair Rental Value of the Site,

as of the Delivery Date. In making such determination of Fair Rental Value, consideration has been given to the uses and purposes that may be served by the Site and the benefits therefrom which will accrue to the District and the general public. Payments of the Total Rent for the Site during each Rental Period shall constitute the total rental for said Rental Period. Total Rent shall be paid from any source of legally available funds of the District, and the District covenants to take such action as may be necessary to include all Total Rent due under the Lease Agreement in its annual budget and to make necessary annual appropriations for all such payments of Total Rent. During the Term of the Lease Agreement, the District will annually furnish to the Trustee, a certificate of the District Representative pursuant to the Lease Agreement. See “INTRODUCTION” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Covenant to Appropriate Funds.”

The obligation of the District to make the Lease Payments does not constitute a debt of the District or of the State, or of any political subdivision thereof, within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the District or the State is obligated to levy or pledge any form of taxation or for which the District or the State has levied or pledged any form of taxation. Pursuant to the Assignment Agreement, the Corporation has assigned its rights to receive and collect Lease Payments to the Trustee in trust for the benefit of the Owners of the Certificates. See “THE ASSIGNMENT AGREEMENT” below.

Reserve Replenishment Rent. If: (1) funds have been withdrawn from the Reserve Fund (including draws on the Reserve Fund

Policy) and shall have been utilized in order to pay interest or principal evidenced by the Certificates or if there shall be a deficiency in the Reserve Fund resulting from a decrease of 10% or more in the market value of the Permitted Investments in the Reserve Fund, determined as provided in the Trust Agreement, and (2) Lease Payments are not in abatement pursuant to the Lease Agreement, and (3) the amount of such Lease Payments is less than the Fair Rental Value (as set forth in the Lease Agreement), and (4) the amount on deposit in the Reserve Fund (including as the result of a draw on the Reserve Fund Policy), is less than the Reserve Requirement,

then: the Lessee shall pay from its first available moneys after payment of Lease Payments, to the Trustee, Reserve Replenishment Rent consistent with the Fair Rental Value,

(i) over a one-year period, in substantially equal quarterly payments, in the event that such deficiency results from a withdrawal from the Reserve Fund, including any amounts required to replay all draws and Policy Costs (as defined in the Trust Agreement) under the terms of the Trust Agreement, or if there shall be a deficiency in the Reserve Fund resulting from a decrease of 10% or more in the market value of the Permitted Investments in the Reserve Fund, determined as provided in the Trust Agreement, or

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(ii) if such payments prescribed in clause (i) are inconsistent with the Fair Rental Value, in such maximum amounts as shall be recommended by the appraisal referenced above consistent with Fair Rental Value on each Payment Date until the amount on deposit in the Reserve Fund equals the Reserve Requirement, including any amounts required to pay all draws and Policy Costs under the terms of the Trust Agreement.

See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Reserve Fund.”

Additional Rent. In addition to the Lease Payments set forth in the Lease Agreement and as part

of the Total Rent, during the Term of the Lease Agreement the District agrees to pay when due or on the next Lease Payment Date following receipt of statements therefor or estimates thereof furnished by or on behalf of the Lessor, Additional Rent equal to the sum of the following:

(1) all taxes and assessments of any nature whatsoever, including, but not limited to, excise taxes, ad valorem taxes, ad valorem and specific lien special assessments and gross receipts taxes, if any, levied upon the Site, or upon any interest of the Lessor, the Trustee or the Owners therein or in the Lease Agreement;

(2) all fees and expenses (not otherwise paid or provided for out of the proceeds of the sale of

the Certificates) of the Trustee in connection with the performance of its duties under the Lease Agreement and Trust Agreement under the terms under the Lease Agreement or under the Trust Agreement that do not otherwise constitute Lease Payments or payments of Reserve Replenishment Rent;

(3) insurance premiums, if any, on all insurance required under the provisions of the Lease

Agreement;

(4) all administrative costs of the Lessor related to the Project, including, without limiting the generality of the foregoing, fees and charges of auditors, accountants and attorneys, any amounts payable under the Lease Agreement, and all other necessary administrative costs of the Lessor or charges required to be paid by the Lessor in order to comply with the terms of the Certificates or the Trust Agreement and to defend and indemnify the Lessor and its members, officers and directors and assigns;

(5) to the extent not satisfied elsewhere under the Lease Agreement, all amounts due to the

Insurer as provider of the Insurance Policy and/or the Reserve Fund Policy under the Lease Agreement or pursuant to the terms of the Trust Agreement; and

(6) all other payments required to be paid by the District under the provisions of the Lease

Agreement or the Trust Agreement.

The District shall pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within 60 days after notice in writing from the Trustee to the District stating the amount of Additional Rent then due and payable and the purpose thereof. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Additional Rental Payments.” Consideration. Rental Payments for each semi-annual Rental Payment during the Term of the Lease Agreement shall constitute the total rent for said semi-annual Rental Payment period, and shall be paid by the District in each semi-annual Rental Payment period for and in consideration of the right of the use and possession of, and the continued use and enjoyment of the Site during each such period for which any Rental Payments are to be paid. The parties to the Lease Agreement have agreed and determined that

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the Rental Payments represent the fair rental value of the Site. In making such determination, consideration has been given to the costs of financing the Project, other obligations of the Parties under the Lease Agreement, the uses and purposes which may be served by the Site and the benefits therefrom which will accrue to the District and the general public. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Abatement” and “Risk Factors – Abatement.” Appropriations Covenant. Total Rent shall be paid from any source of legally available funds of the District, and the District covenants to take such action as may be necessary to include all Total Rent due under the Lease Agreement in its annual budget and to make necessary annual appropriations for all such payments of Total Rent. It shall be the duty of each and every public official of the District to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the District to carry out and perform the covenants made by the District in the Lease Agreement. During the Term of the Lease Agreement, the District will furnish to the Trustee, no later than 20 days following adoption of the budget for that Fiscal Year, a certificate of the District Representative stating that the Total Rent due in that Fiscal Year has been included in the budget approved by the District Board for such Fiscal Year; or if no budget has been approved by August 15th of any year, the District shall deliver to the Trustee no later than August 30th of such year, a certificate of the District Representative stating that the Total Rent due in that Fiscal Year has been appropriated by a resolution duly adopted by the District Board.

Payment; Credit. Each installment of Lease Payments payable under the Lease Agreement shall

be paid in lawful money of the United States of America to or upon the order of the Lessor at the Principal Office of the Trustee, or such other place or entity as the Lessor shall designate. Each Lease Payment shall be deposited with the Trustee no later than the Lease Payment Date preceding the Payment Date on which such Lease Payment is due. Any Lease Payment which shall not be paid by the District when due and payable under the terms of the Lease Agreement shall bear interest from the date when the same is due under the Lease Agreement until the same shall be paid at the rate of 10% per annum. Amounts required to be deposited by the District with the Trustee pursuant to the Lease Agreement on any date shall be reduced to the extent of available amounts on deposit in the Lease Payment Account, or the Certificate Payment Account and its subaccounts. In the event that any payment under the Lease Agreement is due on a day which is not a Business Day, such payment shall be made on the next Business Day. Notwithstanding any dispute between the Lessor and the District under the Lease Agreement, the District shall make all payments when due and shall not withhold any payments pending the final resolution of such dispute. In the event of a determination that the District was not liable for said payments or any portion thereof, said payments or excess payments, as the case may be, shall be credited against subsequent payments due under the Lease Agreement. Fair Rental Value. The District and the Lessor have agreed and determined that the Fair Rental Value of the Site, as of the Delivery Date, is not less than $________. In making such determination of Fair Rental Value, consideration has been given to the uses and purposes that may be served by the Site and the benefits therefrom which will accrue to the District and the general public. Payments of the Total Rent for the Site during each Rental Period shall constitute the total rental payment for such Rental Period.

Abatement of Rental Payments. During any period in which, by reason of material damage to, or destruction to, or condemnation of, the Site, or any defect in title to the Site, there is substantial interference with the District’s right to use and occupy any portion of the Site, Total Rent shall be abated proportionately. The amount of such abatement shall be agreed upon by the District and the Lessor; provided, however, that the Total Rent due for any Rental Period shall not exceed the Fair Rental Value of that portion of the Site available for use and occupancy by the District during such Rental Period. The District and the Lessor shall calculate such abatement and shall provide the Trustee with a certificate setting forth such calculation and the basis therefor. Such abatement shall continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or

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destruction of the Site, ending with the substantial completion of the work of repair or replacement of the Site, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement shall be extended as provided in the Lease Agreement, except that the term of the Lease Agreement shall in no event be extended more than ten years beyond the Termination Date.

Notwithstanding the foregoing, to the extent moneys are available for the payment of Total Rent in

any of the funds and accounts established under the Trust Agreement, Total Rent shall not be abated as provided above, but rather, shall be payable by the District as a special obligation payable solely from said funds and accounts. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Abatement” and “RISK FACTORS – Abatement”; see also “THE LEASE AGREEMENT – Insurance – Rental Interruption” below.

Prepayment - Insurance or Condemnation Proceeds

Mandatory Prepayment from Net Proceeds. If all or a substantial portion of the Site is damaged or destroyed, or taken by the exercise of eminent domain, and the District does not repair, replace, restore, modify, or improve the Site with the Net Proceeds or portion thereof, as provided in the Trust Agreement, the Net Proceeds are to be applied to the prepayment of the Certificates in whole or in part in accordance with the provisions of the Trust Agreement. See “THE CERTIFICATES – Prepayment of the Certificates” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Rental Interruption Insurance” and “ – Public Liability and Property Damage Insurance.”

Maintenance and Taxes

Throughout the Term of the Lease Agreement, all improvement, repair and maintenance of the Site shall be the responsibility of the District, and the District shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Site and improvements thereon resulting from ordinary wear and tear or want of care on its part. The District shall also pay all taxes and assessments, including utility charges, charged to the Lessor or affecting the Site. The District is obligated to pay governmental charges only insofar as such charges become due during the Term. Under certain circumstances, the District may, upon the provision of notice to the Trustee, allow such taxes and charges to remain unpaid while it contests and appeals them in good faith.

Liens

Except as provided in the Lease Agreement, the District shall not, directly or indirectly, create, incur, assume or suffer to exist any pledge, lien, charge, encumbrance or claim on or with respect to the Site, other than the respective rights of the Lessor and the District as provided in the Lease Agreement and any Permitted Encumbrances. Except as expressly provided in the Lease Agreement, the District shall promptly, at its own expense, take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim for which it is responsible, if the same shall arise at any time. The District shall reimburse the Lessor for any expense incurred by it in order to discharge or remove any such pledge, lien, charge, encumbrance or claim.

Insurance

The District shall maintain or cause to be maintained all insurance coverage on the Site required under the terms of the Lease Agreement throughout the Term of the Lease Agreement, for and commencing on the date of the Lease Agreement, with insurers of recognized responsibility, and, in the case of all insurers other than a JPA or JPA Program, rated “A” or better by A.M. Bests Credit Ratings, or through insurance provided by a joint powers authority (“JPA” or “JPA Program”) (as further discussed in (f) below) except subsection (e) below.

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Such insurance coverage shall consist of: (a) a standard comprehensive general insurance policy or policies in protection of the Lessor, its successors and assigns, and the District, and their members, directors, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of construction on, or operation of, the Site. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $150,000 (subject to a deductible clause of not to exceed $50,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. (b) insurance against loss or damage to the Site by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke, sprinkler damage, boiler explosion and such other hazards as are normally covered by such insurance (but excluding earthquake and flood). Such insurance shall be in an amount equal to the full insurable value (without deduction for depreciation) of all structures constituting any part of the Site, (except that such insurance may be subject to a deductible clause of not to exceed $100,000); provided, however, that in no event shall such insurance be maintained in an aggregate amount (together with moneys (as opposed to any Reserve Facility) in the Reserve Fund) less than the aggregate principal amount of Certificates Outstanding at the time.

(c) rental interruption insurance to cover loss, total or partial, of the use of the Site as the result of any of the hazards covered in the insurance required by the Site Lease, in an amount sufficient to pay the total Lease Payments for a period of 24 months (using the two highest annual Lease Payments during the Term). In the event that the District determines, based on a certification from an Insurance Consultant (as defined in the Lease Agreement), that such insurance is not commercially available, the District may under such circumstances (notwithstanding paragraph (f) below) provide for a cash deposit (held by the Trustee), equal to the 24 months of Lease Payments (using the two highest annual Lease Payments during the Term) to satisfy the foregoing requirements of the Lease Agreement. The Net Proceeds of such insurance shall be paid to the Trustee for deposit in the Lease Payment Account to be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable.

(d) workers’ compensation insurance for not less than the amounts required by applicable law, to insure District employees against liability for compensation under the Workers’ Compensation Insurance and Safety Act now in force in the State, or any act enacted as an amendment or supplement thereto or in lieu thereof.

(e) a policy of title insurance insuring (i) the District’s fee interest in the Site; (ii) the Lessor’s leasehold interest in the Site under the Site Lease; and (iii) the District’s leasehold estate in the Site under the Lease Agreement, subject only to Permitted Encumbrances (any of which estates may be insured through an endorsement to such policy), in the form of a CLTA Extended Leasehold Title Policy. The policy shall be in an amount equal to the entire unpaid principal amount evidenced by the Certificates, and be issued by a company of recognized standing, duly authorized to issue the same, payable to the Trustee for the benefit of the Owners. The Title Insurance Policy shall be in form and substance acceptable to the Insurer, and issued through a company acceptable to Insurer.

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(f) for insurance provided through a JPA (except for title insurance, for which the

District may not provide coverage through a JPA Program), the District shall provide, or arrange to provide, a certificate(s) or certifications as to all of the following:

(i) the JPA program must be approved by a nationally recognized independent actuary, insurance company, or broker that has actuarial personnel experienced in the area of insurance for which the District is insuring through a JPA and employing accepted actuarial techniques, as may be designated by the District from time to time (“Insurance Consultant”) (this subsection shall not apply in the case of workers’ compensation insurance coverage); (ii) the JPA Program must include an actuarially sound separate segregated claims reserve fund out of which each claim shall be paid; the JPA Program must include a claims processing and risk management program; the adequacy of such fund must be evaluated initially and at least on an annual basis by an Insurance Consultant; and any deficiencies in any claims reserve fund must be remedied in accordance with the recommendation of the Insurance Consultant; (iii) in the event the JPA Program is discontinued, the actuarial soundness of its claims reserve fund, as determined by an Insurance Consultant, must be maintained; and

(iv) not later than 120 days after the end of each Fiscal Year, the District shall

cause the Insurance Consultant to submit a written report to the Trustee and the Lessor setting forth a determination, employing accepted actuarial techniques, of an adequate amount of reserves to be maintained in the District’s JPA Program trust fund.

(g) Any self-insurance or pooled insurance program, other than in the form of a joint powers insurance authority established under State law, shall be subject to the prior written approval of the Insurer. Any blanket or umbrella insurance policies for property and casualty insurance shall not be permitted unless the Insurer consents.

Certificates and/or endorsements evidencing annual renewal of the policies of insurance required

under subsections (a) through (d) of this Section shall be sent by the District to the Trustee at the address set forth in the Trust Agreement. The Lessor shall cooperate fully with the District at the expense of the District in filing any proof of loss with respect to any insurance policy maintained pursuant the Lease Agreement and in the prosecution or defense of any prospective or pending condemnation proceeding with respect to the Site or any portion thereof.

Application of Net Proceeds If the District shall certify to the Insurer and the Trustee that the Net Proceeds of any insurance award resulting from any damage to or destruction of the Site by fire or other casualty or the Net Proceeds of any eminent domain award, or resulting from any event described under the abatement provisions of the Lease Agreement shall be sufficient, together with any other funds which the District at its option may supply for such purpose, to cover the entire projected repair or replacement cost as provided in the Trust Agreement, estimated in good faith, and shall further certify that such repair or replacement can be completed within the period during which rental interruption insurance proceeds and other designated funds available therefor will cover Lease Payments coming due, the District shall cause the Net Proceeds or other funds, as applicable, to be deposited with the Trustee for deposit in the Insurance and Condemnation Fund

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promptly upon receipt thereof to be applied to the prompt replacement, repair, restoration, modification or improvement of the Site by the District. Otherwise if the District makes certain certifications described in the Trust Agreement, such Net Proceeds shall be applied to the redemption of the Certificates in whole or in part, as provided in the Trust Agreement. No prepayment of the Certificates with Net Proceeds shall occur without the prior written consent of the Insurer, unless all outstanding Insured Certificates are to be redeemed from such Net Proceeds. See “THE CERTIFICATES – Prepayment of the Certificates.”

Substitution or Release of the Site The District shall have the right to substitute alternate real property for any portion of the Site or to release a portion of the Site pursuant to the terms of the Lease Agreement. All costs and expenses incurred in connection with such substitution or release shall be borne by the District. Notwithstanding any substitution or release pursuant to the terms of the Lease Agreement, there shall be no reduction in or abatement of the Lease Payments due from the District as a result of such substitution or release. Any such substitution or release of any portion of the Site shall be subject to the following specific conditions, which are made conditions precedent to such substitution or release: (a) an Independent Appraiser shall find (and shall have delivered a certificate to the

District and the Trustee setting forth its findings) that the Site, as constituted after such substitution or release: (i) has a Fair Rental Value greater than or equal to 105% of the maximum amount of Lease Payments payable by the District in any Rental Period, and (ii) has a useful life equal to or greater than the useful life of the Site as constituted prior to such substitution or release;

(b) the District shall obtain or cause to be obtained a CLTA title insurance policy or

policies with respect to any substituted property in the amount of the fair market value of such substituted property (which fair market value shall have been determined by an Independent Appraiser), of the type and with the endorsement described in the Lease Agreement;

(c) the District shall provide the Trustee with an Opinion of Special Counsel to the

effect that such substitution or release will not, in and of itself, cause the interest evidence by the Certificates to be included in gross income for federal income tax purposes;

(d) the District shall give, or shall make arrangements to give, any notice of the

occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Certificate;

(e) the District, the Lessor, and the Trustee shall execute, and the District shall cause

to be recorded with the County of Santa Cruz Recorder, any document necessary to re-convey to the District the portion of the Site being substituted or released and to include any substituted real property in the description of the Site contained in the Lease Agreement and in the Site Lease; and

(f) the District shall certify to the Lessor that the substituted real property is of

approximately the same degree of essentiality to the District as the portion of the Site for which it is being substituted; and

(g) the Insurer shall have provided prior written consent to such substitution(s) or

release(s).

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Additions, Repairs, Modifications and Improvements to the Site

The District has the right to make certain additions, improvements and modifications to the Site during the term of the Lease Agreement. Such actions may be taken only at the District’s cost and expense upon the conditions stated in the Lease Agreement.

Installation of Equipment

The District and any sublessee may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or other personal property in or upon the Site. All such items shall remain the sole property of the District or such sublessee, and neither the Lessor nor the Trustee shall have any interest therein. The District or such sublessee may remove or modify such equipment or other personal property at any time, provided that such party shall repair and restore any and all damage to the Site resulting from the installation, modification or removal of any such items. Nothing in the Lease Agreement shall prevent the District or any sublessee from purchasing items to be installed pursuant to the Lease Agreement under a conditional sale or lease purchase contract, or subject to a vendor’s lien or security agreement as security for the unpaid portion of the purchase price thereof, provided that no such lien or security interest shall attach to any part of the Site.

No Consequential Damages

In no event shall the Lessor, or its assigns, be liable for any incident, indirect, special or consequential damages, in connection with or arising out of the Lease Agreement or the Trust Agreement.

Other Covenants

The District has made certain other covenants within the Lease Agreement. Such covenants include, but are not limited to, the prevention and remediation of Hazardous Materials, if any occur, relating to the Site and certain limitations on the ability of the District to exercise its statutory powers of condemnation with respect to the Site.

Disclaimers

The Lessor makes no warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the District of the Site or of any other representation or warranty with respect to the Site or any item thereof. In no event shall the Lessor, or its assigns, be liable for incident, indirect, special or consequential damages, in connection with or arising out of the Lease Agreement or the Trust Agreement, for the existence, furnishing, functioning or the District’s use of the Site.

Assignment and Subleasing

Pursuant to the Assignment Agreement, the Corporation has assigned certain of its rights under the

Lease Agreement to the Trustee, including its rights to receive and enforce payment of the Lease Payments. See “THE ASSIGNMENT AGREEMENT” below. The Lease Agreement may be assigned or subleased by the District; provided, however, that any sublease or assignment shall be subject to all of the following conditions:

(a) The Lease Agreement and the obligation of the District to make Lease Payments thereunder shall remain primary obligations of the District; and

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(b) The Lessor shall provide prior written consent, which shall not be unreasonably withheld, to such assignment or sublease; and

(c) Any sublease of the Site by the District shall explicitly provide that such sublease is subject to all rights of the Lessor under the Lease Agreement, including, the right to re-enter and re-let the Site or terminate the Lease Agreement upon a default by the District; and (d) The District shall, within 30 days after the delivery thereof, furnish or cause to be furnished to the Lessor and the Trustee a true and complete copy of such sublease or assignment; and (e) No such sublease or assignment by the District shall cause the Site to be used for a purpose other than a governmental or proprietary function authorized under the provisions of the Constitution and laws of the State;

(f) The District shall furnish the Trustee with an Opinion of Special Counsel to the effect that such sublease will not, in and of itself, cause the interest evidenced by the Certificates to be included in gross income for federal income tax purposes; and

(g) The Insurer shall have consented in writing to such assignment or sublease.

Events of Default The following constitute “events of default” under the Lease Agreement and Trust Agreement:

(a) Failure by the District to pay any Lease Payment, payment of Additional Rent, Reserve

Replenishment Rent or other payment required to be paid under the Lease Agreement when the same becomes due and payable, time being expressly declared to be of the essence in the Lease Agreement. In determining whether a default has occurred, no effect shall be given to payments made under the Insurance Policy.

(b) The District’s interest in the Lease Agreement or any part thereof is assigned or transferred,

either voluntarily or by operation of law or otherwise, without the prior written consent of the Lessor, as thereinafter provided for.

(c) The District or any assignee files any petition or institutes any proceeding under any act or

acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby the District asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of the District’s debts or obligations, or offers to the District’s creditors to effect a composition or extension of time to pay the District’s debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of the District’s debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character be filed or be instituted or taken against the District, or if a receiver of the business or of the property or assets of the District shall be appointed by any court, except a receiver appointed at the instance or request of the Lessor, or if the District shall make a general assignment for the benefit of the District’s creditors,

(d) The District abandons or vacates the Site.

(e) The District shall in no event be in default in the observance or performance of any covenant, condition or agreement in the Lease Agreement on its part to be observed or performed, other than as referred to in subsections (b) through (d) above, inclusive, unless the District shall have failed, for

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a period of 30 days or such additional time as is reasonably required, but in no event greater than 60 days without the consent of the Lessor, the Trustee and Owners of not less than 25% in aggregate principal amount of Certificates, to correct any such default after notice by the Lessor or the Trustee to the District properly specifying in what manner the District has failed to perform any such covenant, condition or agreement. No grace period for a covenant, as referenced above, shall exceed thirty (30) days without the prior written consent of the Insurer.

See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Action on

Default” and “RISK FACTORS – Limited Recourse on Default.”

Remedies; No Acceleration of Lease Payments

(a) Upon the occurrence and continuance of certain events of default specified in the Lease Agreement, the Lessor, or its assignee (subject to the rights of the Insurer under the Lease Agreement and under the Trust Agreement), shall proceed, and upon the occurrence of certain other events of default specified in the Lease Agreement may proceed, to do any of the following:

(1) To terminate the Lease Agreement in the manner provided in the Lease Agreement

on account of default by the District, notwithstanding any re-entry or re-letting of the Site as thereinafter provided for in subparagraph (2) thereof, and to re-enter the Site and remove all persons in possession thereof and all personal property whatsoever situated upon the Site and place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the District. In the event of such termination, the District agrees to surrender immediately possession of the Site, without let or hindrance, and to pay the Lessor all damages recoverable at law that the Lessor may incur by reason of default by the District, including without limitation, any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon the Site and removal and storage of such property by the Lessor or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. Neither notice to pay Total Rent or to deliver up possession of the Site given pursuant to law nor any entry or re-entry by the Lessor nor any proceeding in unlawful detainer, or otherwise, brought by the Lessor for the purpose of effecting such re-entry or obtaining possession of the Site nor the appointment of a receiver upon initiative of the Lessor to protect the Lessor’s interest under the Lease Agreement shall of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the District shall be or become effective by operation of law or acts of the parties thereto, or otherwise, unless and until the Lessor shall have given written notice to the District of the election on the part of the Lessor to terminate the Lease Agreement. The District covenants and agrees that no surrender of the Site or of the remainder of the term or any termination of the Lease Agreement shall be valid in any manner or for any purpose whatsoever unless stated by the Lessor by such written notice.

(2) Without terminating the Lease Agreement, (x) to collect each installment of Total Rent as the same become due and enforce any other terms or provision of the Lease Agreement to be kept or performed by the District, regardless of whether or not the District has abandoned the Site, or (y) to exercise any and all rights of entry and re-entry upon the Site. In the event the Lessor does not elect to terminate the Lease Agreement in the manner provided for in the Lease Agreement, the District shall remain liable and agrees to keep or perform all covenants and conditions therein contained to be kept or performed by the District and, if the Site is not re-let, to pay the full amount of the Total Rent to the end of the term of the Lease Agreement or, in the event that the Site is re-let, to pay any deficiency in Total Rent that results therefrom; and further agrees to pay said Total Rent deficiency punctually at the same time and in the same manner as provided in the Lease Agreement for the payment of Total Rent thereunder, notwithstanding the fact that the Lessor may have received in previous years or may receive thereafter in subsequent years Total

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Rent in excess of the Total Rent as specified in the Lease Agreement, and notwithstanding any entry or re-entry by the Lessor or suit in unlawful detainer, or otherwise, brought by the Lessor for the purpose of effecting such re-entry or obtaining possession of the Site. Should the Lessor elect to re-enter as provided in the Lease Agreement, the District irrevocably appoints the Lessor as the agent and attorney-in-fact of the District to re-let the Site, or any part thereof, from time to time, either in the Lessor’s name or otherwise, upon such terms and conditions and for such use and period as the Lessor may deem advisable and to remove all persons in possession thereof and all personal property whatsoever situated upon the Site and to place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the District, and the District indemnifies and agrees to save harmless the Lessor from any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon and re-letting of the Site and removal and storage of such property by the Lessor or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The District agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Lessor to re-let the Site in the event of such re-entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Lessor in effecting such re-letting shall constitute a surrender or termination of the Lease Agreement irrespective of the use or the term for which such re-letting is made or the terms and conditions of such re-letting, or otherwise, but that, on the contrary, in the event of such default by the District the right to terminate the Lease Agreement shall vest in the Lessor to be effected in the sole and exclusive manner provided for in the Lease Agreement. The District further agrees to pay the Lessor the cost of any alterations or additions to the Site necessary to place the Site in condition for re-letting immediately upon notice to the District of the completion and installation of such additions or alterations. The District waives any and all claims for damages caused or which may be caused by the Lessor in re-entering and taking possession of the Site as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Site and all claims for damages to or loss of any property belonging to the District, or any other person, that may be in or upon the Site.

(b) In addition to the other remedies set forth in the Lease Agreement, upon the occurrence of an event of default, the Lessor and its assignee shall be entitled to proceed to protect and enforce the rights vested in the Lessor and its assignee by the Lease Agreement or by law. The provisions of the Lease Agreement and the duties of the District and of its Board, officers or employees shall be enforceable by the Lessor or its assignee by mandamus or other appropriate suit, action or proceeding in any court of competent jurisdiction. Without limiting the generality of the foregoing, the Lessor and its assignee shall have the right to bring the following actions:

(i) Accounting. By action or suit in equity to require the District and its Board, officers and employees and its assigns to account as the trustee of an express trust.

(ii) Injunction. By action or suit in equity to enjoin any acts or things which may be unlawful or in violation of the rights of the Lessor or its assignee.

(iii) Mandamus. By mandamus or other suit, action or proceeding at law or inequity to enforce the Lessor’s or its assignee’s rights against the District (and its Board, officers and employees) and to compel the District to perform and carry out its duties and obligations under the law and its covenants and agreements with the District as provided in the Lease Agreement.

The term “re-let” or “re-letting” as used in the Lease Agreement shall include, but not be limited

to, re-letting by means of the operation by the Lessor of the Site. If any statute or rule of law validly shall limit the remedies given to the Lessor thereunder, the Lessor nevertheless shall be entitled to whatever remedies are allowable under any statute or rule of law. In the event the Lessor shall prevail in any action brought to enforce any of the terms and provisions of the Lease Agreement, the District agrees to pay a

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reasonable amount as and for attorneys’ fees incurred by the Lessor in attempting to enforce any of the remedies available to the Lessor thereunder. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LEASE AGREEMENT, THE LESSOR SHALL HAVE NO RIGHT UPON A DEFAULT THEREUNDER BY THE DISTRICT TO ACCELERATE LEASE PAYMENTS. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Action on Default” and “RISK FACTORS – No Acceleration Upon Default.”

(c) Notwithstanding anything in the Lease Agreement to the contrary, the termination of the Lease Agreement by the Lessor on account of a default by the District under the Lease Agreement shall not effect or result in a termination of the lease of the Site by the District to the Lessor pursuant to the Site Lease. See “RISK FACTORS – Limited Recourse on Default.”

All rights and remedies of the Trustee, the Lessor and the Owners of the Insured Certificates are

subject to the rights of the Insurer to control certain actions and remedies upon the occurrence of an event of default as set out in the Lease Agreement and in the Trust Agreement.

Amendments and Modifications

The Lease Agreement and the Site Lease, and the rights and obligations of the Lessor and the District thereunder, may be amended or modified at any time by an amendment which shall become binding upon execution by the Lessor and the District, and the Owners of a majority of the principal evidenced by the Certificates then Outstanding, provided that no such amendment shall: (i) extend the payment date of any Lease Payments, reduce the interest component or principal component of any Lease Payments or change the prepayment terms and provisions, without the prior written consent of the Owner of each Certificate so affected and the Insurer, or (ii) reduce the percentage of the principal evidenced by the Certificates, the consent of the Owners of which is required for the execution of any amendment of the Lease Agreement or the Site Lease without the prior written consent of the Owners of all the Certificates then Outstanding and the Insurer.

The Lease Agreement and the Site Lease, and the rights and obligations of the Lessor and the

District thereunder, may also be amended at any time by an amendment which shall become binding upon execution by the Lessor and the District, without the written consents of any Owners and the Insurer, and only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the Lessor or the District to be observed or performed in the Lease Agreement and the Site Lease by the Lessor or the District, or to surrender any right or power reserved in the Lease Agreement and the Site Lease to or conferred in the Lease Agreement and the Site Lease on the Lessor or the District; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Lease Agreement and the Site Lease or in regard to questions arising in the Lease Agreement and the Site Lease which the Lessor or the District may deem desirable or necessary and not inconsistent with the Lease Agreement and the Site Lease; (iii) with the prior written consent of the Insurer, to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the interest components of Lease Payments; (iv) with the prior written consent of the Insurer,to provide for the substitution or release of a portion of the Site in accordance with the provisions of the Lease Agreement; or (v) with the prior written consent of the Insurer to make such other changes in the Lease Agreement and the Site Lease or modifications to the Lease Agreement and the Site Lease as the Lessor or the District may deem desirable or necessary, and which shall not materially adversely affect the interests of the Owners. See “THE TRUST AGREEMENT – Amendments” below.

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Insurer’s Rights The Lease Agreement provides for various rights of the Insurer with respect to various events and actions (as set out in the Lease Agreement and the Trust Agreement) relating to the Insurance Policy for the Insured Certificates and the Reserve Fund Policy for the Certificates. These rights include, but are not limited to, the right of the Insurer to receive various notices, the right to control certain actions and remedies in event of a default under the terms of the Lease Agreement, the right to limit certain actions to amend or supplement the Lease Agreement and the Trust Agreement, the right to approve or consent to certain actions under the terms of the Lease Agreement and the right to require reimbursement(s) of amounts paid, or costs incurred, under the terms of the Insurance Policy and/or the Reserve Fund Policy, as applicable.

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THE TRUST AGREEMENT

The Trustee

Appointment of Trustee. The Trustee is appointed pursuant to the Trust Agreement to receive, hold, invest and disburse the moneys to be paid to it pursuant to the Lease Agreement for credit to the various funds and accounts established by the Trust Agreement. The Trust Agreement authorizes the Trustee, among other things, to execute and deliver the Certificates, and to apply and disburse the Lease Payments to the Owners of the Certificates. See “INTRODUCTION,” “SECURITY AND SOURCES OF PAYMENT THE CERTIFICATES – General” and “ – Lease Payments.”

Removal. The Lessor and the District (so long as no event of default has occurred and is

continuing) may, by an instrument in writing, remove the Trustee initially a party to the Trust Agreement and any successor thereto. If the Trustee resigns the District shall appoint a successor Trustee, provided that any such successor must meet the requirements set forth in the Trust Agreement. Additional provisions regarding the replacement of the Trustee are set forth in the Trust Agreement.

Resignation; Successor. The Trustee may at any time resign by giving 30 days advance written

notice to the Lessor and the District and by giving the Certificate Owners mailed notice pursuant to the terms of the Trust Agreement. Upon receiving such notice of resignation, the District shall promptly appoint a successor Trustee. In the event the District does not appoint a successor Trustee within 30 days following receipt of notice of the Trustee’s resignation, the resigning Trustee may petition a federal court or other appropriate court for appointment of a successor Trustee. Any resignation or removal of the Trustee shall not become effective upon written acceptance of appointment by the successor Trustee. The successor Trustee must meet specified qualifications set forth in the Trust Agreement.

Compensation. The Trustee is compensated for services rendered pursuant to the Trust

Agreement, however, the Trustee shall not have a lien on any and all funds held by it, prior and superior to the lien of the Owners.

Indemnification. The Trustee is indemnified by the District from and against all claims, losses,

damages (including legal fees and expenses), expenses, and liabilities arising out of matters as described in the Trust Agreement. No indemnification is made for any willful misconduct, negligence, or breach of duty under the Trust Agreement by the Trustee, its officers, agents, employees, successors or assigns as specified in the Trust Agreement.

Protection of the Trustee Reliance Upon Papers or Documents; Reliance Upon Opinions of Counsel. The Trustee shall be

conclusively protected in acting upon any notice, resolution, consent, order, certificate, report or other paper or document to be genuine and to have been signed or presented by the proper party or parties. The Trustee, in its discretion, may consult with counsel, who may be counsel to the District or the Lessor, with regard to legal questions and the opinion of such counsel, or advice of such counsel confirmed in writing, shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Trust Agreement in good faith in accordance therewith.

Reliance Upon Requested Certificates. Whenever in the administration of its duties under the Trust Agreement, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action the thereunder, such matter (unless other evidence in respect thereof be therein specifically prescribed) may, in the absence of bad faith on the part of the Trustee, be deemed to be conclusively proved and established by the certificate of a Lessor Representative or a District Representative and such certificate shall be a full warranty to the Trustee for any action taken or suffered

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under the provisions of the Trust Agreement upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter.

Standard of Care. So long as there is no Event of Default, the Trustee shall have such duties and responsibilities, and only such duties and responsibilities, as are expressly set forth in the Trust Agreement and the Trustee shall not be liable in connection with the performance of its duties thereunder or under the Assignment Agreement, except for its own negligence or willful misconduct. In the event there is an Event of Default, the Trustee shall exercise such care in performing its duties under the Trust Agreement as a reasonable person would exercise in the conduct of his or her affairs. The Trustee shall exercise the standard of care set forth in the Trust Agreement in following the making investments upon instructions of the District. In entering into any agreement relating to the investment of funds held under the Trust Agreement, the Trustee shall not be obligated to give any representation or warranty, it being understood that the Trustee enters into such instruments only at the express direction of the District.

Notice of Default. The Trustee shall not be deemed to have knowledge of any Event of Default under the Trust Agreement or under the Lease Agreement unless and until a Responsible Officer shall have actual knowledge thereof.

Co-Trustees The Trustee may from time to time appoint one or more co-trustees to exercise the powers of the

Trustee under the provisions and limitations set forth in the Trust Agreement.

Pledge of Lease Payments

The Lease Payments are irrevocably pledged in the Trust Agreement to, and shall be used for, the punctual payment of the interest and principal evidenced by the Certificates, and the Lease Payments shall not be used for any other purpose while any of the Certificates remain Outstanding. See “INTRODUCTION” and “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Lease Payments.” This pledge constitutes a first and exclusive lien on the Lease Payments in accordance with the terms of the Trust Agreement. See “THE LEASE AGREEMENT – Lease Payments” above.

Title Insurance

Proceeds of any policy of title insurance received by the Trustee in respect of the Site shall be applied and disbursed by the Trustee as follows: (a) if the District determines (and sets forth in a certificate of the District) that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Site and will not result in an abatement of Lease Payments payable by the District under the Lease Agreement, such proceeds shall be remitted to the District and used for any lawful purpose thereof; or (b) if the District determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Site and would result in an abatement in whole or in part of Lease Payments payable by the District under the Lease Agreement, then such proceeds shall immediately be deposited in the Prepayment Fund and such proceeds shall be applied to the prepayment of Certificates in the manner provided in the Trust Agreement.

Funds and Accounts

The Trust Agreement creates the Project Trust Fund and several accounts, and certain subaccounts, to be maintained therein as follows:

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Lease Payment Account. Lease Payments paid by the District pursuant to the provisions of the Lease Agreement, as well as any liquidated damages, proceeds of rental interruption insurance maintained by the District, and any amounts required by the Lease Agreement shall be deposited by the Trustee in the Lease Payment Account and applied to the payment of Lease Payments when due. Notwithstanding anything to the contrary set forth in the Trust Agreement, if on any Payment Date, the amount on deposit in the Lease Payment Account is insufficient to pay the principal or interest evidenced by the Certificates on such Payment Date, the Trustee shall transfer from the Reserve Fund (or draw upon the Reserve Facility, as applicable) and deposit in the Lease Payment Account an amount sufficient to make up the deficiency.

The Trustee shall withdraw moneys from the Lease Payment Account on each Payment Date in amounts equal to the Lease Payment due by the District on the Lease Payment Date preceding such Payment Date and shall cause all such sums withdrawn from the Lease Payment Account to be deposited in the Certificate Payment Account. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Lease Payments.”

Certificate Payment Account. The Trustee shall withdraw from the Certificate Payment Account, on each Payment Date, an amount equal to the Lease Payment due on the Lease Payment Date preceding such Payment Date, and shall cause the same to be applied to the principal and interest payments due evidenced by the Certificates on such Payment Date. If on any Payment Date the amount of funds on hand in the Certificate Payment Account is insufficient to pay the full amount of principal and interest then due and payable evidenced by the Certificates, the Trustee shall apply such funds first to the payment of interest past due, pro-rata if necessary, and second to the payment of principal past due, pro-rata, if necessary. Within subaccounts of the Certificate Payment Account, funds are deposited for the payment of interest payments and principal payments coming due on the Certificates, see “SOURCES AND USES OF FUNDS.” Under the terms of the Trust Agreement, the Trustee shall expend such funds to pay Lease Payments (interest payments and principal payments) on the Certificates for the periods stated therein.

For further information, see “SECURITY AND SOURCES OF PAYMENT FOR THE

CERTIFICATES – Lease Payments.”

Reserve Fund. The Reserve Fund is a fund established with the Trustee to maintain funds or security for the payment of Lease Payments by the District. On the Delivery Date, the Reserve Requirement of the Reserve Fund shall initially be funded and satisfied by the deposit in the Reserve Fund of the Reserve Fund Policy delivered by the Insurer. For further information concerning the Insurer, see “CERTIFICATE INSURANCE – Build America Mutual Assurance Company.” The Trustee shall keep the Reserve Fund separate and apart from all other funds and moneys held by it; and shall administer the Reserve Fund as provided in the Trust Agreement until all required Lease Payments are paid in full and until the first date upon which the Certificates are no longer Outstanding.

Notwithstanding anything to the contrary set forth in the Trust Agreement, if on any Payment Date, the amount on deposit in the Lease Payment Account is insufficient to pay the principal or interest evidenced by the Certificates on such Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Lease Payment Account an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make such deposit in the Lease Payment Account. Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied

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by the Trustee for the final payment of principal and interest evidenced by the Certificates. See “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Reserve Fund.”

The Reserve Requirement, or any portion thereof, may be subsequently satisfied by crediting to the Reserve Fund moneys, a letter of credit, a bond insurance policy, or any other comparable credit facility or any combination thereof, which in the aggregate make funds available in the Reserve Fund in an amount equal to the Reserve Requirement; however, the long-term unsecured debt or claim-paying ability, as the case may be, of the provider of any such letter of credit, bond insurance policy or any other comparable credit facility, must have a rating of at least “A1” from Moody's, and/or “A+” from S&P, on the date such security is deposited into the Reserve Requirement (provided that the Trustee shall be under no obligation and have no responsibility whatsoever to independently determine or verify such rating other than at the time of delivery). The District shall not deposit or substitute any Reserve Facility in lieu of all or any portion of moneys on deposit, or required to be on deposit, in the Reserve Fund without the prior written consent of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). In the event of the use of such a Reserve Facility, the Trustee shall be provided with copies of all documents in regard thereto and shall, to the extent not in conflict with the provisions of the Trust Agreement, conform to the forms thereof for purposes of submitting draws, and making reimbursements, thereon. If, as a result of the payment of principal or interest evidenced by the Certificates or otherwise, the Reserve Requirement is reduced, amounts on deposit in the Reserve Fund in excess of such reduced Reserve Requirement shall be transferred to the Lease Payment Account.

On any date on which Certificates are defeased in accordance with the Trust Agreement, the Trustee

shall, if so directed in a Written Request of the District, transfer any moneys in the Reserve Fund in excess of the Reserve Requirement resulting from such defeasance to the entity or fund so specified in such Written Request of the District, to be applied to such defeasance.

Prepayment Fund. The moneys to be used for prepayment of the Certificates shall be deposited into the Prepayment Fund and applied solely for such purpose.

Insurance and Condemnation Fund. In the event the Trustee receives Net Proceeds of any insurance or condemnation award with respect to the Site (other than proceeds of rental interruption insurance), such proceeds will be deposited in the Insurance and Condemnation Fund and will be applied by the Trustee as described under “THE LEASE AGREEMENT – Insurance” above; see also “SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES – Public Liability and Property Damage Insurance.”

Delivery Costs Account. A portion of the proceeds from the sale of the Certificates will be deposited with the Trustee in the Delivery Costs Account and shall be applied to pay certain Delivery Costs. Investment Earnings. All moneys held by the Trustee in any of the funds or accounts established pursuant to the Trust Agreement shall be invested in Permitted Investments pursuant to directions from the District. In the absence of written instructions from a District Representative for investment of funds or accounts related to the Project in specified Permitted Investments, the Trustee shall invest solely in Permitted Investments set forth in subparagraph (7) of the definition thereof; provided, however, that any such investment shall be made by the Trustee only if, prior to the date on which such investment is to be made, the Trustee shall have received written directions from a District Representative specifying a specific money market fund and, if no such written directions from a District Representative are so received, the Trustee shall hold such moneys uninvested. All Permitted Investments purchased shall be registered in the name of the Trustee in its capacity as Trustee under the Trust Agreement.

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All investment earnings received with respect to the Lease Payment Account shall be retained in such account and applied as a credit against the Lease Payments due by the District under the Lease Agreement. The Trustee shall report, at least seven Business Days prior to each Due Date, the amount of such investment earnings to the Lessor and the District, and the amount of the Lease Payments payable by the District on the next following Due Date shall be reduced by an amount equal to said investment earnings. In the event that such investment earnings exceed the Lease Payment due on said Due Date, the amount of such excess shall be applied as a credit against the next following Lease Payment. Funds in the Reserve Fund not in excess of the Reserve Requirement may be invested without regard to yield. Funds held in the Reserve Fund which are in excess of the Reserve Requirement shall be invested at the written direction of the District in Permitted Investments with a yield below the Yield on the Certificates. The Trustee may rely upon the investment instructions of the District in compliance with such yield restrictions. All investment earning on funds in the Reserve Fund shall be credited to the Reserve Fund. To the extent that monies in the Reserve Fund are less than the Reserve Requirement, investment earnings shall be retained therein. The Trustee shall, on or before each Due Date, transfer any moneys on hand in the Reserve Fund in excess of the Reserve Requirement to the Lease Payment Account. Permitted Investments on moneys held in the Reserve Fund shall mature no later than the earlier of five years from the date of investment or the final stated principal Payment Date for principal evidenced by the Certificates; provided, that if such Permitted Investments may be redeemed at par so as to be available on each Payment Date, any amount in the Reserve Fund may be invested in such redeemable Permitted Investments maturing on any date on or prior to the final stated Payment Date for principal evidenced by the Certificates.

Prepayment Certain Certificates are subject to optional, mandatory sinking fund prepayment and mandatory

prepayment prior to their respective maturities. See “THE CERTIFICATES – Prepayment of the Certificates.”

Notice of Prepayment. When prepayment is authorized or required pursuant to the provisions of

the Trust Agreement, the Trustee shall give to the Certificate Owners notice of the prepayment of the Certificates (“Prepayment Notice”) at the expense of the District. Such notice shall specify: (a) that the whole or a designated portion of the Certificates is to be prepaid, (b) the numbers (if less than all the Certificates of a maturity are to be prepaid) and CUSIP® numbers of the Certificates to be prepaid, (c) the date of notice and the date of prepayment, and (d) the place or places where the prepayment will be made including the name and address of any paying agent; (e) the prepayment price; (f) descriptive information regarding the Certificates, including the Delivery Date, interest rates and stated maturity dates; and (g) if the Certificates are to be prepaid with the proceeds of obligations to be issued or incurred to accomplish a current or advance refunding, a statement that the prepayment of the Certificates is contingent on such obligations being issued or incurred, and whether the prepayment is contingent upon receipt of funds. Such Prepayment Notice shall further state that on the specified prepayment date there shall become due and payable upon each Certificate to be prepaid, the principal (or portion) with respect thereto, together with interest accrued to said prepayment date and prepayment premium, if any, and that from and after such prepayment date interest with respect thereto shall cease to accrue and be payable. The Prepayment Notice may provide that prepayment is contingent upon receipt of funds sufficient to cause such prepayment, or other circumstances, as set forth in this Trust Agreement, and neither the District, the Trustee or the Corporation will have any liability to any Owner, or any other party, as a result of the failure to prepay the Certificates designated for prepayment as a result of insufficient moneys therefore, or due to such other circumstances.

The Trustee shall take the following actions with respect to such Prepayment Notice:

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(a) At least 20 but not more than 45 days prior to the prepayment date, such Prepayment Notice shall be given to the respective Certificate Owners designated for prepayment by first class mail, postage prepaid, at their addresses appearing on the Certificate Register as of the close of business on the fifth day before such Prepayment Notice is given. The District shall provide the Trustee with written directions concerning optional prepayment of the Certificates sufficiently in advance to allow Trustee to comply with the provisions of the Trust Agreement.

(b) Further notice shall be given by the Trustee as set out in the Trust Agreement, but no defect in such further notice or any failure to give all or any portion of such further notice shall in any manner defeat the effectiveness of a prepayment if notice thereof is given as prescribed in the Trust Agreement. Such further notice shall be given at least 20 days before the prepayment date by (a) first-class mail, postage prepaid, (b) confirmed facsimile transmission, or (c) overnight delivery service, to DTC and, upon written request of the District, to any other registered securities depositories then in the business of holding substantial amounts of obligations of types comprising the Certificates, and to the National Information Service, or at the request of the District, any other information services that disseminate notice of prepayment of obligations as the Certificates.

Neither failure to receive any Prepayment Notice nor any defect in such Prepayment Notice so given shall affect the sufficiency of the proceedings for the prepayment of the Certificates. An affidavit by the Trustee that notice of a prepayment has been given as required by the Trust Agreement shall be conclusive against all parties, including all Certificate Owners. Each check or other transfer of funds issued by the Trustee for the purpose of prepaying Certificates shall, to the extent practicable, bear the CUSIP® number identifying, by date and maturity, the Certificate being prepaid with the proceeds of such check or other transfer.

Any Prepayment Notice may specify that prepayment of the Certificates designated for prepayment on the specified date will be subject to the receipt by the District of monies sufficient to cause such prepayment, or other circumstances, as set forth in the Trust Agreement , and the District, the Lessor or the Trustee will have no liability to the Owners of any Certificates, or to any other person or entity, as a result of the District’s failure to prepay the Certificates designated for prepayment as a result of insufficient monies therefor, or due to such other circumstances.

Additionally, the District may rescind any prepayment of the Certificates, and notice thereof, for

any reason on any date prior to the date fixed for such prepayment by causing written notice of the rescission to be given to the Owners of the Certificates so called for prepayment. Notice of rescission of prepayment shall be given in the same manner in which the Prepayment Notice was originally given. The actual receipt by the Owner of any Certificate of notice of such rescission, or by any Depository or any of the Informational Services as specified above, shall not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice shall not affect the validity of the rescission. The District, the Lessor, or the Trustee will have no liability to the Owners of any Certificates, or to any other person or entity, as a result of the District’s decision to rescind a prepayment of any Certificates pursuant to the provisions of the Trust Agreement.

Payment of Certificates on Prepayment. Notice having been given as set forth in the Trust

Agreement, and the moneys for the prepayment, including interest to the applicable prepayment date, having been set aside in the Prepayment Fund, the portion of Certificates to be prepaid shall become due and payable on said prepayment date, and, upon presentation and surrender thereof at the office or offices specified in said notice, said Certificates shall be paid at the prepayment price with respect thereto, plus any unpaid and accrued interest to said prepayment date.

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If, on said prepayment date, moneys for the prepayment of all the Certificates to be prepaid, together with interest to said prepayment date, shall be held by the Trustee so as to be available therefor on such prepayment date, and, if notice of prepayment thereof shall have been given as set forth in the Trust Agreement, then, from and after said prepayment date, interest with respect to the portion of Certificates to be prepaid shall cease to accrue and become payable whether or not any Certificate is presented for prepayment. If said moneys shall not be so available on said prepayment date, interest with respect to such portion of Certificates shall continue to be payable until paid at the same rates as would have been payable had such Certificates not been called for prepayment. All moneys held by or on behalf of the Trustee for the prepayment of particular Certificates shall be held in trust for the account of the Owners of the Certificates so to be prepaid.

In lieu of, or partially in lieu of, any mandatory sinking fund prepayment of the Certificates, monies in the Lease Payment or Certificate Payment Account may be used to purchase the Outstanding Certificates that were to be prepaid with such funds in the manner provided in the Trust Agreement. Purchases of Outstanding Certificates may be made by the District through the Trustee prior to the selection of Certificates for prepayment at public or private sale as and when and at such prices as the District may in its discretion determine but only at prices (including brokerage or other expenses) not more than par plus accrued interest. Any accrued interest payable upon the purchase of Certificates may be paid from the Lease Payment Account or Certificate Payment Account for payment of interest on the next following Payment Date. Any Certificates purchased pursuant to the provisions of this paragraph shall be delivered to, and cancelled by, the Trustee and shall not be resold or reissued.

Rights and Remedies

Upon the occurrence and continuance of any Event of Default under the Trust Agreement or the

Lease Agreement, the Trustee shall, subject to the rights of the Insurer, proceed, subject to its right to receive indemnification satisfactory to it from the Owners for costs and expenses, to exercise the remedies provided under the Lease Agreement or available to the Trustee under the Trust Agreement. Upon the occurrence and continuance of any event of default under the Trust Agreement, the Trustee (a) may, at the direction of the Owners of not less than a majority of the aggregate principal of and interest on the Certificates then Outstanding, and (b) shall, upon being indemnified to its reasonable satisfaction, upon notice in writing to the District and the Lessor, proceed to exercise the remedies set forth in the Lease Agreement or available to the Trustee under the Trust Agreement. See “THE LEASE AGREEMENT – Remedies” above; see also “RISK FACTORS – Limited Recourse on Default.”

Limited Obligation to Owners

The Trust Agreement contains certain provisions limiting the liability of the parties, including the following:

(i) Neither the Lessor nor the District shall have any obligation or liability to any of the other parties or the Owners of the Certificates with respect to the performance by the Trustee of duties imposed upon it by the Trust Agreement;

(ii) Except as provided in the Trust Agreement, neither the Lessor nor the Trustee shall have any obligation or liability to the Owners of the Certificates with respect to the payment of the Lease Payments by the District when due, or with respect to the performance by the District of any other covenant made by it in the Lease Agreement;

(iii) The Trustee shall not be responsible for the sufficiency of the Lease Agreement or of the assignment made to it of rights to receive Lease Payments pursuant to the Lease Agreement, or the value of or title to the Site, or the correctness of the District’s or Lessor’s recitals in the Trust Agreement. The

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Trustee shall not be responsible for any loss suffered in connection with any investment of funds made by it pursuant to the Trust Agreement; and

(iv) Except for the payment of Lease Payments when made in accordance with the Lease Agreement and the performance of the other covenants and agreements of the District contained in the Lease Agreement and the Trust Agreement, the District shall have no obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates or the distribution of Lease Payments to the Owners by the Trustee. See “RISK FACTORS – Limited Recourse on Default” and “ – No Liability of Corporation to the Owners.”

Limitation on Certificate Owners’ Right to Sue No Owner of any Certificate executed and delivered under the Trust Agreement shall have the right

to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Trust Agreement, unless: (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default under the Trust Agreement; (b) the Owners of at least a majority in aggregate principal amount of all the Certificates then Outstanding shall have made written request upon the Trustee to exercise the powers granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.

Such notification, request, tender of indemnity and refusal or omissions are declared, in every case,

to be conditions precedent to the exercise by any Owner of Certificates of any remedy provided in the Trust Agreement; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by his or their action to enforce any right under the Trust Agreement, except in the manner provided in the Trust Agreement, and that all proceedings at law or in equity with respect to an Event of Default shall be instituted, had and maintained in the manner provided in the Trust Agreement and for the equal benefit of all Owners of the Outstanding Certificates.

The right of any Owner of any Certificate to receive payment of said Owner’s proportionate interest

in the Lease Payments as the same become due, or to institute suit for the enforcement of such payment, shall not be impaired or affected without the consent of such Owner, notwithstanding the foregoing provisions of the Trust Agreement or any other provision of the Trust Agreement.

All rights and remedies of the Owners of Insured Certificates are subject to the rights of the Insurer

to control actions and remedies upon the occurrence of an event of default as set out in the Lease Agreement and the Trust Agreement. See “RISK FACTORS – Limited Recourse on Default.”

Amendments

The Trust Agreement and the rights and obligations of the District, the Lessor, if any, and the Trustee may be amended or supplemented at any time by an amendment or supplement to the Trust Agreement which shall become binding when the prior written consents of the Owners of a majority of the aggregate principal amount evidenced by the Certificates then Outstanding are filed with the Trustee. No such amendment or supplement shall: (i) extend the stated principal Payment Date of any Certificate, reduce the interest rate evidenced thereby, extend the time of payment of such interest, reduce the amount of principal evidenced thereby or change the prepayment terms and provisions without the prior written consent of the Owner of each Certificate so affected; (ii) reduce the percentage of Owners whose consent is required for the execution of any amendment or supplement to the Trust Agreement without the prior

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written consent of the Owners of all Certificates then Outstanding; (iii) modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee; or (iv) amend the section of the Trust Agreement addressing amendments without the prior written consent of the Owners of all Certificates then Outstanding. The Trust Agreement and the rights and obligations of the District, the Lessor, if any, and the Owners and the Trustee may also be amended or supplemented at any time by an amendment or supplement to the Trust Agreement which shall become binding upon execution, and without the written consent of any Owners, but only to the extent permitted by law and after receipt of an unqualified approving Opinion of Counsel and only for any one or more of the following purposes:

(i) to add to the agreements, conditions, covenants and terms required by the District

to be observed or performed other agreements, conditions, covenants and terms thereafter to be observed or performed by the District, or to surrender any right or power reserved to or conferred on the District;

(ii) to make such provision for the purpose of curing any ambiguity or of curing,

correcting or supplementing any defective provision contained in the Trust Agreement or in regard to questions arising under the Trust Agreement that the District may deem advisable or necessary and not inconsistent therewith;

(iii) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates; or (iv) for any other reason, provided such amendment or supplement does not adversely affect the rights or interests of the Owners; provided, however, that the District and Trustee may rely, in entering into any such amendment under the Trust Agreement, upon receipt of an Opinion of Counsel stating that the requirements of this paragraph have been met with respect to such amendment or supplement.

The Insurer’s prior written consent is required for all amendments and supplements to the Trust Agreement, with certain exceptions noted in the Trust Agreement. The District shall send copies of any such amendments to the Insurer and the Rating Agencies which have assigned a rating to the Insured Certificates. Any amendment or supplements to the Trust Agreement shall require the prior written consent of the Insurer with the exception of amendments or supplements:

(i) to cure any ambiguity or formal defect or omissions or to correct any inconsistent provisions in the Trust Agreement; or

(ii) to grant or confer upon the Owners of the Insured Certificates any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Owners of the Insured Certificates; or

(iii) to add to the conditions, limitations and restrictions on the issuance of bonds or other obligations under the provisions of the Trust Agreement other conditions, limitations and restrictions thereafter to be observed; or

(iv) to add to the covenants and agreements of the District in the Trust Agreement other covenants and agreements thereafter to be observed by the District or to surrender any right or power therein reserved to or conferred upon the District.

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Tax Covenants So long as any of the Certificates under the Trust Agreement are outstanding and unpaid, the District and the Lessor covenant and agree that they will comply with all applicable requirements of Section 103 and Sections 141 through 150 of the Code and all applicable Treasury Regulations, such that the interest evidenced by the Certificates will remain excluded from gross income pursuant to the Code, and in a manner which will not cause any Certificate to be deemed an “arbitrage bond” within the meaning of Section 148 of the Code and the applicable Treasury Regulations. The proceeds of the Certificates, the earnings thereon and any other moneys on deposit in any fund or account maintained in respect of the Certificates (whether such moneys were derived from the proceeds of the sale of the Certificates or from other sources) will not be used in a manner which would cause any Certificate to be an “arbitrage bond” within the meaning of Section 148 of the Code, or to be a “private activity bond” or “private loan bond” within the meaning of Section 141 of the Code and the applicable Treasury Regulations, or an obligation which is “federally guaranteed” within the meaning of Section 149(b) of the Code. See “TAX MATTERS – Tax Exemption” and “RISK FACTORS – Loss of Tax Exemption.”

All investments of amounts deposited in any fund or account created by or pursuant to the Trust

Agreement, or otherwise containing gross proceeds of the Certificates (within the meaning of Section 148 of the Code) will be acquired, disposed of, and valued (as of the date that valuation is required by the Trust Agreement or the Code) at Fair Market Value. Investments in funds or accounts (or portions thereof) that are subject to a yield restriction under applicable provisions of the Code and (unless valuation is undertaken at least annually) investments in the accounts of the Reserve Fund will be valued at their present value (within the meaning of Section 148 of the Code).

In the event that at any time the District is of the opinion that it is necessary or helpful to restrict or

limit the yield on the investment of any moneys held by the Trustee in any of the funds or accounts established under the Trust Agreement, the District will instruct the Trustee in writing, and the Trustee will take such action as may be necessary in accordance with such instructions.

Notwithstanding any provisions of these covenants, if the District provides to the Trustee an Opinion of Counsel to the effect that any specified action required under these tax covenants is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest on the Certificates, the Trustee may conclusively rely on such opinion in complying with the requirements of these tax covenants and of the Tax Certificate, and these covenants shall be deemed to be modified to that extent.

Other Covenants

The District and Lessor has made various other covenants within the Trust Agreement for the

benefit of the Owners. Such covenants include, but are not limited to, a confirmation of the assignment to the Trustee under the Assignment Agreement and a performance covenant on behalf of the District.

As an additional covenant under the Trust Agreement, and during the term thereof, the District covenants that it will not execute and deliver additional certificates of participation, lease-revenue obligations or similar obligations secured by the same real property and improvements which are the security for the Certificates (the Site), which rank on a parity with the Certificates, except that the District may cause the Certificates to be fully or partially refunded where such full or partial refunding results in a net debt service savings to maturity. Notwithstanding the foregoing, no such additional Certificates or similar obligations, as referred to in the prior sentence, may be issued or delivered by the District if an event of default (as defined in the Trust Agreement) has occurred and has not been cured, or will not be cured by

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the issuance or delivery date of such obligations. Additionally, no such additional parity Certificates shall be issued or delivered unless the amount in the Reserve Fund is funded to an amount equal to the Reserve Requirement for the Outstanding Certificates and such additional certificates.

In accordance with the terms of the Lease Agreement concerning annual budgeting of Lease

Payments, the District will provide the Trustee with an annual certification that the District has complied with its obligations thereunder, and the District Representative shall certify to the Trustee that the District has included all Lease Payments (other than Lease Payments of advance rental) due under the Lease Agreement in the Fiscal Year covered by its proposed budget and adopted budget.

The District has also covenanted to provide for continuing disclosure pursuant to a Continuing Disclosure Certificate to be delivered by the District on the Delivery Date. See “CERTAIN LEGAL MATTERS – Continuing Disclosure” and “APPENDIX E - Form of Continuing Disclosure Certificate.”

Default and Remedies

The following shall be “events of default” under the Trust Agreement and the terms “events of

default” and “default” shall mean, whenever they are used in the Trust Agreement, any one or more of the following events:

(a) An event of default shall have occurred under the terms of the Lease Agreement.

(b) Failure by the District or the Lessor to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Trust Agreement or the Lease Agreement, other than such failure as may constitute an event of default under the Lease Agreement, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the District or the Lessor by the Trustee or to the District, the Lessor and the Trustee or the Owners of not less than a majority in aggregate principal amount of Certificates then Outstanding; provided, however, that if the failure (other than a failure to pay the fees and expenses of the Trustee) stated in the notice cannot be corrected within such period, then the Trustee and the Owners shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the District within such period and diligently pursued until the default is corrected.

The Trustee shall not be deemed to have knowledge of any event of default under the Trust

Agreement or under the Lease Agreement until a Responsible Officer shall have actual knowledge thereof. Upon the Trustee’s actual knowledge of an event of a default under the Trust Agreement, the Trustee shall give notice of such default to the Owners of the Certificates. Such notice shall state that the District or the Lessor is in default and shall provide a brief description of such default. The notice shall be given by first class mail to the Owners within 30 days of the Responsible Officer’s actual knowledge of such occurrence of default. So long as default is not a payment default, the Trustee may determine, in its sole discretion, not to send notice; provided, however, that failure to send such notice would not prejudice the rights of the Owners as set forth in the Trust Agreement.

Upon the occurrence and continuance of any event of default specified in the Trust Agreement, the Trustee shall proceed, subject to its right to receive indemnification satisfactory to it from the Owners for costs and expenses, including reasonable attorneys’ fees, to exercise the remedies set forth in the Lease Agreement or available to the Trustee under the Trust Agreement. Upon the occurrence and continuance of any event of default under the Trust Agreement, the Trustee (a) may, at the direction of the Owners of not less than a majority of the aggregate principal of and interest on the Certificates then Outstanding, and (b) shall, upon being indemnified to its reasonable satisfaction, upon notice in writing to the District and

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the Lessor, proceed to exercise the remedies set forth in the Lease Agreement or available to the Trustee under the Trust Agreement.

The Trustee shall take any appropriate action to cause the District to pay any Lease Payment not

paid when due, upon written request and authorization by the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, subject to Trustee’s right to being indemnified against any liability or expenses with regard thereto and payment of its fees and expenses, and unpaid, and upon being satisfactorily indemnified against any expense and liability with respect thereto and receiving payment for its fees and expenses.

No remedy conferred upon or reserved to the Trustee is intended to be exclusive and every such

remedy shall be cumulative and shall be in addition to every other remedy given under the Trust Agreement and the Lease Agreement, or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Trustee or the Owners to exercise any remedy reserved to it or them, it shall not be necessary to give any notice other than such notice as may be required by law.

In the event any provision contained in the Trust Agreement should be breached by a party and thereafter waived by another party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach under the terms of the Trust Agreements.

All moneys received by the Trustee pursuant to any right given or action taken under the provisions

of the Trust Agreement or the provisions of the Lease Agreement, shall be deposited into the Lease Payment Account and the amounts in such account and all other funds held by the Trustee shall be applied by the Trustee in the following order -

First, Costs and Expenses: to the payment of the fees, costs and expenses of the Trustee, including reasonable compensation to agents, attorneys and counsel; Second, Interest: to the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Third, Principal: to the payment to the persons entitled thereto of the unpaid principal of any Certificates which shall have become due, whether at maturity or by call for prepayment, in the order of their due dates, and, if the amount available shall not be sufficient to pay in full all of the amounts due with respect to the Certificates on any date, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.

Fourth, Reserve: to restore the Reserve Fund to the Reserve Requirement. Defeasance and Discharge

If the Trustee pays or causes to be paid or there is otherwise paid (i) to the Owners of all Outstanding

Certificates the principal and interest evidenced thereby at the times and in the manner stipulated in the Trust Agreement and in the Certificate, and (ii) all other amounts due under the Trust Agreement and under the Lease Agreement, then such Owners will cease to be entitled to the pledge of and lien on the amounts on deposit in the funds and accounts established under the Trust Agreement, as provided therein, and all

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agreements and covenants of the District and the Lessor if any, and the Trustee to such Owners thereunder will thereupon cease, terminate and become void and shall be discharged and satisfied.

Any Outstanding Certificate will be deemed to have been paid within the meaning and with the effect expressed in the Trust Agreement when the whole amount of the principal, premium if any, and interest evidenced by such Certificate has been paid, or when (i) in case said Certificate or portion thereof has been selected for prepayment in accordance with the Trust Agreement prior to its stated principal Payment Date, the District has given to the Trustee irrevocable instructions to give, in accordance with the Trust Agreement, notice of prepayment of such Certificate, or portion thereof, (ii) there is on deposit with the Trustee, moneys, or Defeasance Securities which Defeasance Securities will not contain provisions permitting the redemption thereof other than at the option of the holder, the principal of and the interest on which when due, and without any reinvestment thereof, will provide moneys which will be sufficient to pay when due the principal, premium if any, and interest evidenced by such Certificate and to become due on or prior to the prepayment date or stated principal Payment Date, as the case may be, and (iii) in the event the stated principal Payment Date(s) of such Certificate will not occur, and said Certificate is not to be prepaid, within the next succeeding 60 days, the District will have given the Trustee irrevocable instructions to give notice, as soon as practicable to the Owner of said Certificate, or portion thereof, stating that the deposit of moneys or Defeasance Securities has been made with the Trustee and that said Certificate, or portion thereof, is deemed to have been paid in accordance with the Trust Agreement and stating such principal Payment Date or prepayment date upon which moneys are to be available for the payment of the principal, premium if any, and interest evidenced by said Certificate, or portion thereof.

Neither the moneys nor the Defeasance Securities deposited with the Trustee pursuant to the Trust Agreement nor principal or interest payments on any such Defeasance Securities will be withdrawn or used for any purpose other than, and will be held in trust for and pledged to, the payment of the principal, premium if any, and interest evidenced by said Certificate, or portions thereof. If payment of less than all of the Certificates is to be provided for in the manner and with the effect expressed in the Trust Agreement, the Trustee or the District, as applicable, will select such Certificates, or portions thereof, in the manner specified in the Trust Agreement for selection for prepayment of less than all of the Certificates in the principal amounts designated to the Trustee by the District.

Prior to any defeasance becoming effective, the District will cause to be delivered: (i) a report of an independent firm of nationally certified public accountants (“Accountant”) verifying the sufficiency of any escrow established to pay the Certificates in full on the maturity or prepayment date in such amount as Accountant determines will, together with the interest to accrue thereon, if any, and moneys then on deposit in the Certificate Payment Account together with the interest to accrue thereon, be fully sufficient to pay and discharge all or such specified portion of the Certificates (including all principal, premium (if any) and interest evidenced thereby) at or before the respective maturity dates (“Verification”); (ii) an escrow deposit agreement; (iii) an Opinion of Counsel, dated the date of defeasance, in form and in substance acceptable to the District, to the effect that (A) such Certificates have been paid within the meaning and with the effect expressed in the Trust Agreement, all agreements and covenants of the District and the Trustee to the Owners of such Certificates under the Trust Agreement have ceased, terminated and become void and have been discharged and satisfied, and (B) that such defeasance, in and of itself, will not adversely affect the exclusion of interest evidenced by the certificates from gross income for federal income tax purposes; and (iv) a certificate of discharge of the Trustee with respect to the Certificates. Each Verification and defeasance opinion will be addressed to the District and the Trustee.

After the payment of all the principal, prepayment premium if any, and interest evidenced by all Outstanding Certificates and all other amounts due under the Trust Agreement and under the Lease Agreement, the Trustee will execute and deliver to the District and the Lessor all such instruments as may be necessary or desirable to evidence the discharge and satisfaction of the Trust Agreement, the Trustee will pay over or deliver to the District all moneys or securities held by it pursuant to the Trust Agreement

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which are not required for the payment of the principal, prepayment premium if any, and interest evidenced by such Certificates and all other amounts due under the Trust Agreement and under the Lease Agreement.

Amounts paid by the Insurer under the Insurance Policy shall not be deemed paid for purposes of the Trust Agreement and the Insured Certificates relating to such payments shall remain Outstanding and continue to be due and owing until paid by the District in accordance with the Trust Agreement. The Trust Agreement shall not be discharged unless all amounts due or to become due to the Insurer have been paid in full or duly provided for.

At least three (3) Business Days prior to any defeasance with respect to the Insured Certificates, the District shall deliver to Insurer draft copies of an escrow agreement, an opinion of Special Counsel regarding the validity and enforceability of the escrow agreement and the defeasance of the Insured Certificates, and verification report (a “Verification Report”) prepared by a nationally recognized independent financial analyst or firm of certified public accountants regarding the sufficiency of the escrow fund. Such opinion and Verification Report shall be addressed to Insurer and shall be in form and substance satisfactory to Insurer. In addition, the escrow agreement shall provide that:

(i) Any substitution of securities following the execution and delivery of the escrow agreement shall require the delivery of a Verification Report, an opinion of Special Counsel that such substitution will not adversely affect the exclusion (if interest on the Insured Certificates is excludable) from gross income of the Owners of the Insured Certificates of the interest on the Insured Certificates for federal income tax purposes and the prior written consent of Insurer, which consent will not be unreasonably withheld. (ii) The District will not exercise any prior optional redemption of Insured Certificates secured by the escrow agreement or any other redemption other than mandatory sinking fund redemptions unless (A) the right to make any such redemption has been expressly reserved in the escrow agreement and such reservation has been disclosed in detail in the Preliminary Official Statement for the refunding securities, and (B) as a condition to any such redemption there shall be provided to Insurer a Verification Report as to the sufficiency of escrow receipts without reinvestment to meet the escrow requirements remaining following any such redemption.

(iii) The District shall not amend the escrow agreement or enter into a forward purchase agreement or other agreement with respect to rights in the escrow without the prior written consent of Insurer.

Personal Liability. Notwithstanding anything contained in the Trust Agreement to the contrary,

no member, officer or employee of the District shall be individually or personally liable for the payment of any moneys, including without limitation, the principal of, or interest on, the Certificates, but nothing contained in the Trust Agreement shall relieve any member, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law, by the Lease Agreement or the Trust Agreement. Security Interest. The District shall annually provide a certification to the Trustee that: (1) the Site is and will remain free of any prior lien or security interest; and (2) the District will not encumber the Site during the term of the Lease Agreement. Such certification shall be supplied by the District to the Trustee on an annual basis, commencing with the Completion Date and annually thereafter during the term of the Lease Agreement. In the event of failure to do so, Trustee shall request such documentation in writing pursuant to the terms of the Trust Agreement. Continued failure of the District to so provide shall become an Event of Default under the terms of the Trust Agreement.

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Trustee to Keep Records. The Trustee shall keep books and records of all moneys received and disbursed under the Trust Agreement, which shall be available for inspection by the District and any Owner at any reasonable time during regular business hours upon reasonable prior written notice.

Unclaimed Moneys

Subject to the escheat laws of the State, in the event a Certificate shall not be presented for payment when the principal thereof becomes due, either at maturity or otherwise, or at the date fixed for prepayment thereof, if moneys sufficient to pay the principal of and interest on such Certificate shall have been deposited in the Certificate Payment Account, all liability of the District to the Owner thereof for the payment of such Certificate shall forthwith cease and be completely discharged, and thereupon it shall be the duty of the Trustee to hold such moneys without liability for interest thereon, for the benefit of the Owner of such Certificate who shall thereafter be restricted exclusively to such moneys, for any claim of whatever nature on his part under the Trust Agreement or on, or with respect to, said Certificate. Any moneys so deposited with and held by the Trustee not so applied to the payment of Certificates, if any, within the period ending the earlier of ten Business Days before such funds would escheat to the State or one year after the date on which the same shall have become due shall be paid by the Trustee to the District and thereafter Owners shall be entitled to look only to the District for payment, and then only to the extent of the amount so repaid, and the District shall not be liable for any interest thereon and shall not be regarded as a trustee of such money.

Payment on Non-Business Days. In the event any payment is required to be made under the terms

of the Trust Agreement on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day with the same effect as if made on such non-Business Day.

Insurer’s Rights

The Trust Agreement provides for various rights of the Insurer with respect to various events and actions (as set out in the Lease Agreement and the Trust Agreement) relating to the Insurance Policy for the Insured Certificates and the Reserve Fund Policy for the Certificates. These rights include, but are not limited to, the right of the Insurer to receive various notices, the right to control certain actions and remedies in event of a default under the terms of the Trust Agreement, the right to limit certain actions to amend or supplement the Trust Agreement, the right to approve or consent to certain actions under the terms of the Trust Agreement and the right to require reimbursement(s) of amounts paid, or costs incurred, under the terms of the Insurance Policy and/or the Reserve Fund Policy, as applicable.

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THE ASSIGNMENT AGREEMENT

The Assignment Agreement is entered into between the Lessor and the Trustee, pursuant to which the Lessor assigns and transfers to the Trustee, for the benefit of the Owners of the Certificates, substantially all of its rights under the Lease Agreement, including the right to receive Lease Payments and the rights and remedies to enforce payment of Lease Payments. See “RISK FACTORS – Limited Recourse on Default.”

The Assignment Agreement, and the rights and obligations of the District and the Trustee under

the Assignment Agreement, may be amended or modified at any time by an amendment, which shall become binding upon execution by the District and the Trustee, subject to the prior written consent of the Insurer.

APPENDIX B

AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2017


ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED

JUNE 30, 2017

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TABLE OF CONTENTS JUNE 30, 2017

FINANCIAL SECTION Independent Auditor’s Report 2 Management's Discussion and Analysis 5 Basic Financial Statements

Government-Wide Financial Statements Statement of Net Position 13 Statement of Activities 14

Fund Financial Statements Governmental Funds - Balance Sheet 15 Governmental Funds - Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 16 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balances 18 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Government-Wide Statement of Activities 19 Proprietary Fund - Statement of Net Position 21 Proprietary Fund - Statement of Revenues, Expenses, and Changes in Fund Net Position 22 Proprietary Fund - Statement of Cash Flows 23 Fiduciary Funds - Statement of Net Position 24 Fiduciary Funds - Statement of Changes in Net Position 25 Notes to Financial Statements 26

REQUIRED SUPPLEMENTARY INFORMATION

General Fund - Budgetary Comparison Schedule 69 Schedule of Changes in the District's Net OPEB Liability and Related Ratios 70 Schedule of District Contributions for OPEB 71 Schedule of Investment Returns 72 Schedule of Other Postemployment Benefits (OPEB) Funding Progress 73 Schedule of the District’s Proportionate Share of the Net Pension Liability 74 Schedule of District Pension Contributions 75 Note to Required Supplementary Information 76

SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 79 Local Education Agency Organization Structure 81 Schedule of Average Daily Attendance - District 82 Schedule of Average Daily Attendance - Charter Schools 83 Schedule of Instructional Time - District 84 Schedule of Instructional Time - Charter Schools 85 Reconciliation of Annual Financial and Budget Report with Audited Financial Statements 86 Schedule of Financial Trends and Analysis 87 Schedule of Charter Schools 88 Charter Schools - Schedule of Changes in Fund Balances 89 First 5 Monterey Grant - Schedule of Grant Revenues and Expenditures 90 Non-Major Governmental Funds - Combining Balance Sheet 91 Non-Major Governmental Funds - Combining Statement of Revenues, Expenditures, and Changes in Fund Balances

93

Note to Supplementary Information 95


TABLE OF CONTENTS JUNE 30, 2017

INDEPENDENT AUDITOR’S 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 98 Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance 100 Report on State Compliance 102

SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditor’s Results 106 Financial Statement Findings 107 Federal Awards Findings and Questioned Costs 108 State Awards Findings and Questioned Costs 109 Summary Schedule of Prior Audit Findings 111

1

FINANCIAL SECTION

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INDEPENDENT AUDITOR'S REPORT Governing Board Pajaro Valley Unified School District Watsonville, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Pajaro Valley Unified School District (the District) as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the 2016-2017 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, issued by the California Education Audit Appeals Panel as regulations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Pajaro Valley Unified School District, as of June 30, 2017, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Change in Accounting Principles As discussed in Note 13 to the financial statements, in 2017, the District adopted new accounting guidance, GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, and other required supplementary information as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Pajaro Valley Unified School District's basic financial statements. The supplementary information such as the combining and individual nonmajor fund financial statements and Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and the other supplementary information as listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole.

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Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 10, 2017, on our consideration of the Pajaro Valley Unified School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely 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 effectiveness of Pajaro Valley Unified School District's internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Pajaro Valley Unified School District's internal control over financial reporting and compliance. Palo Alto, California December 10, 2017

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294 Green Valley Road, Watsonville, CA 95076

(831) 786-2100

MANAGEMENT’S DISCUSSION AND ANALYSIS The Management’s Discussion and Analysis section of the 2016-2017 Annual Financial Audit summarizes the District’s financial performance during the 2016-2017 fiscal year ending June 30, 2017. The District’s financial systems and reporting adhere to standards and requirements prescribed under the Governmental Accounting Standards Board (GASB), State Board of Education, federal law, and the California Education Code. OVERVIEW OF THE FINANCIAL STATEMENTS The Financial Statements The financial statements presented herein include all of the activities of the Pajaro Valley Unified School District (the District) using the integrated approach as prescribed by GASB Statement Number 34.

The Government-Wide Financial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting. They present major governmental activities in accordance with accrual accounting. These statements include all assets of the District (including capital assets), as well as all liabilities (including long-term debt). Additionally, certain eliminations have occurred as prescribed by the statement in regards to inter-fund activity, payables, and receivables.

The Fund Financial Statements include statements for each of the three categories of activities:

governmental, proprietary, and fiduciary.

The Governmental Fund Financial Statements are prepared using the current financial resources measurement focus and modified accrual basis of accounting.

The Proprietary Fund Financial Statements are prepared using the economic resources measurement

focus and the accrual basis of accounting.

The Fiduciary Fund Financial Statements are prepared using the economic resources measurement focus and the accrual basis of accounting.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2017

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The Pajaro Valley Unified School District is the primary governmental agency represented in this audit. The District also includes five charter schools established and overseen pursuant to the Education Code. They include Linscott Charter School, Watsonville Charter School of the Arts, Pacific Coast Charter School, Alianza Charter School, and Diamond Technology Institute. Financial information for the charter schools is included in the special revenue, charter school fund of the District. Separately issued financial statements for the charter schools are not prepared. FINANCIAL HIGHLIGHTS OF THE PAST YEAR REPORTING THE DISTRICT AS A WHOLE The Statement of Net Position and the Statement of Activities The Statement of Net Position and the Statement of Activities report information about the District as a whole and its activities. These statements include all assets and liabilities using the accrual basis of accounting. All current year revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the District’s net position and changes in it. Net position is the difference between assets and deferred outflows of resources, and liabilities and deferred inflows of resources. These statements are one measure of the District’s financial health and position. Over time, increases or decreases in the District’s net position is one indicator of whether the financial position of the District is improving or deteriorating. Other factors to consider are changes in the District’s property tax base and the condition of the District’s facilities. Overall, these factors are subject to significant influences from state and federal education funding policies. As a result of current economic conditions, they have undergone dramatic fluctuations over the past five fiscal years. These changes have largely been unforeseen and unprecedented. Projections indicate this condition will continue over the next two fiscal years. The relationship between revenues and expenses is the District’s operating results. Since the Board’s responsibility is to provide services to all students, and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District. The quality of the instructional program, academic achievement among students, and the safety and condition of school facilities are important components in the evaluation of District effectiveness. In the Statement of Net Position and the Statement of Activities, we include the District activities as follows: Governmental Activities - All of the District’s services are reported in this category. This includes the education of transitional kindergarten through grade twelve students, adult education students, the operation of child development activities, other student services, and the on-going effort to improve and maintain buildings and sites. Property taxes, state education funding, user fees, interest income, federal, state and local grants, as well as general obligation bonds, finance these activities.


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REPORTING THE DISTRICT’S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds - not the District as a whole. Some funds are required to be established by state law and by general obligation bond covenants. In addition, District leadership establishes many other funds to provide appropriate fiscal control and accountability to manage money for particular purposes. Specified funds will also provide legally required reporting demonstrating the District’s compliance with state and federal education funding requirements and other legal/statutory guidelines. Governmental Funds - Most of the District’s basic services are reported in governmental funds. These focus on how money flows into and out of those funds and the balances left at year-end. Specific funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District’s general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance District programs. The differences of results in the governmental fund financial statements compared to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. Proprietary Funds - When the District charges users for the services it provides, whether to outside customers or to other departments within the District, these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Position and the Statement of Revenues, Expenses and Changes in Fund Net Position. The District uses internal service funds to report activities that provide supplies and services for the District’s other programs and activities - such as the District’s Self-Insurance Fund. The Internal Service Fund is reported with governmental activities in the government-wide financial statements. THE DISTRICT AS TRUSTEE Reporting the District’s Fiduciary Responsibilities The District is the trustee, or fiduciary, for funds held on behalf of others, such as funds for associated student body activities, scholarships, and employee retiree benefits. The District’s fiduciary activities are reported in the Statements of Fiduciary Net Position. We exclude these activities from the District’s other financial statements because the District cannot use these assets to finance its general operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes.


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THE DISTRICT AS A WHOLE Net Position The District’s net position was -$93.6 million and -$77.9 million for the fiscal years ended June 30, 2017 and 2016, respectively. Of this amount, -$164.2 million and -$152.2 million were unrestricted for fiscal years ending June 30, 2017 and 2016, respectively. Restricted net position is reported separately to show legal constraints from debt covenants and enabling legislation that limit the School Board’s ability to use net position for day-to-day operations. Our analysis below focuses on the net position (Table 1) and change in net position (Table 2) of the District’s governmental activities.

TABLE 1

2017 2016Current and other assets 169,091,186$ 181,137,056$ Loan receivable 1,484,966 1,484,966 Capital assets 158,622,000 149,478,741

Total Assets 329,198,152 332,100,763

Deferred charge on refunding 1,688,402 1,969,802Current year pension contribution 38,128,873 20,677,454

Total Deferred Outflows of Resources 39,817,275 22,647,256

Current liabilities 33,154,629 26,152,425 Long-term debt 222,597,092 222,918,683 Aggregate net pension liability 187,553,243 167,250,206

Total Liabilities 443,304,964 416,321,314

Difference between actual and expected rate of investment return 19,271,558 16,318,520 Total Deferred Inflows of Resources 19,271,558 16,318,520

Net investment in capital assets 44,129,728 46,547,429Restricted 26,491,814 27,788,358 Unrestricted (164,182,637) (152,227,602)

Total Net Position (93,561,095)$ (77,891,815)$

Governmental Activities

The -$164 million in unrestricted net position of governmental activities represents the accumulated results of all past years’ operations.


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Changes in Net Position The results of 2016-2017 general operations for the District as a whole are reported in the Statement of Activities. Table 2 takes the information from the Statement and rearranges it slightly so you can see our total revenues and expenses for the year.

TABLE 2

2017 2016Revenues

Program revenues: Charges for services 826,874$ 1,246,417$ Operating grants and contributions 76,640,070 74,577,332 General revenues:

Federal and state sources 124,627,907 125,820,086 Property taxes 76,493,999 71,834,584 Other general revenues 5,537,888 2,589,370

Total Revenues 284,126,738 276,067,789 Expenses

Instruction related 220,741,484 198,965,882 Student support services 38,699,541 35,512,974 Administration 9,201,086 10,750,145 Maintenance and operations 21,244,692 18,990,967 Other 9,909,215 8,651,117

Total Expenses 299,796,018 272,871,085 Change in Net Position (15,669,280)$ 3,196,704$



As reported in the Statement of Activities, the cost of all of governmental activities in 2016-2017 was $299.8 million. However, the amount that District taxpayers ultimately financed for related activities through local taxes was only $76.5 million. This is because $77.5 million was paid by those benefiting from District programs or by other governments and organizations who subsidized certain programs with grants and contributions. The District paid for the remaining "public benefit" portion of its governmental activities with $130.2 million in State and federal funds and with other revenues, such as interest and general entitlements.


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In Table 3, we have presented the net cost of each of the District’s largest functions - (total cost less revenues generated by the activities). As discussed above, net cost shows the financial burden that was placed on the District’s taxpayers by each of these functions. Providing this information allows members of the public to consider the cost of each function in comparison to the benefits they believe are provided by that function.

TABLE 3

2017 2016Instruction and instruction related 164,307,347$ 145,264,841$ Pupil services 22,615,459 20,520,334 General administration 6,811,683 8,547,172 Maintenance and operations 19,756,835 16,713,555 Other 8,837,750 6,001,434

Totals 222,329,074$ 197,047,336$

Net Cost of Services

GENERAL FUND HIGHLIGHTS A district of this size and complexity will often see a three to five percent swing in its final ending balance between estimated and unaudited actuals. In addition, district revenues and expenditures are now influenced by changes in the state’s Local Control Funding Formula (LCFF). In 2015-16, the ending balance increased by 36.7 percent from the district’s June estimates. For 2016-17, the district’s ending balance decreased by 2.7 percent. This was primarily due to increases in LCFF revenue adopted by the state and an increase in expenditures. District staff provided the Board of Trustees and public information highlighting projected and actual variances to the District’s expenditures and revenues over the course of the fiscal year. This is a standard practice. This information can be found on the District’s website (www.pvusd.net) in the Business Services section. 2016-17 fiscal year was the fourth year of working with the newly implemented Local Control Funding Formula (LCFF) and Local Control Accountability Plan (LCAP). The district engaged the various stakeholder groups to provide specific input and implementation requirements for the LCAP. The district continued to align the budget and its LCAP as required by law. The district’s current year LCAP was adopted as part of its 2017-18 Budget. As part of the LCAP the District brought in additional counselors, coaches to assist teachers in specific content areas, increase access to visual and performing arts curriculum, and added maintenance and custodial staff. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2017 and 2016, the District had $158.6 million and $149.5 million, net of depreciation in a broad range of capital assets including land, buildings, and furniture and equipment. This amount represents a net increase (including additions, deductions and depreciation) of $9.1 million or 6.12%, from last year.


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TABLE 4

2017 2016Land 17,055,144$ 17,055,144$ Construction in progress 37,384,827 19,856,026 Buildings and improvements 280,556,666 279,301,474 Equipment 8,494,254 6,742,382 Accumulated depreciation (184,868,891) (173,476,285)

Totals 158,622,000$ 149,478,741$


This year’s additions to capital assets of $20.5 million (excluding depreciation) are primarily from site improvement and Measure L projects at various sites. Projects were started using the District’s Measure L general obligation bond funds and approximately $16.9 million of the additions to capital assets were Measure L projects. Measure L was enacted by District voters in November 2012. Long-Term Debt At the end of this year, the District had $164.8 million in bonds outstanding. The District’s long-term debt is summarized below.

TABLE 5

2017 2016General obligation bonds 164,830,687$ 168,747,906$ Bond premium 9,182,751 9,589,717 Accumulated vacation - net 1,938,175 3,705,901 Supplemental employees retirement plan 83,106 110,808 Capital leases 1,042,215 1,706,393 Other post employment benefits 45,520,158 39,057,958 Net pension liability 187,553,243 167,250,206

Totals 410,150,335$ 390,168,889$


The State limits the amount of general obligation debt school districts can issue to 2.5 percent of the assessed value of all taxable property within a district’s legal boundaries. Other financial obligations include compensated absences payable, capital leases, and other long-term debt. We present more detailed information regarding the District’s long-term obligations in Note 10 of the financial statements.


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Net Pension Liability (NPL) The District adopted Governmental Accounting Standards Board (GASB) No. 68, Accounting and Financial Reporting for Pensions. The pronouncement requires the District to recognize its proportional share of net pension liability of State Teachers Retirement System (CalSTRS) and California Public Employees Retirement System (CalPERS). As a result, the District reported $187.6 million and $167.3 million net pension liability in its statement of net position in 2016-17 and 2015-16, respectively. SIGNIFICANT ACCOMPLISHMENTS OF FISCAL YEAR 2016-2017 ARE NOTED BELOW: During the 2016-2017 fiscal years, as a result of the implementation of the LCFF and LCAP, the District experienced the following accomplishments:

Visual and Performing Arts continued to expand in the elementary schools through providing release time teachers and purchased musical instruments and art supplies.

Teachers participated in professional development opportunities in their content and/or grade level. Finalized phase in the K-3 class-size reduction. Hired additional counselors to help students with social and emotional issues. Added digital resources and training to support differentiation in the classroom. Strengthening early literacy in the primary grades.

FISCAL OUTLOOK FOR 2017-18 In considering the District Budget for the 2017-2018 year, the District Board and management used the following criteria: The key assumptions in our forecast are:

1. Projection of LCFF revenue based on the FCMAT/BASC calculator. 2. The District’s ADA has been projected at the same level as prior year. 3. Employee benefits will be increased by 5.8%. 4. STRS and PERS (employee retirement systems) rates are increasing 1.85% and 2.041%, respectively.

CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT The annual financial report is designed to provide District citizens, taxpayers, investors and creditors with a general overview of the District’s finances and accountability for the public funds it administers under law. For additional information and/or questions about this report or other District financial activities, please contact: Helen Bellonzi Director of Fiscal Services 294 Green Valley Road, Watsonville, CA 95076 [email protected]

PAJARO VALLEY UNIFIED SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30, 2017

The accompanying notes are an integral part of these financial statements.

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GovernmentalActivities

ASSETSDeposits and investments 155,137,547$ Receivables 13,328,607 Prepaid expenses 349,960 Stores inventories 275,072 Current portion of loan receivable 199,489 Noncurrent portion of loan receivable 1,285,477 Capital assets not depreciated 54,439,971 Capital assets, net of accumulated depreciation 104,182,029

Total Assets 329,198,152

DEFERRED OUTFLOWS OF RESOURCESDeferred charge on refunding 1,688,402Deferred outflows of resources related to pensions 38,128,873

Total Deferred Outflows of Resources 39,817,275

LIABILITIESAccounts payable 21,631,027Interest payable 2,445,022 Unearned revenue 2,780,499 Claim liabilities 6,298,081 Long-term obligations:

Current portion of long-term obligations other than pensions 11,337,272 Noncurrent portion of long-term obligations other than pensions 211,259,820

Total Long-Term Obligations 222,597,092 Aggregate net pension liability 187,553,243

Total Liabilities 443,304,964

DEFERRED INFLOWS OF RESOURCESDeferred inflows of resources related to pensions 19,271,558

Total Deferred Inflows of Resources 19,271,558

NET POSITIONNet investment in capital assets 44,129,728 Restricted for:

Debt service 6,872,344

Capital projects 2,974,107 Food program 5,033,635 Child development program 170,463

Charter schools 3,096,162 Self-Insurance 170,408 Educational programs 8,174,695

Unrestricted (164,182,637) Total Net Position (93,561,095)$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2017


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Revenues andChanges in

Charges for OperatingServices and Grants and Governmental

Functions/Programs Expenses Sales Contributions ActivitiesGovernmental Activities:Instruction 171,057,095$ 201,070$ 40,748,830$ (130,107,195)$ Instruction-related activities:

Supervision of instruction 25,178,998 42,997 14,053,806 (11,082,195) Instructional library, media, and technology 4,936,282 3,056 452,546 (4,480,680) School site administration 19,569,109 654 931,178 (18,637,277)

Pupil services:Home-to-school transportation 6,926,956 - - (6,926,956) Food services 11,093,955 490,037 10,108,974 (494,944) All other pupil services 20,678,630 7,219 5,477,852 (15,193,559)

Administration: Data processing 2,785,465 299 6,809 (2,778,357) All other administration 6,415,621 25,994 2,356,301 (4,033,326)

Plant services 21,244,692 14,499 1,473,358 (19,756,835) Ancillary services 2,390,328 682 111,403 (2,278,243) Community services 20,633 - - (20,633) Interest on long-term obligations 6,645,888 - - (6,645,888) Other outgo 852,366 40,367 919,013 107,014

Total Governmental Activities 299,796,018$ 826,874$ 76,640,070$ (222,329,074)

General revenues and subventions:Property taxes, levied for general purposes 67,860,187 Property taxes, levied for debt service 8,101,061 Taxes levied for other specific purposes 532,751 Federal and State aid not restricted to specific purposes 124,627,907 Interest and investment earnings 492,398 Miscellaneous 5,045,490

Subtotal, General Revenues 206,659,794 Change in Net Position (15,669,280) Net Position - Beginning (77,891,815) Net Position - Ending (93,561,095)$

Net (Expenses)

Program Revenues Net Position

PAJARO VALLEY UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2017


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Non-Major TotalGeneral Building Governmental Governmental

Fund Fund Funds FundsASSETS

Deposits and investments 66,260,944$ 61,315,263$ 21,590,771$ 149,166,978$ Receivables 7,909,508 - 4,792,249 12,701,757 Due from other funds 893,660 - 192,491 1,086,151 Prepaid expenses 349,960 - - 349,960 Stores inventories 149,395 - 125,677 275,072

Total Assets 75,563,467$ 61,315,263$ 26,701,188$ 163,579,918$

LIABILITIES AND FUND BALANCES

Liabilities:Accounts payable 15,686,721$ 2,439,590$ 3,081,180$ 21,207,491$ Due to other funds 4,658 694 1,375,405 1,380,757 Unearned revenue 2,285,724 - 494,775 2,780,499

Total Liabilities 17,977,103 2,440,284 4,951,360 25,368,747

Fund Balances:Nonspendable 714,355 - 125,677 840,032 Restricted 8,174,695 58,874,979 20,466,056 87,515,730 Committed 34,908,359 - 1,158,095 36,066,454 Assigned 5,229,438 - - 5,229,438 Unassigned 8,559,517 - - 8,559,517

Total Fund Balances 57,586,364 58,874,979 21,749,828 138,211,171 Total Liabilities and Fund Balances 75,563,467$ 61,315,263$ 26,701,188$ 163,579,918$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2017


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Amounts Reported for Governmental Activities in the Statement of Net Position are Different Because:

Total Fund Balance - Governmental Funds 138,211,171$

Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds.

The cost of capital assets is 343,490,891$ Accumulated depreciation is (184,868,891)

Net Capital Assets 158,622,000

Deferred charges on pension expenses due to adjustments to net pension liabilities and related accounts are classified as deferred outflows or deferred inflows. 18,857,315

In governmental funds, unmatured interest on long-term debt is recognized in the period when it is due. On the government-wide statements, unmatured interest on long-term debt is recognized when it is incurred. (2,445,022)

An internal service fund is used by the District's management to charge the costs of the self insurance programs to the individual funds. The assets and liabilities of the internal service fund are included with governmental activities. 170,408

Long-term loan receivable is not received during the current year and, therefore are not reported as receivable in the government funds. 1,484,966

Deferred charges on refunding related to the loss on refunding of debt which is classified as a deferred outflow of resources and expensed over the life of the debt on the government-wide financial statements, but were recorded as an expenditure in the governmental fund statements when the debt was issued. 1,688,402

PAJARO VALLEY UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION (Continued) JUNE 30, 2017


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Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds.

Long-term liabilities at year end consist of:Bonds payable (164,830,687) Unamortized bond premium (9,182,751) Capital leases payable (1,042,215) Compensated absences (vacations) (1,938,175) Supplemental employee retirement plan (83,106) OPEB obligations (45,520,158) Net pension liability (187,553,243)

Total Long-Term Liabilities (410,150,335) Total Net Position - Governmental Activities (93,561,095)$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2017


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Non-Major Total

General Building Governmental GovernmentalFund Fund Funds Funds

REVENUESLocal control funding formula 170,940,569$ -$ 13,453,334$ 184,393,903$ Federal sources 20,040,653 - 18,250,363 38,291,016 Other state sources 36,654,688 - 9,990,638 46,645,326 Other local sources 3,631,868 586,100 12,058,014 16,275,982

Total Revenues 231,267,778 586,100 53,752,349 285,606,227 EXPENDITURESCurrent

Instruction 139,162,337 - 19,109,489 158,271,826 Instruction-related activities: Supervision of instruction 18,844,039 - 4,449,241 23,293,280 Instructional library, media and technology 4,119,466 - 447,126 4,566,592 School site administration 12,894,769 - 5,208,760 18,103,529 Pupil services: Home-to-school transportation 6,408,179 - - 6,408,179 Food services - - 10,263,101 10,263,101 All other pupil services 17,706,336 - 1,423,619 19,129,955 Administration: Data processing 2,576,855 - - 2,576,855 All other administration 6,706,435 - 1,052,499 7,758,934 Plant services 17,605,724 1,785,538 1,983,572 21,374,834 Ancillary services 2,175,217 - 36,094 2,211,311 Community services 19,088 - - 19,088 Other outgo 654,545 - - 654,545

Facility acquisition and construction 2,468,517 15,068,485 1,138,313 18,675,315 Debt service

Principal 585,318 - 4,530,000 5,115,318 Interest and other 30,998 - 5,894,568 5,925,566

Total Expenditures 231,957,823 16,854,023 55,536,382 304,348,228 Excess of Expenditures Over Revenues (690,045) (16,267,923) (1,784,033) (18,742,001) Other Financing Sources (Uses) Transfers in - - 910,834 910,834 Transfers out (910,834) - - (910,834)

Net Financing Sources (Uses) (910,834) - 910,834 - NET CHANGE IN FUND BALANCES (1,600,879) (16,267,923) (873,199) (18,742,001) Fund Balance - Beginning 59,187,243 75,142,902 22,623,027 156,953,172 Fund Balance - Ending 57,586,364$ 58,874,979$ 21,749,828$ 138,211,171$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE GOVERNMENT-WIDE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2017


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Total Net Change in Fund Balances - Governmental Funds (18,742,001)$ Amounts Reported for Governmental Activities in the Statement of Activities are Different Because:

Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures; however, for governmental activities, those costs are shown in the statement of net position and allocated over their estimated useful lives as annual depreciation expenses in the statement of activities. This is the amount by which capital outlays exceed depreciation in the period:

Depreciation expense (11,392,606)$ Capital outlays 20,535,865

Net Expense Adjustment 9,143,259

In the statement of activities, certain operating expenses, such as compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). 1,767,726

In the governmental funds, pension costs are based on employer contributions made to pension plans during the year. However, in the statement of activities, pension expense is the net effect of all changes in the deferred outflows, deferred inflows, and net pension liability during the year. (5,804,656)

Payment of capital leases is an expenditure in the governmental funds, but it reduces long-term liabilities in the statement of net position and does not affect the statement of activities. 664,178

Payment of the principal of general obligation bonds is an expenditure in the governmental funds, but reduces the long-term liabilities in the statement of net position and does not affect the statement of activities. 4,530,000

PAJARO VALLEY UNIFIED SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE GOVERNMENT-WIDE STATEMENT OF ACTIVITIES (Continued) FOR THE YEAR ENDED JUNE 30, 2017


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Interest on long-term debt is recorded as an expenditure in the funds when it is due; however, in the statement of activities, interest expense is recognized as the interest accrues, regardless of when it is due. (233,107)

Accreted interest on capital appreciation bonds is not recorded in the governmental funds, but it increases the bond principal in the statement of net position and increases interest expense in the statement of activities. (612,781)

Other postemployement benefit expenditures are recorded in the governmental funds to the extent of amounts actually funded. However, in the statement of activities, the expense is recorded for the full amount of the accrual-basis annual OPEB cost. (6,462,200)

Amortization of premium and refunding costs are not recorded in the governmental funds, but they impact the statement of activities. The net amortization amount during the year is as follows:

Premium on general obligation bonds 406,966 Defeasance costs on general obligation bonds (281,400)

Net amortization 125,566

Supplemental employee retirement plan payment is an expenditure in the governmental funds, but it decreases the long-term liabilities in the statement of net position and does not affect the statement of activities. 27,702

Amounts received from charter schools are recorded as revenues in the governmental funds. However, the amount received is not a revenue in the statement of activities. Instead, it decreases the loan receivable in the statement of net position. (197,821)

An internal service fund is used by the District's management to charge the costs of the various insurance programs to the individual funds. The net expenses of the internal service fund is reported with governmental activities. 124,855

Change in Net Position of Governmental Activities (15,669,280)$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF NET POSITION JUNE 30, 2017


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GovernmentalActivities -

InternalService Fund

ASSETSCurrent Assets

Deposits and investments 5,970,569$ Receivables 626,850 Due from other funds 294,606

Total Assets 6,892,025

LIABILITIES Current Liabilities

Accounts payable 423,536 Non-current Liabilities

Claim liabilities 6,298,081 Total Liabilities 6,721,617

NET POSITIONRestricted for insurance programs 170,408

Total Net Position 170,408$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION FOR THE YEAR ENDED JUNE 30, 2017


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GovernmentalActivities -Internal

Service Fund

OPERATING REVENUESIn-district contributions 2,681,696$

Total Operating Revenues 2,681,696

OPERATING EXPENSESClaims and insurance expense 2,610,286

Total Operating Expenses 2,610,286 Operating income 71,410

NONOPERATING REVENUESInterest income 53,445

Total Nonoperating Expenses 53,445 Change in Net Position 124,855 Total Net Position - Beginning 45,553 Total Net Position - Ending 170,408$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT PROPRIETARY FUND STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2017


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GovernmentalActivities -

InternalService Fund

CASH FLOWS FROM OPERATING ACTIVITIESCash received from user charges 1,760,240$ Cash payments for insurance claims (3,390,337)

Net Cash Used for Operating Activities (1,630,097)

CASH FLOWS FROM FINANCING ACTIVITIES

Cash payments to repay excess contribution (663,923) Net Cash used for Financing Activities (663,923)

CASH FLOWS FROM INVESTING ACTIVITIESInterest on investments 53,445

Net Decrease in Cash and Cash Equivalents (2,240,575) Cash and Cash Equivalents - Beginning 8,211,144 Cash and Cash Equivalents - Ending 5,970,569$

RECONCILIATION OF OPERATING INCOME TO NET CASH USED FOR OPERATING ACTIVITIES

Operating income 71,410$ Adjustments to reconcile operating income to net cash used for operating activities:

Accrued liabilities (46,510) Claims liabilities (733,541)

NET CASH USED FOR OPERATING ACTIVITIES (1,630,097)$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF NET POSITION JUNE 30, 2017


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RetireeBenefits Scholarship Agency

Trust Trust FundsASSETS

Deposits and investments 8,298,624$ 2,320,881$ 310,198$ Accounts receivable - 4,000 -

Total Assets 8,298,624 2,324,881 310,198$

LIABILITIESAccounts payable 626,850 317,622 -$ Due to student groups - - 310,198

Total Liabilities 626,850 317,622 310,198$

NET POSITIONHeld in trust for scholarship and retiree benefits 7,671,774 2,007,259

Total Net Position 7,671,774$ 2,007,259$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2017


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RetireeBenefits Scholarship

ADDITIONS Trust TrustPrivate donations -$ 187,670$ District contributions 4,987,447 - Investment income 37,611 18,926

Total Additions 5,025,058 206,596

DEDUCTIONSBenefit payments 3,002,991 - Scholarships awarded - 227,786

Total Deductions 3,002,991 227,786

Change in Net Position 2,022,067 (21,190) Net Position - Beginning 5,649,707 2,028,449 Net Position - Ending 7,671,774$ 2,007,259$

PAJARO VALLEY UNIFIED SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Pajaro Valley Unified School District was unified in 1964 under the laws of the State of California. The District operates under a locally elected seven-member Board form of government and provides educational services to grades K - 12 as mandated by the State and/or Federal agencies. The District operates sixteen elementary, six middle, three high school, one community day school, one continuation high school, an adult education school, twelve childcare centers, a migrant center and five charter schools. A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. For Pajaro Valley Unified School District, this includes general operations, food service, and student related activities of the District. Component Units - Charter Schools Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization’s relationship with the District is such that exclusion would cause the District’s financial statements to be misleading or incomplete. For financial reporting purposes, the component units have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are included in the financial statements of the District. The component units, although legally separate entities, are reported in the financial statements using the blended presentation method as if they were part of the District's operations because the governing board of the component units is essentially the same as the governing board of the District and because their purpose is to operate charter schools authorized by the District. The District has approved Charters for Diamond Technology Institute, Alianza Charter, Linscott Charter, Watsonville Charter School of Arts, Pacific Coast Charter and Ceiba College Preparatory Academy pursuant to Education Code Section 47605. All Charter Schools, except Ceiba, are operated by the District and their financial activities are accounted for in the charter school special revenue fund. Ceiba College Preparatory Academy is not a component unit of the District.


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Joint Powers Agencies and Public Entity Risk Pools The District is associated with Schools Association For Excess Risk (SAFER), Protection Insurance Program for Schools (PIPS), Self Insured Schools of California (SISC) for medical and vision insurance, and public entity risk pools Northern California Regional Liability Excess Fund (NorCal ReLiEF) that provides insurance coverage to the District. These organizations do not meet the criteria for inclusion as component units, so they are not component units of the District for financial reporting purposes. The District also participates in the Henry J. Mello Center for the Performing Arts Administration Agency (the JPA), through a joint powers agreement with the City of Watsonville and the District. Each member’s board appoints three directors. The JPA was established for the purpose of administering all functions necessary for the operation and maintenance of the Performing Arts Center (the Center). On August 2, 1994, the JPA entered into a management, operation and maintenance agreement with the Pajaro Valley Performing Arts Association (PVPAA), a tax exempt, nonprofit public benefit corporation. The agreement was for a period of ten years and has been reviewed and continued annually, whereby; PVPAA shall operate the Center and perform all services reasonably required in connection with the management and operation of the Center. PVPAA shall pay costs and operating expenses of every kind pertaining to the Center’s operation. Basis of Presentation - Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major and non-major governmental funds: Major Governmental Funds General Fund The General Fund is the chief operating fund for all districts. It is used to account for the ordinary operations of the District. All transactions except those accounted for in another fund are accounted for in this fund. Building Fund The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued.


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Non-Major Governmental Funds Special Revenue Funds The Special Revenue funds are established to account for the proceeds from specific revenue sources (other than trusts, major capital projects, or debt service) that are restricted or committed to the financing of particular activities and that compose a substantial portion of the inflows of the fund. Additional resources that are restricted, committed, or assigned to the purpose of the fund may also be reported in the fund.

Charter Schools Fund This fund may be used by authorizing Districts to account separately for the activities of District-operated charter schools that would otherwise be reported in the authorizing District's General Fund.

Adult Education Fund The Adult Education Fund is used to account separately for federal, State, and local resources committed for adult education programs and is to be expended for adult education purposes only.

Child Development Fund The Child Development Fund is used to account separately for federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs.

Cafeteria Fund The Cafeteria Fund is used to account separately for federal, State, and local resources to operate the food service program (Education Code Sections 38090-38093) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections 38091 and 38100). Deferred Maintenance Fund The Deferred Maintenance Fund is used to account separately for revenues that are restricted or committed for deferred maintenance purposes (Education Code Section 17582).

Debt Service Funds The Debt Service funds are used to account for the accumulation of restricted, committed, or assigned resources for and the payment of principal and interest on general long-term obligations.

Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a District (Education Code Sections 15125-15262).

Capital Project Funds The Capital Project Funds are used to account for financial resources that are restricted, committed, or assigned to the acquisition or construction of capital facilities and other major capital assets (other than those financed by proprietary funds and trust funds).

Capital Facilities Fund The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections 17620-17626. Expenditures are restricted to the purposes specified in Government Code Sections 65970-65981 or to the items specified in agreements with the developer (Government Code Section 66006).


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Proprietary Funds Proprietary Funds are used to account for activities that are more business-like than government-like in nature. Business-type activities include those for which a fee is charged to external users or to other organizational units of the local education agency, normally on a full cost-recovery basis. Proprietary funds are generally intended to be self-supporting and are classified as enterprise or internal service. The District has only one internal service fund which is Self-Insurance fund. Self-Insurance Fund Self-Insurance Fund may be used to account for any activity for which goods or services are provided to other funds of the District in return for a fee to cover the cost of operations. The District operates workers’ compensations and dental programs that are accounted for in the Self-Insurance fund. Fiduciary Funds Fiduciary Funds are used to account for assets held in trustee or agent capacity for others that cannot be used to support the District's own programs. The fiduciary fund category is split into four classifications: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds. The key distinction between trust and agency funds is that trust funds are subject to a trust agreement that affects the degree of management involvement and the length of time that the resources are held. Trust funds are used to account for the assets held by the District under a trust agreement for individuals, private organizations, or other governments and are therefore, not available to support the District's own programs. The District's trust funds are Retiree Benefits Trust and Private Purpose Scholarship Trust. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. The District's agency fund accounts for student body activities (ASB). Basis of Accounting - Measurement Focus Government-wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements, but differs from the manner in which governmental fund financial statements are prepared. The government-wide statement of activities presents a comparison between expenses, both direct and indirect, and program revenues for each governmental function and excludes fiduciary activity. Direct expenses are those that are specifically associated with a service, program, or department and are therefore, clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities, except for depreciation. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District. Eliminations have been made to minimize the double counting of internal activities. Net position should be reported as restricted when constraints placed on net position use is either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net position restricted for other activities results from special revenue funds and the restrictions on their net position use.


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Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental and proprietary fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column.

Governmental Funds All governmental funds are accounted for using the flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements, therefore, include reconciliations with brief explanations to better identify the relationship between the government-wide financial statements, prepared using the economic resources measurement focus and the accrual basis of accounting, and the governmental fund financial statements, prepared using the flow of current financial resources measurement focus and the modified accrual basis of accounting. Proprietary Funds Proprietary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the statement of net position. The statement of changes in fund net position presents increases (revenues) and decreases (expenses) in net total assets. The statement of cash flows provides information about how the District finances and meets the cash flow needs of its proprietary fund. Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of the District.

Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter, to be used to pay liabilities of the current fiscal year. Generally, available is defined as collectible within 60 days. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to State-aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose restrictions. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized.


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Unearned Revenue Unearned revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for unearned revenue is removed from the balance sheet and revenue is recognized. Certain grants received before the eligibility requirements are met are recorded as unearned revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as unearned revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred. Principal and interest on long-term obligations, which has not matured, are recognized when paid in the governmental funds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds but are recognized in the government-wide statements. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows. Investments Investments held at June 30, 2017, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in County and State investment pools are determined by the program sponsor. Prepaid Expenditures/Expenses Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditures/expenses over the benefiting period. Stores Inventories Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost, on the first-in, first-out basis. The costs of inventory items are recorded as expenditures in the governmental type funds and expenses in the proprietary type funds when used.


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Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. Capital assets are long-lived assets of the District. The District maintains a capitalization threshold of $25,000 with the exception to federally funded equipment and Food Services Program which has a threshold of $2,000 with a useful life of five years or more. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide statement of net position. The valuation basis for capital assets is historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings, 20 to 50 years; improvements, 5 to 50 years; equipment, 2 to 15 years. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables". These amounts are eliminated in the governmental column of the statement of net position. Compensated Absences Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide financial statements. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified and certificated school members who retire after January 1, 1999. At retirement, each member will receive service credit for each day of unused sick leave per STRS and PERS regulations. Accrued Liabilities and Long-Term Obligations All payables, accrued liabilities, and long-term obligations are reported in the government-wide and proprietary fund financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the governmental funds.


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However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the governmental fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and other long-term obligations are recognized as liabilities in the governmental fund financial statements when due. Debt Issuance Costs, Premiums and Discounts In the government-wide financial statements and in the proprietary fund type financial statements, long-term debt obligations and other long-term obligations are reported as liabilities in the applicable governmental activities, or proprietary fund statement of net position. Debt premiums and discounts, as well as issuance costs, related to prepaid insurance costs are amortized over the life of the bonds using the effective interest method. In governmental fund financial statements, bond premiums and discounts, as well as debt issuance costs are recognized in the current period. The face amount and premium of the debt is reported as other financing sources. Issuance costs, whether or not withheld from the actual debt proceeds, are reported as debt service expenditures. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position also reports deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The District reports deferred outflows of resources for the unamortized amount on the refunding of general obligation bonds and for pension related items. In addition to liabilities, the statement of financial position reports a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. The District reports deferred inflows of resources for pension related items. Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the California State Teachers Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) plan for schools (Plans) and additions to/deductions from the Plans' fiduciary net position have been determined on the same basis as they are reported by CalSTRS and CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Member contributions are recognized in the period in which they are earned. Investments are reported at fair value. Fund Balances - Governmental Funds As of June 30, 2017, fund balances of the governmental funds are classified as follows: Nonspendable - amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact.


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Restricted - amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments. Committed - amounts that can be used only for specific purposes determined by a formal action of the governing board. The governing board is the highest level of decision-making authority for the District. Commitments may be established, modified, or rescinded only through resolutions or other action as approved by the governing board. Assigned - amounts that do not meet the criteria to be classified as restricted or committed but that are intended to be used for specific purposes. Under the District's adopted policy, only the governing board, chief business officer and assistant superintendent of business services may assign amounts for specific purposes. Unassigned - all other spendable amounts. Spending Order Policy When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the District considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the District considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds, as needed, unless the governing board has provided otherwise in its commitment or assignment actions. Minimum Fund Balance Policy In fiscal year 2010-2011, the governing board adopted a minimum fund balance policy for the General Fund in order to protect the district against revenue shortfalls or unpredicted on-time expenditures. The policy requires a Reserve for Economic Uncertainties consisting of unassigned amounts equal to no less than 3 percent of General Fund expenditures and other financing uses. In 2016-17, the governing board approved an additional 3% or $6.8 million. Stabilization Arrangement In fiscal year 2010-2011, the governing board adopted a resolution for stabilization arrangements. Under the resolution, a portion of the fund balance of the General Fund is committed for stabilization arrangements, such as might be needed in emergency situations or when revenue shortages or budgetary imbalances occur. The resolution states that, at fiscal year end, an amount approximately equal to, but not less than, ten percent of the annual operating expenditures of the General Fund is to be committed for use in covering catastrophic losses, including natural and man-made disasters, insurance loss reserves, and limited operating expenses in a period of severe economic uncertainty. At June 30, 2017, $16,353,154 of the fund balance for the General Fund was reported as committed for economic stabilization. The resolution recognizes that under extreme conditions, the use of resources may result in the committed fund balance amount dropping below the established threshold. Such amounts are required to be reinstated by the end of the subsequent fiscal year.


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Net Position Net position represents the difference between assets and liabilities. Net position net of investment in capital assets, consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. Net position is reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position is available. Operating Revenues and Expenses Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. For the District, these revenues are interfund insurance premium. Operating expenses are necessary costs incurred to provide the good or service that are the primary activity of the fund. Interfund Activity Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented in the financial statements. Interfund transfers are eliminated in the governmental columns of the statement of activities. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1st of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes on-behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles.


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Property Tax Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The Counties of Santa Cruz and Monterey bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. New Accounting Pronouncements Effective This Fiscal Year In June 2015, the GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. The District has implemented the provisions of this Statement as of June 30, 2017. In March 2016, the GASB issued Statement No. 82, Pension Issues - An Amendment of GASB Statements No. 67, No. 68, and No. 73. The objective of this Statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. Specifically, this Statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The District has implemented the provisions of this Statement as of June 30, 2017, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer's pension liability is measured as of a date other than the employer's most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. New Accounting Pronouncements Effective in the Future Fiscal Year GASB Statement No. 75 – In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions. The objective of the Statement is to replace the requirements of GASB Statement No. 45. In addition, the Statement requires governments to report a liability on the face of the financial statements for the OPEB provided and requires governments to present more extensive note disclosures and required supplementary information about their OPEB liabilities. The Statement is effective for the periods beginning June 15, 2017, or the fiscal year 2017-18. The District has not determined the effect of the statement. GASB Statement No 81 – In March 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements. The objective of this Statement is to improve accounting and financial reporting for irrevocable splitinterest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. The District has not determined the effect of the statement.


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GASB Statement No. 83 – In November 2016, GASB issued Statement No. 83, Certain Asset Retirement Obligations. This Statement addresses accounting and financial reporting for certain asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital asset should recognize a liability based on the guidance in this Statement. This Statement also requires disclosure of information about the nature of a government’s ARO, the methods and assumptions used for the estimates of the liabilities, and the estimated remaining useful life of the associated tangible capital assets. The requirements of this Statement are effective for reporting periods beginning after June 15, 2018, or the 2018-19 fiscal year. The District has not determined the effect of the statement. GASB Statement No. 84 – In January 2017, GASB issued Statement No. 84, Fiduciary Activities. The objective of this Statement is to improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. The requirements of this Statement are effective for reporting periods beginning after December 15, 2018, or the 2019-20 fiscal year. The District has not determined the effect of the statement GASB Statement No. 85 – In March 2017, GASB issued Statement No. 85, Omnibus 2017. The objective of this Statement is to address practice issues that have been identified during implementation and application of certain GASB Statements. This Statement addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits). The Statement is effective for the reporting periods beginning after June 15, 2017, or 2017-18 fiscal year. The District has not determined the effect of the statement. GASB Statement No. 86 – In May 2017, GASB issued Statement No. 86, Certain Debt Extinguishment Issues. The primary objective of this Statement is to improve consistency in accounting and financial reporting for insubstance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources–resources other than the proceeds of refunding debt are placed in an irrevocable trust for the sole purpose of extinguishing debt. This Statement also improves accounting and financial reporting for prepaid insurance on debt that is extinguished and notes to financial statements for debt that is defeased in substance. The Statement is effective for the reporting periods beginning after June 15, 2017, or 2017-18 fiscal year. The District has not determined the effect of the statement. GASB Statement No. 87 – In June 2017, GASB issued Statement No. 87, Leases. The objective of this Statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This Statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. The Statement is effective for the reporting periods beginning after December 15, 2019, or 2020-21 fiscal year. The District has not determined the effect of the statement.


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NOTE 2 - DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2017, are classified in the accompanying financial statements as follows: Governmental funds 149,166,978$ Proprietary fund 5,970,569 Fiduciary funds 10,929,703

Total Deposits and Investments 166,067,250$

Deposits and investments as of June 30, 2017, consist of the following: Cash on hand and in banks 575,198$ Cash in revolving 150,000 Investments 165,342,052

Total Deposits and Investments 166,067,250$

Policies and Practices

The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investment in County Treasury - The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis.


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General Authorizations Limitations as they relate to interest rate risk and concentration of credit risk are indicated in the schedules below:

Maximum Maximum MaximumAuthorized Remaining Percentage Investment

Investment Type Maturity of Portfolio in One IssuerLocal Agency Bonds, Notes, Warrants 5 years None NoneRegistered State Bonds, Notes, Warrants 5 years None NoneU.S. Treasury Obligations 5 years None NoneU.S. Agency Securities 5 years None NoneBanker's Acceptance 180 days 40% 30%Commercial Paper 270 days 25% 10%Negotiable Certificates of Deposit 5 years 30% NoneRepurchase Agreements 1 year None NoneReverse Repurchase Agreements 92 days 20% of base NoneMedium-Term Corporate Notes 5 years 30% NoneMutual Funds N/A 20% 10%Money Market Mutual Funds N/A 20% 10%Mortgage Pass-Through Securities 5 years 20% NoneCounty Pooled Investment Funds N/A None NoneLocal Agency Investment Fund (LAIF) N/A None NoneJoint Powers Authority Pools N/A None None

Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Pooled investments, such as the county pool and mutual funds were not rated on June 30, 2017. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by investing in the County Pool.


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Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investment by maturity:

Fair MaturityInvestment Type Cost Value in Years

Mutual Funds 2,835,184$ 2,835,184$ N/ACounty Pool 162,506,868 162,208,773 0.87

Total 165,342,052$ 165,043,957$

Custodial Credit Risk - Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2017, the District's bank balance of $185,090 was exposed to custodial credit risk because it was uninsured but collateralized with securities held by the pledging financial institution's trust department or agent, but not in the name of the District. NOTE 3 - FAIR VALUE MEASUREMENTS The District categorizes the fair value measurements of its investments based on the hierarchy established by generally accepted accounting principles. The fair value hierarchy, which has three levels, is based on the valuation inputs used to measure an asset's fair value. The following provides a summary of the hierarchy used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets that the District has the ability to access at the measurement date. Level 1 assets may include debt and equity securities that are traded in an active exchange market and that are highly liquid and are actively traded in over-the-counter markets. Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable, such as interest rates and curves observable at commonly quoted intervals, implied volatilities, and credit spreads. For financial reporting purposes, if an asset has a specified term, a Level 2 input is required to be observable for substantially the full term of the asset. Level 3 - Unobservable inputs should be developed using the best information available under the circumstances, which might include the District's own data. The District should adjust that data if reasonably available information indicates that other market participants would use different data or certain circumstances specific to the District are not available to other market participants.


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Uncategorized - Investments in the Santa Cruz County Treasury Investment Pool are not measured using the input levels above because the District's transactions are based on a stable net asset value per share. All contributions and redemptions are transacted at $1.00 net asset value per share. The District's fair value measurements are as follows at June 30, 2017:

Investment Type Fair Value Level 1 UncategorizedMutual Funds 2,835,184$ 2,835,184$ -$ County Pool 162,208,773 - 162,208,773

Total 165,043,957$ 2,835,184$ 162,208,773$

Fair Value Measurements

All assets have been valued using a market approach, with quoted market prices. NOTE 4 - RECEIVABLES Receivables at June 30, 2017, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full.

Non-MajorGeneral Governmental Fiduciary

Fund Funds Total FundsFederal Government

Categorical aid 3,782,650$ 3,333,520$ 7,116,170$ -$ State Government

State principal apportionment 2,266,182 222,741 2,711,664 - Categorical aid 601,265 760,628 1,361,893 - Lottery 788,582 74,517 937,616 -

Other Local Sources 470,829 1,027,693 1,498,522 4,000 Total 7,909,508$ 5,419,099$ 13,625,865$ 4,000$


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NOTE 5 - CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2017, was as follows:

Balance BalanceJuly 1, 2016 Additions Deductions June 30, 2017

Governmental ActivitiesCapital Assets Not Being Depreciated:

Land 17,055,144$ -$ -$ 17,055,144$ Construction in Progress 19,856,026 17,528,801 - 37,384,827

Total Capital Assets Not Being Depreciated 36,911,170 17,528,801 - 54,439,971

Capital Assets Being Depreciated:Buildings and Improvements 279,301,474 1,255,192 - 280,556,666 Furniture and Equipment 6,742,382 1,751,872 - 8,494,254

Total Capital Assets Being Depreciated 286,043,856 3,007,064 - 289,050,920 Less Accumulated Depreciation:

Buildings and Improvements 168,939,613 10,996,584 - 179,936,197 Furniture and Equipment 4,536,672 396,022 - 4,932,694

Total Accumulated Depreciation 173,476,285 11,392,606 - 184,868,891 Capital Assets Being depreciated, Net 112,567,571 (8,385,542) - 104,182,029

Net Capital Assets 149,478,741$ 9,143,259$ -$ 158,622,000$

Depreciation expense was charged as a direct expense to governmental functions as follows: Governmental Activities

Instruction 6,581,303$ Supervision of instruction 968,587 Instructional library and media 189,889 School site administration 752,786 Home to school transpiration 266,467 Food services 426,763 All other pupil services 795,467 Ancillary services 91,951 Community services 794 All general administration 322,634 Data processing services 107,151 Plant services 888,814

Total Depreciation Expense 11,392,606$


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NOTE 6 - INTERFUND TRANSACTIONS

Interfund Receivables/Payables (Due To/Due From) Interfund receivables and payable balances arise from interfund transactions and are recorded by all funds affected in the period which transactions are executed. Interfund receivable and payable balances at June 30, 2017, between major and non-major governmental funds, and proprietary funds are as follows:

Non-MajorGeneral Governmental Proprietary

Due To Fund Funds Funds TotalGeneral -$ -$ 4,658$ 4,658$ Building Fund 694 - - 694 Non-Major Governmental Funds 892,966 192,491 289,948 1,375,405

Total 893,660$ 192,491$ 294,606$ 1,380,757$

Due From

Operating Transfers Interfund transfers for the year ended June 30, 2017, consisted of the following:

1,210$ The General Fund transferred to the Charter School Fund to support the schools' operations. 113,453

796,171 Total 910,834$

The General Fund transferred to the Cafeteria Fund to support the District's cafeteria operations including providing assistance to student outstanding accounts.

The General Fund transferred to the Child Development Fund to support the child development program.


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NOTE 7 - DEFERRED CHARGE ON REFUNDING Deferred charge on refunding is a consumption of net position by the District that is applicable to a future reporting period. The $1,688,402 balance of the deferred outflows of resources at June 30, 2017 will be recognized as an expense and as a decrease in net position over the remaining life of related bonds. The change in the District’s deferred charge on refunding is as follows:

Balance Accretion/ BalanceJune 30, 2016 Additions Deductions June 30, 2017

Deferred charges on refunding 1,969,802$ -$ 281,400$ 1,688,402$

NOTE 8 - ACCOUNTS PAYABLE Accounts payable at June 30, 2017, consisted of the following:

Non-MajorGeneral Building Governmental Proprietary Fiduciary

Fund Fund Funds Total Fund FundsVendor payables 5,558,464$ 2,439,590$ 824,035$ 8,852,501$ 423,536$ 317,622$ Salaries and benefits 10,128,257 - 2,257,145 13,006,991 - - Other - - - - - 626,850 Total 15,686,721$ 2,439,590$ 3,081,180$ 21,859,492$ 423,536$ 944,472$

NOTE 9 - UNEARNED REVENUE Unearned revenue at June 30, 2017, consists of the following:

Non-MajorGeneral Governmental

Fund Funds TotalFederal financial assistance 282,484$ 237,960$ 520,444$ State categorical aid 339,436 - 339,436 Other local 1,663,804 256,815 1,920,619 Total 2,285,724$ 494,775$ 2,780,499$


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NOTE 10 - LONG-TERM OBLIGATIONS Summary The changes in the District's long-term obligations during the year consisted of the following:

Balance Accretion/ Balance Due in June 30, 2016 Additions Deductions June 30, 2017 One Year

General obligation bonds 168,747,906$ 612,781$ 4,530,000$ 164,830,687$ 10,290,000$ Bond premium 9,589,717 - 406,966 9,182,751 406,966 Accumulated vacation - net 3,705,901 - 1,767,726 1,938,175 - Capital leases 1,706,393 - 664,178 1,042,215 596,692 Other postemployment benefits 39,057,958 11,449,647 4,987,447 45,520,158 - Supplemental employees retirement benefits 110,808 - 27,702 83,106 27,702 Net pension liability 167,250,206 20,303,037 - 187,553,243 -

Total 390,168,889$ 32,365,465$ 12,384,019$ 410,150,335$ 11,321,360$

Payments on the general obligation bonds are made by the Bond Interest and Redemption Fund with local revenues. Regularly scheduled principal payments on the capital leases are paid by the General Fund. Accumulated vacation, supplemental employee retirement benefits, and net pension liability are paid by the funds for which the employees worked. Bonded Debt The outstanding general obligation bonded debt is as follows:

Bonds BondsIssue Maturity Interest Original Outstanding Accreted / OutstandingDate Date Rate Issue June 30, 2016 Issued Redeemed June 30, 20172005 2030 3.00%-5.31% 18,254,288 $ 24,797,906$ 612,781$ -$ 25,410,687$ 2013 2048 3.00%-5.00% 68,540,000 64,335,000 - 1,015,000 63,320,000 2013 2038 0.63%-5.12% 11,460,000 11,405,000 - 60,000 11,345,000 2013 2023 0.73%-3.19% 19,675,000 18,660,000 - 2,320,000 16,340,000 2013 2023 2.00%-4.00% 9,765,000 9,550,000 - 1,135,000 8,415,000 2016 2045 2.00%-5.00% 40,000,000 40,000,000 - - 40,000,000

168,747,906$ 612,781$ 4,530,000$ 164,830,687$


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Debt Service Requirements to Maturity The bonds mature through fiscal year 2049 as follows:

Interest toFiscal Year Principal Maturity Total

2018 5,145,000$ 4,431,118$ 9,576,118$ 2019 5,555,000 5,791,170 11,346,170 2020 4,705,000 5,640,287 10,345,287 2021 4,630,000 5,486,765 10,116,765 2022 4,618,064 5,692,291 10,310,355

2023-2027 15,684,117 40,383,562 56,067,679 2028-2032 14,037,106 37,813,614 51,850,720 2033-2037 17,360,000 21,227,207 38,587,207 2038-2042 30,250,000 15,556,337 45,806,337 2043-2047 44,045,000 6,679,625 50,724,625 2048-2049 8,055,000 171,169 8,226,169

Subtotal 154,084,287 148,873,145$ 302,957,432$

Accretion to date 10,746,400 Total general obligation bonds 164,830,687$

Capital Leases The District's liabilities on lease agreements with options to purchase are summarized below:

School SchoolBuses Buses Total

Balance, July 1, 2016 325,534$ 1,439,509$ 1,765,043$ Payments 162,767 532,409 695,176 Balance, July 1, 2017 162,767$ 907,100$ 1,069,867$

The capital leases have minimum lease payments as follows:

Year Ending LeaseJune 30, Payment

2018 616,317$ 2019 453,550 Total 1,069,867

Less: Amount Representing Interest 27,652 Present Value of Minimum Lease Payments 1,042,215$


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Accumulated Unpaid Employee Vacation The long-term portion of accumulated unpaid employee vacation for the District at June 30, 2017, amounted to $1,938,175. Supplemental Employees Retirement Plan (SERP) The outstanding balance for the Supplemental Employee Retirement Plans as of June 30, 2017 consists of the 2015 Plan’s amount of $83,106.


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NOTE 11 - FUND BALANCES Fund balances are composed of the following elements:

Non-MajorGeneral Building Governmental

Fund Fund Funds TotalNonspendable

Revolving cash 150,000$ -$ -$ 150,000$ Stores inventories 149,395 - 125,677 275,072 Prepaid expenditures 349,960 - - 349,960 Other reserve 65,000 - - 65,000

Total Nonspendable 714,355 - 125,677 840,032 Restricted

Educational programs 8,174,695 - 170,463 8,345,158 Food program - - 4,907,958 4,907,958 Charter schools - - 3,096,162 3,096,162 Capital projects - 58,874,979 2,974,107 61,849,086 Debt services - - 9,317,366 9,317,366

Total Restricted 8,174,695 58,874,979 20,466,056 87,515,730 Committed

Deferred maintenance - - 586,426 586,426 Adult education - - 571,669 571,669 Stabilization 16,353,154 - - 16,353,154 Facilities 2,796,841 - - 2,796,841 Furniture and science labs replacement 900,000 - - 900,000 One time salary payment 8,000,000 - - 8,000,000 Additional 3% reserve 6,858,364 - - 6,858,364

Total Committed 34,908,359 - 1,158,095 20,308,090 Assigned

Program carryover 5,229,438 - - 5,229,438 Total Assigned 5,229,438 - - 5,229,438

UnassignedReserve for economic uncertainties 6,986,114 - - 6,986,114 Remaining unassigned 1,573,403 - - 1,573,403

Total Unassigned 8,559,517 - - 8,559,517 Total 57,586,364$ 58,874,979$ 21,749,828$ 122,452,807$


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NOTE 12 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The Postemployment Benefit Plan (the "Plan") is a single-employer defined benefit healthcare plan administered by the Pajaro Valley Unified School District. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 160 retirees and beneficiaries currently receiving benefits and 2,045 active plan members. The Plan is presented in these financial statements as the Retiree Benefits Trust Fund. Separate financial statements are not prepared for the Trust. Contribution Information The contribution requirements of plan members and the District are established and may be amended by the District and the Teachers Association (PVFT), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined annually through the agreements between the District, PVFT, CSEA and the unrepresented groups. For fiscal year 2016-2017, the District contributed $4,987,447 to the plan, all of which was used for current premiums (approximately 100% percent of total premiums incurred by retirees plus one eligible dependent). Annual OPEB Cost and Net OPEB Obligation The District's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District's net OPEB obligation to the Plan: Annual required contribution 9,692,039$ Interest on net OPEB obligation 1,757,608 Annual OPEB cost (expense) 11,449,647 Contributions made (4,987,447) Increase in net OPEB obligation 6,462,200 Net OPEB obligation, beginning of year 39,057,958 Net OPEB obligation, end of year 45,520,158$


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The annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for the most recent six years was as follows:

Year Ended Amount Percentage Net OPEBJune 30, OPEB Cost Contributed Contributed Obligation

2017 11,449,647$ 4,987,447$ 43.56% 45,520,158$ 2016 11,227,132 4,055,492 36.12% 39,057,958 2015 10,772,028 3,770,427 35.00% 24,884,717 2014 8,957,471 4,353,494 48.60% 20,280,740 2013 8,026,326 4,943,178 61.59% 17,197,592 2012 7,795,167 4,492,879 57.64% 13,895,304

Funded Status and Funding Progress Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. The following shows the funded status for the most recent actuarial valuation:

Actuarial Unfunded UAAL as aActuarial Accrued AAL Funded Percentage ofValuation Actuarial Value Liability (UAAL) Ratio Covered Covered Payroll

Date of Assets (a) (AAL) (b) (b - a) (a / b) Payroll (c) ([b - a] / c)July 1, 2017 2,835,184$ 70,565,914$ 67,730,730$ 4.02% 137,357,251$ 49.31%

Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the October 22, 2017, actuarial valuation, the Entry age normal actuarial cost method was used. The actuarial assumptions included a 4.5 percent investment rate of return (net of administrative expenses), based on the plan being funded in an irrevocable employee benefit trust invested in a combined equity and fixed income portfolio. Healthcare, dental, and vision cost trend rates were averaged at 4 percent. The UAAL is being amortized at a level percentage of payroll method on an open basis. The remaining open amortization period at July 1, 2017 was 22 years. The actuarial value of assets as of July 1, 2017 was $2,835,184.


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NOTE 13 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description Plan administration. Pajaro Valley Unified School District administers the Postemployment Benefits Plan (the "Plan") – a single-employer defined benefit plan that is used to provide postemployment benefits other than pensions (OPEB) for the District. Management of the Plan is vested in the District’s Governing Board, which consists of seven locally elected plan members. Plan membership. At June 30, 2017, Plan membership consisted of the following: Inactive plan members or beneficiaries currently receiving benefit payments 160Active plan members 2,045

Total Plan Members 2,205

Benefits provided. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Benefits are provided through a third-party insurer, and the full cost of benefits is covered by the plan. The District’s Governing Board has the authority to establish and amend the benefit terms as contained within the negotiated labor agreements. Contributions. The contribution requirements of plan members and the District are established and may be amended by the District and the Teachers Association (PVFT), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined annually through the agreements between the District, PVFT, CSEA, and the unrepresented groups. For fiscal year 2016-2017, the District contributed $4,987,447 to the plan, all of which was used for current premiums (approximately 100 percent of total premiums). Plan members are not required to contribute to the plan. The remainder of the premiums were funded from beginning net position and interest earnings.


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Investments Investment policy. The Plan's policy in regard to the allocation of invested assets is established and may be amended by the Pajaro Valley Unified School District Governing Board by a majority vote of its members. It is the policy of the Governing Board to pursue an investment strategy that reduces risk through the prudent diversification of the portfolio across a broad selection of distinct asset classes. The Plan's investment policy discourages the use of cash equivalents, except for liquidity purposes, and aims to refrain from dramatically shifting asset class allocations over short time spans. The following was the Board's adopted asset allocation policy as of June 30, 2017:

Asset Class Target AllocationUS Large Cap 40%US Small Cap 20%Long-Term Corporate Bonds 30%Short-Term Gov't Fixed 10%Total 100%

Rate of return. For the year ended June 30, 2017, the annual money-weighted rate of return on investments, net of investment expense, was 3.33 percent. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. Net OPEB of the District The component of the net OPEB liability of the District as June 30, 2017, were as follows: Total OPEB liability $ 74,847,015 Plan fiduciary net position 2,835,184 District's net OPEB liability $ 72,011,831 Plan fiduciary net position as a percentage of the total OPEB liability 3.79%

Actuarial assumptions. The total OPEB liability was determined by an actuarial valuation as of June 30, 2017, using the following actuarial assumptions, applied to all periods included in the measurement, unless otherwise specified: Inflation 2.75 percentSalary increases 2.75 percent, average, including inflationInvestment rate of return 3.33 percent, net of OPEB plan investment expense, including inflationHealthcare cost trend rates 4 percent Mortality rates were based on the 2009 CalSTRS Mortality, 2009 CalPERS Mortality for Retired Miscellaneous Employees, and the 2009 CalPERS Mortality for Active Miscellaneous Employees for Males or Females, as appropriate, with adjustments for mortality improvements based on CalPERS analysis. The actuarial assumptions used in the June 30, 2017 valuation were based on the results of an actuarial experience study for the 2009 CalSTRS Retirement Rates, 2009 CalPERS 2.0% at 60 Rates for Miscellaneous Employees, and the 2009 CalPERS Retirement Rates for School Employees.


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The long-term expected rate of return on OPEB plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major asset class included in the target asset allocation as of June 30, 2017, (see the discussion of Plan's investment policy) are summarized in the following table:

Asset Class Long-Term Expected Real Rate of ReturnUS Large Cap 7.795%US Small Cap 7.795%Long-Term Corporate Bonds 5.295%Short-Term Gov't Fixed 3.250%

Discount rate. The discount rate used to measure the total OPEB liability was 3.6 percent. The projection of cash flows used to determine the discount rate assumed that District contributions will be made at rates equal to the actuarially determined contribution rates. Based on those assumptions, the OPEB plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability. Sensitivity of the net OPEB liability to changes in the discount rate. The following presents the net OPEB liability of the District, as well as what the District's net OPEB liability would be if it were calculated using a discount rate that is 1-percentage-point lower (2.6 percent) or 1-percentage-point higher (4.6 percent) than the current discount rate:

1% Decrease Discount Rate 1% Increase2.6% 3.6% 4.6%

Net OPEB liability $ 77,119,626 $ 72,011,831 $ 67,278,580

Sensitivity of the net OPEB liability to changes in the healthcare cost trend rates. The following presents the net OPEB liability of the District, as well as what the District's net OPEB liability would be if it were calculated using healthcare cost trend rates that are 1-percentage-point lower (4 percent decreasing to 3 percent) or 1-percentage-point higher (4 percent increasing to 5 percent) than the current healthcare cost trend rates:

Healthcare Cost

1% Decrease Trend Rates 1% Increase 3% 4% 5%

Net OPEB liability $ 68,366,731 $ 72,011,831 $ 75,052,765


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NOTE 14 - RISK MANAGEMENT Property and Liability The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees and natural disasters. During fiscal year ending June 30, 2017, the District contracted with Schools Association For Excess Risk for property and liability insurance coverage. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year. Workers' Compensation Coverage provided by the Schools Association for Excess Risk for Property and Liability and the Pajaro Valley Unified School District Workers’ Compensation Self-Insurance Program is as follows:

Insurance Program / Company Name Type of Coverage LimitsPublic Insurance Program for Schools Workers' Compensation 1,000,000$

(Incidents after to 7/1/12)Schools Association For Excess Risk Property 250,250,000 Schools Association For Excess Risk Liability 25,000,000 Schools Association For Excess Risk Excess Liability 25,000,000

Claims Liabilities The District records an estimated liability for workers’ compensation claims filed prior to the termination of the self-insured program and dental. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred, but not reported based on historical experience. Unpaid Claims Liabilities The fund establishes a liability for both reported and unreported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District from July 1, 2015 to June 30, 2017: Liability Balance, July 1, 2015 8,527,916$

Claims and changes in estimates 1,190,774 Claims payments (2,687,068)

Liability Balance, June 30, 2016 7,031,622 Claims and changes in estimates 1,876,746

Claims payments (2,610,287) Liability Balance, June 30, 2017 6,298,081$ Assets available to pay claims at June 30, 2017 6,468,489$


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NOTE 15 - EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Academic employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS).

For the fiscal year ended June 30, 2017, the District reported net pension liabilities, deferred outflows of resources, deferred inflows of resources, and pension expense for each of the above plans as follows:

Net Deferred Outflows Deferred InflowsPension Plan Pension Liability of Resources of Resources Pension Expense

CalSTRS 133,420,686$ 22,307,579$ 15,474,862$ 14,947,967$ CalPERS 54,132,557 15,821,294 3,796,696 7,576,723

Total 187,553,243$ 38,128,873$ 19,271,558$ 22,524,690$

The details of each plan are as follows: California State Teachers' Retirement System (CalSTRS) Plan Description The District contributes to the State Teachers Retirement Plan (STRP) administered by the California State Teachers' Retirement System (CalSTRS). STRP is a cost-sharing multiple-employer public employee retirement system defined benefit pension plan. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2015, annual actuarial valuation report, Defined Benefit Program Actuarial Valuation. This report and CalSTRS audited financial information are publically available reports that can be found on the CalSTRS website under Publications at: http://www.calstrs.com/member-publications. Benefits Provided The STRP provides retirement, disability and survivor benefits to beneficiaries. Benefits are based on members' final compensation, age and years of service credit. Members hired on or before December 31, 2012, with five years of credited service are eligible for the normal retirement benefit at age 60. Members hired on or after January 1, 2013, with five years of credited service are eligible for the normal retirement benefit at age 62. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service. The STRP is comprised of four programs: Defined Benefit Program, Defined Benefit Supplement Program, Cash Balance Benefit Program and Replacement Benefits Program. The STRP holds assets for the exclusive purpose of providing benefits to members and beneficiaries of these programs. CalSTRS also uses plan assets to defray reasonable expenses of administering the STRP. Although CalSTRS is the administrator of the STRP, the state is the sponsor of the STRP and obligor of the trust. In addition, the state is both an employer and nonemployer contributing entity to the STRP.


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The District contributes exclusively to the STRP Defined Benefit Program, thus disclosures are not included for the other plans. The STRP provisions and benefits in effect at June 30, 2017, are summarized as follows:

Hire dateOn or before

December 31, 2012On or after

January 1, 2013Benefit formula 2% at 60 2% at 62Benefit vesting schedule 5 years of service 5 years of serviceBenefit payments Monthly for life Monthly for lifeRetirement age 60 62Monthly benefits as a percentage of eligible compensation 2.0% - 2.4% 2.0% - 2.4%Required employee contribution rate 10.25% 9.205%

Required employer contribution rate 12.58% 12.58%Required state contribution rate 8.828% 8.828%

STRP Defined Benefit Program

Contributions Required member, District and State of California contributions rates are set by the California Legislature and Governor and detailed in Teachers' Retirement Law. The contributions rates are expressed as a level percentage of payroll using the entry age normal actuarial method. In accordance with AB 1469, employer contributions into the CalSTRS will be increasing to a total of 19.1 percent of applicable member earnings phased over a seven year period. The contribution rates for each plan for the year ended June 30, 2017, are presented above and the District's total contributions were $11,700,700. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2017, the District reported a liability for its proportionate share of the net pension liability that reflected a reduction for State pension support provided to the District. The amount recognized by the District as its proportionate share of the net pension liability, the related state support and the total portion of the net pension liability that was associated with the District were as follows:

133,420,686$ 75,954,016

Total 209,374,702$

Total net pension liability, including State share:

District's proportionate share of net pension liabilityState's proportionate share of the net pension liability associated with the District

The net pension liability was measured as of June 30, 2016. The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts and the State, actuarially determined. The District's proportionate share for the measurement period June 30, 2016 and June 30, 2015, respectively was 0.1650 percent and 0.1842 percent, resulting in a net decrease in the proportionate share of 0.0192 percent.


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For the year ended June 30, 2017, the District recognized pension expense of $14,947,967. In addition, the District recognized pension expense and revenue of $7,341,755 for support provided by the State. At June 30, 2017, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Deferred Outflows Deferred Inflowsof Resources of Resources

Pension contributions subsequent to measurement date 11,700,700$ -$ Net change in proportionate share of net pension liability - (12,220,216) Difference between projected and actual earnings on pension plan investments 10,606,879 - Differences between expected and actual experience in the measurement of the total pension liability - (3,254,646)

Total 22,307,579$ (15,474,862)$

The deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent fiscal year. The deferred outflow of resources related to the difference between projected and actual earnings on pension plan investments will be amortized over a closed five-year period and will be recognized in pension expense as follows:

Year Ended Deferred OutflowsJune 30, of Resources

2018 231,407$ 2019 231,407 2020 6,165,815 2021 3,978,250 Total 10,606,879$


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The deferred (inflows) of resources related to the net change in proportionate share of net pension liability and differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the measurement period is 7 years and will be recognized in pension expense as follows:

Year Ended Deferred (Inflows)June 30, of Resources

2018 (2,630,694)$ 2019 (2,630,694) 2020 (2,630,694) 2021 (2,630,694) 2022 (2,630,692) 2023 (2,321,394) Total (15,474,862)$

Actuarial Methods and Assumptions Total pension liability for STRP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2015, and rolling forward the total pension liability to June 30, 2016. The financial reporting actuarial valuation as of June 30, 2015, used the following methods and assumptions, applied to all prior periods included in the measurement:

Valuation date June 30, 2015 Measurement date June 30, 2016 Experience study July 1, 2006 through June 30, 2010 Actuarial cost method Entry age normal Discount rate 7.60% Investment rate of return 7.60% Consumer price inflation 3.00% Wage growth 3.75%

CalSTRS uses custom mortality tables to best fit the patterns of mortality among its members. These custom tables are based on RP2000 series tables adjusted to fit CalSTRS experience. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. The best estimate ranges were developed using capital market assumptions from CalSTRS general investment consultant. Based on the model for CalSTRS consulting actuary' investment practice, a best estimate range was determined be assuming the portfolio is re-balanced annually and that the annual returns are lognormally distributed and independently from year to year to develop expected percentile for the long-term distribution of annualized returns. The assumed asset allocation is based on board policy for target asset allocation in effect on February 2, 2012, the date the current experience study was approved by the board.


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Best estimates of 10-year geometric real rates of return and the assumed asset allocation for each major asset class used as input to develop the actuarial investment rate of return are summarized in the following table:

Long-term Assumed Asset Expected Real

Asset Class Allocation Rate of ReturnGlobal equity 47% 6.30%Fixed income 12% 0.30%Real estate 13% 5.20%Private equity 13% 9.30%Absolute Return/Risk Mitigating Strategies 9% 2.90%Inflation sensitive 4% 3.80%Cash/liquidity 2% -1.00% Discount Rate The discount rate used to measure the total pension liability was 7.60 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Projected inflows from investment earnings were calculated using the long-term assumed investment rate of return (7.60 percent) and assuming that contributions, benefit payments and administrative expense occurred midyear. Based on these assumptions, the STRP's fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate:

Net PensionDiscount Rate Liability

1% decrease (6.60%) 192,022,457$ Current discount rate (7.60%) 133,420,686$ 1% increase (8.60%) 84,751,111$


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California Public Employees Retirement System (CalPERS) Plan Description Qualified employees are eligible to participate in the School Employer Pool (SEP) under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2015 annual actuarial valuation report, and Schools Pool Actuarial Valuation. These reports and CalPERS audited financial information are publically available reports that can be found on the CalPERS website under Forms and Publications at: https://www.calpers.ca.gov/page/forms-publications. Benefits Provided CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of service credit, a benefit factor and the member's final compensation. Members hired on or before December 31, 2012, with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. Members hired on or after January 1, 2013, with five years of total service are eligible to retire at age 52 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after five years of service. The Basic Death Benefit is paid to any member's beneficiary if the member dies while actively employed. An employee's eligible survivor may receive the 1957 Survivor Benefit if the member dies while actively employed, is at least age 50 (or 52 for members hired on or after January 1, 2013), and has at least five years of credited service. The cost of living adjustments for each plan are applied as specified by the Public Employees' Retirement Law. The CalPERS provisions and benefits in effect at June 30, 2017, are summarized as follows:

Hire dateOn or before

December 31, 2012On or after

January 1, 2013Benefit formula 2% at 55 2% at 62Benefit vesting schedule 5 years of service 5 years of serviceBenefit payments Monthly for life Monthly for lifeRetirement age 55 62Monthly benefits as a percentage of eligible compensation 1.1% - 2.5% 1.0% - 2.5%Required employee contribution rate 7.00% 6.00%Required employer contribution rate 13.888% 13.888%

School Employer Pool (CalPERS)


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Contributions Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Total plan contributions are calculated through the CalPERS annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. The contributions rates are expressed as percentage of annual payroll. The contribution rates for each plan for the year ended June 30, 2017, are presented above and the total District contributions were $5,019,334. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions As of June 30, 2017, the District reported net pension liabilities for its proportionate share of the CalPERS net pension liability totaling $54,132,557. The net pension liability was measured as of June 30, 2016. The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts, actuarially determined. The District’s proportionate share for the measurement period June, 30 2016 and June 30, 2015, respectively was 0.2741 percent and 0.2932 percent, resulting in a net decrease in proportionate share of 0.0191 percent. For the year ended June 30, 2017, the District recognized pension expense of $7,576,723. At June 30, 2017, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Deferred Outflows Deferred Inflowsof Resources of Resources

Pension contributions subsequent to measurment date 5,019,334$ -$ 8,399,632

- Change in assumption - (1,626,361) Differences between expected and actual experience 2,328,219 - Change in proportions 74,109 (2,170,335)

Total 15,821,294$ (3,796,696)$

Differences between projected and actual earnings on plan investments

The deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent fiscal year. The deferred outflows of resources related to the difference between projected and actual earnings on pension plan investments are amortized over a closed five-year period and will be recognized in pension expense as follows:


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DeferredYear Ended Outflows

June 30, of Resources2018 1,178,159$ 2019 1,178,159 2020 3,851,083 2021 2,192,231 Total 8,399,632$

The deferred (inflows) of resources related to the net change in proportionate share of net pension liability, changes of assumptions, and differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the measurement period is 3.9 years and will be recognized in pension expense as follows:

DeferredYear Ended (Inflows)

June 30, of Resources2018 (487,981)$ 2019 (485,903) 2020 (420,484) Total (1,394,368)$

Actuarial Methods and Assumptions Total pension liability for the SEP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2015, and rolling forward the total pension liability to June 30, 2016. The financial reporting actuarial valuation as of June 30, 2015, used the following methods and assumptions, applied to all prior periods included in the measurement:

Valuation date June 30, 2015 Measurement date June 30, 2016 Experience study July 1, 1997 through June 30, 2011 Actuarial cost method Entry age normal Discount rate 7.65% Investment rate of return 7.65% Consumer price inflation 2.75% Wage growth Varies by entry age and service

Mortality assumptions are based on mortality rates resulting from the most recent CalPERS experience study adopted by the CalPERS Board. For purposes of the post-retirement mortality rates, those revised rates include five years of projected ongoing mortality improvement using Scale AA published by the Society of Actuaries.


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In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound returns were calculated over the short-term (first ten years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Long-term Assumed Asset Expected Real

Asset Class Allocation Rate of ReturnGlobal equity 51% 5.71%Global debt securities 20% 2.43%Inflation assets 6% 3.36%Private equity 10% 6.95%Real estate 10% 5.13%

Infrastructure and forestland 2% 5.09%Liquidity 1% -1.05% Discount Rate The discount rate used to measure the total pension liability was 7.65 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Based on these assumptions, the School Employer Pool fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents the District's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate:

Net PensionDiscount rate Liability

1% decrease (6.65%) 80,766,076$ Current discount rate (7.65%) 54,132,557$ 1% increase (8.65%) 31,954,911$


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Accumulated Program for Part-Time and Limited Services Employees (APPLE) As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (CalSTRS or CalPERS) must be covered by Social Security or an alternative plan. The District has elected to use the APPLE Retirement Program as its alternative plan. Contributions made by the District and an employee vest immediately. The District contributes 1.3 percent of an employee's gross earnings. An employee is required to contribute 6.2 percent of his or her gross earnings to the pension plan. On Behalf Payments The State of California makes contributions to CalSTRS and CalPERS on behalf of the District. These payments consist of State General Fund contributions to STRS in the amount of $8,821,244, $5,980,867, and $4,210,741, respectively, for 2017, 2016 and 2015 (8.828, 7.410, and 5.679, percent of annual payroll for 2017, 2016, and 2015, respectively). Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures, however, guidance received from the California Department of Education advises local educational agencies not to record these amounts in the Annual Financial and Budget Report. These amounts have been recorded in the financial statements. These amounts have not been included in the actual or budgeted amounts reported in the General Fund Budgetary Comparison Schedule. On behalf payments have been excluded from the calculation of available reserves. NOTE 16 - COMMITMENTS AND CONTINGENCIES Construction Commitments As of June 30, 2017 the District had the following construction commitments.

Remaining ExpectedConstruction Date of

Capital Project Commitment CompletionAHS-Freedom Field Upgrade-Ph 1,2 and 3 426,456$ 2022AHS Modernization 2,140,377 2022AHS Solar 79,506 2022AJHS Modernization 1,876,250 2022Bradley Modernization 843,603 2022Mar Vista - Reconfigure MPR MOD 1,195,340 2022Mar Vista Modernization 15,868 2022Rio Del Mar Modernization 292,197 2022Valencia Modernization 250,265 2022Renaissance High Modernization 1,176,099 2022PV High Upper Fields 9,986,097 2022PV High New Auditorium 5,676,420 2022PV High - Additional Work - MOD 185,935 2022PV High Solar 6,451 2022


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Remaining ExpectedConstruction Date of

Capital Project Commitment Completion Cesar Chavez MS Modernization 1,377,766 2022Cesar Chavez Relocatables 873,500 2022Lakeview MS Modernization 644,962 2022RHMS Gym Modernization 478,929 2022RHMS - Modernization 876,325 2022RHMS Solar 1,423 2022Amesti Modernization 1,816,861 2022Ann Soldo Modernization 1,027,682 2022Calabasas Modernization 382,599 2022Freedom Modernization 1,565,908 2022HA Hyde Modernization 163,245 2020HA Relocatables 2,770 2017Radcliff Modernization 1,221,927 2022Starlight Modernization 1,093,240 2022Alianza Fire Hydrant and Water Tank 582,206 2017Alianza Modernization 381,265 2022Alianza - Relocatables 82,326 2018WCSA Modernization 44,986 2022WCSA Relocatables 69,464 2018Landmark Modernization 485,689 2022New School - Modernization 92,328 2022WHS - Modernizations 636,288 2022PMS Modernization 246,087 2021EA Hall Track and Field Replacement 2,378,408 2022Hall District Modernization 40,333 2022MacQuiddy Modernization 678,527 2022Ohlone Modernization 1,473,753 2022Mintie White - Wing A - Modernization 1,688,816 2022Mintie White Other Modernization 204,463 2022Linscott Modernization 1,855,968 2022Pajaro Middle Roofing Improvements 71,208 N/ARolling Hills - Roofing Improvements 47,871 2022Flooring - Phase 5 268,089 Nov 17HA Hyde Building Refurbishing 172,509 Nov 17

47,178,585$


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Grants The District received financial assistance from federal and state agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the general fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, 2017. Litigation The District is involved in various litigations arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the district at June 30, 2017. NOTE 17 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS, JOINT POWER AUTHORITIES AND OTHER RELATED PARTY TRANSACTIONS The District is a member of Self Insured Schools of California (SISC), Northern California Regional Liability Excess Fund (NorCal ReLiEF), and Public Insurance Program for Schools (PIPS) public entity risk pools (JPAs). The District pays an annual premium to the applicable entity for its property and liability coverage, excess workers’ compensation and excess medical insurance. The relationship between the District and the JPAs is such that the JPAs are not component units of the District for financial reporting purposes. The JPA has a budgeting and financial reporting requirements independent of member units and their financial statements are not presented in these financial statements; however, fund transactions between the entities and the District are included in these statements. During the year ended June 30, 2017, the District made payments of $3,676,433 to PIPS for workers’ compensation insurance, $1,049,321 to NorCal ReliEF for excess property and liability insurance, and $52,324,378 to SISC for medical and vision insurance.


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NOTE 18 - LOAN RECEIVABLE In May 8, 2013, the District entered into a Release and Settlement agreement with Ceiba College Preparatory Academy (the Charter). The agreement includes a $2 million renovation loan to the Charter school. The loan bears interest at 0.84%. The loan amount will be recovered over ten years, beginning July 1, 2014 and ending June 30, 2024. Quarterly payments of $52,722 are due the first day of each quarter, commencing December 1, 2014. The loan matures through 2025 as follows:

Interest to Fiscal Year Principal Maturity Total

2018 199,489$ 11,401$ 210,890$ 2019 201,169 9,719 210,888 2020 202,842 8,047 210,889 2021 204,574 6,315 210,889 2022 206,298 4,591 210,889

2023-2025 470,594 3,957 474,551 Total Loan Receivable 1,484,966$ 44,030$ 1,528,996$

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REQUIRED SUPPLEMENTARY INFORMATION

PAJARO VALLEY UNIFIED SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2017

See accompanying note to required supplementary information.

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Variances-Favorable

(Unfavorable)Final

Original Final Actual to ActualREVENUESLocal control funding formula 170,605,902$ 169,768,892$ 170,940,569$ 1,171,677$ Federal sources 19,650,687 19,489,890 20,040,653 550,763 Other state sources 32,159,403 33,675,218 36,654,688 2,979,470 Other local sources 1,261,628 3,342,703 3,631,868 289,165

Total Revenues 223,677,620 226,276,703 231,267,778 4,991,075

EXPENDITURESCurrent

Certificated salaries 86,724,450 87,333,626 87,930,343 (596,717) Classified salaries 31,565,244 32,573,485 33,018,759 (445,274) Employee benefits 77,448,005 75,233,010 78,888,677 (3,655,667) Books and supplies 14,909,848 10,646,205 10,194,089 452,116 Services and operating expenditures 20,174,554 21,032,236 19,263,636 1,768,600 Other outgo 540,775 (34,790) (397,954) 363,164

Capital outlay 17,000 3,768,932 2,443,957 1,324,975 Debt service - principal 572,283 585,318 585,318 - Debt service - interest 46,267 30,998 30,998 -

Total Expenditures 231,998,426 231,169,020 231,957,823 (788,803)

Excess (Deficiency) of Revenues Over Expenditures (8,320,806) (4,892,317) (690,045) 4,202,272 Other Financing Sources (Uses)

Transfers out (811,262) (627,546) (910,834) (283,288) Net Financing Sources (Uses) (811,262) (627,546) (910,834) (283,288)

NET CHANGE IN FUND BALANCES (9,132,068) (5,519,863) (1,600,879) 3,918,984 Fund Balance - Beginning 59,187,243 59,187,243 59,187,243 - Fund Balance - Ending 50,055,175$ 53,667,380$ 57,586,364$ 3,918,984$

Budgeted Amounts

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF CHANGES IN THE DISTRICT’S NET OPEB LIABILITY AND RELATED RATIOS FOR THE YEAR ENDED JUNE 30, 2017


70

2017

6,666,329$ 2,539,977

(3,345,424) 5,860,882

68,986,133 74,847,015

284,816 (30,503) 254,313

2,580,871 2,835,184

72,011,831$

3.79%137,357,251$

52.43%District's net OPEB liability as a percentage of covered - payroll

Total OPEB LiabilityService costInterestChanges of benefit terms

Administrative expenseNet change in plan fiduciary net position

Net changes in total OPEB liabilityTotal OPEB Liability - beginningTotal OPEB Liability - ending (a)

Plan Fiduciary Net Position

District's net OPEB liability - ending (a) - (b)

Plan fiduciary net position as a percentage of the total OPEB liabilityCovered payroll

Net investment income

Plan fiduciary net position - beginningPlan fiduciary net position - ending (b)

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF DISTRICT CONTRIBUTIONS TO OPEB FOR THE YEAR ENDED JUNE 30, 2017


71

20173,345,424$ 4,987,447

(1,642,023)$

137,357,251$ 3.63%

Contribution deficiency (excess)

Covered payrollContribution as a percentage of covered employee payroll

Actuarially determined contributionContributions in relations to the actuarially determined contribution

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF INVESTMENT RETURNS FOR THE YEAR ENDED JUNE 30, 2017


72

2017Annual moneyweighted rate of return, net of investment expense 3.33%

Note : In the future, as data become available, ten years of information will be presented.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS FOR THE YEAR ENDED JUNE 30, 2017


73

Actuarial Unfunded UAAL as aActuarial Accrued AAL Funded Percentage ofValuation Actuarial Value Liability (UAAL) Ratio Covered Covered Payroll

Date of Assets (a) (AAL) (b) (b - a) (a / b) Payroll (c) ([b - a] / c)July 1, 2017 2,835,184$ 70,565,914$ 67,730,730$ 4.02% 137,357,251$ 49.31%

April 1, 2015 2,534,396 71,971,950 69,437,554 3.52% 120,692,614 57.53%May 1, 2013 2,208,592 60,161,152 57,952,560 3.67% 116,303,100 49.83%

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF THE DISTRICT’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY FOR THE YEAR ENDED JUNE 30, 2017


74

MEASUREMENT DATE, JUNE 30, 2016 2015 2014

CalSTRS

District's proportion of the net pension liability 0.1650% 0.1842% 0.1758%

District's proportionate share of the net pension liability 133,420,686$ 124,038,926$ 102,724,052$ State's proportionate share of the net pension liability associated with the District 75,954,016 65,602,918 62,029,218

Total 209,374,702$ 189,641,844$ 164,753,270$

District's covered payroll 83,782,062$ 82,863,246$ 80,688,631$

District's proportionate share of the net pension liability as a percentage of its covered payroll 159.25% 149.69% 127.31%

Plan fiduciary net position as a percentage of the total pension liability 70% 74% 77%

CalPERS

District's proportion of the net pension liability 0.2741% 0.2932% 0.2922%

District's proportionate share of the net pension liability 54,132,557$ 43,211,280$ 33,166,972$


District's proportionate share of the net pension liability as a percentage of its covered payroll 164.52% 133.09% 107.34%

Plan fiduciary net position as a percentage of the total pension liability 74% 79% 83%

Note : In the future, as data becomes available, ten years of information will be presented.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF DISTRICT PENSION CONTRIBUTIONS FOR THE YEAR ENDED JUNE 30, 2017


75

FISCAL YEAR ENDED, JUNE 30, 2017 2016 2015

CalSTRS

Contractually required contribution 11,700,700$ 7,603,674$ 6,752,541$ Contributions in relation to the contractually required contribution 11,700,700 7,603,674 6,752,541

Contribution deficiency -$ -$ -$


Contributions as a percentage of covered payroll 12.74% 9.08% 8.15%

CalPERS

Contractually required contribution 5,019,334$ 3,897,772$ 3,821,850$ Contributions in relation to the contractually required contribution 5,019,334 3,897,772 3,821,850 Contribution deficiency -$ -$ -$

District's covered - payroll 36,009,464$ 32,903,213$ 32,468,352$

Contributions as a percentage of covered - payroll 13.94% 11.85% 11.77%

Note : In the future, as data becomes available, ten years of information will be presented.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT NOTE TO REQUIRED SUPPLEMENTARY INFORMATION JUNE 30, 2017

76

NOTE 1 - PURPOSE OF SCHEDULES Budgetary Comparison Schedule This schedule presents information for the original and final budgets and actual results of operations, as well as the variances from the final budget to actual results of operations. Schedule of Changes in the District's Net OPEB Liability and Related Ratios This schedule presents information on the District's changes in the net OPEB liability, including beginning and ending balances, the plan's fiduciary net position, and the net OPEB liability. In the future, as data becomes available, ten years of information will be presented. Change in benefit terms – The District did not make changes in benefit terms in the Fiscal Year 2016-2017.

Change in assumptions – The District did not make changes in assumptions in the Fiscal Year 2016-2017. Schedule of District Contributions for OPEB This schedule presents information on the District's actuarially determined contribution, contributions in relation to the actuarially determined contribution, and any excess or deficiency related to the actuarially determined contribution. In the future, as data becomes available, ten years of information will be presented. Valuation Date: Actuarially determined contribution rates are calculated as of June 30, 2017, two years prior to the end of the fiscal year in which contributions are reported. Methods and assumptions used to determine contribution rates: Actuarial cost method Entry age

Amortization method Level percentage of payroll, projected

Amortization period 20 years

Asset Valuation method 5-year smoothed market

Inflation 2.75 percent

Healthcare cost trend rates 4 percent

Salary increases 2.75 percent, average, including inflation

Investment rate of return 3.33 percent, net of OPEB plan investment expense, including inflation

Retirement age Expected retirement ages of general employees were adjusted to more closely reflect actual experience

Mortality 2009 CalSTRS Mortality, 2009 CalPERS Mortality for Retired Miscellaneous Employees, 2009 CalPERS Mortality for Active Miscellaneous Employees

PAJARO VALLEY UNIFIED SCHOOL DISTRICT NOTE TO REQUIRED SUPPLEMENTARY INFORMATION JUNE 30, 2017

77

Schedule of Investment Returns This schedule presents information on the annual money weighted rate of return on OPEB plan investments. In future years, as data becomes available, ten years of information will be presented. Schedule of Other Postemployment Benefits (OPEB) Funding Progress This schedule is intended to show trends about the funding progress of the District's actuarially determined liability for postemployment benefits other than pensions. Schedule of the District's Proportionate Share of the Net Pension Liability This schedule presents information on the District's proportionate share of the net pension liability (NPL), the plans' fiduciary net position and, when applicable, the State's proportionate share of the NPL associated with the District. In the future, as data becomes available, ten years of information will be presented.

Changes in Benefit Terms – There were no changes in benefit terms since the previous valuations for both CalSTRS and CalPERS. Changes in Assumptions – There were no changes in economic assumptions for the CalSTRS plan from the previous valuations. The CalPERS changes from 7.6 percent to 7.65 percent from the previous valuations.

Schedule of District Pension Contributions This schedule presents information on the District's required contribution, the amounts actually contributed, and any excess or deficiency related to the required contribution. In the future, as data becomes available, ten years of information will be presented.

78

SUPPLEMENTARY INFORMATION

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2017

See accompanying note to supplementary information.

79

Pass-ThroughFederal Entity

Federal Grantor/Pass-Through CFDA Identifying Federal Grantor/Program or Cluster Title Number Number Expenditures

U.S. DEPARTMENT OF EDUCATIONPassed through California Department of Education (CDE):

Adult Education Act:Adult Basic Education and ESL 84.002A 14508 94,534$ Priority 5, Adult Secondary Education 84.002 13978 77,874 English Literacy and Civics Education 84.002A 14109 48,855

Total Adult Education 221,263$ No Child Left Behind Act:

Title I-Basic Grants Low-Income and Neglected 84.010 14329 5,025,420 Title I-Migrant Education 84.011 14326 3,173,003 Title I-Even Start Migrant Education 84.011 14768 145,984 Title I-School Site Improvements 84.377 14971 336,665 Title II-Teacher Quality 84.367 14341 914,386 Title III-Limited English Proficiency Student 84.365 10084 787,102 Title IV-21st Century Community Centers Learning 84.287 14349 4,051,705 Title X-McKinney-Vento Homeless Assistance 84.196 14332 138,738

Carl D. Perkins Career and Technical Education Act:

Vocational and Applied Technology 84.048 14894 176,008

Evem Start Technical Assistance 84.213 14381 2,265 Special Education Cluster

Basic Local Assistance Entitlement 84.027 13379 3,396,408 Mental Health Allocation Plan, Private Schools 84.027 14468 217,655 Preschool Grants 84.173 13430 175,276 Preschool Local Entitlement 84.027A 13682 514,164 Preschool Staff Development 84.173A 13431 1,693

Total Special Education Cluster 4,305,196 Early Intervention Grants 84.181 23761 246,523

Workability II 84.126 10006 230,203 Total U.S. Department of Education 19,754,461

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (Continued) FOR THE YEAR ENDED JUNE 30, 2017


80

Pass-ThroughFederal Entity

Federal Grantor/Pass-Through CFDA Identifying Federal Grantor/Program or Cluster Title Number Number Expenditures

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICESPassed through California Department of Education:

Medicaid Programs:Medi-Cal Billing Option 93.778 10013 443,889 Medi-Cal Administrative Activities 93.778 10060 63,565

Total Medicaid Programs 507,454 Federal Child Care Center Base 93.596 13609 523,337 Head Start 93.600 10016 7,717,086

Total U.S. Department of Health and Human Services 8,747,877

U.S. DEPARTMENT OF AGRICULTUREPassed through California Department of Education:

National School Lunch Act:National School Lunch Program 10.555 13524 5,957,506 National School Breakfast 10.553 13390 23,845 Meal Supplements 10.555 13396 511,600 Especially Needy Breakfast 10.553 13526 2,671,824 Commodity Supplemental Food Program 10.555 13524 497,009

Total Child Nutrition Cluster 9,661,784 Child and Adult Care Food Program 10.558 13393 217,150 Team Nutrition 10.574 15332 13,005 Fresh Fruits and Vegatables 10.582 14968 393,748

Total U.S. Department of Agriculture 10,285,687

Total Expenditures of Federal Awards 38,788,025$



81

LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2017

ORGANIZATION The Pajaro Valley Unified School District was established in 1964 and consists of an area comprising approximately 150 square miles. The District operates sixteen elementary, six middle, three high schools, one community day school, one continuation high school, an adult education school, twelve childcare centers, a migrant center and five charter schools.

GOVERNING BOARD MEMBER OFFICE TERM EXPIRES Kim De Serpa

President 2018

Jeff Ursino

Vice President 2018

Maria Orozco Member 2020

Georgia Acosta Member 2020

Karen Osmundson Member 2020

Leslie De Rose

Member 2018

Willie Yahiro Member

2018

ADMINISTRATION Michelle Rodriguez

Superintendent



82

SCHEDULE OF AVERAGE DAILY ATTENDANCE - DISTRICT FOR THE YEAR ENDED JUNE 30, 2017

Second Period AnnualReport Report

Regular ADATransitional kindergarten through third 5,642.53 5,645.84 Fourth through sixth 4,314.43 4,298.44 Seventh and eighth 2,596.27 2,588.68 Ninth through twelfth 4,740.53 4,700.25

Total Regular ADA 17,293.76 17,233.21

Extended Year Special EducationTransitional kindergarten through third 9.71 9.71 Fourth through sixth 5.20 5.20 Seventh and eighth 6.53 6.54 Ninth through twelfth 6.91 6.91

Total Extended Year Special Education 28.35 28.36

Special Education, Nonpublic, Nonsectarian SchoolsTransitional kindergarten through third 0.34 0.27 Fourth through sixth 0.43 0.57 Ninth through twelfth 9.78 10.57

Total Special Education, Nonpublic, Nonsectarian Schools 10.55 11.41

Extended Special Education, Nonpublic, Nonsectarian SchoolsFourth through sixth 0.09 0.09 Ninth through twelfth 1.16 1.16

Total Special Education, Nonpublic, Nonsectarian Schools 1.25 1.25

Community Day SchoolSeventh and eighth 4.32 3.24 Ninth through twelfth 31.46 33.20

Total Community Day School 35.78 36.44 Total ADA 17,369.69 17,310.67

Final Report



83

SCHEDULE OF AVERAGE DAILY ATTENDANCE – CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2017

CHARTER SCHOOLS

Alianza Charter School

Diamond Technology

Institute

Linscott Charter School

Pacific Coast

Charter School

Watsonville Charter

School of The Arts

Second Period Report

Classroom-Based

Transitional kindergarten through third 325.55 - 97.17 - 156.56 Fourth through sixth 212.77 - 98.93 - 111.25 Seventh and eighth 108.51 - 51.00 - 46.82 Ninth through twelfth - 60.92 - - -

Total Classroom-Based 646.83 60.92 247.10 - 314.63 Non Classroom-Based

Transitional kindergarten through third - - - 18.85 - Fourth through sixth - - - 19.14 - Seventh and eighth - - - 31.26 - Ninth through twelfth - - - 164.11 -

Total Non Classroom-Based - - - 233.36 - Total Charter School 646.83 60.92 247.10 233.36 314.63

Annual ReportClassroom-Based

Transitional kindergarten through third 325.89 - 98.78 - 156.14 Fourth through sixth 212.37 - 100.52 - 110.40 Seventh and eighth 108.14 - 51.74 - 46.73 Ninth through twelfth - 60.12 - - -

Total Classroom-Based 646.40 60.12 251.04 - 313.27 Non Classroom-Based

Transitional kindergarten through third - - - 19.32 - Fourth through sixth - - - 19.98 - Seventh and eighth - - - 32.51 - Ninth through twelfth - - - 161.53 -

Total Non Classroom-Based - - - 233.34 - Total Charter School 646.40 60.12 251.04 233.34 313.27



84

SCHEDULE OF INSTRUCTIONAL TIME - DISTRICT FOR THE YEAR ENDED JUNE 30, 2017

Number1986-87 2016-17 of DaysActual Actual Traditional

Grade Level Minutes Minutes Calendar StatusKindergarten 36,000 36,000 180 In complianceGrades 1 - 3

Grade 1 50,400 50,653 180 In complianceGrade 2 50,400 50,653 180 In complianceGrade 3 50,400 50,653 180 In compliance

Grades 4 - 6Grade 4 54,000 54,155 180 In complianceGrade 5 54,000 54,155 180 In complianceGrade 6 54,000 54,160 180 In compliance

Grades 7 - 8Grade 7 54,000 55,821 180 In complianceGrade 8 54,000 55,821 180 In compliance

Grades 9 - 12Grade 9 64,800 65,094 180 In complianceGrade 10 64,800 65,094 180 In complianceGrade 11 64,800 65,094 180 In complianceGrade 12 64,800 65,094 180 In compliance



85

SCHEDULE OF INSTRUCTIONAL TIME – CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2017

Education Code 2016-2017Section 46201.2 Actual

Grade Level Required Minutes Minutes StatusDiamond Technology Institute

Grade 9 64,800 65,412 In ComplianceGrade 10 64,800 65,412 In ComplianceGrade 11 64,800 65,412 In ComplianceGrade 12 64,800 65,412 In Compliance

Alianza Charter SchoolKindergarten 36,000 36,895 In ComplianceGrade 1 50,400 55,165 In ComplianceGrade 2 50,400 55,165 In ComplianceGrade 3 50,400 55,165 In ComplianceGrade 4 54,000 55,155 In ComplianceGrade 5 54,000 55,155 In ComplianceGrade 6 54,000 55,155 In ComplianceGrade 7 54,000 54,255 In ComplianceGrade 8 54,000 54,255 In Compliance

Linscott Charter SchoolKindergarten 36,000 40,500 In ComplianceGrade 1 50,400 52,290 In ComplianceGrade 2 50,400 52,290 In ComplianceGrade 3 50,400 52,290 In ComplianceGrade 4 54,000 54,255 In ComplianceGrade 5 54,000 54,255 In ComplianceGrade 6 54,000 54,255 In ComplianceGrade 7 54,000 54,255 In ComplianceGrade 8 54,000 54,255 In Compliance

Watsonville Charter School of the ArtsKindergarten 36,000 37,800 In ComplianceGrade 1 50,400 52,740 In ComplianceGrade 2 50,400 52,740 In ComplianceGrade 3 50,400 53,640 In ComplianceGrade 4 54,000 55,080 In ComplianceGrade 5 54,000 55,080 In ComplianceGrade 6 54,000 60,120 In ComplianceGrade 7 54,000 60,120 In Compliance



86

RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2017 There were no adjustments to the Unaudited Actual Financial Report, which required reconciliation to the audited financial statements at June 30, 2017.



87

SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017

(Budget)

2018 1 2017 2016 2015GENERAL FUND

Revenues 226,151,969$ 231,267,778$ 218,543,346$ 190,782,120$ Other sources - - 424,805 18,624,056

Total Revenues and Other Sources 226,151,969 231,267,778 218,968,151 209,406,176

Expenditures 235,687,230 231,957,823 202,476,066 201,838,368 Other uses and transfers out 622,294 910,834 608,944 972,594

Total Expenditures and Other Uses 236,309,524 232,868,657 203,085,010 202,810,962

INCREASE (DECREASE) IN FUND BALANCE (10,157,555)$ (1,600,879)$ 15,883,141$ 6,595,214$ ENDING FUND BALANCE 47,427,008$ 57,586,364$ 59,187,243$ 43,304,102$

AVAILABLE RESERVES 2 8,871,904$ 9,473,723$ 18,615,506$ 13,485,383$

AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO 3.75% 4.07% 9.17% 6.65%LONG-TERM OBLIGATIONS 399,532,229$ 385,231,000$ 390,168,889$ 311,130,200$

K-12 AVERAGE DAILY ATTENDANCE AT P-2 17,370 17,370 17,403 17,347

The General Fund balance has increased by $14,282,262 over the past two years. The fiscal year 2017-2018 budget projects a decrease of $10,157,555. For a district this size, the State recommends available reserves of at least 3 percent of total General Fund expenditures, transfers out, and other uses (total outgo). The District has incurred an operating deficit during the fiscal year 2016-2017 and anticipates incurring an operating surplus during the 2017-2018 fiscal year. Total long-term obligations have increased by $74,100,800 over the past two years. Average daily attendance has decreased by 56 over the past two years. A decrease of 33 ADA is anticipated during fiscal year 2017-2018. 1 Budget 2018 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all unassigned fund balances including all amounts reserved for economic uncertainties contained with the

General Fund.



88

SCHEDULE OF CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2017

Name of Charter School Audit ReportDiamond Technology Institute YesAlianza Charter School YesLinscott Charter School YesPacific Coast Charter School YesWatsonville Charter School of the Arts YesCeiba College Preparatory Academy No



89

CHARTER SCHOOLS SCHEDULE OF CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2017

Alianza Diamond Linscott Pacific Coast WatsonvilleCharter Technology Charter Charter School ofSchool Institute School School the Arts Total

Fund balance, beginning 807,515$ 36,213$ 392,038$ 1,220,004$ 495,183$ 2,950,953$ Revenues 6,645,631 864,693 2,070,214 2,191,376 2,941,982 14,713,896 Expenditures (6,619,829) (831,423) (2,171,272) (2,137,101) (2,809,062) (14,568,687) Fund balance, ending 833,317$ 69,483$ 290,980$ 1,274,279$ 628,103$ 3,096,162$



90

FIRST 5 MONTEREY GRANT SCHEDULE OF GRANT REVENUES AND EXPENDITURES FOR THE YEAR ENDED JUNE 30, 2017

Grantor/Program Revenue ExpendituresFirst 5 Monterey 99,000$ 99,000$



91

NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET JUNE 30, 2017

Charter Adult ChildSchool Education Development CafeteriaFund Fund Fund Fund

ASSETSDeposits and investments 4,140,396$ 822,485$ 215,094$ 3,509,333$ Receivables 297,258 269,428 1,652,222 2,573,341 Due from other funds - - 192,491 - Stores inventories - - - 125,677

Total Assets 4,437,654$ 1,091,913$ 2,059,807$ 6,208,351$

LIABILITIES AND FUND BALANCES

Liabilities:Accounts payable 652,001$ 392,968$ 1,421,754$ 588,893$ Due to other funds 689,491 100,091 - 585,823 Unearned revenue - 27,185 467,590 -

Total Liabilities 1,341,492 520,244 1,889,344 1,174,716

Fund Balances:Nonspendable - - - 125,677 Restricted 3,096,162 - 170,463 4,907,958 Committed - 571,669 - -

Total Fund Balances 3,096,162 571,669 170,463 5,033,635 Total Liabilities and Fund Balances 4,437,654$ 1,091,913$ 2,059,807$ 6,208,351$

92

Deferred Capital Bond Interest Non-MajorMaintenance Facilities and Redemption Governmental

Fund Fund Fund Funds

586,616$ 2,999,481$ 9,317,366$ 21,590,771$ - - - 4,792,249 - - - 192,491 - - - 125,677

586,616$ 2,999,481$ 9,317,366$ 26,701,188$

190$ 25,374$ -$ 3,081,180$ - - - 1,375,405 - - - 494,775

190 25,374 - 4,951,360

- - - 125,677 - 2,974,107 9,317,366 20,466,056

586,426 - - 1,158,095 586,426 2,974,107 9,317,366 21,749,828 586,616$ 2,999,481$ 9,317,366$ 26,701,188$


See accompanying note to supplementary information

93

NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2017

Charter Adult ChildSchool Education Development CafeteriaFund Fund Fund Fund

REVENUESRevenue limit sources 13,453,334$ -$ -$ -$ Federal sources - 221,263 8,240,423 9,788,677 Other State sources 1,641,773 3,045,895 4,529,608 719,976 Other local sources 53,199 900,128 713,473 542,294

Total Revenues 15,148,306 4,167,286 13,483,504 11,050,947 EXPENDITURESCurrent

Instruction 9,030,025 1,856,906 8,222,558 - Instruction-related activities:

Supervision of instruction 225,282 1,518,665 2,705,294 -

Instructional library, media, and technology 293,404 57,448 96,274 - School site administration 4,990,368 106,434 111,958 -

Pupil services:Food services - - - 10,263,101 All other pupil services 119,804 55,878 1,247,937 -

Administration:All other administration - 112,752 523,804 415,943

Plant services 421,573 180,528 863,833 20,866 Facility acquisition and construction - - 390,853 - Ancillary services 36,094 - - -

Debt servicePrincipal - - - - Interest and other - - - -

Total Expenditures 15,116,550 3,888,611 14,162,511 10,699,910 Excess (Deficiency) of Revenues Over Expenditures 31,756 278,675 (679,007) 351,037 Other Financing Sources (Uses)

Transfers in 113,453 - 796,171 1,210 NET CHANGE IN FUND BALANCES 145,209 278,675 117,164 352,247 Fund Balance - Beginning 2,950,953 292,994 53,299 4,681,388 Fund Balance - Ending 3,096,162$ 571,669$ 170,463$ 5,033,635$

94

Deferred Capital Bond Interest Non-MajorMaintenance Facilities and Redemption Governmental

Fund Fund Fund Funds

-$ -$ -$ 13,453,334$ - - - 18,250,363 - - 53,386 9,990,638

6,441 1,736,750 8,105,729 12,058,014 6,441 1,736,750 8,159,115 53,752,349

- - - 19,109,489

- - - 4,449,241

- - - 447,126 - - - 5,208,760

- - - 10,263,101 - - - 1,423,619

- - - 1,052,499 49,773 446,999 - 1,983,572

173,207 574,253 - 1,138,313 - - - 36,094

- - 4,530,000 4,530,000 - - 5,894,568 5,894,568

222,980 1,021,252 10,424,568 55,536,382

(216,539) 715,498 (2,265,453) (1,784,033)

- - - 910,834 (216,539) 715,498 (2,265,453) (873,199) 802,965 2,258,609 11,582,819 22,623,027 586,426$ 2,974,107$ 9,317,366$ 21,749,828$


95

NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2017 NOTE 1 - PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of Federal awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). The District has not elected to use the 10-percent de minimis indirect cost rate as allowed under the Uniform Guidance. The following schedule provides reconciliation between revenues reported on the Statement of Revenues, Expenditures and Changes in Fund Balances and the related expenditures reported on the Schedule of Expenditures of Federal Awards. The reconciling amounts represent Federal funds that had been recorded as revenues in the fiscal year ended June 30, 2016 then spent during the fiscal year ended June 30, 2017. The unspent balances are reported as legally restricted ending fund balances within the General Fund.

CFDANumber Amount

DescriptionTotal Federal Revenues per Statement of Revenues, Expenditures and Changes in Fund Balances: 38,291,016$

Add: Fair Market Value of Commodities not recorded in the financial statements 10,555 497,009

Total Schedule of Expenditures of Federal Awards 38,788,025$

Local Education Agency Organization Structure This schedule provides information about the District's boundaries, schools operated, members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. The District neither met nor exceeded its target funding. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections 46200 through 46206. Districts must maintain their instructional minutes at the 1986-87 requirement, as required by Education Code Section 46201.


96

NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2017 Reconciliation of Annual Financial and Budget Report with Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Unaudited Actual Financial Report to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Schedule of Charter Schools

This schedule lists all Charter Schools chartered by the School District, and displays information for each Charter School on whether or not the Charter School is included in the School District audit. Charter School Statement of Changes in Fund Balances

The charter school schedule of changes in fund balances provides information about the changes in fund balance in each of the five charter schools operated by the District.

First 5 Monterey Grant Schedule of Revenues and Expenditures

The First 5 Monterey grant schedule of revenues and expenditures provides information about the current year revenues and expenses of the grant program operated by the District. Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances.

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INDEPENDENT AUDITOR’S REPORTS

98

INDEPENDENT AUDITOR'S 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

Governing Board Pajaro Valley Unified School District Watsonville, California We have audited, in accordance with the 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, the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Pajaro Valley Unified School District (the District) as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise Pajaro Valley Unified School District's basic financial statements, and have issued our report thereon dated December 10, 2017. Emphasis of Matter - Change in Accounting Principles As discussed in Note 1 to the financial statements, in 2017, the District adopted new accounting guidance, GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Our opinion is not modified with respect to this matter. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Pajaro Valley Unified School District's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Pajaro Valley Unified School District's internal control. Accordingly, we do not express an opinion on the effectiveness of Pajaro Valley Unified School District's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

99

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Pajaro Valley Unified School District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Palo Alto, California December 10, 2017

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INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL

OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Governing Board Pajaro Valley Unified School District Watsonville, California Report on Compliance for Each Major Federal Program We have audited Pajaro Valley Unified School District's compliance with the types of compliance requirements

described in the OMB Compliance Supplement that could have a direct and material effect on each of Pajaro Valley Unified School District's (the District) major Federal programs for the year ended June 30, 2017. Pajaro Valley Unified School District's major Federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its Federal awards applicable to its Federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of Pajaro Valley Unified School District's major Federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major Federal program occurred. An audit includes examining, on a test basis, evidence about Pajaro Valley Unified School District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major Federal program. However, our audit does not provide a legal determination of Pajaro Valley Unified School District's compliance.

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Opinion on Each Major Federal Program In our opinion, Pajaro Valley Unified School District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major Federal programs for the year ended June 30, 2017. Report on Internal Control Over Compliance Management of Pajaro Valley Unified School District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Pajaro Valley Unified School District's internal control over compliance with the types of requirements that could have a direct and material effect on each major Federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major Federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Pajaro Valley Unified School District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

Palo Alto, California December 10, 2017

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INDEPENDENT AUDITOR'S REPORT ON STATE COMPLIANCE Governing Board Pajaro Valley Unified School District Watsonville, California Report on State Compliance We have audited Pajaro Valley Unified School District's (District) compliance with the types of compliance requirements as identified in the 2016-2017 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting that could have a direct and material effect on each of the District's State government programs as noted below for the year ended June 30, 2017. Management's Responsibility Management is responsible for compliance with the requirements of State laws, regulations, and the terms and conditions of its State awards applicable to its State programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance of each of the District's State programs based on our audit of the types of compliance requirements referred to above. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the 2016-2017 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting. These standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the applicable government programs noted below. An audit includes examining, on a test basis, evidence about the District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. Our audit does not provide a legal determination of the District's compliance with those requirements. Basis for Qualified Opinion on Unduplicated Local Control Funding Formula Pupil Counts As described in the accompanying schedule of findings and questioned costs, Pajaro Valley Unified School District did not comply with requirements regarding Unduplicated Local Control Funding Formula Pupil Counts 2017-1. Compliance with such requirements is necessary, in our opinion, for the District to comply with the requirements applicable to that program. Qualified Opinion on Unduplicated Local Control Funding Formula Pupil Counts In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, Pajaro Valley Unified School District complied, in all material respects, with the types of compliance requirements referred to above for the year ended June 30, 2017.

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Unmodified Opinion on Each of the Other Programs In our opinion, Pajaro Valley Unified School District complied, in all material respects, with the compliance requirements referred to above that are applicable to the government programs noted below that were audited for the year ended June 30, 2017. In connection with the audit referred to above, we selected and tested transactions and records to determine the Pajaro Valley Unified School District's compliance with the State laws and regulations applicable to the following items:

Procedures Performed

LOCAL EDUCATION AGENCIES OTHER THAN CHARTER SCHOOLS Attendance Yes Teacher Certification and Misassignments Yes Kindergarten Continuance Yes Independent Study Yes Continuation Education Yes Instructional Time Yes Instructional Materials Yes Ratios of Administrative Employees to Teachers Yes Classroom Teacher Salaries Yes Early Retirement Incentive No, see below Gann Limit Calculation Yes School Accountability Report Card Yes Juvenile Court Schools No, see below Middle or Early College High Schools No, see below K-3 Grade Span Adjustment Yes Transportation Maintenance of Effort Yes Mental Health Expenditures Yes

SCHOOL DISTRICTS, COUNTY OFFICES OF EDUCATION, AND CHARTER SCHOOLS

Educator Effectiveness Yes California Clean Energy Jobs Act Yes After School Education and Safety Program:

General Requirements Yes After School Yes Before School Yes

Proper Expenditure of Education Protection Account Funds Yes Unduplicated Local Control Funding Formula Pupil Counts Yes Local Control Accountability Plan Yes Independent Study - Course Based Yes Immunizations Yes

CHARTER SCHOOLS

Attendance Yes Mode of Instruction Yes Non Classroom-Based Instruction/Independent Study for Charter Schools Yes Determination of Funding for Non Classroom-Based Instruction Yes Annual Instruction Minutes Classroom-Based Yes Charter School Facility Grant Program No, see below

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The District did not offer an Early Retirement Incentive Program during the current year; therefore, we did not perform procedures related to the Early Retirement Incentive Program. The District does not have any Juvenile Court Schools; therefore, we did not perform any procedures related to Juvenile Court Schools. The District does not have any Middle or Early College High Schools; therefore, we did not perform any procedures related to Middle or Early College High Schools. The District does not offer a Before School Education and Safety Program; therefore, we did not perform any procedures related to the Before School Education and Safety Program. The District does not have a Charter School Facility Grant Program; therefore, we did not perform any procedures for Charter School Facility Grant Program. Palo Alto, California December 10, 2017

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SUMMARY OF AUDITOR’S RESULTS FOR THE YEAR ENDED JUNE 30, 2017

106

FINANCIAL STATEMENTSUnmodified

NoNone reported

No

FEDERAL AWARDS

NoNone reportedUnmodified

NoIdentification of major federal programs:

CFDA Numbers Name of Federal Program or Cluster84.027, 84.173 Special Education Cluster84.287 Title IV-21st Century Community Centers Learning

1,163,641$ Auditee qualified as low-risk auditee? Yes

STATE AWARDSUnmodified

Unmodified for all programs except for the Unduplicated Local Control Funding Formula Pupil Counts which was qualified.

Significant deficiency(ies)?Type of auditor's report issued on compliance for major federal programs:Any audit findings disclosed that are required to be reported in accordance with Section 200.516(a) of the Uniform Guidance?

Type of auditor's report issued on compliance for all other programs:

Internal control over major federal programs:Material weakness(es) identified?

Dollar threshold used to distinguish between Type A and Type B programs:

Type of auditor's report issued:Internal control over financial reporting:

Material weaknesses identified?Significant deficiencies identified?

Noncompliance material to financial statements noted?

PAJARO VALLEY UNIFIED SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2017

107

None reported.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT FEDERAL AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2017

108

None reported.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT STATE AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2017

109

The following findings represent instances of noncompliance and questioned costs relating to State program laws and regulations. The findings have been coded as follows:

Five Digit Code

AB 3627 Finding Type 40000 State Compliance

2016-001 Code: 40000 Unduplicated Local Control Funding Formula Pupil Counts Criteria or Specific Requirements

Supplemental and concentration grant amounts are calculated based on the percentage of “unduplicated pupils” enrolled in the District on census day (first Wednesday in October). The percentage equals:

Unduplicated count of pupils who (1) are English learners, (2) meet income or categorical eligibility requirements for free or reduced-price meals under the National School Lunch Program, or (3) are foster youth. Divided by total enrollment in the LEA (EC sections 2574(b)(1) and 42238.02(b)(5)).

“Unduplicated count” means that each pupil is counted only once even if the pupil meets more than one of these criteria (EC sections 2574(b) (2) and 42238.02(b)(1)). Data submitted by LEAs to CALPADS is used as the starting point for calculating the unduplicated student count. CALPADS Certification Report 1.17 – FRPM/English Learner/Foster Youth – Count, displays the counts of students by category and an unduplicated total. In order to be counted in Report 1.17, a student must have an open primary or short-term enrollment in CALPADS over census day and meet one or more of the following criteria:

Have a program record with an education program code of Homeless (191), Migrant (135), Free Meal Program (181), or Reduced-Price Meal Program (182), that is open over census day.

Have an English Language Acquisition Status (ELAS) of “English learner” (EL) that is effective over census day.

Be directly certified in July through November as being eligible for free meals based on a statewide match conducted by CALPADS.

Be identified as a foster youth based on a statewide match conducted by CALPADS. Be identified as a foster youth through a local data matching process and submitted to and

validated by CALPADS. Condition

Our audit procedures identified that the District omitted 872 pupils who meet the criteria above were not included in the count. After the errors were noted we selected additional 71 samples from the omitted 872 qualified pupils, and no exceptions were noted.

Questioned Costs

There are no questioned costs.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT STATE AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2017

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Context The above condition pertains to the testing of 2016-17 Unduplicated pupil counts.

Effect As a result of the errors, the unduplicated pupils’ count for the past three years was revised to 43,133 from previous 42,260. Incorrect reporting can result in a calculation error in LCFF funding. The District underreported the total CalPADS Unduplicated pupil counts by 872. The audited total (B-4) is 43,132. This number includes the original 42,260 pupils, 1 district funded county program student (B-2), and 871 omitted pupils as the audit adjustment (B-3). Cause The underreported counts is because the District inadvertently failed to collect the Alternative Income Forms (Forms) from Community Eligibility Program School (CEP) in the current year, resulting the CEP’s unduplicated pupil count was omitted. Recommendation Periodic review and reconciliation of the District’s data and CALPADS data should be performed to ensure the integrity of data. Corrective Action Plan The CEP was new to the district for the 2016-17 school year. Part of the provision is the Food Services Department is no longer allowed to collect Free and Reduced Applications from the designated CEP schools and any student who qualified for Free and Reduced meals in the prior school year are qualified for 4 years. The district became aware of the omission in March when CALPADS was being finalized. At that time, the Business Services Department created an Alternative Income Form based on samples from the California Department of Education (CDE) website, distributed to the sites to have the kindergarten and any new students’ parents fill out and entered the data into eSchool (district attendance software where CALPADS resides). To capture the students who qualified from the previous year, the Technology Department rolled the students to the current year. For the 2017-18 school year and beyond, Alternative Income Forms were and will be distributed to the CEP schools at the beginning of the school year for all kindergarten and new students and returned to the Business Services Department to be input into eSchool. The Technology Department rolled and will roll prior year eligible students to capture returning students who are eligible. With the 4 year qualification, the district will require all CEP schools to have all students’ parents re-certify their income in 2020-21 and every 4 years after.

PAJARO VALLEY UNIFIED SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2017

111

There were no audit findings reported in the prior year's schedule of financial statement findings.

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APPENDIX C

GENERAL INFORMATION ABOUT THE CITY OF WATSONVILLE AND SANTA CRUZ COUNTY

The following information concerning the City of Watsonville (the “City”) and Santa Cruz County

(the “County”) is included only for the purpose of supplying general information regarding the area of the District. This information is provided only for general informational purposes, and provides prospective investors limited information about the City, the County and their economic base. The Certificates are not a debt of the City, the County, the State of California (the “State”) or any of its political subdivisions (other than the District), and none of the City, the County, the State (other than the District) or any of its political subdivisions is liable therefor.

General Information

Santa Cruz County is located along the central coast of California, approximately 65 miles south

of San Francisco. The County covers 439 square miles and two-thirds of the County is forest land owned by the United States Department of Agriculture. The County’s boundaries are chiefly natural ones – the Santa Cruz Mountains to the east, the Pajaro River on the south, and to the west, Monterey Bay and the Pacific Ocean.

The County is an important vacation and recreation area. Within its borders are six state parks,

including a number of beaches. The City of Santa Cruz, the largest city and county seat, features attractive beaches and a boardwalk. The mid-county section, which consists of the City of Capitola and the unincorporated areas of Soquel and Aptos, provides numerous attractions for both tourists and local residents, including four major shopping centers and two State beaches. The southern part of the county, Pajaro Valley, is a productive agricultural district. Industries such as food canning and freezing, which are closely tied to farming, are located in or near Watsonville, the major community in the region. The activities which are not directly based on agriculture or tourism, such as electronics-related manufacturing, computer services, and educational services, are scattered throughout the County.

Population

The following table lists population estimates for the City and County for the last five calendar

years, as of January 1:

SANTA CRUZ COUNTY Population Estimates

Calendar Years 2014 through 2018, as of January 1

Area 2014 2015 2016 2017 2018 Capitola 10,215 10,421 10,533 10,570 10,563 Santa Cruz 63,822 65,031 65826 66,170 66,454 Scotts Valley 11,944 12,137 12,195 12,196 12,195 Watsonville 52,571 53,129 53,449 53,447 53,434 Unincorporated 132,582 133,248 133,734 134,121 134,218 Total County 271,134 273,966 275,737 276,504 276,864

Source: State Department of Finance Estimates (as of January 1, 2018).

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Largest Employers The table below lists the largest employers in the County as of June, 30 2017.

Employer

Product/Service

Number of Employees

2016-2017 (1)

% of Total Employment 2016-2017 (2)

University of California at Sant Cruz Education 1,000 - 4,999 2.15% Pajaro Valley Unified School District Education 1,000 - 4,999 2.15 County of Santa Cruz County Services 1,000 - 4,999 2.15 Domincan Hospital Hospital 1,000 - 4,999 2.15 Santa Cruz Beach Boardwalk Amusement/Recreation 1,000 - 4,999 2.15 Dutra Farms Grocery/Wholesale 1,000 - 4,999 2.15 Granite Rock Excavating Contractors 500 – 999 0.54 Cabrillo College Education 500 – 999 0.54 City of Santa Cruz City Services 500 – 999 0.54 Watsonville Community Hospital Hospital 500 – 999 0.54 West Marine Retail 500 – 999 0.54 Plantronics Telephone Apparatus Mfg. 500 – 999 0.54

____________________ (1) Number of employees reflects a range provided by California Employment Development Department (“EDD”) data. (2) Average of the reported range divided by total civilian employment of 139,400 as reported by the EDD for March 2016. Source: County of Santa Cruz, California Comprehensive Annual Financial Report For The Fiscal Year Ended June 30, 2017.


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Employment Industry The City is included in the Santa Cruz-Watsonville Metropolitan Statistical Area (“MSA”), which

consists of the County. The unemployment rate in Santa Cruz County was 3.5% in September, 2018, down from a revised 5.7% in March, 2018, and below the year-ago estimate of 7.0%. This compares with an unadjusted unemployment rate of 4.1% for California and 3.7% for the nation during the same period.

The following table shows the average annual estimated numbers by industry comprising the

civilian labor force, as well as unemployment information for years 2012 through 2017.

SANTA CRUZ WATSONVILLE MSA (Santa Cruz County)

Annual Average Civilian Labor Force, Employment and Unemployment Unemployment by Industry (March 2017 Benchmark)

2012 2013 2014 2015 2016 2017

Civilian Labor Force (1) 142,100 142,100 142,400 143,400 144,000 143,900 Employment 125,300 127,500 130,200 132,700 133,900 135,800 Unemployment 16,800 14,600 12,500 10,700 10,000 8,200 Unemployment Rate 11.8% 10.3% 8.8% 7.5% 7.0% 5.7% Wage and Salary Employment: (2) Agriculture 8,400 8,300 8,500 8,300 8,400 8,200 Mining and Logging 3,000 3,200 3,400 3,700 4,400 4,600 Manufacturing 5,700 6,000 6,200 6,700 7,000 6,900 Wholesale Trade 3,400 3,500 3,500 3,500 3,400 3,300 Retail Trade 11,400 11,500 11,800 12,000 12,400 12,300 Transportation, Warehousing and Utilities 1,400 1,400 1,300 1,500 1,500 1,600 Information 800 800 800 800 800 800 Financial Activities 3,200 3,400 3,500 3,500 3,600 3,500 Professional and Business Services 9,700 9,700 9,500 9,700 9,800 10,200 Educational and Health Services 15,800 16,500 16,900 17,300 17,300 17,900 Leisure and Hospitality 11,600 12,200 12,900 13,600 13,900 14,100 Other Services 3,800 4,100 4,300 4,500 4,600 4,800 Federal Government 500 500 500 500 500 500 State Government 8,000 8,100 8,200 8,400 8,400 8,800 Local Government 11,900 12,100 12,400 12,500 12,800 12,900 Total All Industries 98,600 101,200 103,700 106,600 108,900 110,400

(1) Labor force data is by place of residence; includes self-employed individuals, unpaid family workers, household

domestic workers, and workers on strike. (2) Industry employment is by place of work; excludes self-employed individuals, unpaid family workers, household

domestic workers, and workers on strike. Source: State of California Employment Development Department, March 2017 Benchmark.

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Construction Trends Provided below are the building permits and valuations for the City and the County for calendar

years 2013 through 2017.

CITY OF WATSONVILLE Total Building Permit Valuation

Calendar Years 2013 through 2017 (Valuation in Thousands of Dollars)

2013 2014 2015 2016 2017 Permit Valuation New Single-family $690.0 $2,671.8 $1,528.7 $29,554.3 $13,200.9 New Multi-family 482.8 697.1 0.0 7,315.8 476.6 Res. Alterations/Additions 2,112.2 2,974.5 1,515.0 1,285.3 1,132.6 Total Residential $3,285.0 $6,343.4 $3,043.7 $38,155.4 $14,810.0 New Commercial $2,330.0 $4,478.6 $1,660.0 $1,930.0 $2,553.3 New Industrial 0.0 0.0 9,000.0 0.0 0.0 New Other 477.5 372.4 3,316.8 740.4 2,881.0 Com. Alterations/Additions 904.9 8,981.8 3,037.6 11,732.2 9,786.6 Total Nonresidential $3,712.4 $14,832.8 $17,014.4 $14,402.6 $15,220.9 New Dwelling Units Single-family 3 13 8 20 61 Multiple Family 5 4 0 56 2 TOTAL 8 17 8 76 63 Source: Building Permit Summary, Construction Industry Research Board.

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Provided below are the building permits and valuations for the County for calendar years 2013 through 2017.

COUNTY OF SANTA CRUZ Total Building Permit Valuation

Calendar Years 2013 through 2017 (Valuation in Thousands of Dollars)

2013 2014 2015 2016 2017 Permit Valuation New Single-family $37,027.7 $36,082.8 $33,216.3 $29,554.3 $51,454.2 New Multi-family 6,505.0 1,504.2 9,159.0 36,471.1 25,673.8 Res. Alterations/Additions 27,650.4 35,698.1 33,707.3 35,393.0 34,955.0

Total Residential $71,183.1 $73,285.1 $76,082.6 $101,418.4 $112,083.0

New Commercial $23,379.4 $39,646.9 $7,495.5 $45,035.3 $11,749.8 New Industrial 914.0 0.0000 9,000.1 0.0 0.0 New Other 4,007.6 38,487.1 10,555.2 9,996.8 6,376.4 Com. Alterations/Additions 21,150.2 10,726.0 28,778.8 41,579.4 26,780.3

Total Nonresidential $49,451.0 $88,860.0 $55,829.5 $96,611.5 $44,906.5 New Dwelling Units Single-family 94 114 102 107 210 Multiple Family 37 9 62 209 97 TOTAL 131 123 164 316 307 Source: Building Permit Summary, Construction Industry Research Board.


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Commercial Activity Total taxable sales during calendar year 2016 in the City were reported to be $636,887, a 2.88%

increase over the total taxable sales of $619,049 reported during calendar year 2015.

CITY OF WATSONVILLE Taxable Retail Sales

Number of Permits and Valuation of Taxable Transactions (Dollars in Thousands)

Retail Stores Total All Outlets

Number

of Permits

Taxable

Transactions

Number

of Permits

Taxable

Transactions 2012 722 439,364 1,141 551,398 2013 717 455,395 1,110 585,790 2014 736 468,479 1,109 600,287 2015 761 481,511 1,222 619,049 2016 755 500,917 1,234 636,887

Source: California State Board of Equalization, Taxable Sales in California (Sales & Use Tax).

COUNTY OF SANTA CRIZ

Taxable Retail Sales Number of Permits and Valuation of Taxable Transactions

(Dollars in thousands) Retail Stores Total All Outlets

Number

of Permits

Taxable

Transactions

Number

of Permits

Taxable

Transactions 2012 5,835 2,375,320 8,320 3,056,694 2013 6,074 2,525,183 8,539 3,270,766 2014 6,274 2,610,443 8,735 3,382,117 2015 6,148 2,679,131 9,730 3,546,784 2016 6,221 2,724,303 9,891 3,611,274

Source: California State Board of Equalization, Taxable Sales in California (Sales & Use Tax).

Santa Cruz County Agriculture

Information from the Santa Cruz Chamber of Commerce indicates that farming was Santa Cruz’s

first industry and remains a keystone of the County’s economy. Agricultural hires one out of every eight local workers; the market value of its products has grown from $400 million to more than $600 million in less than ten years notwithstanding a small net reduction in the acreage in production.

Nearly two-thirds of that total production (2014) was generated by berries, led by strawberries at $220 million. Nursey crops (cut flowers, greens and nursey stock) account for another 20% of total value. Vegetables make up about 10% and the balance is generated by apples, wine grapes and other tree and vine fruit, livestock, and timber. Between 2010 and 2014 the value of organically grown products in the county grew by a factor of 4.5 times to $119 million.

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Santa Cruz County Measure J (1978) and subsequent County general plans provide strong protection of agricultural land uses in Santa Cruz County. Agriculture’s greatest threats are water shortages, including groundwater overdraft and land use conflicts, especially with residential development. Agriculture also has a rich social and cultural history in Santa Cruz County with an engaging Agriculture Center and Museum located at the County Fair Grounds.

Information from the 2013 Crop Report indicates that agriculture is related to many other

employment opportunities in Santa Cruz County that are not included in the direct or indirect agricultural employment figure because they are not paid by an agricultural firm or their suppliers. Santa Cruz is home to numerous public and private institutions that employ researchers and scientists to work on pest, soil and water management, disease resistance, and sustainable agriculture. There are also jobs created in agricultural education and communication, agricultural regulation, agricultural engineering, and food safety. Some of the institutions in our county include University of California-Santa Cruz, Cabrillo College, LifeLab, Farm Bureau, California Certified Organic Farmers (CCOF), to name just a few.

Santa Cruz County Transportation

Five major State highways connect Santa Cruz with adjacent counties. Highway 1 leads along the

coast from San Francisco south to the City of Santa Cruz and on to Monterey. Highways 9 and 17 traverse the County from the City of Santa Cruz across the Santa Cruz mountains into Santa Clara County. Watsonville is joined with Santa Clara County by Highway 152 and with San Benito County by Highway 129. Highways 17, 152 and 129 connect with U.S. 101, a major north-south route.

Air cargo and passenger flight services are provided at the San Jose Metropolitan Airport, 32 miles

east; Monterey Airport, 43 miles south; San Francisco International Airport, 60 miles northeast; and Watsonville Municipal Airport. Watsonville Municipal Airport provides private and executive air transportation facilities.

Bus transportation is provided through the Santa Cruz Metropolitan Transit District for inter-urban

and local inter-community service. Greyhound and Peerless Bus Lines provide service to other local areas and additional transcontinental service.

Commercial and passenger rail services are provided by the Southern Pacific and Amtrak lines.

Southern Pacific Transportation Company provides freight service for the coastal part of the County and the Watsonville area. Freight transportation is also provided through numerous common and contract carriers.

Santa Cruz County Environmental Control Services

Water Supply. Information from the County of Santa Cruz website (Environmental Health)

indicates that Santa Cruz County waters provide drinking water for residents and visitors, critical habitat to numerous threatened and endangered species and opportunities for recreational and commercial activities. The overwhelming majority of Santa Cruz County’s water supply is locally derived from surface and groundwater sources – a unique situation in a state supported by large federal and state water projects. However, like many other areas of California, Santa Cruz County faces water resource challenges including impaired water quality, inadequate water supply, overdrafted groundwater basins, depleted streams, and degraded riparian habitat. Balancing water supply with environmental needs and other uses is a challenge that requires a collaborative effort among all stakeholders.

Flood Control. Information from the City of Santa Cruz website (Public Works) indicates that the Flood Control Engineering unit provides engineering services for Santa Cruz County Flood Control and Water Conservation Districts Zone 7, Zone 7A, the Pajaro Storm Drain Maintenance District, and

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the Santa Cruz County Flood Control and Water Conservation District (general). These services include staffing for various Pajaro River and Flood Protection Area Committees, administration and coordination of the Army Corps of Engineers’ Pajaro Flood Risk Reduction Project, and staffing for the County’s participation in the Pajaro River Watershed Flood Prevention Authority of Santa Cruz, Monterey, Santa Clara, and San Benito Counties. This unit also prepares permit applications for drainage and flood control maintenance operations with various County, State, and Federal regulatory agencies and works with the County’s legislative advocate in Washington D.C. to identify additional funding for the long-awaited levee reconstruction project.

Sewage. Information from the City of Santa Cruz website (Public Works), indicates that the Sanitation Division of Santa Cruz Public Works is responsible for the collection of wastewater (sewage) for several sanitation districts and county service areas (CSAs) located within Santa Cruz County, providing water service (Davenport only), and Environmental Compliance.

Santa Cruz County Education

There are five elementary school districts, three unified (K-12) school districts, one city school

district and one K-12 school district in Santa Cruz County. There are three two-year community college campuses located in Santa Cruz County. There are

also three universities in the County – the University of California, Santa Cruz, Bethany University and John F. Kennedy University.

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APPENDIX D

FORM OF OPINION OF SPECIAL COUNSEL

Upon delivery of the Certificates, Atkinson, Andelson, Loya, Ruud & Romo, A Professional Law Corporation, Irvine, California, Special Counsel to the District, proposes to render its final approving opinion with respect to the Certificates in substantially the following form:

[Closing Date]

Board of Trustees of the Pajaro Valley Unified School District 294 Green Valley Road Watsonville, CA 95076 Re: $_____________ Pajaro Valley Unified School District 2019 Certificates of Participation Final Opinion of Special Counsel Ladies and Gentlemen: We have acted as Special Counsel in connection with the execution and delivery of $_____________ principal amount of Pajaro Valley Unified School District 2019 Certificates of Participation (“Certificates”) evidencing direct, undivided fractional interests of the owners thereof in Lease Payments to be made by the Pajaro Valley Unified School District (“District”) as rental for certain property pursuant to a Lease Agreement, dated as of January 1, 2019 (“Lease Agreement”), by and between the District and the Public Property Financing Corporation of California (“Corporation”). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of January 1, 2019 (“Trust Agreement”), among the District, the Corporation, and U.S. Bank National Association, as Trustee (“Trustee”). The District has been authorized to enter into the Trust Agreement, the Lease Agreement and other documents necessary for the execution and delivery of the Certificates by the adoption on November 14, 2018, of Resolution No. 18-19-18 of the District’s Board of Trustees (“Resolution”). Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Trust Agreement or the Lease Agreement. As Special Counsel, we have examined copies certified to us as being true and complete copies of the proceedings in connection with the execution and delivery of the Certificates (“District Proceedings”), including the Resolution, the Trust Agreement, the Lease Agreement, and other related documents in connection with the execution and delivery of the Certificates. We have also examined certificates and representations of fact made by public officials and representatives of the District, the Corporation, the Trustee, the Underwriter and others, including, but not limited to, the Tax Certificate, as we have deemed necessary to render this opinion. Attention is called to the fact that we have not been requested to examine and have not examined any documents or information relating to the District other than the record of the District Proceedings hereinabove referred to, and no opinion is expressed as to any financial or other information, or the adequacy thereof, which has been or may be supplied to any purchaser of the Certificates.

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We have not been engaged and have not undertaken to review the accuracy, completeness or sufficiency of the Official Statement and no opinion is expressed herein as to the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the Certificates (excepting only matters set forth as our opinion in the Official Statement). The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion speaks only as of its date and is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Our engagement with respect to the Certificates has concluded with the delivery thereof and we disclaim any obligation to update this opinion. As to questions of fact material to our opinion, we have relied upon the documents, representations of fact and certifications referred to above, and we have not undertaken by independent investigation to verify the authenticity of signatures or the accuracy of the factual matters represented, warranted or certified therein. Furthermore, we have assumed compliance with all covenants contained in the Trust Agreement, the Lease Agreement, the Tax Certificate and other related documents, including, without limitation, covenants compliance with which is necessary to assure that future actions or events will not cause the interest with respect to the Certificates to be included in gross income for federal income tax purposes. Failure to comply with certain of such covenants may cause interest with respect to the Certificates to be included in gross income for federal income tax purposes retroactive to the date of original execution and delivery of the Certificates.

The Trust Agreement and other related documents refer to certain requirements and procedures which may be changed and certain actions which may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to the effect on any Certificate or the interest evidenced thereby if any such change is made, or action is taken or omitted, upon the advice or approval of counsel other than ourselves. We call attention to the fact that the rights and obligations under the Certificates, the Lease Agreement, the Trust Agreement and related documents are subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to creditors’ rights and remedies, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against school districts in the State of California (“State”). We advise you that a State court may not strictly enforce certain covenants in the foregoing documents if it concludes that enforcement would be unreasonable under the circumstances. Based on the foregoing, and in reliance thereon, and our consideration of such questions of law as we have deemed relevant to the circumstances, as of the date hereof, we are of the following opinions: 1. The District has, and such proceedings show, full power and authority to execute and

deliver the Trust Agreement, the Lease Agreement and the Site Lease. The Lease Payments are not obligations of the State or any public agency thereof (other than the District). The obligation of the District to make Lease Payments does not constitute a debt of the District within the meaning of any constitutional debt limitation or restriction, or violate any statutory debt limitation.

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2. The Trust Agreement, the Lease Agreement and the Site Lease have each been duly and lawfully authorized, executed and delivered by the District and, assuming due authorization, execution and delivery by the other parties thereto, are valid and binding agreements of the District, enforceable in accordance with their terms.

3. Assuming due authorization, execution and delivery of the Trust Agreement and the

Certificates by the Trustee, the Certificates are entitled to the benefits of the Trust Agreement.

4. The portion of each Lease Payment designated as and constituting interest paid by the

District under the Lease Agreement and received by the Registered Owners of the Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended, and is exempt from State personal income taxes. Interest on each Lease Payment is not a specific preference item for purposes of the federal alternative minimum tax. We express no opinion regarding other tax consequences related to the Lease Payments or to the accrual or receipt of the interest with respect to the Certificates.

We express no opinion as to any matter other than as expressly set forth above. We specifically express no opinion with regard to the “Blue Sky” laws in connection with the Certificates. Our opinion represents our legal judgment based upon such review of the law and the facts that we deem relevant to render our opinion and is not a guarantee of a result. This opinion is given as of the date hereof and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Very truly yours,

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APPENDIX E

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and delivered by the Pajaro Valley Unified School District (the “District”) in connection with the execution and delivery of $[Principal Amount] 2019 Certificates of Participation (the “Certificates”). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of January 1, 2019 (the “Trust Agreement”), among U.S. Bank National Association, as trustee (the “Trustee”), Public Property Financing Corporation of California, a California nonprofit public benefit corporation (the “Corporation”), and the District. The District covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the holders and beneficial owners of the Certificates and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Annual Report Date” means the date not later than nine months (currently March 31) after the end of each fiscal year of the District (currently June 30th).

“Dissemination Agent” shall mean Dale Scott & Company, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation.

“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.

“MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule.

“Official Statement” means the final official statement executed by the District in connection with the delivery of the Certificates.

“Participating Underwriter” shall mean RBC Capital Markets, LLC, the original underwriter of the Certificates required to comply with the Rule in connection with offering of the Certificates.

“Repository” shall mean each National Repository and each State Repository.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

Section 3. Provision of Annual Reports.

(a) The District shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing March 31, 2019 with the report for the 2017-18 fiscal year, provide to the MSRB in an electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure

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Certificate. Not later than 15 Business Days prior to the Annual Report Date, the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If by 15 Business Days prior to the Annual Report Date the Dissemination Agent (if other than the District) has not received a copy of the Annual Report, the Dissemination Agent shall contact the District to determine if the District is in compliance with the previous sentence. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report, and later than the Annual Report Date, if not available by that date. If the District’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c). The District shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the District hereunder.

(b) If the District does not provide (or cause the Dissemination Agent to provide) an Annual Report by the Annual Report Date, the District in a timely manner shall provide (or cause the Dissemination Agent to provide) to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A, with a copy to the Paying Agent and Participating Underwriter.

(c) With respect to each Annual Report, the Dissemination Agent shall:

(i) determine each year prior to the Annual Report Date the then-applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and

(ii) if the Dissemination Agent is other than the District, file a report with the District, with a copy to the Paying Agent and the Participating Underwriter, certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, and stating the date it was provided.

Section 4. Content of Annual Reports. The District’s Annual Report shall contain or incorporate by reference the following:

(a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District’s audited financial statements are not available by the Annual Report Date, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

(b) Unless otherwise provided in the audited financial statements filed on or before the Annual Report Date, the following information:

(i) assessed valuation of taxable properties in the District for the current fiscal year;

(ii) assessed valuation of properties of the top twenty taxpayers for the current fiscal year;

(iii) property tax collection delinquencies for the District for the most recently completed fiscal year, if available at the time of filing the Annual Report; and

(iv) the District’s most recently adopted Budget or approved interim report with budgeted figures, which is available at the time of filing the Annual Report.

(c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, the District shall provide such further information, if any, as may be necessary to

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make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

(d) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which are available to the public on the MSRB’s Internet web site or filed with the Securities and Exchange Commission.

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 Listed Events with respect to the Certificates:

(1) Principal and interest payment delinquencies.

(2) Non-payment related defaults, if material.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

(6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax-exempt status of the security.

(7) Modifications to rights of security holders, if material.

(8) Bond calls, if material, and tender offers.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment of the securities, if material.

(11) Rating changes.

(12) Bankruptcy, insolvency, receivership or similar event of the obligated person.

(13) The consummation of a merger, consolidation or acquisition involving an obligated 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 to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material.

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, and, if the Listed Event is described in sections (a)(2), (a)(6), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13) or (a)(14) above, the District determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall, or shall cause the Dissemination Agent (if not the District) to file a notice of such occurrence with the MSRB, in an electronic format as prescribed by the MSRB, in a timely

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manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Certificates under the governing legal documents.

(c) The District acknowledges that the events described in subparagraphs (a)(2), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13), and (a)(14) of this Section 5 contain the qualifier “if material.” The District shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that the District determines the event’s occurrence is material for purposes of U.S. federal securities law.

(d) For purposes of this Disclosure Certificate, any event described in paragraph (a)(12) above is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the District in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District.

Section 6. Identifying Information for Filings with the MSRB. All documents provided to the MSRB under the Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.

Section 7. Termination of Reporting Obligation. The District’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(c).

Section 8. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be Dale Scott & Company. Any Dissemination Agent may resign by providing 30 days’ written notice to the District and the Paying Agent.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Certificates, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver either (i) is approved by holders of the Certificates in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders, or (ii) does not, in

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the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Certificates.

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the District to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be filed in the same manner as for a Listed Event under Section 5(c).

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 11. Default. If the District fails to comply with any provision of this Disclosure Certificate, the Participating Underwriter or any holder or beneficial owner of the Certificates may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. (a) The Dissemination Agent shall have only such duties as are specifically set forth in this

Disclosure Certificate, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent will have no duty or obligation to review any information provided to it by the District hereunder, and shall not be deemed to be acting in any fiduciary capacity for the District, the Certificate holders or any other party. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates.

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(b) The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees as amended from time to time, and shall be reimbursed for all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder.

Dated: [Closing Date], 2019 PAJARO VALLEY UNIFIED SCHOOL DISTRICT

By ___________________________________ Superintendent

AGREED AND ACCEPTED:

Dale Scott & Company, as Dissemination Agent

By: ________________________________ Name: _________________________________ Title: _______________________________

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EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: PAJARO VALLEY UNIFIED SCHOOL DISTRICT

Name of Issue: $[Principal Amount] 2019 Certificates of Participation Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be made by the Pajaro Valley Unified School District as the Rental for Certain Property Pursuant to a Lease Agreement with the Public Property Financing Corporation of California

Date of Issuance: [Closing Date], 2019

Notice is hereby given that the District has not provided an Annual Report with respect to the above-named Certificates as required by Section 10.06 of the Trust Agreement, dated as of January 1, 2019, by and among U.S. Bank National Association, as trustee, the District and the Public Property Financing Corporation of California, and the Continuing Disclosure Certificate, dated [Closing Date], 2019, executed by the District and countersigned by Dale Scott & Company, as dissemination agent. The District anticipates that the Annual Report will be filed by ____________________.

Dated: ____________________

DALE SCOTT & COMPANY

By: ___________________________________ Title: ____________________________________

cc: Trustee

APPENDIX F

SANTA CRUZ COUNTY POLICY

APPENDIX G

QUARTERLY INVESTMENT REPORT

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APPENDIX H

BOOK-ENTRY ONLY SYSTEM

The following description under the heading “Procedures and Record Keeping” with respect to beneficial ownership interests in the Certificates, payment of principal of and interest on the Certificates to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the Certificates, confirmation and transfer of beneficial ownership interests in the Certificates and other Certificate-related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the Certificates is based solely on information furnished by DTC to the District which the District believes to be reliable, but the District and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

Procedures and Record Keeping

The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Certificates. The Certificates will be executed and delivered as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Certificate will be issued for each maturity of the Certificates, each in the aggregate principal amount of such maturity, and will be deposited through the facilities of DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information on such website is not incorporated herein by such reference or otherwise.

Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC’s records. The ownership interest of each actual purchaser of each Certificate (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase.

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Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued.

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

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as prepayments, tenders, defaults, and proposed amendments to the Certificates documents. For example, Beneficial Owners of the Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of notices be provided directly to them. Prepayment Notices shall be sent to DTC. If less than all of the Certificates are being prepaid, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be prepaid.

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

Payments of principal amount and prepayment price of and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or the Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal amount and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

H-3

DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Certificates are required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, the Certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof.

Discontinuance of DTC Services

In the event that (a) DTC determines not to continue to act as securities depository for the Certificates, or (b) the District determines that DTC shall no longer act and delivers a written certificate to the Trustee to that effect, then the District will discontinue the Book-Entry System with DTC for the Certificates. If the District determines to replace DTC with another qualified securities depository, the District will prepare or direct the preparation of a new single separate, fully-registered Certificate for each maturity of the Certificates registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Trust Agreement. If the District fails to identify another qualified securities depository to replace the incumbent securities depository for the Certificates, then the Certificates shall no longer be restricted to being registered in the Certificate registration books in the name of the incumbent securities depository or its nominee, but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the Certificates shall designate.

In the event that the Book-Entry System is discontinued, the following provisions would also apply: (i) the Certificates will be made available in physical form, (ii) principal amount of and redemption premiums if any, on the Certificates will be payable upon surrender thereof at the trust office of the Trustee identified in the Trust Agreement, and (iii) the Certificates will be transferable and exchangeable as provided in the Trust Agreement.

The District, the Corporation and the Trustee do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the Certificates, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal amount of, redemption price of the Certificates; (iii) the delivery of any notice which is permitted or required to be given to registered owners under the Trust Agreement; (iv) the selection by DTC or any DTC Participant of any person to receive payment in the event of a partial redemption of the Certificates; (v) any consent given or other action taken by DTC as registered owner; or (vi) any other matter arising with respect to the Certificates or the Trust Agreement. The District, the Corporation and the Trustee cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal amount of the Certificates paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The District, the Corporation and the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the Certificates or any error or delay relating thereto.

APPENDIX I

SPECIMEN MUNICIIPAL BOND INSURANCE POLICY

MUNICIPAL BOND INSURANCE POLICY (Annual Payments)

ISSUER: [NAME OF ISSUER] Policy No: _____ MEMBER: [NAME OF MEMBER] BONDS: $__________ in aggregate principal Effective Date: _________ amount of [NAME OF TRANSACTION] [and maturing on]

Initial Risk Premium: $__________ Initial Member Surplus Contribution: $ _________

Total Initial Insurance Payment: $_________ AnnualInsurancePayments:seeattachedScheduleA

BUILD AMERICA MUTUAL ASSURANCE COMPANY (“BAM”), for consideration received, hereby

UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the “Trustee”) or paying agent (the “Paying Agent”) for the Bonds named above (as set forth in the documentation providing for the issuance and securing of the Bonds), for the benefit of the Owners or, at the election of BAM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer.

On the later of the day on which such principal and interest becomes Due for Payment or the first Business Day following the Business Day on which BAM shall have received Notice of Nonpayment, BAM will disburse (but without duplication in the case of duplicate claims for the same Nonpayment) to or for the benefit of each Owner of the Bonds, the face amount of principal of and interest on the Bonds that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by BAM, in a form reasonably satisfactory to it, of (a) evidence of the Owner’s right to receive payment of such principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner’s rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in BAM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of the preceding sentence, and BAM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, any of whom may submit an amended Notice of Nonpayment. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner’s right to receive payments under such Bond. Payment by BAM either to the Trustee or Paying Agent for the benefit of the Owners, or directly to the Owners, on account of any Nonpayment shall discharge the obligation of BAM under this Policy with respect to said Nonpayment.

Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. “Business Day” means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer’s Fiscal Agent (as defined herein) are authorized or required by law or executive order to remain closed. “Due for Payment” means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless BAM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration) and (b) when referring to interest on a Bond, payable on the stated date for payment of interest.

“Nonpayment” means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. “Nonpayment” shall also include, in respect of a Bond, any payment made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. “Notice” means delivery to BAM of a notice of claim and certificate, by certified mail, email or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by an Owner, the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or became Due for Payment. “Owner” means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that “Owner” shall not include the Issuer, the Member or any other person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds.

BAM may appoint a fiscal agent (the “Insurer’s Fiscal Agent”) for purposes of this Policy by giving written notice to the Trustee, the Paying Agent, the Member and the Issuer specifying the name and notice address of the Insurer’s Fiscal Agent. From and after the date of receipt of such notice by the Trustee, the Paying Agent, the Member or the Issuer (a) copies of all notices required to be delivered to BAM pursuant to this Policy shall be simultaneously delivered to the Insurer’s Fiscal Agent and to BAM and shall not be deemed received until received by both and (b) all payments required to be made by BAM under this Policy may be made directly by BAM or by the Insurer’s Fiscal Agent on behalf of BAM. The Insurer’s Fiscal Agent is the agent of BAM only, and the Insurer’s Fiscal Agent shall in no event be liable to the Trustee, Paying Agent or any Owner for any act of the Insurer’s Fiscal Agent or any failure of BAM to deposit or cause to be deposited sufficient funds to make payments due under this Policy.

To the fullest extent permitted by applicable law, BAM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to BAM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy may not be canceled or revoked, whether for failure to pay any Installment Payment set forth in the attached Schedule or otherwise.

This Policy sets forth in full the undertaking of BAM and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. THIS POLICY IS ISSUED WITHOUT CONTINGENT MUTUAL LIABILITY FOR ASSESSMENT.

In witness whereof, BUILD AMERICA MUTUAL ASSURANCE COMPANY has caused this Policy to be executed on its behalf by its Authorized Officer.

BUILD AMERICA MUTUAL ASSURANCE COMPANY By: _______________________________________ Authorized Officer

Schedule A to Municipal Bond Policy No. _________

In consideration for the issuance of the Policy on the closing date and as provided in the Bond documents, the Issuer has paid, or caused to be paid, an initial insurance payment comprised of an Initial Risk Premium and an Initial Member Surplus Contribution. Beginning on __________ __, _____, and on each one-year anniversary thereafter, the Issuer shall pay, or cause to be paid, an annual payment (the “Annual Insurance Payments”) on the principal amount of Bonds outstanding on such date, (takingintoaccountanyprincipalpaymentmadeontheBondsonsuchdate),at the rate of ___% as further consideration for the issuance of the Policy as set forth below. No portion of the Initial Risk Premium, the Initial Member Surplus Contribution, or any paid Annual Insurance Payment is refundable for any reason, including without limitation any legal defeasance or payment on the Bonds prior to maturity. The Annual Insurance Payments shown below assume that all Bonds are retired in accordance with their respective maturity and mandatory sinking fund redemption requirements, and accordingly are subject to adjustment for actual par outstanding on such payment dates.

Annual Insurance Payments

Annual Insurance Payment Date

Member Surplus Contribution

Risk Premium

Total Annual Insurance Payment

Notices (Unless Otherwise Specified by BAM)

Email: [email protected] Address: 200 Liberty Street, 27th floor New York, New York 10281 Telecopy: 212-962-1524 (attention: Claims)

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